Overview: Supply Chain & Procurement in the Oil & Gas Industry

The supply chain is an indispensable part of every oil and gas activity and operation. Upstream companies need drilling equipment and drilling services providers to explore and produce oil and gas. Midstream companies need steelmakers, pipe makers, and valve makers to deliver pipelines. Firms in the downstream segment need precision control and industrial control system (ICS) suppliers to operate refineries and petrochemical complexes. All subsectors need engineers, safety and construction specialists and project management specialists to work seamlessly.

The oil and gas industry needs supply chain contractors and an efficient relationship with third-party providers in order to deliver the desired outcomes, meet budget specifications, and create a safe working environment for employees and operations. From oil and gas extraction to crude oil and gas delivery, from the pipelines to the refinery and to the petrol station, supply chain and procurement are essential to all operations in the oil and gas industry.

International companies in the sector continue to exhibit strict capital discipline after the oil price crash in 2014-2016, aiming to continue cutting costs and optimize operations and procurement.

The supply chain has suffered from the reduced capital expenditure of upstream operators, and has seen profit margins squeezed when international oil and gas majors aimed to reduce costs, limit their spending, and achieve greater efficiencies as oil prices slumped from $100 in early 2014 to $50 per barrel in 2017.     

As the market started to recover from the 2015-2016 lows, investment has returned to the key oil and gas basins in the world, including to the UK Continental Shelf (UKCS). The strength of the supply chain is crucial to keeping the competitive position of the UK offshore industry, the OGUK association said in its Economic Report 2019.

The UK oil and gas market returns to grow, yet some firms in the supply chain continue to see challenges to their sustainability, OGUK’s report said.

In 2018, the UK oil and gas industry supported some 259,900 jobs, while the number of jobs is anticipated to have increased to around 269,100 in 2019—this would be the first annual rise in employment in the sector since 2014, OGUK’s estimates show. Most of those jobs are in the supply chain, which contributes £2.4 billion, or 0.13 per cent, to the total UK gross domestic product (GDP). If we include the gross value added (GVA) of supply chain companies, the oil and gas industry’s total contribution would overtake that of electricity generation and transmission, and is nearly 38 per cent higher than other major industries, such as motor vehicle production, for example, OGUK says.

In order to overcome the challenges, the supply chain and operators have to work constructively together to spread the risk and make the most of investments, according to the industry association. 

New entrants in the UK Continental Shelf tend to rely more on the support and services of the supply chain and to embrace new contracting models.

Revenues in the supply chain largely stabilised in 2018, OGUK says, noting that some growth could be seen in 2019, to reflect the higher investment and expenditure levels compared to the levels seen at the worst of the downturn.

Going forward, keeping the UKCS competitive to attract more investment and opportunities is as important as ensuring a balance between cost control and sustainable revenues and margins for the supply chain. Operators on the UKCS need to have the ability to access a strong supply chain in the long term, OGUK said in its Economic Report. 

“New business and contracting models, innovation, partnerships and true collaboration are all vital to achieving a sustainable balance between cost control and a reasonable return on investment for supply chain companies. Increasing the focus on value-driven outcomes rather than solely on costs will require all companies to work even more constructively, with a more balanced share of risk and reward,” OGUK noted.

The UK oil and gas supply chain also has opportunities to grow with the rising decommissioning activity and investment, and with the opportunities to diversify in the energy transition, the industry body reckons.

The UK is one of the key basins for decommissioning around the world, and the supply chain can play an important role in this sector both on the UKCS and in exporting its competence and technology abroad.

According to OGUK, companies in the UK should try to excel in the domestic decommissioning market and to seize opportunities for the wider North Sea decommissioning activity offshore Denmark, the Netherlands, and Norway. Much of this activity can be handled by UK facilities and using UK capability to its full extent. In the longer term, the UK supply chain should seek opportunities globally, building off their experience for delivering North Sea decommissioning projects, OGUK said.

In recent years, UK oil and gas supply chain companies have diversified their businesses into other energy sectors to survive the downturn, by spreading the risk and limiting their exposure to the oil and gas market. More than half of OGUK members have diversified into other energy sectors, but oil and gas remains their primary source of incomes, OGUK’s Business Outlook 2019 showed. 

“The drive to achieve a net-zero economy will provide further opportunities, with estimates suggesting that achieving this aim could require up to £1 trillion of investment,” the industry association said. 

“The supply chain can continue to be a global leader in oil and gas services, whilst embracing the opportunities presented by the energy transition. This will ensure that the industry’s supply chain continues to contribute to the UK economy in the decades to come,” OGUK reckons.  
 
The North Sea and its supply chain can play a leading role in the energy transition, PwC and OGUK said in a report in November, ‘Turning the Tide – the Transformation of the North Sea,’ based on interviews with more than 20 senior stakeholders from the industry.

The North Sea, which has emerged from a challenging downturn, can become a global leader for the energy transition through technology for Carbon Capture, Utilisation and Storage (CCUS), the alternative use of infrastructure, and the production of hydrogen, according to the report.

The report also showed that the UK supply chain cannot sustain further tightening in costs and the focus should shift from cost to value creation. There is also increased willingness among stakeholders to engage more closely with the supply chain, where most new technologies are deployed, PwC and OGUK’s report found.

“The transition to a lower carbon, diverse energy mix is an exciting opportunity for our transforming industry. With extensive skills, capabilities and infrastructure, we are well placed to support the development of low carbon technologies such as CCUS and hydrogen while reducing emissions from production operations,” said Mike Tholen, Upstream Policy Director at OGUK.