London conference 2012

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

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London conference 2012

  1. 1. Specifics of Supply Chain Management in the Oil & Gas field in Russia. SCM in the environment of aggressive growth. Global Procurement and Supply Chain Management for the Oil and Gas Industry conference in London, September 2012
  2. 2. Global Procurement and Supply Chain Management for the Oil & Gas Industry2 Managing partner • 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 Consulting partnership • SCM • Management consulting • Joint venture organization and support in Energy, Oil & Gas, Metals & Mining • Av. partners’ experience in SCM – 11+ years • Over 60 headcount Major clients:
  3. 3. Global Procurement and Supply Chain Management for the Oil & Gas Industry3 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
  4. 4. Global Procurement and Supply Chain Management for the Oil & Gas Industry4 billion barrels billion barrels per year Proved reserves: Production: 44,6 trillion cubic metres 0,6 trillion cubic metres per year 1st Proved reserves: Production: 2nd Source: BP Statistical Review of World Energy June 2012 Rank in the world
  5. 5. Global Procurement and Supply Chain Management for the Oil & Gas Industry5 Significant amount of local capital is available for JVs: Source: RA Expert research 2011 “Light” taxes Government investment & government programmes Investment in Oil & Gas exploration from Russian Federal funds by 2020 Local capital Company Capitalization Gazprom over $140 bln. Rosneft over $70 bln. Lukoil over $50 bln. Novatek over $35 bln. Source: The General scheme of oil & gas industry development up to 2030 (Russian State Programme)
  6. 6. Global Procurement and Supply Chain Management for the Oil & Gas Industry6 Reserves, billion barrels of oil Capitalization, billion USD 0 5 10 15 20 25 30 0 80 160 240 320 400 480 GAP Source: Company`s annual reports, Bloomberg data
  7. 7. Global Procurement and Supply Chain Management for the Oil & Gas Industry7 Source: IHS Upstream Spend Report, 2012 69,0 94,0 109,0 103,0 132,0 144,0 167,080,0 123,0 189,0 194,0 238,0 286,0 323,0 67,0 76,0 91,0 85,0 93,0 100,0 110,0 63,0 86,0 112,0 106,0 133,0 151,0 181,0 137,0 223,0 322,0 301,0 392,0 477,0 528,0 62,0 79,0 107,0 102,0 121,0 143,0 163,0 52,0 72,0 102,0 97,0 119,0 138,0 163,0 0,0 200,0 400,0 600,0 800,0 1000,0 1200,0 1400,0 1600,0 Russia & Caspian Latin America North America Middle East Europe Asia-Pacific Africa Summary upstream CAPEX and OPEX spending – By region USDbillion 2004 2006 2008 2010 2012F 2014F 2016F Forecasted CAGR for the world: 9.2% Forecasted CAGR for Russia: 9.6%
  8. 8. Global Procurement and Supply Chain Management for the Oil & Gas Industry8 Arctic – next step Greenfields Brownfields
  9. 9. Global Procurement and Supply Chain Management for the Oil & Gas Industry9 … all of these factors are pretty attractive for the world’s leaders to come to the Russian market in all their glory …bringing Best foreign technology Expertise Global agreements Capital Market recognition
  10. 10. Global Procurement and Supply Chain Management for the Oil & Gas Industry10 The oil & gas “shoot-on-target”: extraction investments are primary, but not the only to be considered Oil & gas extraction investments Investments in services (exploration, drilling etc.) Investments in infrastructure (transport, communications, support etc.)
  11. 11. Global Procurement and Supply Chain Management for the Oil & Gas Industry11 Foreign giants working in Russia face significant pitfalls as a result of unevaluated risks of local content and culture specifics «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 «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
  12. 12. Global Procurement and Supply Chain Management for the Oil & Gas Industry12 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 ProcurementPracticalefficiency/valuegeneration(ROI) Spend Construction, Execution & Operations Engineering & Technology Financial decision, Strategy and project design • 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 • Non-transparent local decision maker structure • Undervalued importance of long-term planning
  13. 13. Global Procurement and Supply Chain Management for the Oil & Gas Industry13 Real-life example: key issues 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. Overall procurement function Inventory Management Perform inventory control Plan and manage inventory Supplier Performance Management & Development Measure and drive performance Establish, negotiate and manage supplier development plans Contractor Selection & Contract Award Negotiate contract Strategic Sourcing Management and Category Management Define sourcing strategy by category Analyze spend and assess opportunity Analyze supply market Business needs management (demand management) Planning of business needs for the next period Manage business needs ProcessesFunctions Sub-processes Publish plan Clear needs of on-hand material stock Prepare pre-qualification Select supplier Contract award Contract Management and Order Placement Create purchase orders Processcontrolsandcompliance Organization&capabilities Monitor and enforce contracts ITsystems&tools Conduct supplier reviews Create contract Conduct RFx/ auctions High-level Procurement & SCM processes classification framework 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: Core reason: best practices implemented as they were, without taking local factors into account
  14. 14. Global Procurement and Supply Chain Management for the Oil & Gas Industry14 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 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 Leading trends – critical success factors
  15. 15. Global Procurement and Supply Chain Management for the Oil & Gas Industry15 Fields of reengineering Supply Chain Management SCM strategy Supplier management CatalogueIT Materials management and planning Procurement processes Risks and controls Organisation 1 2 3 4 5 6 7 8 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 non- liquid 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. 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
  16. 16. Example on effects of the implementation of initiatives for improving supply systems efficiency 3 - 6% Accuracy of planning Reduction of delivery timeReduction of downtime 3 - 10% Consolidation of needs; coverage with procurement strategies, counterparties efficiency management Automation of procurement, electronic bidding Standardization and unification of technical solutions Coverage of total cost of ownership Saving by increase in supply system efficiency Saving by increase in planning system efficiency 2 - 4% Decrease in unclaimed high liquid positions Increase in stock turnover and funds in transactions Reduction of unfinished construction due to supply shortage Reduction of working capital Reduction of non-current capital Improving reliability of production Cost reduction Optimization of capital Resulting benefits $ 8 - 30% $ High-level indicators Basic KPIs Decrease in low-liquid positions Complete and timely satisfaction of needs 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 - 6-12%; 3rd year - 8-20%. 16
  17. 17. Global Procurement and Supply Chain Management for the Oil & Gas Industry17 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 Quantity optimization Security schemes of investment projects Financial responsibilities allocation matrix Establishment of regional procurement centers Bundles of regulatory documents Delivery time management Management of competencies Automation requirements Integrated development plan Implementation of IT systems Organization structure Procurement function maturity model
  18. 18. Global Procurement and Supply Chain Management for the Oil & Gas Industry18 Case: info and background 70 ml tons of oil equivalent Exploration 8 regions of upstream operations in Russia 4 bln USD In annual Upstream spending (CAPEX) 1.7 – 2.5 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. Company`s info: Major vertically integrated Russian oil company, among the ten largest private oil companies in the world.
  19. 19. Global Procurement and Supply Chain Management for the Oil & Gas Industry19 Case: key issues Overall procurement function Inventory Management Perform inventory control Plan and manage inventory Supplier Performance Management & Development Measure and drive performance Establish, negotiate and manage supplier development plans Contractor Selection & Contract Award Negotiate contract Strategic Sourcing Management and Category Management Define sourcing strategy by category Analyze spend and assess opportunity Analyze supply market Business needs management (demand management) Planning of business needs for the next period Manage business needs ProcessesFunctions Sub-processes Publish plan Clear needs of on-hand material stock Prepare pre-qualification Select supplier Contract award Contract Management and Order Placement Create purchase orders Processcontrolsandcompliance Organization&capabilities Monitor and enforce contracts ITsystems&tools Conduct supplier reviews Create contract Conduct RFx/ auctions High-level Procurement & SCM processes classification framework • 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
  20. 20. Global Procurement and Supply Chain Management for the Oil & Gas Industry20 Case: value-added solution 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 • Reengineering of the procurement system* • Implementation of the uniform integrated solution based on the ERP system SAP 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 Solution:
  21. 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. © 2012 BRIGHT Group. All rights reserved .

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