Oil & Gas Supply Chain Dynamics: Navigating the Tipping Point

By Joshua Trott, Chief Revenue Officer

Introduction: The Macro Squeeze

Coming off of strong Q1 and Q2 earnings, Oil & Gas companies are finding themselves navigating an increasingly challenging environment even as demand continues to rise. Manufacturing and shipping still haven't recovered from the tumult of Covid. Investment continues to decline. The geopolitical and policy environment remains unpredictable. And we have an election year to look forward to.

As O&G companies look for new ways to grow in this constrained environment, they are unlocking increases in efficiency (for example, increased well counts per rig), which has resulted in stiff competition for labor, suppliers, parts, and materials. This competition, coupled with the inconsistent supply, has created an environment where costs continue to rise and lead times continue to far outpace pre-Covid levels.

Those blockbuster profitability numbers from H1? They may become a thing of the past for companies that don’t proactively seek out new ways to improve their cost basis.

Why do I say “may” be a thing of the past? Because while wins can feel more and more elusive in this challenging macro environment, we now have extraordinary insight into how those pressures translate internally for Oil & Gas companies. In a benchmark study commissioned by Workrise, senior leaders at Oil & Gas companies and their service providers across the US and Canada have opened up about their outlook, priorities, and what’s keeping them awake at night.

An Industry at a Crossroads

We embarked on this journey because we felt it was critical to establish a benchmark for all of Oil & Gas. Our hope is that shining a light on the O&G supply chain — and reflecting back the results to an industry under pressure — will facilitate new dialogue and reveal new paths to change. 

I’m excited to share some key findings from the study, which you can read in full here. Thanks to candid answers from operators and suppliers, we came away with a rich and nuanced picture of the dynamics on the ground. The biggest takeaway is simple: The Oil & Gas supply chain is at a tipping point.

The single biggest threat to the industry — from the perspective of the majority of those we surveyed — is “policy and geopolitics,” which includes regulatory reform, permitting, and global supply chain issues. This complex macro push-pull is shaking the foundation of how these companies operate, while shareholders continue to demand more and more. 

Can the Shells and Exxons of the world sustain earnings calls like we saw in Q1 and Q2 of this year? What about the independents who still make up a significant portion of overall production in the US? Some may succeed, and others will very likely fail. We don't have a crystal ball. But what the study bears out is that success in this changing landscape will require a new level of focus on the supply chain and everything it touches.

A note about our methodology: Workrise commissioned NewtonX, the world's leading B2B market research company, to formulate and field this impartial benchmark study on the space. In total, 131 leaders from Oil & Gas providers and services companies including Shell, Chevron, Enbridge, TC Energy, Seadrill, OneOk, Oxy, TotalEnergies, BP, and Marathon Petroleum, participated. To put that number in context, 275 companies in the US are responsible for over 70% of Oil & Gas production, making the study’s sample size statistically significant. 

Respondents ranged from C-suite executives to managers with regional scope across the supply chain, operations, logistics, and finance departments, while 87% of respondents identified as either the decision maker or a joint decision maker within their business unit or department. 

The study covered the following key areas: 

1. Outlook. How confident are business leaders in achieving their department level and company-wide goals?
2. Challenges & Pain Points. What is keeping Oil & Gas leaders up at night?
3. Data & Solution Gaps. Where are there gaps for data and solutions?
4. Trends & Pressures. What trends or pressures are impacting supply chain dynamics?
5. The Suppliers' Perspective. How is this seen from the vantage point of the suppliers who support production?

The Supply Chain Tipping Point: Highlights from the Benchmark Study 

Thanks to the candid answers from O&G operators and suppliers, we came away with a rich and nuanced picture of the dynamics on the ground. 

Let’s take a look at some of the study’s key findings.

Rising Costs

Costs are on the rise across all service categories. But it’s not just parts and labor. Increased competition for suppliers is also driving cost increases, and making it easier to charge rush fees for just-in-time services.

Input Costs 

• While anecdotally we hear input costs have stabilized, over 80% of respondents reported cost increases across all service categories ranging from 5% to 50%.
• 43% of respondents ranked “cost of parts and materials” as the No. 1 driver of cost increases, followed by “cost of labor” (33% of respondents).

• And in addition to raw inputs, 39% of Suppliers reported that they charge a rush fee on more than 20% of their projects.

Comparing Actuals to Budget

What number do you think is a reasonable benchmark for project completion on budget: 85%? 90%? Whatever your answer, consider this: 

• The study found that only 23% of Operations and even fewer Supply Chain leaders (19%) reported that 80% or more of their projects were delivered on or under budget. Put another way, less than a quarter of industry leaders we surveyed said that 80% or more of their projects hit budget goals. That’s a lot of projects going over budget.
• And according to the majority of Oil & Gas Supply Chain leaders surveyed, 50% or fewer of their projects are completed on or under budget.

Lack of Quality Data

For companies that deploy as much capital as Oil & Gas operators do, the fidelity of the data they depend on to plan and forecast is surprisingly low. 

“If you imagine that 95% of our spend is manually coded, whether or not that data is reliable is questionable. We use it maybe as a good ballpark, but it's hard to even assess the quality of it.” — Senior Category Manager, Supply Chain at an Oil & Gas supermajor

Data Access

• Only 20% of respondents across all departments feel they "definitely have the data I need” to make decisions in their daily work.
• The majority of Operations leaders say they don't have regional pricing data to know if they are paying the right price for goods and services in a given region.
• 83% of logistics leaders say they don't have reliable data on their key performance indicators (KPIs).

What data is valued most?
60% of decision makers at O&G companies say they value current data for “project input costs (i.e. materials, equipment, fuel, etc)” more than anything else in their purview, while current data for “health, safety, and environment (HSE)” took second billing (50%).

Scarcity of Labor and Suppliers

Competition — for workers at all skill levels and suppliers across service categories — is fierce across today’s energy landscape. This not only contributes to increased costs, but also creates risk in the form of disruptions, and calls into question operators’ ability to execute on new projects once they are greenlit.

• Over half of all respondents listed "workforce availability and talent drain" as a major threat to the industry.
• 35% of those surveyed called "availability of quality vendors to deliver on projects in the field" a "very significant" problem.
• 48% of respondents say they don't have the data to evaluate vendors outside of their AVL
• When asked for "the one thing you would like to see change in terms of how your company delivers projects in the field," the spread was wide, but the No. 1 answer was "improved vendor management (sourcing, reliability, contingency plans, etc).

The Suppliers’ Perspective‍

This perception of competition is validated by the responses of the suppliers who participated in the study. 

• No supplier reported that they are at less than 60 to 80% capacity.
• 25% of the suppliers surveyed are at 100% capacity and report that they have had to waitlist their clients.
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"Lead time for transportation by rail has doubled recently. What took 6 six weeks to transport by rail could now take 12 weeks."

Manufacturing and Logistics Challenges

For energy companies and their providers, lead time for everything from parts to materials and equipment is a major pain point. While anecdotally some respondents noted that they believed the supply chain disruptions posed by Covid and the war in Ukraine were in the rear view mirror, the numbers paint a nuanced picture.

"Lead time for transportation by rail has doubled recently. What took 6 six weeks to transport by rail could now take 12 weeks." — Logistics and Transportation Manager for a Global Supermajor

• The No. 1 challenge reported by energy services companies is longer lead times for parts, materials, and equipment.
• 62% of respondents listed longer lead times as the top challenge keeping them up at night.
• Nearly half of all respondents (49%) experienced a lead time increase of at least 50% for electrical components.
• 26% of energy providers noted a 50%+ increase in the cost of replacing “custom-made” parts.

Diversification and ESG

Perspectives on diversification and ESG highlight the complex nature of the conversation, and the push-pull within Oil & Gas as the industry contemplates its role in the energy transition.  

• 76% of respondents anticipate “increased focus on carbon reduction and ESG” over the next five years.
• The top two renewable energy verticals that Oil & Gas companies have entered, or have plans to enter, are “hydrogen” (56%) and “solar energy” (55%).

Obstacles to Diversification

• A common myth in Oil & Gas is that new business lines in carbon capture or renewables will cannibalize existing business lines such as conventional drilling and LNG. Yet only 16% of respondents say that “fear of cannibalizing existing business lines” is a meaningful barrier to diversification.
• In fact, the top barrier to diversification is more pragmatic and rooted in fact. The largest group of respondents (44%) list “belief that fossil fuel will still be the primary source of energy and revenue” for the foreseeable future as the reason diversification hasn't happened faster.
• Most do not see diversification as out of reach. Only 18% of Operations and 26% of Supply Chain leaders see “lack of access to approved vendors with the expertise to deliver in new verticals” as a challenge to diversification.

Barriers to Change

If acknowledging the facts and embracing change is critical to not just surviving but growing in a challenging environment, then it’s critical to look at what is standing in the way. The biggest barriers, according to the leaders surveyed, were related to resources, bureaucracy and hierarchical organizational structures, and the friction created by human error. 

“We have an industry that doesn't like to change. We find things we're good at and we like to do the same thing over and over …  There's a lot of reluctance to think outside the box or challenge anything. I would say that we don't have anyone that's consistently advocating for change” — Supply Chain Manager, Purchasing and Materials Management for a major US-based pipeline company

Internal Challenges

• The No. 1 barrier to implementing needed changes is “insufficient human resources (bandwidth and people).” 
• The No. 2 barrier: “hierarchical organizational structure which hinders change.” 
• The biggest operational challenge across all teams is “reducing red tape and bureaucracy to empower teams to be more agile.” 

Human Error Creates Friction

• Disputes have become a time-consuming but standard part of all energy projects. 64% of operations leaders report that they dispute invoices between 20% and 40% of the time.
• 40% of Supply Chain leaders say they dispute invoices between 50% and 60% of the time.

Finding Solutions

The supply chain touches every department of every company in energy. Leaders at the biggest Oil & Gas companies aren’t just hoping they’ll make it through this challenging time. They’re looking at solutions to improve how they operate and to be able to better navigate the storms that will inevitably come.

The top areas of focus for industry leaders looking to improve how they operate:

1. 58%: Researching New + Innovative Supply Chain Solutions
2. 53%: Strengthening Relationships With Vendors
3. 50%: Implementing New Technology

Opportunities for problem-solving with technology:

• The industry overwhelmingly finds “artificial intelligence” to be the most exciting innovation (74%), followed by “procurement and supply chain automation”(48%).
• 83% of Supply Chain leaders expect an increased focus on AI, automation, and digitization over the next five years.
• Over half of Supply Chain leaders say their organization aims to have a single source of truth (SSoT) to connect data, workflows, and teams.

The need for more transparency and accuracy:

• 52% of supply chain leaders say they don't have the data to evaluate vendors outside of their AVL. 

As we've discussed, most Operations leaders are having to deal with invoice disputes on 20-40% of invoices. In a world where headcount is allocated to people whose sole job is to hunt down and resolve invoice disputes, there is a clear need for better data across the board.

Where Do We Go From Here?

If you've gotten this far, you have a unique opportunity. There are 10 new questions hiding behind every truth surfaced in the seven sections above. The challenge is not to shrug your shoulders and turn away, but to dig in deeper. To uncover the questions hiding behind each insight and then begin to answer them.

With so many external forces at play, and so much outside of our control, Oil & Gas companies have the power to make meaningful changes by starting from within. What becomes clear with this new data is that we are at a crossroads: accept the status quo and continue to bake waste into your operating model, or take proactive measures to strengthen the supply chain. The companies that do so, and evolve to do more with less, will reap the rewards no matter how choppy the water gets.

Nowhere is the status quo — the sheer inertia of “how things have always worked” — a more powerful force than it is in energy.

‍It's time to find ways to do things better, to work smarter, and to believe we can change “how things have always worked” to “how things can work better.” For companies that have innovated time and again at the wellhead and thousands of feet underground, there’s no reason not to tackle innovation on the business side. If even one of the findings I mentioned above makes you think about one thing differently, ask a new question. Take a new step. Change begins with you.  
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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.