Oil and Gas Procurement – Strategies During and Post Covid-19

Four factors form one force

Volatility is the defining force that shapes prices in the oil and gas markets. This has perhaps never been illustrated more clearly in peacetime than under the dictatorial variable of COVID-19, which has wreaked havoc in 2020 and continues to do so. Volatility looms over whether procurement can enable supply and demand in anything resembling optimum conditions. Under normal market and social circumstances, budget constraints, timely delivery, and cost-effectiveness while maintaining safety standards, means effective strategies are vital for energy procurement. Over an average year, four factors determine volatility, as outlined by the SIPMM. Who in turn cites a very useful and easily understood diagram from below Reference: ektinteractive.com

An unknown variable

These models encapsulate fluctuation and demand in a normal year. However, by June 1, 2020, all that had changed and the effects of COVID-19 had rapidly impacted the market as recounted in an overview post from GEP, a London-based “global supply chain and operations consulting powerhouse,” and “provider of managed procurement and supply chain services,” - an entity at the nexus of procurement strategising.

Deep impact

As outlined, lockdowns across the world caused demand for crude oil to drop significantly, causing oversupply and a subsequent dive in prices for the substance. This, in turn, led to major oil and gas companies slashing their expenditure for 2020 resulting in reduced production and exploration.

Damage Assessment, countermeasures

Eight days later, on June 9, 2020, The Boston Consulting Group (BCG) had begun to assess the impact of the changing energy markets and identify strategic weaknesses that needed to be managed. In this post, the problem of oilfield services and equipment suppliers (OFSE) being able to operate on time and across borders was emphasised. As OFSE companies are critical to maintaining supply chains BCG stated that “Operators must adopt a radical dual approach. In the short term, they need to take steps to protect OFSE companies and enable industry supply chains to continue functioning.” BCG continued “At the same time, oil and gas operators should view the crisis as an opportunity to transform commercial relationships in the medium term and apply lessons from other industries in preparation for an imminent lower for the longer oil-price environment.” These vital needs were all remanded by the “New reality for oil and gas procurement within the definitive headline of BCG’s" post.

Future of oil & gas procurement

In January of this year, a procurement consultancy group, 4 C Associates based in London, offered a warning insight to the energy sector if collaboration between operators and suppliers is not pursued to counter the effects of low prices caused by the pandemic lockdowns. “Our fear, however, is that many operators will simply react to the very low oil price and use the same ‘reactive’ sourcing strategy is based on aggressive short-term cost reduction that will have significant consequences for future supplier management in the industry, just as it has in the past. They concluded, “...Our concern is that the industry may once again ‘miss the boat’.”

New Reality, New Strategy

Therefore, as with many solutions emerging to the infinite changes caused by COVID-19, cooperation on overcoming shared problems to ensure survival are the guiding philosophies in this most volatile and usually profitable sector. Oil and gas procurement can only proceed as a safe commercial sector if all those involved, from field sources through supply chains to distributors, share the burden and evolve solutions.

Collaboration & Costs

This is a view shared by PriceWaterhouseCoopers, who offer a macro view of now and the future within the oil and gas sector. As part of post-COVID-19 operations, PWC says, “...companies will therefore need to build a high degree of flexibility and continued resiliency into the short and medium-term strategising they will need to be ready to adjust operations up and down and not assume that recovery will be a continuous and linear process.”

A common thread

They continue “...in the oil and gas sector, for example, high cost produces that have been left exposed by the collapse in the oil-price may need to turn to collaborative partnerships or consolidation as ways of bringing costs down.”

Now’s the time

The commentary finishes with a paragraph leading with relevance to the current summit on climate change.” On a wider level, policymakers and the public will reflect on the impact of lockdowns on reduced traffic, pollution and CO2 emissions. In many regions, they will have seen how renewable sources of electricity were able to supply 100% of demand. In others, it might be clear that the economics of individual power plants may no longer be viable. Will these experiences give added momentum to now deliver energy transformation? Or might a Global recession push climate change and sustainability down the list of concerns?”

Who cares and who decides?

This is the crossroads at which all people now stand. Whether they be within government, oil and gas procurement in corporate business, or outside of these powerful and defining sectors. Now is a moment in which political, commercial, and social philosophies are converging and illustrate that collaboration and collective strategising are vital, not only for the short term survival of our oil and gas-dependent economies but for the longer-term transition to sustainable energy sources that will, we hope, be enough to reduce climate change. Addressing the United States House Oversight Committee's environmental subcommittee yesterday on world Earth Day, Greta Thunberg spoke in characteristically stark terms about the need to end fossil fuel subsidies and what this may mean for future generations if such policy action is not pursued.