Specifics of Supply Chain Management in the Oil & Gas field in Russia. SCM in the environment of aggressive growth.
Major clients:
Managing partner
Consulting partnership
•
• • •
• • •
2
Worked for major oil and gas companies for over than 15 years (Yukos, TNK-BP, Slavneft) SCM project director M&A leader for oilfield services The European SCM Excellence Award
Global Procurement and Supply Chain Management for the Oil & Gas Industry
• •
SCM Management consulting Joint venture organization and support in Energy, Oil & Gas, Metals & Mining Av. partners’ experience in SCM – 11+ years Over 60 headcount
We are here for: Musings on best practices and perspectives of SCM in O&G, greenfield & brownfield, etc. Practical benefits (cases, contacts, leads, etc.) It’s all about this
3
Global Procurement and Supply Chain Management for the Oil & Gas Industry
Proved reserves:
Rank in the world
billion barrels Production: billion barrels per year
Proved reserves:
44,6
trillion cubic metres
1st
Production:
0,6
trillion cubic metres per year
2nd
Source: BP Statistical Review of World Energy June 2012
4
Global Procurement and Supply Chain Management for the Oil & Gas Industry
“Light� taxes
Government investment & government programmes
Local capital Significant amount of local capital is available for JVs:
Investment in Oil & Gas exploration from Russian Federal funds by 2020
Source: The General scheme of oil & gas industry development up to 2030 (Russian State Programme)
5
Global Procurement and Supply Chain Management for the Oil & Gas Industry
Company
Capitalization
Gazprom
over $140 bln.
Rosneft
over $70 bln.
Lukoil
over $50 bln.
Novatek
over $35 bln.
Source: RA Expert research 2011
Reserves, billion barrels of oil
30
480
25
400
20
320
15
240
10
160
5
80
0
0
Source: Company`s annual reports, Bloomberg data
6
Capitalization, billion USD
Global Procurement and Supply Chain Management for the Oil & Gas Industry
GAP
Summary upstream CAPEX and OPEX spending – By region 1600,0 1400,0
143,0
USD billion
121,0 102,0 107,0
800,0 72,0 79,0
600,0
0,0
52,0 62,0
223,0
137,0
86,0 76,0
63,0 67,0 80,0 69,0
2004
123,0 94,0
2006
322,0
97,0
North America
102,0
Middle East
392,0 181,0
301,0
112,0
106,0
91,0
85,0
189,0
194,0
109,0
103,0
2010
Europe
151,0 133,0
2008
528,0 477,0
110,0
Asia-Pacific
100,0
93,0 238,0
286,0
323,0
Africa
132,0
144,0
167,0
2012F
2014F
2016F
Source: IHS Upstream Spend Report, 2012
7
Latin America 163,0
119,0
1000,0
200,0
163,0 138,0
1200,0
400,0
Russia & Caspian
Forecasted CAGR for the world: 9.2% Forecasted CAGR for Russia: 9.6%
Global Procurement and Supply Chain Management for the Oil & Gas Industry
Arctic – next step
Greenfields Brownfields
8
Global Procurement and Supply Chain Management for the Oil & Gas Industry
‌ all of these factors are pretty attractive for the world’s leaders to come to the Russian market in all their glory
Best foreign technology
‌bringing
Capital Market recognition
9
Global Procurement and Supply Chain Management for the Oil & Gas Industry
Expertise Global agreements
The oil & gas “shoot-on-target�: extraction investments are primary, but not the only to be considered
Investments in services (exploration, drilling etc.)
Oil & gas extraction investments
Investments in infrastructure (transport, communications, support etc.)
10
Global Procurement and Supply Chain Management for the Oil & Gas Industry
Foreign giants working in Russia face significant pitfalls as a result of unevaluated risks of local content and culture specifics
«For much of its eight-year history, Russian oil company TNK-BP Ltd. has seen its two shareholders at odds. BP PLC and a group of Soviet-born billionaires known as AAR have done battle in courtrooms and boardrooms from Siberia to the Caribbean»
«The pressure on the Sakhalin-2 has been seen as «softening-up» exercise to force the international oil companies (IOCs) to revise the terms of their investments to allow greater Russian participation in their projects».…Shell surrendering its controlling stake in Sakhalin Energy»
The Wall Street Journal Royal Dutch Shell Blog
11
Global Procurement and Supply Chain Management for the Oil & Gas Industry
«Gazprom officially admitted that the giant Shtokman project on gas production in the Barents Sea was frozen for n undefined period of time: the costs proved to be too high». Energy news
Practical efficiency/ value generation (ROI)
Despite well-grounded decisions at the design stage, project execution and spend effectiveness are lacking. And considerable part of challenges lies in the field of Procurement
Construction, Execution & Operations Engineering & Technology
• Non-transparent local decision maker structure • Undervalued importance of long-term planning
Financial decision, Strategy and project design
• Need to comply with local technical standards • Poor local technologies • Harsh environment • Lack of infrastructure
Spend
12
Global Procurement and Supply Chain Management for the Oil & Gas Industry
• Harsh environment • Remote locations with undeveloped logistical infrastructure, complicated supply routes • Expensive mobilization for non-local suppliers • Undeveloped local suppliers • Low qualified local staff • Fraud as common practice
Real-life example: key issues Background: JV between major world and largest Russian oil & gas players. Best operational practices taken directly from the international shareholder. Healthcheck trigger: shareholders not satisfied with SCM. Internal audit rates SCM unsatisfactory. Healthcheck findings: High-level Procurement & SCM processes classification framework Functions
Sub-processes
Processes Business needs management (demand management)
1.
Planning of business needs for the next period Manage business needs Publish plan
2. 3.
Define sourcing strategy by category
Prepare pre-qualification Perform inventory control Inventory Management
Plan and manage inventory Clear needs of on-hand material stock
Overall procurement function
Conduct RFx/ auctions Contractor Selection & Contract Award
Negotiate contract
IT systems & tools
Analyze supply market
Organization & capabilities
Analyze spend and assess opportunity
Process controls and compliance
Strategic Sourcing Management and Category Management
4. 5.
Select supplier Contract award
6.
Create contract Contract Management and Order Placement
Monitor and enforce contracts Create purchase orders
Supplier Performance Management & Development
Measure and drive performance Conduct supplier reviews
7.
No business needs (demand) management suitable for SCM. No Category management process. Roles & Responsibilities. Lack of healthy cross-functional interaction and no creative tension between technical and commercial (procurement) roles. Technical roles prevail. Low compliance. No Supplier performance management and proactive supplier development planning. Poor data management (catalogues) does not properly support SCM process requirements. Insufficient SCM Staff competences to properly perform within defined processes.
Establish, negotiate and manage supplier development plans
Core reason: best practices implemented as they were, without taking local factors into account 13
Global Procurement and Supply Chain Management for the Oil & Gas Industry
Implementing best practices and end-to-end business focus to project design, implementation and operation to deal with capital projects risks and pitfalls is particularly important in the oil and gas sector Strategy & Long-term planning Collaboration with local business and government Attention to the local specifics, adaptation of global practices
Leading trends – critical success factors
Early involvement of procurement and suppliers in the project lifecycle Engineering, procurement and construction (EPC) contractors iteration Procurement strategy, smooth handover of materials from project to operations
14
Global Procurement and Supply Chain Management for the Oil & Gas Industry
Fields of reengineering First we need to evaluate existing system and create reference models to initiate future changes: ďƒ˜ ďƒ˜
Reference model oriented on strategic goals and long-term targets; Transition plan and first priority activities for model reengineering, based on Company readiness to change and real opportunities to get visible value
Fields of changes: 1
SCM strategy 8
1. Strategic management of SCM function (goals, KPIs, key principals, segregation of duties and responsibilities).
2
Risks and controls
2. Function and organisation structure (separation of SCM function (vertical), multi-functional groups, centralization for major groups of services and materials)
Organisation 3 Supply Chain Management
IT
Catalogue
7 Materials management and planning 6
3. Implementation of services/materials catalogue, matrix of accountability segregation due to category. 4. Reference model and corporate SCM framework (demand planning, purchases, contract administration, management of commitments, materials management, etc.). 5. Supplier evaluation, supplier efficiency data base
Procurement 4 processes
Supplier management 5
6. Optimisation of materials management system, including illiquid and nonliquid assets
7. It-strategy based on integration SCM processes with linking processes (production planning, investment and business planning, management accounting). 8. Risk matrix, Control matrix, risk management procedures.
15
Global Procurement and Supply Chain Management for the Oil & Gas Industry
Example on effects of the implementation of initiatives for improving supply systems efficiency $ Improving reliability of production
High-level indicators
Basic KPIs Accuracy of planning
3 - 6%
Reduction of downtime
Reduction of delivery time
Complete and timely satisfaction of needs
Consolidation of needs; coverage with procurement strategies, counterparties efficiency management
Cost reduction Resulting benefits
Saving by increase in supply system efficiency
$ 8 - 30% The model is based on an average scenario and a conservative estimate is used, the level of accuracy is (+-50%). If any of the current processes corresponds to the level of "best practices“ the value of the “Resulting benefits” will be reduced by the improvement value of such process. The dynamics of the “Resulting
benefits” with regard to experience enhancement and process automation. Динамика «итоговых выгод» с учетом набора опыта и автоматизации процессов: 1st year - 2-6%; 2nd year - 6-12%; 3rd year - 8-20%.
16
3 - 10%
Reduction of administration costs
Saving by increase in planning system efficiency
Optimization of capital
Automation of procurement, electronic bidding
Reduction of working capital
2 - 4% Reduction of non-current capital
Standardization and unification of technical solutions Coverage of total cost of ownership
Decrease in unclaimed high liquid positions Increase in stock turnover and funds in transactions Reduction of unfinished construction due to supply shortage Decrease in low-liquid positions
The better practices are well known, complex tools, approaches and frameworks are important, but much more critical is the value generation by right implementation
…… … … … … Complex approach to supply chain transformation
17
Organization structure
Procurement function maturity model
Delivery time management
Integrated development plan
Core elements of best practices
Quantity optimization
Management of competencies
Global Procurement and Supply Chain Management for the Oil & Gas Industry
Organization structure
Financial responsibilities allocation matrix
Security schemes of investment projects
… … … … … …
… … … … … …
… … … … …
Map of target processes
Process schemes
Establishment of regional procurement centers
Bundles of regulatory documents
Automation requirements
Implementation of IT systems
Case: info and background Company`s info: Major vertically integrated Russian oil company, among the ten largest private oil companies in the world. 70 ml tons of oil equivalent
Exploration
8 regions
4 bln USD
1.7 – 2.5 bln USD
of upstream operations in Russia
In annual Upstream spending (CAPEX)
In annual Upstream spending (OPEX)
Background
18
•
The company was created as a strategic partnership between one of the world's leading international oil and gas companies and a group of Russian businessmen with the aim to jointly hold their oil assets in Russia and Ukraine.
•
The international company owned 50% of this JV shared not only capital, but its corporate best practices, technology and expertise.
•
Indeed many of Procurement related practices just haven`t worked: tendering procedure was unclear, independent controls was not working, level of bureaucracy was too high to make the company flexible, planes wasn`t fulfilled.
Global Procurement and Supply Chain Management for the Oil & Gas Industry
Case: key issues
High-level Procurement & SCM processes classification framework Functions
Sub-processes
Processes Business needs management (demand management)
• Low level of procurement centralization
Planning of business needs for the next period Manage business needs
• Lack of strategic approach to category management
Publish plan Define sourcing strategy by category
Plan and manage inventory Clear needs of on-hand material stock
Overall procurement function
Conduct RFx/ auctions Contractor Selection & Contract Award
Negotiate contract Select supplier Contract award Create contract
Contract Management and Order Placement
Monitor and enforce contracts Create purchase orders
Supplier Performance Management & Development
19
Measure and drive performance Conduct supplier reviews Establish, negotiate and manage supplier development plans
Global Procurement and Supply Chain Management for the Oil & Gas Industry
IT systems & tools
Perform inventory control
• Law requirements for business needs planning Organization & capabilities
Analyze supply market Prepare pre-qualification
Inventory Management
• Inefficient greenfield procurement process
Analyze spend and assess opportunity
Process controls and compliance
Strategic Sourcing Management and Category Management
• Reactive vs. proactive controls and inefficient P2P compliance function • Law level of P2P
Case: value-added solution Solution: •
Reengineering of the procurement system*
•
Implementation of the uniform integrated solution based on the ERP system SAP
Results:
•
Transparency and standardization of processes of planning, procurement system control, performance management and control
•
Automation of procurement processes including precise procurement and operational functions distinction
•
Automation of payment processes, segregation of duties related to payments approval and operational control
•
Supplier management via long-term framework contracts
•
Inventory control, online receipt and replenishment of materials; improved inventory turnover, reduced free inventory
End of the day result – $300 mln in 5 years * The project has won the “SCM Global Awards” international competition as the best Procurement Reengineering Project in Oil & Gas sector
20
Global Procurement and Supply Chain Management for the Oil & Gas Industry
BRIGHT is a successful Russian company which provides consulting services and expertise in the field of supply chain management, planning and control, project management, development and implementation & operation of integrated business processes based on ERP-systems. Our services are aimed at achieving global standards in business processes and control mechanisms in the Russian market.
Š 2012 BRIGHT Group. All rights reserved .