Benchmark Study Shines a Light on the Oil & Gas Supply Chain’s Rising Cost Crunch

By Joshua Trott, Chief Revenue Officer

Industry Under Pressure

In Oil & Gas we routinely feel the push and pull of outside forces — geopolitics, financial markets, and commodities pricing — as they ripple through our balance sheets. With conflict in the Middle East raising questions about increased sanctions on Iran, and the potential of steady increases in production from Venezuela over the coming years, this feels acutely relevant now. In many ways, today’s energy giants are being asked to build a foundation on shifting sands. 

To be successful in this universe requires a blend of supply chain best practices and adaptability that’s predicated on an ability to sense the vibrations — the sometimes-imperceptible tremors that precede the earthquake — along with the capabilities to make adjustments to minimize the damage.

Last month Workrise published the results of a new benchmark study by Newton X, which we commissioned to capture an unbiased, highly detailed snapshot of the state of the Oil & Gas supply chain. More than 130 leaders from Oil & Gas providers and service companies in the US and Canada shared what they are seeing on the ground, giving us an unprecedented window into their collective experience, knowledge, and challenges.

We’ve shared the study’s highlights, and I kicked off our more detailed analysis of key takeaways with a deep dive into the findings around data quality and access. 

Another area of focus that produced startling results, and an issue that is keeping decision-makers up at night, is the cost environment. Let’s take a look at what Oil & Gas leaders are grappling with today — and how we can use this information to meet both present and future challenges, maintain profitability, and put energy companies in a position of strength moving forward.

A Confident Outlook Amid Shifting Realities

The study took the temperature on both the macro outlook and the granular challenges and goals of those who participated. Broadly speaking, industry leaders reported a positive outlook, with 95% saying they were either “confident” or “very confident” their company will hit their financial targets for the 2023 fiscal year.

At least at first blush, it’s looking good. Really good. Only a small group seem to be concerned about tying 2023 up with a bow. 

But at the same time, when asked to rank the significance of the issues they face every day — from geopolitics to cash flow and liquidity, access to data, regulatory complexity, you name it — the No. 1 most significant issue respondents flagged was the rising cost of goods and services required to support their operations. 

Beyond what’s “significant,” another useful judge is the simple question: “What’s keeping you up at night”?

Across all departments, 62% of decision-makers named “rising cost of goods and services” as a challenge that is keeping them up at night, with Logistics feeling the squeeze more than other departments (91% of Logistics leaders noted rising costs as a concern).

Add to that the fact that over 80% of respondents reported cost increases across all service categories that range from 5% to 50%, and the picture becomes more nuanced. Sure, in most cases 5% is not enough to make the unit economics of a given project fall to pieces. But 25% or 35% input cost increases? That warrants a more meaningful look.

TL;DR: While the vast majority of respondents are confident in their outlook for FY23, they are feeling the pressures of a rising cost environment that must be closely monitored as it threatens to chip away at their margins.

Currency and Competition

“Inflation has been on our radar. Now, vendors have been seeking almost a blank-check type of price increase, or price adjustment clauses in their contracts. That certainly keeps me up at night."

— Senior Category Manager, Top 10 US-based Oil & Gas producer

You might read that quote and think, “What’s new there? I’ve been watching the news.” The insight here is not that inflation exists, or that it encourages suppliers to push for more flexible pricing models. The challenge lies in the combination of rising inflation and increased demand  — and therefore competition — for everything from parts to materials and labor.

Even with slow but steady growth, and most of the biggest players committed to staying the course despite rising oil prices, the supply of parts, services, and materials — and especially labor — has lagged behind what the industry requires. And that competition? It’s driving prices up.

Costs for standardized replacement parts and materials have risen 25-50%, according to the majority of respondents. Among Oil & Gas producers, more than half of those surveyed noted the same 25-50% rise in transportation and logistics costs, while half are seeing that jump in prices for electrical components.

When it comes to fuel, the majority of respondents are seeing increases ranging from 25-50% for the fuels they need to run their operations.

And in labor, where the right skills for the right job are becoming increasingly difficult to find, it should be no surprise that 94% of respondents are seeing prices rise by as much as 50% across their operations.

“Every single day it seems like parts are getting harder to find,” said an Operations Superintendent for a  Supermajor. “Standard off-the-shelf things like seals, gaskets, pipes, pumps, valves, you name it. We're finding that long lead times for even ridiculously small items are really snagging us.”

I could go on listing verbatims here, but the theme is the same. One thing in isolation is manageable. But rising inflation and increased competition for everything from parts to labor and materials? That’s a different, and far more complicated, story.

TL;DR: Increased inflation, compounded by increased competition, is resulting in a cost environment that will only become more challenging as operators look to steadily increase production to take advantage of oil prices continuing to hover around $90-100 per barrel.

Actuals-to-Budget Ratios: The Proof is in the Pudding

We’ve talked about the complex and shifting nature of the cost environment in which Oil & Gas companies are operating. But there’s another way to gauge their ability to manage cost, one that doesn’t involve trying to read the tea leaves on what Russia, Iran, or OPEC will do next or how the Fed will manage interest rates the next time it meets.

We can look at how these companies managed costs in the past, on a project-to-project basis. The good news is that this is absolutely measurable. The bad news is that doing so doesn’t increase my confidence in the overwhelmingly positive outlook for FY23 expressed by most participants in the study.

As we touched on in our first piece on the benchmark study, when you look at the ability of Oil & Gas companies to deliver projects on budget, a surprising picture emerges:

• Only 23% of Ops (and 19% of Supply Chain) leaders said that 80% or more of their projects were delivered on or under budget. That leaves more than three-quarters of leaders reporting big budget misses.
• According to the majority of Oil & Gas Supply Chain leaders, 50% or fewer of their projects are completed on or under budget.

These are astonishingly low numbers. And they may only get more dire if the dynamics detailed above continue to push prices steadily higher.

Does that mean the biggest Oil & Gas companies won’t hit their topline revenue targets? Of course not. But what it does mean is that metrics like gross profit and EBITDA may be under serious pressure as we close out 2023 and begin 2024.

TL;DR: This may fly at $100 oil. But if you can’t manage the cost environment — and if you don’t find ways to improve leverage, expand your approved vendor list (AVL), and bake adaptability into your supply chain strategy — this upward pressure on the costs of delivering and maintaining assets in the field can easily get out of hand. 

Unlocking the Power of a Stronger Supply Chain 

There’s a myth that manufacturing has largely recovered to pre-pandemic capabilities, that suppliers are staffed back up, and that we should be able to scale up to meet rising demand, whether for crude distillates or LNG. 

What we see is a different picture, one where increased competition and continued volatility in financial markets will continue to chip away at the margins of even the biggest, most sophisticated players in the industry.

We see a world where now, more than ever, those margins are critical — both to deliver returns to shareholders and to allow for reinvestment. To strengthen existing operations, unlock pathways to growth via M&A, new asset purchases, or a combination of the two. And to begin to explore new opportunities to responsibly and strategically diversify in challenging times.

It all starts with the supply chain, which touches every department in every Oil & Gas organization. This challenging cost environment? Just another proof point for our case that the supply chain is the last great frontier for today’s Oil & Gas companies to improve their cost basis and lay the foundation for a stronger tomorrow.

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Joshua Trott has spent his career serving the energy industry, including at Workrise where as Chief Revenue Officer (and previously as Head of Oil & Gas) he has helped shepherd the company’s rise to become the No. 1 Oil & Gas labor provider in the country, and played a critical role in guiding its evolution into an end-to-end supply chain solution provider. A lifelong soccer player and fan, he lives in Austin, Texas with his wife Kimberly and two boys.

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