Purchasing and supply in oil and gas

The oil and gas industry is divided into three areas the ‘upstream’  ‘midstream’ and ‘downstream’ operations.

Upstream involves finding areas where oil oil and gas might be and  bring it to the surface it safely.

The midstream involve transportation and storage of oil and gas .

The downstream part of the industry is concerned with refining,  processing distribution  so as can be used by end users.

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.

Sustainable procurement

Other key factors to consider when choosing a supplier include their ability to respond quickly to changing customer needs and how well they can help towards meeting a business’ sustainability goals.

Sustainable procurement is a high profile matter for businesses today. It can help to save money, reduce waste, improve competitiveness and build a business’ reputation. As part of their sustainability programmes, many oil companies have invested in local transportation networks or built schools. They provide jobs and by sourcing supplies locally help to develop the local economy. The global oil industry has a responsibility to the countries in which it operates to manage its operations in as sustainable way as possible. A purchasing manager might want to consider whether the supplier behaves responsibly, for example, adhering to ethical standards or sourcing raw materials in an ethical way.

For example, Shell is working with its existing suppliers to implement the Shell Supplier Principles. These set out the minimum standards which Shell suppliers need to meet. These include using energy and natural resources as efficiently as possible to minimise impact on the environment and covering health and safety issues.

Other aspects of sustainable business include managing waste effectively and reducing the company’s carbon footprint. This can be improved by choosing suppliers who also take their responsibilities towards environmental impact seriously.