Uncompetitive procurement processes in the international oil industry

This month (September 2017) Redburn published a follow up report to their report last year (“The Ubers and AirBnBs of Oil Services”) around how new collaborative digital platforms could finally reduce bloated procurement costs in the oil and gas industry.

You can find links to the full reports at the end of this article, but I’ve summarised the key findings:

  • Slow and bureaucratic procurement processes are hindering competitiveness and will present an existential threat for many companies if the oil price stays low for long
  • Approved supplier status and high marginal cost of engaging with unapproved suppliers leads to increased pricing by approved suppliers
  • Opaque nature of the procurement industry leads to high industry mark-ups of equipment, often hidden within bundled contracts
  • BP stands out as one of the few Majors implementing effective changes to their practices

Much of the rationale for the DeepStream vision is encapsulated in both of these Redburn research reports. Compared to other industrial industries (e.g. automotive, aerospace), costs in procurement remain bloated and overdue for a dramatic improvement in efficiency. The tell all stat that ~10% of headcount at the Majors is in procurement (dwarfing the ratio found in other industrial industries) is indicative of how much money is being wasted in inefficient processes. The silver lining of the oil price decline and squeezed profits is that the infamously change-averse industry is now being strong-armed into adopting new best practices to survive.

An interesting approach to transforming the industry

It is not easy going, and we are constantly surprised of how impervious the inefficient but tried and tested ways of doing business in oil are gas procurement are. Only last week I sat with the head of “Procurement and Supply Chain Transformation” at one of the Majors, who told me his answer to reduction in industry procurement cost was having fewer suppliers (“rationalising the supplier base”) to be able to squeeze them harder on a relationship basis to reduce cost. This strategy flies in the face of the conventional economics that governs all other industries, and ignores the clear and intuitive benefits of creating a dynamic and competitive supplier base. This is the same person who employs a team of 40 people to run correlations to back solve what the “true” cost of equipment was that they were purchasing. So much for market forces. This primitive approach to trade is costing the industry hundreds of millions, if not billions, of dollars every year.

The pressure is on

The positive is that for each person clinging to their ‘tried and tested’ processes, we meet at least 10 who are chomping at the bit to try out new collaborative digital technology such as DeepStream. My gut instinct tells me that we are at an inflection point in the industry. The old guard will peter away into the past, whilst the organisations that are pro-active and open-minded about change and digital technologies will thrive and expand.

You can read the Redburn research reports here:

Written by Jack Macfarlane