The energy transition will change the game for O&G procurement teams
by Dr James Allan and Russ Brown,
Unpacking the risks and opportunities the energy transition presents to oil and gas companies has become a key task for executives. And it’s a similar situation deeper within organisations. Procurement and supply chain teams, in particular, will be engaging with unfamiliar industries and practices and need to map out what the energy transition roadmap means to them.
Ultimately, this will mean re-examining the entire sourcing cycle. To help with this process, we’ve identified some of the main implications of the energy transition for the supply chain and procurement teams of O&G companies, Oilfield Service (OFS) and Engineering, Procurement & Construction (EPC) firms.
- Engaging new industries and suppliers: Rendered beef fat anyone? Providing lower carbon energy will require new products and services. For the O&G industry this may include buying from companies that currently support mining, renewable energy, aerospace and food production, to name just a few. Innovating alongside existing suppliers will also present new opportunities for upstream companies, particularly as fossil fuels are still expected to meet the majority of global energy demand into 2040.
- Evaluating suppliers: As always, it will be critical to ensure robust evaluation processes for new suppliers. However, companies will need to update standards and skills to properly assess new suppliers operating throughout emerging value chains, which may range from cutting-edge materials fabricators to farmers providing biofuel feedstocks. Procurement teams will also need to consider how new suppliers stack up against ever more stringent ‘ESG’ requirements, including performance against human rights and environmental issues, that are being demanded by governments, investors and customers.
- Assessing supplier performance: As we enter the energy transition journey, it becomes even more critical that suppliers deliver in accordance with contracts and demonstrate behaviors aligned with relevant codes of conduct and protocols. This involves nurturing collaborative relationships and encouraging mutual innovation around new product development or service delivery models. Creating a culture of trust will be as important as using traditional KPI’s and training, and more robust supplier risk management processes will have to be developed to deal with the changing landscape.
- Adapting inventory strategies: Teams will onboard new suppliers from different industries, so re-examining inventory management strategies may be necessary. Traditionally the O&G industry has sought to reduce company-owned inventory, placing the storage burden on suppliers or third-party logistics providers. New suppliers, such as farms and mines, may not operate in the same way and companies will have to adapt.
- Controlling costs: Prior to the COVID-19 crisis and oil price crash, the internal rate of return (IRR) for O&G projects was typically more than double that of solar and wind projects. Due to lower commercial returns on renewables, procurement teams will be expected to fine tune supplier costs and margins to ensure materials and services are procured cost-effectively. This may prove challenging though, as the teams will be dealing with new industries and relatively unknown supply sources, while lacking detailed knowledge of their cost structures
- Data analysis and reporting: O&G companies are setting ambitious carbon targets and will be looking to reduce emissions from their supply chains. This will require careful monitoring and reporting of emissions associated with products and services. However, the focus won’t just be limited to carbon. Companies will increasingly have to account for a wide range of sustainability impacts in their supply chains, such as deforestation and human rights.
In the current climate of COVID-19 and low oil prices, the focus will be on short-term performance and securing materials and services to meet today’s requirements. However, this situation won’t last forever and soon companies will be preparing for the future. Investors, governments, activists and community groups will also quickly resume their focus on climate-related issues.
While it may not seem an immediate concern, getting ahead of the game now will pay dividends later. Procurement teams can start by learning about the new products and services they will need in the future, they can engage with new industry bodies, and begin internal discussions on key areas for improvement or different ways of working. Change is always difficult but planning for this transition now will make life a whole lot easier in the future.