Emerging Issues for Procurement in Oil and Gas by Robert Handfield

This past week, I hosted a meeting with a small group of oil and gas procurement executives  in Houston to share thoughts on some of the major trends occurring in oil and gas, changes to the global oil and gas organization structure, as well as the impacts on procurement capability in the emerging ecosystem.

As companies continue to go global and enter into challenging land rig markets, the environment is becoming an increasingly complex and chaotic environment, and procurement will need to prepare for this new landscape. Companies are trying to move towards a value-based strategy and less volume, and are selling down to get their cash values higher.  Capital expenditures may start to fall, as they turn more to their operations to extract value.

In the midstream markets, the regulatory environment is going up.  The regulatory body doubled in staff size last year and again doubled this year.  “We have inspectors behind our welders and our QC operators”.

A majority of resources is going to US production and managing the logistics aspects of getting the quality and cost of getting oil out of the ground.  This has placed a premium on resources:  “We have so many projects going on it is a scramble to keep up.  Just getting the bodies we need is a challenge, and there is a battle for resources especially overseas in places like Australia and Asia.

What is happening in terms of organizational changes?

Everyone noted they are seeing more centrally led executed models and the businesses are becoming more autonomous, as the regions command more authority and are building stronger procurement capabilities.  As a result global procurement organizations are starting to shift from the center to a stronger regional model and we have to keep those regions strong and consistent, and that is a challenge as a CPO.  The regions are getting very strong in day-to-day support of operations and the contracting side is not as strong.  To cope, companies are moving to a single SME in the contracting arena in each business unit  who are the central point of contact (before going to the legal department) when contracting issues come up.

As companies become more decentralized, procurement executives need to be able to employ the influence model, described in other of my posts.  This means that procurement is starting to operate in a hybrid model, where there is centralization of some functional process capability.  Functional centers are typically people who own the global process, and serve as global process advisors for elements such as market intelligence, procurement operations, negotiations, category management, organization capability, etc.   Process owners essentially help to determine how these processes will operate.  In some cases they are being deployed both in upstream and downstream, in an advisory role to the business units.  Weekly meetings with individuals working in the global business units occur, and training may be developed onsite for competence areas.  It is important to employ this approach, to avoid having the  “8 versions of category management.”

The approach is also to allow what can be changed and what can’t.  “Black language”  was used at one company to designate policies and procedures that can’t be changed and which everyone in every business unit must adhere to.  Blue language is business specific based on local situation, relationships.  We even have purple language that is very specific to groups of people. The global process advisors develop black language and business units develop blue language.

This insight aligns well with our prior research on global supply chain trends, as companies seek to build “global process standards that can flex”.  There is little doubt in this group that flexibility to deal with more challenges in the form of regulatory issues, volatility, and changing conditions will be key.