Skip to main content

Post Award Contract Management with $40 Oil: Insights from Big Oil

I had the opportunity to host a good colleague of mine  in my supply chain relationships class this week.  We worked together years ago to help define the a baseline framework for strategic sourcing and category management that was deployed within the  a large oil and gas company’s lubricants group, and which later became deployed across the entire Procurement organization.  Much of our work together focused on the importance of market intelligence, cost models, using the appropriate price index, negotiating the right contract archetypes, and establishing the right internal stakeholder needs.  This work was instrumental in shaping my thinking about how to structure category management at a global level. In my class this past week, my colleague spoke further about how procurement is markedly different in an era of $40 oil.

This conversation was further clarified in my mind when I spoke with a journalist,  from the Mexican journal Manufactura, about the importance of procurement in Mexico.  As the industry is becoming privatized with more private companies coming in to explore, the need for procurement will continue to escalate.  This is due to the fact that local suppliers, particularly in contracting services, will need to be developed to identify the right skills and talent that can enable safe, efficient, and profitable operations, when revenue is dropping.

As my colleague emphasized, CFO’s and COO’s are much more interested in what procurement can offer them in an era of $40 oil, versus when oil was $100 a barrel.  All of a sudden, it is critical to find cost savings, and identify opportunities to drive out costs.  But this requires that oil companies don’t pursue the traditional approach of demanding price cuts from suppliers.  Rather, it requires true collaboration with trusted supplier partners. The day after my class, he was scheduled to fly out to one of their major rigs in the Gulf of Mexico.  He notes that “I walk into a room of about 30 people, representing 5 suppliers as well as Shell people.  For these meetings we bring in benchmark data, comparing the different operating cost categories for Shell, and another chart that shows the cost models for all other rigs operating in the GOM.  This allows us to compare this rig’s cost versus others, and the cost of our fleet operating relative to other fleets on 10 different performance metrics. He also noted that “What is interesting, is that people in the room hardly look at  the data.  We have a rule, that we only want operators in the room, no sales people!  Many of these guys are from the Bayou, have been working on rigs for 10 or 20 years, and they know the rig inside and out.  They also know how their company makes money, and they know the things that they are getting paid to do that isn’t a core part of how they make money.  So I ask a very simple question:  “We all know we have to save money given the environment.  So I need your help.  What is it that bugs you about the way we operate today?  What is the ‘stupid money’ we are throwing at today in the way we opeate that doesn’t make sense?” Now consider that it costs about $1.2M   per day to operate a rig, which includes the lease, the people, the surrounding infrastructure, etc.  And the people involved in operating that rig are drillers, pipefitters, seismic people, mudders, and others.  In every case, people will open up and tell me – “look – here is something that you are asking us to do that is probably costing you $100K a day!  We will then look at the chart – and sure enough we will see the differential in the cost category that they are talking about.  Now in a period of $100 oil, no one is going to look at $100K per day – because it is all about “first oil” – getting the oil out as quickly as possible.  Don’t talk to me about skimping to save a few dollars.  But suddenly, $100K a day is a big deal.  Safety is number one, so we also have to consider if that savings improves or doesn’t compromise safety.”

My friend also emphasized to students that to be able to engage and talk to people and be successful in procurement and supply chain, you need to also think about your “brand image”.  He noted that “you need to develop a brand image, which will help you throughout your entire life.  You want to develop a brand around your strengths, and what you do well.  If you are good at analytics – that is ok – but you can’t just be in the room and not be able to also talk about what you did, and the meaning of the data that you analyzed.  Other possible strengths might be your ability to network within the organization, your ability to influence people towards a solution, your ability to lead a team, or even just being known as someone who is on-time and will do what they promise!  For me in my role, I need to get clarity from the business on what they want – or I will not be able to cut a good contract.  For upstream – it is all about getting the well out of the ground in an efficient and safe manner. So I know that my personal brand is about being clear and always following up on my commitments to individuals.

Wise words for all of us to take away…