Equipment shortages are driving up prices. Using a vendor marketplace can be a helpful way of bringing costs down.
With costs in the Oil and Gas industry soaring, what can companies do to make savings and reduce expenditure?
Shortages of equipment and lengthy delays are driving up prices for those commodities that are available, meaning profit margins are getting squeezed.
Problems with logistics has meant that Oil and Gas companies have found it difficult to source steel, for example, as well as submersible pumps that boost well pressures, and pickups that transport workers and equipment.
The upstream oil and gas industry in particular has been hard hit by soaring fracking sand prices due to labor shortages at sand mines and a lack of truck drivers.
Meanwhile, it was recently reported that Permian oil producer Diamondback Energy had experienced a 93% rise in fuel costs, a 43% hike in cement costs, as well as rises in steel casing prices (42%), directional drilling costs (35%), and equipment rentals (more than 20%).
Oil & Gas services firms are struggling.
The net result is that many Oil and Gas services firms are struggling to deliver.
The current turmoil is exacerbating existing problems that were caused by the Covid-19 pandemic and has led to concerns that a growing number of Oil and Gas supply companies could go bust, with the result that vital industry capabilities are lost and the ability of oil and gas operators to maintain production is reduced.
The Dallas Federal Reserve Bank polled Oil and Gas executives in New Mexico, Louisiana and Texas to gauge trends in the sector for its input cost index. The results of the poll showed that costs for oil and gas support services firms rose to a five-year high in 2021, with an index score of 70 during the last quarter of the year. A total of 72% of companies reported increased costs and only 2% reported a decline in costs – the index score represents the difference between the percentage of respondents expecting an increase and the percentage anticipating a decrease.
Cost Pressures Expected to Continue
The bad news is that the problem of escalating costs is not expected to go away anytime soon.
Research conducted by Rystad Energy has concluded that supply chain costs are set to increase for Oil and Gas projects in the US in the coming years, with the engineering, procurement, construction and installation (EPCI) segment “being the first to record a double-digit percentage hike in costs”.
The research forecast that EPCI costs, mostly driven by climbing wages and material costs, are set to have increased by about 10% in 2023 when compared to 2021 levels.
The Rystad Energy report said that, as a result, US capital expenditure on EPCI in 2023 is expected to end at $15.5 billion, around $1.4 billion higher than the 2021 total.
How You Can Reduce Expenditure
So, with costs escalating, Oil & Gas operators are looking for opportunities to reduce expenditure and speed up time to revenue.
One way in which Oil & Gas services firms are able to achieve both of these objectives is by using a vendor marketplace.
An Oil & Gas vendor marketplace matches vendors and operators, while also performing a number of functions, including: streamlining the MSA [master services agreement] process, maintaining vendor compliance, and negotiating payment terms.
What cost reductions can you expect?
Here’s how a vendor marketplace helps both vendors and operators reduce costs.
Firstly, a vendor marketplace makes it easier, and more cost effective, for vendors to market their services as a large number of customers are able to view their offering.
A marketplace also helps vendors save time and money on marketing because the marketplace is promoting their product or service on their behalf and helping to get their offering in front of the best potential customers.
In addition, a marketplace will ensure vendors consistently get paid on time, meaning they are able to manage cash flow more effectively.
From an operator’s perspective, competition between vendors means they will not only try to provide you with a better service than their competitors, but also offer a better price.
In addition, the marketplace can onboard vendors on the operator’s behalf, as well as providing subcontracting and vendor management services that enable the operator to save time and money normally spent on: sourcing, price negotiations, contracts, onboarding, health, safety and environmental reviews and vetting; and payments.
How a Vendor Marketplace Reduces Time to Revenue
A marketplace can also lower operating costs by streamlining the master services agreement (MSA) process, as well as the onboarding process. Finalizing an MSA, in particular, can be challenging and time-consuming, but a vendor marketplace reduces the length of the MSA process from a few months to just a few days.
In addition, using a vendor marketplace frees you from the burden of having to negotiate payment terms, and also means you are matched with the right customer for your business in a much shorter time frame.
Benefits for Operators
From an operator’s perspective, using a vendor marketplace means:
- The master services agreement process is quicker – a vendor marketplace will reduce the length of the MSA process from a few months to just a few days, thus lowering operating costs
- It’s easier to find vendors that meet your requirements – a marketplace offers pre-qualified vendors, which means the administrator is guaranteeing the vendors are able to provide the exact service you require
- You can find vendors quickly – you have access to hundreds of pre-qualified vendors right when you need them, rather than after 3-6 months of negotiations
- You don’t need to worry about managing the ongoing vendor relationship – a marketplace will take care of your procurement needs on a continuing basis
At Workrise, we can match you with the right customer for your business, so you can get back to focusing on what you do best.