The COVID-19 pandemic presents an opportunity for oil and gas companies to re-evaluate their supply chain and build up operations with an agile, resilient business model
When COVID-19 started to spread, with borders closed and lockdowns in effect, oil and gas companies across the globe found that their supply chains were not able to adapt to the shifting market landscape.
The oil and gas sector has always had vulnerabilities in its supply chain, but the COVID-19 pandemic has brought these to light against the backdrop of an unprecedented crisis. It has never been more important for companies in oil and gas to re-evaluate and optimize their supply chain operations.
A report by McKinsey says that the crisis could present companies with a growth opportunity, noting that companies with solid balance sheets could “use crises as a trigger to re-design their supply chain and drive medium to long-term impact.”
“Even before COVID-19, looking at operating income margins, the oil and gas industry was already under stress,” says Firas Shnoudeh, Global Segment Head for Oil and Gas at Aramex. “Following the pandemic, the situation has deteriorated further, and the market glut has forced companies to re-evaluate their business models and to seek out asset and supply chain optimization strategies.”
Because of their typically traditional approach and reliance on a fixed model, oil and gas companies continued to bear the same costs for their supply chain operations throughout the pandemic, even though their activity was significantly impacted due to lower oil demand. Prices remained fixed at a time where efficiency and cost-cutting were not only important, but integral to survival.
“A fixed model cannot adapt to changing market conditions,” Shnoudeh says. “In a variable model, costs are linked to activity levels. It becomes easy to accommodate fluctuating supply chain needs, adding agility to the supply chain while cutting costs. It is a resilience model that can cope with changes in the environment very quickly.”
He adds that a full assessment, re-evaluation, and re-design of a company’s procurement and supply chain strategies requires strategic partnership—rather than working with multiple smaller logistics and supply chain companies which provide limited services, oil and gas companies should search for partners that can add value across the full value chain.
In a traditional business partnership, a customer asks for a service, and then receives a quote for that service. Shnoudeh says that the industry needs to pivot to a value co-creation approach, which starts with diagnosing issues in the supply chain, re-designing it, making links between all parts of the value chain, and then actually implementing the new system.
“A strategic partner re-imagines the supply chain with the customer to find out which model is the most efficient, agile, and the fastest,” Shnoudeh says. Analysts echo the value of strategic partnerships, asserting that a deep and strategic supply chain integration would be critical for service providers in the oil and gas sector.
He recalls one partnership with a global oilfield service provider which had eight workshops in the GCC, with a range of inefficiencies that were increasing operating costs. After assessing the company’s operational model, Aramex identified the factors which were reducing efficiency, slowing work, and raising costs. For example, it found that the bulk of manual work could be eliminated with the right digital systems in place.
By evaluating and optimizing these operations, the company was able to cut costs from the workshops by approximately 20%. “We try to think outside of the box to see how well we can find synergies to optimize operations across the board, because this is the only way for the industry to survive after COVID-19,” Shnoudeh says. “You would be surprised at the massive impact just one small change can have on growth, sustainability, and success.”