Special Report – Next Generation Supply Chain Solutions – Panalpina World Transport (Holding) Ltd by Global Business Media

SPECIAL REPORT

Next Generation Supply Chain Solutions

The Frontier in Gaining Competitive Advantage is in the Supply Chain A Chain of Growth Supplying the Heart of the Sector A Chain of Control Extreme Challenges and More

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Published by Global Business Media

Published by Global Business Media Global Business Media Limited 62 The Street Ashtead Surrey KT21 1AT United Kingdom Switchboard: +44 (0)1737 850 939 Fax: +44 (0)1737 851 952 Email: info@globalbusinessmedia.org Website: www.globalbusinessmedia.org Publisher Kevin Bell Business Development Director Marie-Anne Brooks Editor John Hancock Senior Project Manager Steve Banks Advertising Executives Michael McCarthy Abigail Coombes Production Manager Paul Davies For further information visit: www.globalbusinessmedia.org The opinions and views expressed in the editorial content in this publication are those of the authors alone and do not necessarily represent the views of any organisation with which they may be associated. Material in advertisements and promotional features may be considered to represent the views of the advertisers and promoters. The views and opinions expressed in this publication do not necessarily express the views of the Publishers or the Editor. While every care has been taken in the preparation of this publication, neither the Publishers nor the Editor are responsible for such opinions and views or for any inaccuracies in the articles.

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The Importance of the Supply Chain Strategy Keeping Pace With Demand Managing the Supply Chain World-Class Chain Execution The Panalpina System

A Chain of Growth

John Hancock, Editor

A Context of Growth Growing Capabilities Growing Costs Positive Investment Climate Controlling Operating Costs

Supplying the Heart of the Sector

Peter Dunwell, Correspondent

One Productive World In Line with Current Business Practice Oil, Gas and Ethics

A Chain of Control

Francis Slade, Staff Writer

The Offshore Challenge An Important Part of the Process Cost Control

Extreme Challenges and More

John Hancock, Editor

The Price is Right and the Need is Compelling Just Getting There Challenge upon Challenge The Long-Term

References 15

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SPECIAL REPORT: NEXT GENERATION SUPPLY CHAIN SOLUTIONS

Foreword A

MONG MANY business processes named

It was the advent of globalisation that elevated

in the past century, Supply Chain, a term

supply chain from this simple idea to a key business

reputedly coined as recently as 1982, probably

process on which everything depended; the facilitator

conjures up the least glamorous image. However,

of modern industrial economies. Nevertheless, at

what it represents can fairly be credited as the

heart, the supply chain is still about moving materials

driving force behind civilisation as we know it.

and goods from where they originate to where

From the moment when people realised they

theyâ&#x20AC;&#x2122;re wanted and/or needed. The offshore oil and

could achieve more by moving away from a self-

gas supply chain operates in an environment where

sufficient closed society to one that traded with

the usual means of transportation are not available

other societies for a broader choice and to enjoy

or are impractical and where quality and range over-

objects beyond where they were grown, mined or

ride quantity every time; so the process has to be

made, there was a supply chain moving materials

sensitive to those realities. It also has to be responsive

and goods from where they originated to where

to a raft of logistical challenges that few if any other

they were wanted and/or needed.

supply chains have to face.

The opening article in this Special Report looks at

The second piece in the Report contains a review of

the importance of creating and managing an efficient

the broader offshore context within which the supply

and workable supply chain strategy, especially in the

chain has to function and some of the forces at play,

oil and gas industry. The reduction in trade barriers

before looking at the role and place of the supply chain

has resulted in greater globalisation which, in turn,

in delivering not only supplies but also the values

has led to the necessity for greater access to energy

of the sector. We next consider the management

resources. This has created the need to further

challenges of supplying a voracious, high value and

develop these resources, often in far-flung locations,

never sleeping industry before finally looking at all of

subject to local laws and regulations. It is important,

the challenges faced by those charged with that task.

therefore, to maintain good controls and management procedures, which are made possible by efficient supply chain systems.

John Hancock Editor

John Hancock joined as Editor of Offshore Technology Reports in early 2012. A journalist for nearly 25 years, John has written and edited articles and papers on a range of engineering, support services and technology topics as well as for key events in the sector. Subjects have included aero-engineering, testing, aviation IT, materials engineering, weapons research, supply chain, logistics and naval engineering.

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SPECIAL REPORT: NEXT GENERATION SUPPLY CHAIN SOLUTIONS

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The Frontier in Gaining Competitive Advantage is in the Supply Chain George Schutte, VP, Regional head of Oil & Gas Americas and Frank Bichowski, SVP, Global Head of Oil & Gas, The Panalpina Group

www.panalpina.com oilandgas@panalpina.com PANALPINA VESSEL IN WEST AFRICA

LOBALIZATION HAS driven supply chain management to the top of the corporate food chain. The necessity to speed up the movement of goods and materials in a world that has become accustomed to immediate gratification puts the effectiveness of procurement and delivery at the forefront of the competitive battle. The supply chain mania that permanently altered the landscape of the high tech sector has found its way to the oil and gas industry. The last generation upstream operation was not cost or efficiency conscious, but rather a study in pragmatism. Supply planning focused on short term need as opposed to system optimization.

The Importance of the Supply Chain Strategy High performing organizations radicalize profitability and efficiency through the supply

chain. Resources and the hopes and dreams of many are thrown into this vibrant aspect of the integrated business model. Innovators whose very success can be traced directly to successful management of the supply chain have become the aspire-to-be organizations of the modern business world. The likes of Dell, HP, and IBM were some of the first organizations to figure out how to take what was traditionally a pure cost center and utilize a principled approach to improving net returns. That is, where the delivery model was earlier viewed as generating costs, today it is a tool to gain clear competitive advantage. In practice, effective supply chain management lowers costs as well as increasing margins on production. Unparalleled CAPEX in the oil and gas industry has drawn increased scrutiny on the cost side. Qualified supply chain methodologies counterbalance burdensome OPEX levels and enhance production returns. WWW.OFFSHORETECHNOLOGYREPORTS.COM | 3

SPECIAL REPORT: NEXT GENERATION SUPPLY CHAIN SOLUTIONS

In practice, effective supply chain management lowers costs as well as increasing margins on production

APPROACHING THE RIG SITE

Certainly, in today’s volatile, largely destabilized, and worsening economic environment, to create an efficient and workable supply chain strategy is quite difficult. The need for qualified, global partners to execute the supply chain grows continually. Yet, the availability of those qualified partners dwindles as industry moves to increasingly remote locations that lack an appropriate infrastructure. Highly specialized and underdeveloped geographies associated with oil and gas require dynamic and innovative approaches. Current macroeconomic conditions dictate that the world class enterprise must be flexible in its supply chain strategy, yet disciplined in execution to a level that ensures “noise” does not jeopardize the entire program. Moving into 2014, capital expenditure has reached some of its highest recorded levels, seemingly unfazed by fluctuations in global energy demand and price. The lifting of sanctions and the expected long term increases in the world’s appetite for energy means the expansion and moving of capital assets into even more difficult geographies and a subsequent race for resources of all types. Economic growth should grow at a pace better than energy capacity. Therefore, the oil and gas industry must continue to develop its supply chain strategies to minimize risks and to catch up to other industry segments in terms of security, visibility, capacity, and delivery.

Keeping Pace With Demand The hefty rise in demand for oil and energy related commodities/resources has been driven in no small part by the economic onset of burgeoning, populations, and energy-hungry 4 | WWW.OFFSHORETECHNOLOGYREPORTS.COM

developing economies such as in the BRIC. The onset of these monster appetites alone has led to a massive increase in industrial capacity, with falling prices for manufactured goods and tradable services. Efficiently feeding demand requires development of intelligent supply chains to ensure the smooth flow of material to all corners of a shrinking world. The global reduction of trade barriers has fostered globalization. Today, almost all countries have interaction on some level when it comes to trade. As nations develop on the back of globalization, the necessity for greater access to energy resources grows. As such, it is necessary to further develop those resources. International Oil Companies as well as National Oil Companies are in a race for resources. As competition heats up, the frontier in gaining competitive advantage is in the supply chain. That is, the organization that can develop fields at the fastest pace and deliver in the most consistently cost efficient manner will be the most successful.

Managing the Supply Chain The final frontier is in successful management of the supply chain. Global economic conditions drive the oil and gas industry as well as dictate where exploration/production will happen. The repositioning of manufacturing capacity and booming populations with increasing access to wealth drives up demand for energy resources. To effect hydrocarbon development at this level, it is necessary to position material, equipment, technology, and general knowhow to the developing world. In order to do so, the industry must establish sound procurement

SPECIAL REPORT: NEXT GENERATION SUPPLY CHAIN SOLUTIONS

The organization that

at the fastest pace and deliver in the most consistently cost efficient manner will be the most successful

practices and modalities that meet delivery requirement for the operation. In our diverse world, it also means adapting the approach to take into account the locality of the operation. Instilling innovative values will drive formulation of the world class upstream supply chain. Developing local knowledge and capability meets not only a civic duty, but will regionalize the approach leading to more efficiency and tailored approaches meeting market conditions. This will allow integration at the country level and reduce barriers to trade even further. Where development is necessary to ensure viable supply lines, leveraging technology will ensure efficiency in the operation and global visibility as foreign entities seek to execute operations in far flung locales. While there will always be risks in the supply chain, a cautious approach will ensure stability for the world’s energy requirements.

World-Class Chain Execution As a pioneer in oil and gas logistics and a market leading service provider for more than 50 years, Panalpina embraces its role in ensuring our clients deliver through the supply chain. The challenges in the global Oil and Gas arena are imminent and continuous cost pressures call for intelligent supply chain solutions supported by scalable, technical, human and operational capacity. In addition to the fundamentals, Panalpina’s established safe and compliant operational standards provide the foundation for world-class supply chain execution. Our experienced and skilled resources limit operational risks in complex geographies. To ensure long term sustainability

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can develop fields

in the upstream operating theatre, Panalpina take seriously its inherent corporate responsibility in developing standards to the local level – being global but acting local. Through consistent and robust training methods and quality control mechanisms, Panalpina achieves one global standard. Supply chain complexity is accelerating which requires more efficient management to meet growth while controlling cost. Panalpina’s view on improving supply chain performance is based on Total Cost of Ownership and is enhancing our clients’ overall business performance as opposed to a narrowly constructed tactical offering. Our solutions mitigate real performance detractors – namely downtime based on material problems and the ability to manage rig down or production shut down situations. While being economical at the transactional level, our solutions enhance customers’ global material management strategy, thereby providing control and profitability optimization through the effective management of material flow and inventory control.

The Panalpina System The Panalpina system accommodates overall efficiency through utilization of our global infrastructure as well as several oil and gas specific products and services. At the same time, we are flexible enough to allow for a significant level of customization to meet the unique needs of each of our clients’ operative aspects. In execution, our commitment to safe and compliant operations is a core competence for Panalpina and is the prime driver of our global delivery model. Panalpina is the first multinational provider of supply chain solutions to achieve global certification to OHSAS 18001, ISO 9001 and ISO 14001 standards. Our PanGreen strategy has resulted in all global sites being certified through ISO methods for environmental standards. Both programs are continually updated to remain at the forefront of industry standards. Effective immediately, Panalpina will also automatically calculate all customers’ emissions from the transport services they use based on the reporting standard EN 16258. By using the state-of-the-art tool “EcoTransIT World” we run more accurate reports for customers so they can develop effective strategies to reduce the environmental impact of their global transport chains. Panalpina considers compliance with all applicable laws and regulations as nonnegotiable for itself and for those with whom it does business. This is especially relevant in terms of national and international laws and regulations related to anti-corruption, environmental protection, and other legal

www.panalpina.com oilandgas@panalpina.com

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Supply chain complexity is accelerating which requires more efficient management to meet growth while controlling cost

OFFSHORE INSTALLATION IN ACTION

requirements. Panalpina takes all necessary precautions to ensure full compliance with all laws, including conducting internal audits and compliance audits of subcontractors to ensure that there are no unknown legal risks or liabilities and that there are no actual or perceived violations of any laws or regulations where Panalpina does business. Panalpina has established an industry-leading compliance structure and designed state-ofthe-art compliance policies and programs. The company established a dedicated global compliance organization to assess jointly with the internal audit function the group’s operations in its countries of operation. Conducting anticorruption training both in-person and webbased, implementing systematic third-party due diligence and developing a whistleblowing program are among the specific measures taken by the company.

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About Panalpina The Panalpina Group is one of the world’s leading providers of supply chain solutions. The company combines its core products of Air Freight, Ocean Freight, and Logistics to deliver globally integrated, tailor-made end-to-end solutions. Drawing on in-depth industry know-how and customized IT systems, Panalpina manages the needs of its customers’ supply chains, no matter how demanding they might be. The Panalpina Group operates a global network with some 500 offices in more than 70 countries, and it works with partner companies in a further 90 countries. Panalpina employs around 16,000 people worldwide who deliver a comprehensive service to the highest quality standards – wherever and whenever. www.panalpina.com oilandgas@panalpina.com

SPECIAL REPORT: NEXT GENERATION SUPPLY CHAIN SOLUTIONS

A Chain of Growth sss

John Hancock, Editor The performance of the offshore oil and gas sector is particularly reliant on a robust and sustainable supply chain.

A Context of Growth The world is becoming a busier place with a growing population and growing life expectations within that population fuelling higher levels of demand for almost everything. It all boils down to the greatest level of demand for energy that we have ever experienced… and there is no sign or likelihood that this will change in the foreseeable future. So winning energy resources from the earth has meant exploring for and exploiting reserves of oil and gas under the sea and in ever more remote places; plus siting large clusters of wind energy generators also in the oceans. All of this, in turn, has fuelled an ever more geographically and technically challenging industry for which the task of supply has become a significant sector in its own right. This paper will focus on the supply chain but we first need to understand the context in which that business process has become so important.

Growing Capabilities We’ve already considered that global energy requirements have risen inexorably with the growth of economies at all stages in the development cycle (undeveloped, emerging and developed alike) and the ever increasing demands and expectations of a rapidly growing population. As a result, energy businesses have sought to exploit reserves of oil and gas in ever more distant and inaccessible places. Another factor driving development is that, in a world of geopolitical uncertainty, nations want energy security: reserves of carbon fuels within their own jurisdiction can support that security. And a well-run supply chain that focuses on local capabilities can ensure that the finite value of oil and gas reserves can be converted into more robust and sustainable long-term economic benefit. Today, reserves are sought wherever they might be located. That means that, even in a time of unprecedented rates of consumption, known world reserves have actually risen as exploration has outpaced even consumption. According to Dev Sanyal, Executive VP at BP, speaking in 20101; “In 1981, the world’s oil reserves stood at 700 billion barrels. By last year, this had risen to

1,650 billion barrels. And that is despite the fact that in the intervening three decades the world consumed around 800 billion barrels. This is testimony to the way in which the industry has sought, found and produced new resources through its capacity to innovate, develop and deploy technology.”

Growing Costs Of course, growth in capability of this magnitude does not come cheap and both significant cost measures, capital expenditure (Capex) and operational expenditure (Opex), have also seen considerable growth. The two expense streams do serve different if interdependent purposes2. “Capex… is a business expense incurred to create future benefit, i.e. acquisition of assets that will have a useful life beyond the tax year… like building, machinery, equipment or upgrading existing facilities… On the other hand, those expenditures required for the day-to-day functioning of the business, like wages, utilities, maintenance and repairs fall under the category of Opex...”

www.panalpina.com oilandgas@panalpina.com

Positive Investment Climate In the UK, according to Mike Tholen of Oil & Gas UK, in 20133, “The oil and gas industry is the UK’s largest industrial investor, providing hundreds of thousands of skilled jobs, exports, and tax revenues for Britain. What’s more, the sector is enjoying a period of strong growth. Last year saw record investment of £11.4 billion in new production, and the government and industry see this rising further to over £13 billion this year. In total, [UK] oil and gas production companies have just under £100 billion of capital investment in their business plans. With 70% of investment typically spent with UK based suppliers...” But it isn’t only in the UK that this is the case. Infield Systems Ltd in their 2013 report, ‘Global Offshore Oil and Gas Outlook’4, reckoned that between then and 2018 the sector will be investing something in the region of $800 billion Capex with subsea investment in particular enjoying a gross annual growth rate of [more than] 14%. And the number of offshore rigs WWW.OFFSHORETECHNOLOGYREPORTS.COM | 7

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Reserves are sought

are forecasting tighter monitoring of capital expenditures (CAPEX) this year, according to new research published by DNV GL.”8 Growing costs will be met by efforts to better control them which, in turn, will put greater pressure on supply chains to deliver value, i.e. price and quality. And, according to Business Day in March 20149, a growing number of international oil companies (IOCs) have chosen to cut their capital expenditures for the year… [but] to “maintain a disciplined and selective approach to capital that ensures any new investment will contribute to robust cash flow growth,” according to Rex W. Tillerson, chairman and chief executive officer, ExxonMobil.

wherever they might be located. That means that, even in a time of unprecedented

Controlling Operating Costs

rates of consumption, known world reserves

OFFSHORE PRODUCTION PLATFORM

have actually risen as exploration has outpaced even consumption

in use has ‘skyrocketed’ according to eHow5. Infield Systems added that the operational platforms fleet in 2012 stood at just over 11,000; and that doesn’t include exploration platforms. IFP Energies nouvelles6 calculated in 2011 the world fleet of offshore drilling rigs (jack-up rigs, platforms, submersibles, drilling vessels, etc.) at 1,320 units. The same report also estimated more than 400 new production facilities (fixed, floating and subsea platforms) constructed every year and that the number of offshore construction projects has grown by an average of 15% per year since 2005. Overall, “the outlook for the Subsea industry is amongst the most promising in the offshore oil and gas world, with Subsea Capital Expenditure (Capex) set to grow at a staggering 14.8% CAGR to 2017.” This, again, came from Infield Systems7. All that said, investment (Capex) will not offer the sector a blank cheque. “Amid a positive outlook for the offshore oil and gas industry in 2014, senior oil and gas professionals

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To some extent, capital costs can only really be controlled once, at the point of purchase of the capital items in which investment has been made. Operating costs, on the other hand, can be managed every day to improve the efficiency of the business. One thing this requires is procurement and supply chain expertise which almost certainly won’t be part of an oil and gas business’s core competencies and so might well be better brought in from outside of the company. In this context, the supply chain takes on a pivotal role and has to look to its own processes if it is to earn a place to contribute to a growing sector. That will require a change of focus away from managing individual functions and towards integrating all supply activities into key processes. Such business process integration requires collaborative work between various participants in the chain and willingness as well as ability to share information. The expert oversight of this integrated approach to supply is a specialist function and is why supply chain has become a significant part of the Business Processing Outsource (BPO) industry with increasing numbers of companies handing the management and performance of their supply chain to a specialist. Fortunately, given the maturity of the offshore sector in all of its processes and geographical diversity, the supply chain on which it relies is both mature and robust.

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Supplying the Heart of the Sector Peter Dunwell, Correspondent The supply chain doesn’t only deliver to offshore oil and gas; it can also help make the sector’s reputation… for good or not

One Productive World Globalisation has reduced the world to a single production unit in which components, goods and services are supplied from wherever they can best be sourced. Bringing this whole network of value together is a business process in its own right; called ‘supply chain’. Management of supply chains is a key component in any business process where infrastructure, structures and equipment need a secure and reliable flow of supplies and materials to ensure their optimum and continuing performance. Offshore oil and gas falls squarely into that category with its main business units located tens or even hundreds of kilometres offshore and yet requiring a consistent flow of inputs in order to be able to deliver the outputs for which they exist. And, when costs are routinely measured in hundreds of millions or even billions of dollars, waste is not acceptable. Waste in this context is downtime but with complex processes undertaken in massively challenging environments, the inventory of materials, supplies, individual parts, subassemblies and whole assemblies needed to keep the system working is enormous; creating a supply challenge all of its own.

In Line with Current Business Practice In one business philosophy, waste of any sort (material, time or ideas) is specifically targeted. LEAN operations follow a business philosophy that means creating more value but with the use of fewer resources to increase productivity. LEAN businesses identify processes that don’t contribute to the value chain and remove or reduce them. IIt is as applicable on a platform in the North Sea as in any other process or function in the business. This poses a particular challenge for supply chains charged with ensuring a consistent flow of inputs, avoiding any unnecessary

inventory costs and maintaining a high quality of productive components and materials. It might seem that these are contradictory requirements but their successful achievement has lifted supply chain from a cost of buying to a business process in its own right. And it has spawned its own discipline. Along with the supply chain has grown an associated management discipline, Supply Chain Management (SCM): the management of the flow of goods. SCM includes the movement and storage of materials, inventory, and finished goods from point of origin to point of consumption. Still following the theme of current business practice, supply chains as a BPO sector are all of a piece with today’s notion of businesses focusing on core capabilities; relying on external relationships to supply what they need beyond that core. Supply chains override enterprise boundaries to organise business processes as value chains of multiple companies. And in the offshore oil and gas sector, the supply chain is itself big business. As Mike Tholen explained in his May 2013 Oil & Gas Journal article ‘UK supply chain flourishes on record investment’10 “The supply chain itself makes a significant and growing economic contribution. Its expertise is in strong demand internationally… More than 40 years of exploration and production operations in the UK have resulted in a supply chain that offers a unique array of products, services and expertise, developed in one of the world’s most challenging offshore environments...”

www.panalpina.com oilandgas@panalpina.com

Oil, Gas and Ethics Perhaps then it is no surprise that this important business process has, itself, been subject to a lot of thought. There is a Supply Chain Council (SCC) which has endorsed the Supply-Chain Operations Reference (SCOR) which has become the standard diagnostic tool for supply chain management. Also, as a major business WWW.OFFSHORETECHNOLOGYREPORTS.COM | 9

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Management of supply chains is a key component in any business process where infrastructure, structures and equipment need a secure and reliable flow of supplies and AWAITING A NEW DAY

materials to ensure their optimum and continuing performance

process, supply chain has to conform to current notions of corporate citizenship. The adage that if its gets into the news it’s probably bad news has sometimes been true of reporting on how oil and gas businesses impact on the places from which they take their product. In response to this, supply chain methodologies have been formalised in ways that reflect responsibility, such as the Oil & Gas UK, Supply Chain Code of Practice (SCCoP), a set of best practice guidelines which the UK oil and gas industry is encouraged to follow in order to help businesses: • Improve overall performance; • Eliminate unnecessary costs; • Add value and boost competitiveness. As well as the ‘feel good’ factor, there is a sound business principle in responsible practices. An area of increasing concern and cost, if realised, is risk. Risk management is a growing area of management focus in all activities but, with offshore supply chain, the disruptive potential of risk is all too clear when operating at the distances from shore, at the depths and in the conditions where an increasing number of new discoveries are being found. The sector has to consider more than growth or engineering challenges and the supply chain

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bears significant responsibility in that. The discovery of oil and gas reserves can transform a national economy but it won’t just happen. Not only is the product itself very valuable but also it can drive improvements in employment and technical skills in the local economy. That will, in turn, benefit economic capability and generate tax revenues which will significantly affect the ability of a government to provide for its people in the longer term those staples of modern life such as good communications, healthcare and education. Achieving this is largely a function of responsible procurement of goods and services to support long-term developments of capability in the local economy and long-term skills in the local population. BP, for instance, ensures that11, “When we move into a new area, we look for opportunities to share the benefits of our presence... by helping to develop the national and local supply base, and community investment, such as supporting communities’ efforts to increase their incomes and improve standards of living.” The supply chain doesn’t only deliver supplies to offshore oil and gas, it also delivers values on behalf of the sector.

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A Chain of Control sss

Francis Slade, Staff Writer

As well as being a vital link in the offshore exploration and production process, the supply chain is important enough to be a business process in its own right

As Peter Dunwell made clear in the previous article, the offshore oil and gas supply chain bears considerable responsibility. Such is the value of the sector that, even in a developed economy such the UK, using the supply chain to deliver onshore value as part of its offshore role is a priority of government12. “Converting the current high investment figures into British jobs is important to the economy and an issue Government cares about. Building on current DECC [UK Department of Energy and Climate Change] initiatives, and working closely with those awarding contracts in the UKCS [UK continental shelf], will provide a better understanding of the strengths and weaknesses of the UK supply chain. The development and deployment of the UK supply chain is as important as securing investment in the UKCS [author’s italics].”

The Offshore Challenge Most offshore environments are harsh and pose significant challenges to platform operators. Offshore oil and gas fields can be found in all climatic and environmental conditions which makes offshore production even more challenging. But, over and above the risk of its location, an offshore oil platform is a working community with predictable needs. Supplies for work and for living, even waste, have to be transported to and from the platform, which requires careful planning of the supply chain13. Plus, offshore platforms are large constructions in their own right with many systems and fittings all of which must be supplied and, when necessary, resupplied.

An Important Part of the Process The picture is building that supply chains are important; as Richard Baldwin puts it in his introduction to ‘Global supply chains: Why they emerged, why they matter, and where they are going’14, “Global supply chains (GSCs) are transforming the world.” In summary15, “A supply chain consists of all parties involved, directly or indirectly, in fulfilling a customer request. The supply chain not only includes

the manufacturer and suppliers, but also transporters, warehouses, retailers, and customers themselves… A supply chain is dynamic and involves the constant flow of information, product, and funds between different stages.” The Capgemini White Paper ‘BPO Supply Chain Management’16 tells us that “The supply chain forms the core of most businesses.” In fact, while the supply chain concept has been around for centuries (it was why empires were built) the term itself was coined as recently as 1982 by Keith Oliver in an interview for the Financial Times. By December 2003, in a presentation to Supply Chain World Europe, Statoil17 confirmed that “Integrated supply chains [are] important to Statoil…” and that the company was developing a Supply Chain Operations Reference model (SCOR). Even in 2003, supply services for offshore operations were already demanding with more than 900,000 tonnes of supplies shipped annually to rigs and installations and 50 ships working for Statoil alone on the Norwegian Continental Shelf (NCS).

www.panalpina.com oilandgas@panalpina.com

Cost Control Good supply chain management is not only a pre-requisite to effective operations but it’s also important as a cost control element itself. TKDN Online in ‘The Challenges of Supply Chain Management Function in Upstream Oil and Gas Activities’ in April 2011 (no longer available) explained, “The activities of procuring goods and services, known by the term Supply Chain Management (SCM), constitutes one of the end most points in the process of expenditure in various business activities. Approximately two thirds of operational cost in upstream oil and gas business activities is expended through SCM Function.” Not only does supply chain manage costs, it also constitutes a significant cost whose management is also important. For ‘Challenging Climates: The outlook for the oil and gas industry in 2014’18, DNV GL surveyed 438 senior professionals and executives in the global oil and gas sector. Among the WWW.OFFSHORETECHNOLOGYREPORTS.COM | 11

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The supply chain not only includes the manufacturer and suppliers, but also transporters, warehouses, retailers, and customers themselves… A supply chain is dynamic and involves the constant flow of information, product, and funds between different stages

DISCHARGE OFFSHORE

findings, reported by Marine Log, were that, “In response to rising costs, operators will seek to rely on larger supply chain partners that are more capable of providing a consistent global service, according to the report… 37% of operators say that their companies intend to acquire partners with the specialist knowledge and skills they need as they move into tougher exploration and production sites, with 49% saying they will need to increase alliances with others to share knowledge in order to cope with more challenging environments. In turn, DNV GL’s research affirms that operators will focus on controlling risks and costs by seeking greater standardization in their procurement approaches. This gives rise to greater interest in oil companies centralizing, standardizing and streamlining their supply chain to avoid costs in creating new solutions.” Given all of the above and its role both as a facilitator of other processes and a key process in its own right, it is no exaggeration to say that management of the supply chain is at the heart 12 | WWW.OFFSHORETECHNOLOGYREPORTS.COM

of offshore oil and gas profitability. According to Intergraph19, “For a typical new oil or gas facility, 10 to 15 per cent of the total cost is for engineering design and 50 to 60 per cent of the costs are related to material. It is obvious that surplus materials caused by ineffective materials management, even to levels of only five per cent, can result in the loss of millions of dollars on an average capital project… delays can often be even more costly when they affect the oil and gas facility owner’s ability to produce and sell the product. Effectively managing these complicated business processes in an integrated environment throughout all phases of the project life cycle is vital.” Without an organised supply chain, a significant part of the offshore oil and gas sector would be unviable, the cost of energy would be considerably greater and availability considerably less. It is difficult to overstate the importance of the supply chain to the offshore oil and gas sector.

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Extreme Challenges and More John Hancock, Editor The supply chain for offshore operations has to function at all levels of challenge; distance, adverse conditions, serious cost implications and extreme longevity

One positive by-product from offshore oil and gas production has been a culture of innovation. Readers will be familiar with engineering achievements that have physically tamed the most demanding environments. When the price is right, people will support the most creative solutions in order to make a process work and it isn’t only in the sphere of engineering that would be true. Establishing, maintaining and supplying complete working communities on platforms far from land has also driven innovation in business processes such as supply chain management.

The Price is Right and the Need is Compelling With offshore oil and gas, not only is the price right but also the world needs the product. 30% of the world’s oil production comes from offshore; that’s why it’s important. And it’s a growing sector in a growing industry. IFP Energies nouvelles20 estimates that in 2010, offshore production regions represented nearly 650 billion barrels of oil equivalent (Gboe) or 20% of known remaining global oil reserves. In terms of gas, these regions contain 25% of known reserves and 28% of remaining reserves. The conclusion that the report draws is that offshore is a nonnegotiable imperative for oil companies, but one that presents multiple technological challenges… it also presents multiple supply challenges to ensure that all of the equipment and materials needed to support this critical production area are always available where they are needed when they are needed. In numbers, deepwater and ultra-deepwater oil and gas production, having climbed to 1.5 million barrels per day (BPD) in the decade to 2000 had grown exponentially to reach 7.2 million barrels by 2012. What is more, Infield21 reckons that “The subsea oil and gas market continues to grow at an increasing pace, as oil and gas operators continue to discover reserves in deeper water areas...” And, in this context, ‘deepwater’ can mean up to 3000m below the surface for which the supply chain must be able to cope with some very specialised items.

Those challenges identified by IFP Energies nouvelle are compounded when, as is often the case today, identified reserves are further from shore or in deeper waters than would have been considered exploitable even a few years ago. As more accessible oil and gas reserves are depleted, the price of oil and gas rises making more remote, inaccessible and technically demanding reserves increasingly attractive and viable given the right engineering (see above) and an effective supply chain. When working at enormous distances from land the effectiveness and viability of any exploration or production facility will depend almost entirely on the quality of its supply lines. Given the enormous importance of the oil and gas offshore sector, it can be seen why supplying that sector is itself a critical business.

Just Getting There

www.panalpina.com oilandgas@panalpina.com

Supplying remote installations is never easy, even for onshore operations. When the remote location is up to 350km offshore and in an extreme environment, the task becomes even more of a challenge. Offshore oil and gas platforms and their operations are very expensive (see earlier articles) and most of the space on them is devoted to the task of extracting, processing and transporting oil and gas. Spare space to store materials and equipment other than that which is in immediate demand is not really available. Yet, because of those same costs, platforms cannot afford time lost waiting for materials and equipment to be delivered when they are needed. Supplies, materials, equipment and tools must be delivered when needed but not before. This is known as ‘just-in-time’ delivery in which nothing is there until it is needed but it must be there when required. So it isn’t only about the ability to transport equipment and materials to locations as far as 350 km away from land (Huskey’s SeaRose FPSO, Canada). Because oil and gas production is very much an industrial process, there needs to be a high degree of predictability and reliability WWW.OFFSHORETECHNOLOGYREPORTS.COM | 13

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The sheer and growing size of the sector means that supply chains can never settle for current capacity but must always seek ways to increase capacity in the current process and/ or extend its reach

in the correlation between when things are needed and when they are available.

Challenge upon Challenge However, despite their difficulties, deep sea operations are neither the only nor the most challenging for today’s offshore oil and gas business. An even greater challenge is what Bob Reiss in CNN Money22 described as the ‘arms race for arctic oil‘. It’s long been known that there is oil beneath the Arctic Ocean but the technology to reach it has, until recently, not been available. The melting ice cap has brought increasing areas of the Arctic into reach but also technologies such as subsea processing are making it possible to exploit reserves even beneath the ice. And, it isn’t only the environment or the engineering that poses challenges. The sheer and growing size of the sector means that supply chains can never settle for current capacity but must always seek ways to increase capacity in the current process and/or extend its reach. Douglas-Westwood23, estimated over 7,000 fixed plus more than 200 floating platforms in 2011… and growing; and with 190,000 km of pipeline currently installed plus a number of major modification programmes to push growth in offshore operations… in the next couple of years. It isn’t only the growth of new fields but also the life extension of established fields that is stretching oil and gas production life cycles to extents that were not previously planned. That brings us to the concluding challenge.

The Long-Term Distance from shore, depth, ice, climate, specialist engineering… all of these will challenge the supply chain but the final challenge has to be sustainability and longevity. Oil and gas fields are not short term investments. From exploration and discovery, through commercial drilling, production and life extension to final decommissioning can span well over 50 years. Few enough businesses have to plan five years ahead let alone five or more decades: offshore supply chains have to.

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References: 1

BP http://www.bp.com/en/global/corporate/press/speeches/perspectives-on-the-challenges-facing-super-majors.html

Diffen http://www.diffen.com/difference/Capex_vs_Opex

Oil & Gas Journal http://www.ogj.com/articles/print/volume-111/issue-8/special-report-offshore-europe/uk-supply-chain-flourishes-on-record.html

Infield Systems, ‘Global Offshore Oil and Gas Outlook’ http://www.gaselectricpartnership.com/HOffshore%20Infield.pdf

eHow http://www.ehow.com/about_4597210_offshore-oil-rigs.html

IFP Energies nouvelles

http://www.ifpenergiesnouvelles.com/content/download/71825/1530746/version/6/file/Panorama2012_09-VA+-+HydrocarbureOffshore.pdf

Infield Systems http://www.infield.com/news/subsea-oil-gas-sector-growth-2017

Marine Log http://www.marinelog.com/index.php?option=com_k2&view=item&id=6156:outlook-positive-for-offshore-but-tighter-capex&Itemid=222

Business Day http://businessdayonline.com/2014/03/decline-in-iocs-capex-amid-growing-oil-gas-discoveries/#.Uyr4TYWgR8E

Oil & Gas Journal article ‘UK supply chain flourishes on record investment’ http://www.ogj.com/articles/print/volume-111/issue-8/special-report-offshore-europe/uk-supply-chain-flourishes-on-record.html

BP http://www.bp.com/en/global/corporate/sustainability/society/Supporting-development-in-societies-where-we-work.html

UK Oil & Gas Industrial Strategy

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/175480/bis-13-748-uk-oil-and-gas-industrial-strategy.pdf 13

Wikipedia http://en.wikipedia.org/wiki/Offshore_drilling

Ideas http://ideas.repec.org/p/cpr/ceprdp/9103.html

What is a Supply Chain http://www.sbaer.uca.edu/publications/supply_chain_management/pdf/01.pdf

Capgemini White Paper ‘BPO Supply Chain Management’

http://www.capgemini.com/resources/capgemini-bpo-supply-chain-management-white-paper 17

Supply Chain World Europe, Statoil http://supply-chain.org/f/STATOIL_SCC.pdf

Marine Log http://www.marinelog.com/index.php?option=com_k2&view=item&id=6156:outlook-positive-for-offshore-but-tighter-capex&Itemid=222

Intergraph http://www.intergraph.com/oilgas/default.aspx

IFP Energies nouvelles

http://www.ifpenergiesnouvelles.com/content/download/71825/1530746/version/6/file/Panorama2012_09-VA+-+HydrocarbureOffshore.pdf 21

Subsea Well Intervention Market Report to 2017 http://www.infield.com/market-forecast-reports/subsea-well-intervention-market-report

CNN Money http://features.blogs.fortune.cnn.com/2012/05/10/eskimo-and-oil-man-reiss/

Subsea Asia Conference 2011 http://www.subseauk.com/documents/subsea%20asia%20-%20jason%20waldie.pdf

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