The Oil & Gas supply chain is a complex and highly specialized problem space. But at the end of the day, the underlying premise is the same as any other industry. It’s about getting what you need, when you need it, for the best price—while managing hidden costs and operational risk to ensure everyone at your company has access to the goods and services they need to do their job.
And in real terms, it impacts nearly every department. In-house teams that touch the supply chain can include operations, finance, procurement, invoicing, and payroll, and still others. At larger organizations, specialized supply chain teams are employed to manage the challenges and complexity that await.
In this guide, we’ll explain the basics of the Oil & Gas supply chain and provide some insight into how companies can proactively manage their own.
An Analogy: Selling Burgers
Imagine you’re selling burgers. Your restaurant needs supplies. You need ingredients (meat, cheese, buns, etc.) but you also need hardware: stoves, pans, mops, brooms…
Beyond figuring out the types of supplies you also need to figure out the quantity of supplies - or goods and services - you need to run the business and maximize profits. To do that, you must know the schedule by which you need to resupply. How many burgers are you selling? How many of those pickles do you actually need? Are Saturdays busier than Wednesdays? Is cleaning service every other day enough? Or do you need to switch to daily to stay up to code and ensure a good experience for customers?
Then there’s a question of quality. You also want to know that you are getting the best quality for the best price from your vendors. Is there a better supplier of lettuce? No one likes sad floppy lettuce on their burger. That means you need data about the suppliers you buy from, and the ones you don’t.
It’s not enough to simply measure the quantity of supplies by category, or the net cost of goods and services over time. You have to measure the entire process, inclusive of industry pricing, new supplier onboarding, service delivery, verification, and payment. That’s the only way to really understand how you manage the supply chain, and to be able to proactively make changes that improve the ROI of every dollar you spend on the goods and services required to operate.
What makes up the supply chain in the Oil & Gas industry?
The oil and gas supply chain can be defined as the goods and services required to maintain smooth operations for operators spanning the Upstream (production), Midstream (transmission), and Downstream (refining) sectors, as well as the people, resources, and tooling required to purchase and deploy these goods and services anywhere they operate.
You can think about the Oil & Gas supply chain as being made up of three primary categories:
- Supplies – things you’d buy or rent (like equipment, parts, materials)
- Services – the people and services necessary for carrying out the requisite supply chain operations.
- Transportation and logistics – the movement of people, supplies, and services from the point of origin to the location where they are put to use
Supplies
There are thousands of distinct kinds of supplies changing hands on a daily basis within the Oil & Gas supply chain. So while individual supplies may vary by sector within Oil & Gas, it’s most helpful to understand the categories of supplies required.
These are:
- Parts: custom-made parts, off-the shelf parts, gaskets, pipe, casing, drill bits, valves, etc.
- Materials: Sand, water, fuel, wire, lumber, etc.
- Operational Equipment: Excavators, generators, blowout preventers (BOP), trucks, cranes, helicopters, tanks
- Safety Equipment: PPE, first aid kits, hydrogen sulfide detectors, fire extinguishers, spill containment systems
- Chemicals: Drilling mud, Hydraulic fluids, anti-corrosion agents, lubricants
- Technology: Radios and satellite phones, GPS systems, internet and networking equipment, surveillance and security systems, software, wellhead control systems
Services
The services required to maintain smooth operations in each sector of the Oil & Gas industry share significant commonality, but do have some variation as well. Here are a few examples of common services required in each of the sectors discussed thus far:
- Upstream Oil & Gas: land surveying, engineering, water hauling, or equipment rental services.
- Midstream Oil & Gas: construction, tree clearing, pipeline manufacturing, and inspection services
- Downstream Oil & Gas: simulation and modeling, structural engineering, maintenance, and disposal services
Transportation and Logistics
Transportation and logistics includes external partners like shipping and logistics providers as well as in-house teams who are responsible for the distribution of goods and services to the right location.
The transportation and logistics space is particularly challenged by global events such as the war in Ukraine, congestion at the Panama Canal, and disruption to shipping channels in the red sea.
Oil & Gas Supply Chain Challenges
For the last decade we’ve been working with operators ranging from global supermajors to independents with regional scope. We’ve seen firsthand the particular challenges, both from our own observations and the findings of our supply chain benchmark study. We surveyed 131 leaders from Oil & Gas providers and services companies. The responses were illuminating.
Data Access
Without a doubt, Oil & Gas has a data problem. Only 20% of leaders feel they have the data they need to make decisions. 40% of operators have the data to evaluate vendors outside of their approved vendor list (AVL). And when it comes to understanding the going rate for goods and services in a given region… it’s hard to imagine a profitable burger joint paying 2x market rates for their buns and patties.
Cost Visibility
It might take just 10 days to drill a well but it can be up to 90 days to get the spend reports back to know what it cost. Proactively managing supply chain-related costs becomes impossible when operators don’t have access to spend visibility by geography, category, service provider, or time period. Operators need real-time visibility of all project costs to optimize how they deliver and maintain projects in the field.
Market Vendor Data
Nearly half of respondents in a recent survey said that they don’t have “data to compare and contrast vendors outside of their AVL.” If operators don’t even have access to data of their approved vendors already working on a project, what hope do they have of accurately evaluating vendors outside their AVL?
There’s never been a centralized marketplace for goods and services in Oil & Gas, which means no one really knows whether they are paying the right price for goods and services in a given region. Could there be another vendor who can deliver the same solution for a lower cost? Maybe! But without concrete data to back it up, it’s a gamble–and a time-consuming one at that.
Oil & Gas is an industry forever looking for new opportunities in new regions. That’s admirable and part of what makes this such a dynamic world to operate in, but it also means there’s no historical data.
“If a field operations leader wants to pull a report to see whether a proposed bid on inspection services maps to what the company pays elsewhere in the region, it likely will take a week or two for someone on the team to come back with an answer. Unfortunately, a week or two is most likely 5 to 9 days past when the inspection needs to take place.” – Adam Hirschfeld, Workrise
As a result, most operators go with the people they know and trust. It’s a cautious approach that leaves millions of dollars on the table.
Data Silos
Most Oil & Gas operators use 8 or more different systems to manage the process from finding and evaluating new vendors to paying for completed work (also known as the Source-to-Pay process). Anyone who wants to get a full view of their supply chain data, must get a handle on this foundational piece.
The patchwork of solutions operators rely on to manage the source-to-pay process relies on manual processes and brittle integrations. That means greater complexity, more room for error, and for many Oil & Gas companies, entire teams focused on invoice disputes.
Talk about a waste of energy.
Today, if a decision maker wants to leverage data to inform their decision making, 9 times out of ten they have to ask someone on their team to build a report, and wait a week to be able to factor that data in. That means most decisions are made based on a combination of past experience and gut-level intuition.
While the talented men and women in Oil & Gas continue to make ends meet with this approach, there is so much opportunity to improve and proactively optimize the supply chain with data.
Price Volatility
If you’ve been keeping up with the news, it’s clear that we live in volatile times. Russia’s war with Ukraine, the Chinese economy, and even the war in Gaza have real impacts on the global economy. This affects the price of oil and gas derivatives (jet fuel, the gas we get at the pump, etc), but it also affects the price of everything else that goes into the production and delivery of fuel to consumers.
Fixed pricing
One way that operators have coped with the volatility of their input costs has been to lock in pricing for longer periods of time. But with multi-year contracts, they’re not always getting the best deal.
To support longer term contracts, suppliers are forced to pad pricing to avoid going underwater on the deal. So what can feel good for both sides once a deal is done, is actually baking waste into the system.
Rather than buying from the right provider at the right time, operators consolidate with strategic partners on long-term contracts. This squeezes out the smaller players, reducing competition, and driving up costs.
Compliance
One area where Oil & Gas companies can’t afford to cut corners is when it comes to safety. Any energy operation relies on stringent compliance with safety and regulatory requirements, which adds another layer of complexity.
And this comes with a cost. For every new vendor an operator engages with, with (and there could be hundreds or even thousands of them), they must maintain a record of up-to-date compliance documents, each with their own renewal schedule, which can vary by geography or service category.
The grunt work and legacy cost of managing each vendor on an operator’s AVL puts further pressure on operators to consolidate, rather than expand their vendor list. Safety is critical, and will always remain a top priority. But in a world where competition is leverage, operators must find innovative ways to expand their vendor list without drastically increasing their risk exposure if they want to more proactively manage their costs.
Procurement and Payments
There’s a reason 60% of vendor invoices are disputed on a monthly basis by Oil & Gas supply chain leaders. It comes back to the Source-to-Pay process, which sits at the center of the Oil & Gas supply chain.
Because of the myriad manual touchpoints, and lack of continuity in the process from discovery of new vendors to verifying and paying for completed work, small errors result in piles of disputes for internal invoicing teams, and long, multi-month delays for suppliers waiting for payments.
Mastering the supply chain, and getting access to the data needed to proactively manage it, starts here.
When this process is working, every step in the process from securing bids, procuring new vendors, scheduling and verifying completed work, and paying for services rendered is captured on a single digital chain.
Done right, pricing from competitive bids is available organization-wide, so you know whether a new bid represents good value. Agreed upon pricing is captured in a work order to govern pricing for all jobs going forward, and a record of services rendered can automatically be mapped to an invoice, without a single human being getting involved.
Finally, the speed unlocked by this automation is what enables real-time spend visibility. And real-time spend visibility is what is required to proactively manage spend over time.
When conducted by multiple teams operating 8 or more tools, all of these steps today are opportunities for human error, coupled with delay due to bandwidth constraints and approval layers. When consolidated on a single, end-to-end system, procurement and payments can be so much more efficient.
ESG
ESG frameworks are used by operators to assess their impact on three key pillars:
- Environmental Impact
- Social Impact
- Governance
ESG initiatives and reporting touch every department at today’s energy companies. Within the domain of the Oil & Gas Supply Chain, key ESG metrics include vendor diversity reporting, emissions reporting, and purchasing-related emissions reporting.
Emissions Reporting
Due to the complexity and structural challenges of measuring emissions, energy companies often hire consulting firms to partner with internal teams to evaluate their emissions. In most cases, emissions reporting captures both the emissions they generate within their operational footprint, as well as the carbon footprint associated with the transportation of the goods and services they rely on to operate; from the point of origin to the location where they are put into use by the company.
Vendor Diversity Reporting
Vendor Diversity refers to the percentage of, for example, women and minority-owned business on a given operator’s AVL, and involves reporting on the utilization of those vendors on an annual basis, against company policies and targets.
As more companies look to build diverse supplier pools, it’s all for naught if they can’t identify and report on suppliers who meet their diversity requirements within their existing AVL. If you can’t identify diverse suppliers you can’t leverage them. And if you can’t report on utilization, there’s no way to attribute positive steps in this area to results against your broader ESG goals.
Success in this arena relies on an operator’s ability to track and easily surface vendor diversity types. Creating a single source of truth (SSoT) for all vendor data is a widely accepted best practice, and first step to being able to report on. and proactively manage supplier diversity.
Once vendor lists are consolidated across teams, diversity data is collected as a standard part of the onboarding process, and that same diversity data is maintained over time, Oil & Gas companies can fulfill their ESG requirements, while increasing the range of suppliers they purchase from over time.
Oil & Gas Supply Chain Management Best Practices
While the complexity and specificity of goods and services may be industry-specific, proactive supply chain management in Oil & Gas follows many of the same principles that have been true of the supply chain since the function was created.
So what does good look like?
- A singular purchasing motion for all teams involved
- Increased competition, from the broadest possible pool of vendors
- Efficiency, powered by automation
- Proactive ESG management
- Real-time data access and transparency
A Singular Purchasing Motion for All Teams Involved
As we’ve discussed, the Source-to-Pay (S2P) process is the backbone of effective supply chain management. The best organizations start by implementing an end-to-end S2P solution to support the purchasing lifecycle. This establishes a singular internal process, ensures data quality for each step in the process, mitigates human error and manual entry, and sets the stage for automation to power more and more of the process over time.
There is no point in hiring supply chain teams to manage cost, if the data you have on cost is incorrect. And there is no way to reduce the burden of relationship management on internal teams, if the data from each step in that process isn’t available to pass on to the next step (and the step after that).
Increased Competition, From the Broadest Pool of Vendors
In an industry where there is no singular marketplace for goods and services, finding and evaluating qualified vendors is both challenging and time consuming. But it’s essential to proactive supply chain management.
There’s no stronger negotiating tactic than to be able to say “we can get the same thing for less from another supplier.” Oil & Gas companies must find ways to ensure every bid is a competitive one, and to manage an expanded AVL without taking on undue risk.
This can be done both through supplier networks - where operators can search to discover and evaluate vendors outside of their AVL - and by empowering suppliers to log in and manage their compliance documents proactively, without having to reach out individually for every insurance renewal or safety record update.
Finally, Source-to-Pay solutions that offer integrated bidding can take the grunt work out of competitive bids, and capture the data from competitive bids as yet another pricing data point to inform future purchases.
Efficiency, Powered by Automation
Once the purchasing lifecycle is consolidated onto a single platform, automation becomes possible. Automation removes the manual process and approval flows that incur so much cost (both time and treasure) today.
Running a burger stand, you’d expect to know when you’re running low on ketchup. Why can’t the same be true for our industry? Imagine being notified when you’re 12-24 hours away from needing a water hauler. You could order that service when you need it, without the waste of having water haulers standing by for when the moment they’re needed arises.
And when that water hauler delivers their load, imagine automating both the invoice, and the payment, based on agreed upon pricing between the operator and the supplier? A process that used to touch 3 different teams can now be executed almost instantaneously.
Proactive ESG Management
When it comes to ESG best practices, all roads lead to data. Most Oil & Gas companies spend 2-3 months every year building their sustainability report from scratch. Report after report are manually generated. Meeting after meeting is had to gather the raw inputs needed to build the final report that sees the light of day. And often, this is just to learn that a department missed, in part, because they didn’t know they were behind.
The future of ESG is real-time data and proactive management of all workstreams against company policy and targets. Instead of teams working overtime to generate annual reports, Oil & Gas companies could track how they’re performing against their ESG targets bi-monthly or even weekly, and course correct as needed.
Real-time Data Access and Transparency
The value of increased transparency and access to data doesn’t stop with ESG. Data can improve every aspect of energy production and delivery.
Data means less downtime. Take the example of a field operations manager being able to see where a vendor is in the onboarding process. That empowers them to follow up with the right person or team so they can get that vendor approved to work faster.
Data also means everyone from the field to centralized teams finally have a playing field on which to collaborate. Accounts payable can see the approved pricing on the work order, instead of having to call the field to verify services on a given invoice. Operations teams in the field can easily see who’s approved to work by the supply chain team, so they can get the job done. Or find a new vendor, when their go-to’s are fully booked.
All of this leads to greater efficiency and accuracy, removing the need to second guess or play it safe. And it all starts with the purchasing motion that is at the center of the Oil & Gas supply chain.
Source-to-Pay: The Backbone of the Oil & Gas Supply Chain
For an industry as complex as Oil & Gas you need a partner who understands the unique challenges. Workrise source-to-pay solutions combine purpose-built software with expert teams to take on the heavy lifting that comes with improving your supply chain operations, while empowering suppliers to more easily maintain the documents their clients rely on to ensure compliance.
Workrise S2P solutions:
- Connect the entire source-to-pay process, capturing each step along the way in a continuous digital ledger record
- Allow a vendor to log in once, update a compliance document, and automatically roll that out to all clients
- Enable field personnel to log and verify work with a couple of taps
- Automate accurate invoicing and payments, based on pre-approved pricing and scope
- Equip centralized teams to track milestone progress and spend across all projects, down to the job, in real time
- Empower leaders to make decisions based on reliable, real-time data
With its unique position as both the leading supplier of labor services and a provider of strategic vendor and supply chain management for energy companies, Workrise has deep firsthand experience with the friction, bloat, and headaches suffered by both operators and suppliers.
That’s why we created Workrise Vendor Management, a connected source-to-pay solution — not just another tool — for today’s energy industry.
In today’s world, uncertainty is the only constant. Our hope is that the best practices we outlined today, combined with innovative solutions, empower today’s Oil & Gas companies to better navigate the road ahead.
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