London

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

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. 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. 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. 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. 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. 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. Global Procurement and Supply Chain Management for the
Oil & Gas Industry8
Arctic – next step
Greenfields
Brownfields

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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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 .