Logistics plays a very significant role in the Oil & Gas (O&G) sector. A recent evaluation suggests that logistics represent between 5 and 15 percent of the total operating costs fora typical oil and gas project or facility (KPMG, 2017). Past evaluations also show that logistics can represent between 5 and 10 percent of the oil market value (IEA, 2011). Companies functioning in the O&G sector operate in almost every geographical region in the world, often in difficult environments and with very volatile prices. As a result of poor logistical planning, O&G players, in particular, can pay very high price errors in the supply chain. Therefore, any value leakage in the logistics field can represent a significant stake for O&G players.
Following the plunge in oil prices in 2014, many companies decided to implement improvement plans throughout different operational areas. In particular, logistics became a focus area because improvements in this sector can result in substantial improvements to an organization’s bottom line. For this reason, Oil-Field Service and Equipment (OFSE) companies were put under increasing pressure by the upstream oil and gas client companies to investigate areas of improvement and find new ways to cooperate with operators in the industry.
Additionally, logistics challenges remain particularly important in the upstream sector, where significant new development of both onshore and offshore unconventional activities creates specific challenges that still need to be addressed today. In the midstream and downstream sectors, logistics has been identified as a key challenge to be addressed, even if some solutions still need to be more broadly implemented.
Global logistic challenges across the different O&G activities
Independent of the segments in which they operate, upstream, midstream, and downstream O&G companies face significant business challenges regarding logistics. The O&G sector also faces specific security issues in addition to infrastructure and regulatory constraints. Safety is a great concern, and Health, Safety and Environment (HSE) records area key differentiators in a crowded logistics market, where logistics services have traditionally been sourced, planned, and managed in functional silos, with tactical logistics execution partners. Because teams’ skill sets tend to be mostly technical in the O&G sector, there is often a lack of focus on end-to-end logistics with limited data culture or access to logistics systems. To counter this, there are several strategic moves that organizations can implement to facilitate a higher logistics performance.
Support from fourth-party logistics players
Support from fourth-party logistics players makes particular sense for O&G activities. The so-called Lead Logistics Providers (LLPs), also referred to as fourth-party logistics (4PL) providers, can become a choice partner to manage overall supply-chain dimensions. Although third-party logistics (3PL) providers already manage several aspects of logistics, 4PL providers are involved in strategic decision-making which enables them to take on broader responsibility and accountability for logistic operations. Because they are deeply involved in the client’s business model definition, 4PL providers make sure that the whole supply chain is aligned with short-term and long-term strategic goals. To do this, they take l responsibility for the design, management, and operational performance of the entire supply chain function.
Develop strong relationships with local authorities
Strong ties with local authorities are absolutely necessary to understand any policy change that could potentially impact logistics-related issues. Policy changes affecting temporary imports and duty exemptions can directly influence O&G companies or their logistic partners. Additionally, due to the fact that infrastructure challenges are a recurring issue in the O&G sector, it is important to keep up to date with major developments occurring in critical geographical sectors. For example, in a major region like the Gulf Cooperation Council (GCC), the construction of a trans-GCC rail network inter-GCC deliveries.
Reinforcing the selection process for local, regional or global logistics partners
ForO&G players, it’s paramount that they pay particular attention to the reputation and experience of suppliers. Although the price is, of course, a critical factor, it should remain an indicator rather than the sole determining factor.s Particularly in the O&G industry, short-term gains can be very quickly lost to high-value supply chain disruptions. Partnering with a company that perfectly understands the O&G industry and cane properly implement systems and procedures that comply with the strict HSE standards and Business Ethics Policies, can be invaluable. Because the infrastructure landscape is constantly evolving and public policy strongly influences this sector, a strong intelligence effort should be pursued and maintained on a regular basis. Selecting the right logistics partners at the start of the project can prevent financial losses and production delays. Making the choice to change logistics providers mid-course can be prohibitively expensive and involve serious operational risks.
Don’t forget logistics issues related to non-core business activities
The logistics activities that relate to the non-hydrocarbon supply chains – such as mechanical and electrical parts, materials and services required to run the business, etc. – are crucial for analyzing functional performance. The natural tendency is to focus on the logistics of one’s own products and services production and delivery, but non-core business activities should not be overlooked.
Deploy a comprehensive logistics management system
By utilizing a global approach to the logistics management system, organizations can take advantage of the following:
- Identify business benefits from managing logistics as part of a cross-geography, cross-modal solution
- Determine appropriate areas for external support through 4PL supplier
- Selection of a 4PL supplier for offshore logistics operations.
The continuous deployment of traditional non-O&G specific logistics and supply chain best practices
Finally, organizations must favor
- A “make or buy” company strategy in regard to the level of outsourcing, specific goals, etc.
- Demand intelligence and data management for materials, cargo, personnel
- Developing organizational structure, operational and security processes, etc.
- Infrastructure and equipment: regulation compliance, transport solutions, etc.
- Systems: IT solutions, databases, etc.
Focus on specific challenges met by Offshore Upstream activities
When it comes to Offshore E&P, with the development of unconventional O&G, the number of platforms and the distance to shore has increased significantly over the past decade. For this reason, logistics represents an increasingly strategic part of the cost associated with those projects. The cost and availability of Marine Platform Supply vessels (PSV), for example, can represent a significant burden for companies operating offshore platforms because offshore operations and maintenance can face setbacks due to logistics issues. This can result in non-productive time or too much standby time for operators and contractors’ crews causing potential production deferment.
Diverse Platform Supply Vessel (PSV) sharing or pooling agreements can be put in place
Supply Vessels remain the main cost drivers for material supply and communal solutions are attracting greater interest. In the North Sea, for example, the CNS pool managed by Peterson on behalf of Dana, Petrofac and Total; Team (Chevron/Conoco) marine operation managed by Asco; AMLA sharing platform managed by Peterson; Shell / Chrysaor PSV pooling agreement, and the Shell / Total PSV ad-hoc sharing agreement.
Joint task forces can also address logistics issues
In the United Kingdom, a group of O&G players is currently working on the development of industry-wide practices regarding PSV sharing. Some of these practices include:
- Benchmarking PSV utilization performance (deck/time)
- Modeling of PSV voyage optimization
- Development of industry contract terms and conditions for PSV ad-hoc sharing
- Reviewing best industry options to improve visibility of PSV availability for ad hoc sharing
- Reviewing options to extend PSV pooling managed by either logistics providers or directly between operators.
THE NEXEN UK CASE STUDY
To reduce it’s Offshore Non-Productive-Time (NPT) – a critical KPI the company decided to focus on –Nexen reviewed the operation of its Platform Supply Vessel (PSV) fleet in 2016.
By improving the overall PSV logistics, it was able to reduce its PSV fleet from 4 to 3 vessels and drastically lower its dependency on ad-hoc spot hires. This change alone resulted in annual savings between£3.5M – £4M. In addition, Nexen significantly improved its sailing schedule, further increasing its annual savings by an additional £1.25-£1.5M (Oil and Gas UK, 2017).
Focus on specific challenges met by the development of shale gas activities
Because of the significant growth in the development of shale gas operations, the demand for road transportation and materials has skyrocketed in many regions, particularly in the United States. By nature, shale gas exploration and operations are fast-paced and intensive activities with a high risk of operation disruption and increased safety hazards in the associated logistics field. In addition, those large projects often include parallel logistics networks, where multiple suppliers and contractors may be used, leading to inefficiencies, increased costs, and increased safety exposure. Skills shortages in the logistics sector also strongly limit the improvement capabilities regarding a logistics management approach.
Integrate supply chain management
An integrated supply chain management approach can significantly improve logistics capability and performance. A centralized approach can significantly improve demand visibility, clearly enhance planning and reporting capabilities. In addition, it also facilitates contractor management and oversight, leading to a significantly more simple and transparent organization that requires less distance to be covered by the logistics fleet.
Professional logistics function is key for unconventional onshore activities
Logistics skills improvement should be promoted within the company through training, the creation of a dedicated department, and the recognition of the value brought by individuals in logistics management. Of course, external support can also be particularly beneficial during the transition phase: the creation of a department, review of the different processes, etc.
THE SHELL CASE STUDY
With the support of an external consulting player, Shell fully reviewed its logistics activities in one of its U.S. Onshore O&G locations by designing, sourcing and implementing a solution less than 4 months.
The solution that was implemented delivered net savings of over 25 percent of logistics costs, thereby significantly reducing the cost-per-barrel of water downhole. Because the distance traveled by vehicles was reduced by nearly 2 million miles, safety exposure was improved thanks to improved road transport planning and scheduling (Accenture, 2015).
New Development In The Midstream And Downstream Sectors
In the oil industry, he midstream and downstream supply chain involve crude oil procurement, transportation, refining, storage, logistics, and sales. Downstream logistics mainly rely on conventional methods like trucking, rail and boat shipment as well as pipelines. In order to be profitable, O&G companies need to keep their products moving; the haulers must have their trucks moving and retailers must keep their inventory available at all times while keeping an eye on a potentially changing regulation.
The shared-fleet model in the downstream sector can represent an attractive solution
A shared fleet model can be a delivery operations solution by enabling an organization to have a more efficient truck movement across a given region. By sharing one fleet, multiple O&G players can introduce a higher number of oil products and fuel depots, delivering a higher number of customers sites. This results in better route optimization, a lower risk of stock-outs, and an overall increased final customer satisfaction. Synergies can definitely be found here.
Dynamic scheduling and digitalization are key to improving downstream operations
Today, the routing process remains a manual or semi-automatic process with many interfaces and options. By automatizing the entire process including delivery amounts, schedules, stock levels, average sales, and health and safety issues (e.g. truck driving time), operations can be optimized. Streamlining documentation and attestation through digitization is a shift that could significantly transform the downstream supply chain operations by improving efficiencies for all stakeholders.
Integrating agile route optimization processes
To address potential bottlenecks and delays at border crossings, agile route optimization process should be integrated. Alternative modes of transport, alternative truck routes, and points of entry should be regularly investigated to challenge existing practices. Investing in infrastructure – with the development of new hubs, gateways – can also be a solution to optimize logistics in some regions.
Receiving support from third- and fourth-party partners
Outsourcing some aspects of O&G activities through third- and fourth-party partners can bring significant benefits for the entire value chain, not only for the upstream activities but also for the downstream sector. SeeExxonMobil Case Study.
Downstream Logistics Center optimization: ExxonMobil Case Study
In November 2017, ExxonMobil Partner officially opened a new 60,000 square-foot logistics center in Texas. This logistics site serves as a regional distribution center for the maintenance, repair, and operations of six refineries and chemical plants in Texas.
In order to manage its downstream logistics, ExxonMobil decided to partner with DHL Supply Chain to manage the site. Thanks to the new organization and the support of an external partner, ExxonMobil supply chain costs should be reduced by 15 percent as a result of the elimination of regional inventory duplications and further optimizing the company’s supply chain (Transport Topics, 2017).
Logistics optimization has a very significant impact on the bottom line of O&G companies. Beginning in 2014 with the plunge of oil prices, the optimization of O&G operations from upstream to downstream activities must continue to leverage the potential cost optimization brought by the digital revolution and the development of external partnerships. Increased pooling or sharing practices in addition to the development of partnerships with 3PL and 4PL players that logistics operations have already clearly shown significant impacts on the bottom-line of some key O&G players.
Other threats like geopolitical instability can also have a strong impact on O&G logistics operations. The recent events in the Strait of Hormuz illustrate how security issues still remain a critical risk element when it comes to supply-chain management. For this reason, it is important for O&G companies to have a holistic approach to their supply-chain challenges in order to develop the best global approach.
- Accenture (2015). Shell: achieving a step-change in logistics performance through the design and deployment of a first-in-industry 4PL logistics solution. https://www.accenture.com/_acnmedia/Accenture/Conversion-Assets/DotCom/Documents/Global/PDF/Dualpub_10/Accenture-Shell-Achieving-Step-Change-Logistics-Prformance.pdf Accessed 16 May 2019.
- KPMG (2017). Rethinking the Upstream Supply Chain. Available at: https://assets.kpmg/content/dam/kpmg/ng/pdf/audit/ng-rethinking-upstream-supply-chain.pdf Accessed 16 May 2019.
- EIA (2011). Oil and Natural Gas Logistics. Available at: https://iea-etsap.org/E-TechDS/PDF/P03_oilgaslogistics_PS_revised_GSOK2.pdf Accessed 16 May 2019.
- Oil and Gas UK (2017). Nexen – Driving greater efficiency of platform supply vessel fleet through controlling offshore nonproductive time. https://oilandgasuk.co.uk/category/efficiency-case-studies/business-process-casestudy/logistics-case-studies/ Accessed 23 Jun. 2019.
- Oil and Gas UK (2018). Developing an industry vision for the optimisation of logistics. https://oilandgasuk.co.uk/logistics-cluster-approach/ Accessed 16 May 2019.
- Transport Topics (2017) DHL Supply Chain, ExxonMobil Partner on New Texas Logistics Center. https://www.ttnews.com/articles/dhl-supply-chain-exxonmobil-partner-new-texas-logistics-center Accessed 23 Jun. 2019.