Most oil exploration projects are located in regions that are difficult to access and dangerous to supply, adding to the “many unquantifiable sources of instability” that large oil and gas exploration and production projects must contend with. Heading that list:
- Over 50% of the world's production occurs in regions that are highly corrupt; and
- Oil price volatility can bring projects to a sudden halt if prices drop suddenly.
With multiple stakeholders and large investments at stake, it is perhaps no surprise that relational approaches are seen as increasingly critical to the success of oil and gas upstream projects.
Traditional approaches are not effective
Published recently in IACCM's Journal of Strategic Contracting and Negotiation (JSCAN), The Role of Effective Relationship Management In Successful Large Oil & Gas Projects: Insights from Procurement Executives1, concludes that in such highly challenging and fragmented conditions, traditional approaches to contract and supply chain management are not effective. More collaborative approaches are needed to create long-term preferred relationships with suppliers and share the risks and rewards of doing business.
The report reviews a number of studies that suggest the oil and gas construction industry supply chain is beginning to encourage collaborative working arrangements, however actually achieving this is still challenging.
Regional conflict, theft and corruption
With so much of the world's oil production in regions that are highly corrupt, this difficult issue has a major impact on project outcomes, particularly when it comes to procurement and regulatory negotiations with local governments. The report includes a table listing the top oil producing countries and public perceptions of public corruption in those countries.
Further “unquantifiable” sources of instability in producing areas include regional conflict and theft. Uncertainties around nationalization of oil companies can also lead to or cause major disruptions in both investment cycles and short-term availability.2
Other significant challenges include:
- Political instability;
- Shifting investment cycles associated with the oil and gas environment;
- Oil price volatility impacting the hedging and assessment of projects whose cash flows are influenced by the expected price of oil; and
- Long term future oil price uncertainty changing incentives to develop new fields in producing countries.3
Mobilizing equipment to remote, dangerous locations adds a further dimension to project risk. One executive noted, “When we ship equipment to Western Africa, we assume we will never be shipping it back due to the conditions in those regions.”
Senior procurement executives share their experiences
Thirteen senior, experienced oil and gas procurement executives representing the major Fortune 500 oil and gas companies were interviewed for the report, all with significant experience in working on large complex projects in the oil and gas sector. They included seven (current or past) chief procurement officers, five contract directors, and one chief legal counsel for the organization.
Based on their insights, and tested more widely through a general survey of oil and gas executives using IACCM's survey tool, the report identifies five essential requirements of project outcomes that are successful beyond basic measures of cost and timeliness.
Exploring the role and impact of each, the report's authors1 find the common thread of stakeholder and relationship management playing a fundamental underpinning role in the successful management of risk and value. This role is therefore critical to the outcomes that are associated with oil and gas project success. In particular they find that:
- Procurement relationship management practices affect the extent to which the needs of project stakeholders outside the contract are met (e.g. users, suppliers and communities affected by the project), as well as the way project relationships are managed inside and outside project teams.
- Contracting and inter-firm relationships in LIECPs, supply chain and procurement strategies impact on project value and on the way project risks are managed.
Their results also seem to support a growing belief in the project management community that robust contract management is a significant factor in maintaining alignment and achieving relative success for complex projects.
Looking at the background to the issues, the report makes the point that LIECPs (construction) supply chains and management practices differ from those in manufacturing in important ways. With transient locations they are highly fragmented and may need to be recreated several times between trades.4 In addition:
- Frequency and volume of demand makes it difficult to establish the necessary long-term commitment to suppliers.5
- Many companies lack the internal resources to ensure the continuously high levels of operational and commercial collaboration needed.
Critical issues need further research
The report calls for further research on critical issues such as talent management and up-skilling of those working in major project contracting roles with longer-term studies on both the conditions needed for collaborative relationships to take place and organizational barriers to partnering. Further research is also needed on the role of procurement and supply chain executives who, in order to manage value and risk in large projects, need to spend more time in the early phases of contract negotiation engaging and involving a larger pool of stakeholders.
The framework proposed also needs to be further refined and developed to account for conditions in specific LEICPs, so that it can be used as a tool to leverage procurement and supply chain decisions in large projects.
- The Role of Effective Relationship Management In Successful Large Oil & Gas Projects: Insights from Procurement Executives, Robert B. Handfield, Marcos A. M. Primo and Marcos Paulo Valadares de Oliveira, JSCAN, March 2015. (Note: End Notes 2-5 below also appear as references in this JSCAN document.)
- Ebrahim Z et al: Macroeconomic impacts of oil price volatility: Mitigation and resilience, Frontiers in Energy, 2014.
- Matar W et al: An introduction to oil market volatility analysis. OPEC Energy Review, 37, 247–269, 2013.
- Azambuja M & O`Brien WJ: Construction Supply Chain Modelling: Issues and Perspectives (2009)
- Cox A and Ireland P: Managing construction supply chains: the common sense approach (2002)