Page 3: Purchasing and supply in oil and gas
The oil and gas industry is divided into the ‘upstream’ and ‘downstream’ operations. Upstream involves exploring for oil and gas and extracting it safely. The downstream part of the industry is concerned with refining, distribution and sales.
The supply chain
The oil and gas industry has very long supply chains. Many companies may be involved in supplying the materials, components and services at different stages and across the various processes involved in extracting, refining and distributing oil and gas. Procurement becomes even more important in this type of global operation. A company such as BP sources services and supplies from many different countries. These include mechanical and electrical parts, to professional services such as project management or legal expertise for drawing up contracts.
Reliability is a crucial factor in supply, both of quality and timing. If supplies are of poor quality, delivered late or cost more than was agreed, this will affect productivity and profitability. If production is delayed or faulty products need to be scrapped, this can reduce profits. Poor quality inputs could also affect the safety of the process – a major consideration in the oil and gas industry.
For example, to help improve safety and quality of supply, BP is introducing safety performance indicators into contracts of suppliers involved in high-risk activities. Suppliers who do not meet these standards may be removed from contracts. As part of this safety focus, BP is also planning to reduce use of agency staff in procurement roles and boost its in-house expertise in supply chain management.
'Make or buy'
An important decision for many businesses is whether to carry out a particular part of its process itself (‘make’) or buy in the components or expertise it needs. This decision might depend on, for example, whether the skills and capacity are available in-house; whether there is a need for high security of supply; or whether it is simply cheaper to outsource.
For example, an oil company could choose to rent or own an oil platform. If it rents, its costs are limited to the rental period, with repairs and maintenance the responsibility of the owner. Buying outright might cost more initially but the company has the benefit of the asset. However, it also has the issues and costs of maintenance and ultimately, disposal. Purchasing managers work with operational managers to consider these issues and find the most cost-effective and efficient solution for the business.