Comment: Eliminating bottlenecks in oil and gas
Ali Hasan Raza talks about removing impediments in the MENA oil and gas industry through implementation of innovative American supply chain analytics
As the energy downturn began in April 2014, many US oil and gas upstream players entered the survival game. To sustain breakeven operations, digital oilfield solutions were re-evaluated. From innovation stalwarts like General Electric to strategy consultants like McKinsey, thought leaders advocated using technology to achieve cost-cutting, consolidation and vertical integration.
The frequent query from the oil and gas investor has been, “How do we do it faster, cheaper, and better?” As recently highlighted by Accenture, technologists answered this with technology transfer proposals to automate activities. However, even with new technology enabling right-sizing, oil and gas operations have yet to resume wide-scale profitability. According to The Hill, while ‘sweet spots’ have allowed for special causation profitability, many service companies are still running at a loss. Thus, companies are now looking towards better asset management processes.
More importantly, they are asking a better question: “How much is the critical need?” By nature of upstream operations, the asset management problem is closely tied to the working capital problem. Often incorrectly, operations managers are held responsible for working capital results due to their involvement with asset management. However, the actual responsibilities lie with supply professionals who directly control logistics, warehousing, and inventory. Remarkably as per the Leadership Network, supply chain organisations lack tools, talent, and above all internal trust to enable noticeable impact.
Yet, supply chain divisions are expected to manage billions of asset dollars to enable online E&P operations. It is our ignorance as oil and gas professionals that we don’t see that in modern business, everyone is a stakeholder in supply chain’s success. To solve the root cause of many of our money problems, we need to empower supply chains to do more.
While technical petroleum innovation is often prioritised as source to unlock profits, eliminating supply chain complexities has recently received attention. Companies are re-examining automation to enable more throughput. According to Cerasis, by 2018 more than 80% of organisations will have implemented supply chain automation.
For example, GE is pursuing Enterprise Impact, a project that is meant to streamline operations and predictive maintenance. Six-sigma black belts, warehouse managers and logistics experts are being consulted to optimise individual supply chains. However, the throughput objective remains a very tedious, manual process. Besides the model building aspects, one of the primary reasons behind the lack of success is to quickly identify and eliminate bottlenecks to systematically put out fires.
While firefighting is inevitable in any industry’s supply chain, energy companies are not borrowing techniques from supply chain leaders like UPS, Amazon and Wal-Mart that successfully deal with real-time bottlenecks. Unlike oil and gas, these companies trust data analytics to discover problems. Remarkably, many of these platforms are industry-agnostic and can be successfully transferred to oil and gas.
Supply chain data analytics tools are simply not the norm in oil and gas. Even at leading oil and gas companies, IT Analytics divisions prioritise reservoir optimisation to unlock value and have usually ignored supply chain. From a managerial perspective, divisions still function as individual units, rather than addressing company-wide bottlenecks to achieve global zero downtime.
Current actionable insights tools can offer a 70% improvement to strategy acceleration for zero downtime, and thus additional elimination of billions of dollars in waste. This means notable reductions in insurance, logistics and storage, while better EBIDTA for business units. Nationally scaled, the results are lower breakeven American oil prices that are more competitive to Middle Eastern sources. Yet, oil and gas still trusts error-prone manpower over statistics-based software systems. The obvious reason is because their core business is production, not supply chain optimisation.
As a Middle East example, consider if the UAE became one of the regional pioneers of adopting supply chain predictive analytics for oil and gas. Considering CNBC’s estimate for UAE’s current breakeven oil price to be around $70, if all UAE-based oil and gas supply chains were synced on a single platform, unrealised efficiencies could lower the country’s overall fiscal breakeven price to be competitive with the $55 breakeven price of Kuwait and Qatar. Regionally speaking, optimising the Gulf’s supply chain would reduce competitive advantage for American E&Ps.
In conclusion, the supply chain analytics can create immediate global impact in the reduction of fiscal breakeven prices for oil. According to MarketsandMarkets, the multi-billion dollar supply chain analytics market will provide immediate financial relief in the current environment and transform productivity across the global value chain. Corporations in the United States are actively implementing solutions to accelerate upstream industry recovery. Especially in the Middle East, globalising the transformational power of modern analytics to lowering the bar to achieve hydrocarbon profitability.