Specifics of Supply Chain Management in the Oil & Gas field in Russia. SCM in the environment of aggressive growth.

Transcription

1 Specifics of Supply Chain Management in the Oil & Gas field in Russia. SCM in the environment of aggressive growth.

2 Major clients: Managing partner Consulting partnership Worked for major oil and gas companies for over than 15 years (Yukos, TNK-BP, Slavneft) SCM project director M&A leader for oilfield services The European SCM Excellence Award SCM Management consulting Joint venture organization and support in Energy, Oil & Gas, Metals & Mining Av. partners experience in SCM 11+ years Over 60 headcount 2

3 We are here for: Musings on best practices and perspectives of SCM in O&G, greenfield & brownfield, etc. Practical benefits (cases, contacts, leads, etc.) It s all about this 3

4 Proved reserves: Rank in the world billion barrels Production: billion barrels per year Proved reserves: 44,6 trillion cubic metres Production: 0,6 trillion cubic metres per year 1 st 2 nd Source: BP Statistical Review of World Energy June

5 Light taxes Government investment & government programmes Local capital Significant amount of local capital is available for JVs: Investment in Oil & Gas exploration from Russian Federal funds by 2020 Company Gazprom Rosneft Lukoil Novatek Capitalization over $140 bln. over $70 bln. over $50 bln. over $35 bln. Source: The General scheme of oil & gas industry development up to 2030 (Russian State Programme) Source: RA Expert research

6 Reserves, billion barrels of oil Capitalization, billion USD GAP Source: Company`s annual reports, Bloomberg data 6

7 USD billion Summary upstream CAPEX and OPEX spending By region 1600,0 1400,0 Forecasted CAGR for the world: 9.2% Forecasted CAGR for Russia: 9.6% 138,0 163,0 163,0 Russia & Caspian Latin America 1200,0 119,0 143,0 North America 1000,0 800,0 600,0 400,0 200,0 0,0 121,0 528,0 102,0 97,0 477,0 107,0 102,0 392,0 72,0 181,0 79,0 322,0 301,0 151,0 110,0 52,0 133,0 223,0 100,0 62,0 112,0 106,0 93,0 137,0 86,0 91,0 85,0 323,0 286,0 63,0 76,0 238,0 67,0 189,0 194,0 123,0 80,0 69,0 94,0 109,0 103,0 132,0 144,0 167, F 2014F 2016F Middle East Europe Asia-Pacific Africa Source: IHS Upstream Spend Report,

8 Arctic next step Greenfields Brownfields 8

9 all of these factors are pretty attractive for the world s leaders to come to the Russian market in all their glory Best foreign technology bringing Expertise Capital Market recognition Global agreements 9

10 The oil & gas shoot-on-target : extraction investments are primary, but not the only to be considered Investments in services (exploration, drilling etc.) Oil & gas extraction investments Investments in infrastructure (transport, communications, support etc.) 10

11 Foreign giants working in Russia face significant pitfalls as a result of unevaluated risks of local content and culture specifics «For much of its eight-year history, Russian oil company TNK-BP Ltd. has seen its two shareholders at odds. BP PLC and a group of Soviet-born billionaires known as AAR have done battle in courtrooms and boardrooms from Siberia to the Caribbean» The Wall Street Journal «The pressure on the Sakhalin-2 has been seen as «softening-up» exercise to force the international oil companies (IOCs) to revise the terms of their investments to allow greater Russian participation in their projects». Shell surrendering its controlling stake in Sakhalin Energy» Royal Dutch Shell Blog «Gazprom officially admitted that the giant Shtokman project on gas production in the Barents Sea was frozen for n undefined period of time: the costs proved to be too high». Energy news 11

12 Practical efficiency/ value generation (ROI) Despite well-grounded decisions at the design stage, project execution and spend effectiveness are lacking. And considerable part of challenges lies in the field of Procurement Construction, Execution & Operations Non-transparent local decision maker structure Undervalued importance of long-term planning Financial decision, Strategy and project design Engineering & Technology Need to comply with local technical standards Poor local technologies Harsh environment Lack of infrastructure Harsh environment Remote locations with undeveloped logistical infrastructure, complicated supply routes Expensive mobilization for non-local suppliers Undeveloped local suppliers Low qualified local staff Fraud as common practice Spend 12

13 Real-life example: key issues Background: JV between major world and largest Russian oil & gas players. Best operational practices taken directly from the international shareholder. Healthcheck trigger: shareholders not satisfied with SCM. Internal audit rates SCM unsatisfactory. Healthcheck findings: High-level Procurement & SCM processes classification framework Functions Overall procurement function Processes Business needs management (demand management) Strategic Sourcing Management and Category Management Inventory Management Contractor Selection & Contract Award Contract Management and Order Placement Supplier Performance Management & Development Planning of business needs for the next period Manage business needs Publish plan Define sourcing strategy by category Analyze spend and assess opportunity Analyze supply market Prepare pre-qualification Perform inventory control Plan and manage inventory Negotiate contract Sub-processes Clear needs of on-hand material stock Conduct RFx/ auctions Select supplier Contract award Create contract Monitor and enforce contracts Create purchase orders Measure and drive performance Conduct supplier reviews Establish, negotiate and manage supplier development plans Process controls and compliance Organization & capabilities IT systems & tools 1. No business needs (demand) management suitable for SCM. 2. No Category management process. 3. Roles & Responsibilities. Lack of healthy cross-functional interaction and no creative tension between technical and commercial (procurement) roles. Technical roles prevail. 4. Low compliance. 5. No Supplier performance management and proactive supplier development planning. 6. Poor data management (catalogues) does not properly support SCM process requirements. 7. Insufficient SCM Staff competences to properly perform within defined processes. Core reason: best practices implemented as they were, without taking local factors into account 13

14 Implementing best practices and end-to-end business focus to project design, implementation and operation to deal with capital projects risks and pitfalls is particularly important in the oil and gas sector Leading trends critical success factors Strategy & Long-term planning Collaboration with local business and government Attention to the local specifics, adaptation of global practices Early involvement of procurement and suppliers in the project lifecycle Engineering, procurement and construction (EPC) contractors iteration Procurement strategy, smooth handover of materials from project to operations 14

15 Fields of reengineering First we need to evaluate existing system and create reference models to initiate future changes: Reference model oriented on strategic goals and long-term targets; Transition plan and first priority activities for model reengineering, based on Company readiness to change and real opportunities to get visible value 7 8 Risks and controls IT Materials management and planning 6 1 SCM strategy Supply Chain Management Supplier management 5 2 Organisation Catalogue Procurement processes 4 3 Fields of changes: 1. Strategic management of SCM function (goals, KPIs, key principals, segregation of duties and responsibilities). 2. Function and organisation structure (separation of SCM function (vertical), multi-functional groups, centralization for major groups of services and materials) 3. Implementation of services/materials catalogue, matrix of accountability segregation due to category. 4. Reference model and corporate SCM framework (demand planning, purchases, contract administration, management of commitments, materials management, etc.). 5. Supplier evaluation, supplier efficiency data base 6. Optimisation of materials management system, including illiquid and nonliquid assets 7. It-strategy based on integration SCM processes with linking processes (production planning, investment and business planning, management accounting). 8. Risk matrix, Control matrix, risk management procedures. 15

16 Example on effects of the implementation of initiatives for improving supply systems efficiency $ High-level indicators Basic KPIs Improving reliability of production 3-6% Reduction of downtime Accuracy of planning Reduction of delivery time Complete and timely satisfaction of needs Resulting benefits $ 8-30% Cost reduction 3-10% Saving by increase in supply system efficiency Consolidation of needs; coverage with procurement strategies, counterparties efficiency management Automation of procurement, electronic bidding Reduction of administration costs The model is based on an average scenario and a conservative estimate is used, the level of accuracy is (+-50%). If any of the current processes corresponds to the level of "best practices the value of the Resulting benefits will be reduced by the improvement value of such process. The dynamics of the Resulting benefits with regard to experience enhancement and process automation. Динамика «итоговых выгод» с учетом набора опыта и автоматизации процессов: 1st year - 2-6%; 2nd year %; 3rd year %. Optimization of capital 2-4% Saving by increase in planning system efficiency Reduction of working capital Reduction of non-current capital Standardization and unification of technical solutions Coverage of total cost of ownership Decrease in unclaimed high liquid positions Increase in stock turnover and funds in transactions Reduction of unfinished construction due to supply shortage Decrease in low-liquid positions 16

17 The better practices are well known, complex tools, approaches and frameworks are important, but much more critical is the value generation by right implementation Complex approach to supply chain transformation Core elements of best practices Organization structure Map of target processes Process schemes Organization structure Procurement function maturity model Quantity optimization Financial responsibilities allocation matrix Establishment of regional procurement centers Bundles of regulatory documents Delivery time management Integrated development plan Management of competencies Security schemes of investment projects Automation requirements Implementation of IT systems 17

18 Case: info and background Company`s info: Major vertically integrated Russian oil company, among the ten largest private oil companies in the world. 70 ml tons of oil equivalent Exploration 8 regions of upstream operations in Russia 4 bln USD In annual Upstream spending (CAPEX) bln USD In annual Upstream spending (OPEX) Background The company was created as a strategic partnership between one of the world's leading international oil and gas companies and a group of Russian businessmen with the aim to jointly hold their oil assets in Russia and Ukraine. The international company owned 50% of this JV shared not only capital, but its corporate best practices, technology and expertise. Indeed many of Procurement related practices just haven`t worked: tendering procedure was unclear, independent controls was not working, level of bureaucracy was too high to make the company flexible, planes wasn`t fulfilled. 18

19 Case: key issues High-level Procurement & SCM processes classification framework Functions Overall procurement function Processes Business needs management (demand management) Strategic Sourcing Management and Category Management Inventory Management Contractor Selection & Contract Award Sub-processes Planning of business needs for the next period Manage business needs Publish plan Define sourcing strategy by category Analyze spend and assess opportunity Analyze supply market Prepare pre-qualification Perform inventory control Plan and manage inventory Clear needs of on-hand material stock Conduct RFx/ auctions Negotiate contract Select supplier Process controls and compliance Organization & capabilities IT systems & tools Low level of procurement centralization Lack of strategic approach to category management Inefficient greenfield procurement process Law requirements for business needs planning Reactive vs. proactive controls and inefficient P2P compliance function Law level of P2P Contract award Contract Management and Order Placement Create contract Monitor and enforce contracts Create purchase orders Supplier Performance Management & Development Measure and drive performance Conduct supplier reviews Establish, negotiate and manage supplier development plans 19

20 Solution: Case: value-added solution Reengineering of the procurement system* Implementation of the uniform integrated solution based on the ERP system SAP Results: Transparency and standardization of processes of planning, procurement system control, performance management and control Automation of procurement processes including precise procurement and operational functions distinction Automation of payment processes, segregation of duties related to payments approval and operational control Supplier management via long-term framework contracts Inventory control, online receipt and replenishment of materials; improved inventory turnover, reduced free inventory End of the day result $300 mln in 5 years * The project has won the SCM Global Awards international competition as the best Procurement Reengineering Project in Oil & Gas sector 20

21 BRIGHT is a successful Russian company which provides consulting services and expertise in the field of supply chain management, planning and control, project management, development and implementation & operation of integrated business processes based on ERP-systems. Our services are aimed at achieving global standards in business processes and control mechanisms in the Russian market BRIGHT Group. All rights reserved.