Downturn in the Oil and Gas Industry: An Opportunity for Supply Chain Improvements

“Most people who look at the Oil and Gas industry right now are likely to characterize the market as ‘challenged’.”

So stated Kent Stuart, Director of Oil and Gas at C.H. Robinson, earlier this year on Talking Logistics. Looking at some recent news, it seems like the industry remains challenged.

As the Wall Street Journal reported this past weekend, “U.S. oil-and-gas producers have written down the value of their drilling fields by more in 2015 than any full year in history, as the rout in commodity prices makes properties across the country not worth drilling…A group of 66 oil and gas producers have taken impairment charges totaling $59.8 billion through June, according to a tally by energy consultancy IHS Herold Inc.”

And according to an article in the Houston Chronicle, “During the past eight months, energy companies have slashed more than 176,000 jobs worldwide, although the number is likely greater because many aren’t made public. The U.S. has seen at least 91,000 job cuts across the energy industry since prices collapsed last summer, according to Continental Resources, an Oklahoma oil company that tracks layoffs.”

All that said, I agree with something else Kent said:

I believe from a supply chain and logistics perspective, I would characterize Oil and Gas as generally full of opportunity, not just for companies in the industry to turn their supply chains into a competitive advantage, but it’s a great opportunity for service providers that are well positioned to add value and drive change.

I asked Kent what challenges and opportunities he’s hearing from supply chain and logistics executives in the industry, and here’s an excerpt of what he said:

I hear consistent things from Oil and Gas companies, which are among the largest companies in the world. A lot of these companies have a [sense] that they have a very large transportation and logistics spend, but most of them don’t know exactly how much they spend…They will often say, ‘We literally have hundreds and hundreds of carriers and logistics service providers, but we don’t have a centralized platform to really understand the value and risk profile of these providers.’

Accessorials is another example. Companies in the Oil and Gas industry use virtually every mode available, and they get all sorts of bills with accessorials on them, but they often don’t have a process to determine if an accessorial, such as a detention fee, is legitimate. So, they just pay these bills as they come in.

Companies in the industry also have little to no visibility, especially from a global perspective.

Some companies respond to downturns by cutting costs and taking other short-term actions to simply weather the storm, while others view a downturn as a catalyst for change — that is, as an opportunity to make supply chain improvements that will pay dividends not only in the near term, but for years to come. Are most Oil and Gas companies taking the current market environment as a catalyst for change or are they simply looking to weather the storm? Not surprising, Kent said the answer is both:

I’m definitely having conversations with executives in the industry that are strategic, where they are looking to take advantage of [this market downturn] to make supply chain improvements not only for the short term but for the long haul too – that is, create something that is sustainable so that when the market comes back, they will have a better [supply chain] in place.

But make no mistake, these conversations have a whole layer of urgency around reducing costs, increasing efficiency, and being able to track the value of these things right now.

So, what actions can Oil and Gas companies take to move up the supply chain maturity curve? Watch the clip below for Kent’s perspective, which includes deploying a technology platform like a transportation management system (TMS) and leveraging the knowledge and expertise of logistics service providers:

To wrap up, I asked Kent for his outlook for the Oil and Gas industry, and he summed it up this way:

My prediction is that companies that take advantage of this opportunity to really improve their supply chains, that are preparing now to be in a position to continuously improve, will be recognized as leaders in the marketplace. Companies that apply TMS technology and provide consistent processes and visibility into their supply chains will be much better equipped to see [market changes coming] and to react much faster and effectively than they can today.

I encourage you to watch the rest of my conversation with Kent for additional insights on this topic. Then post a question or comment and keep the conversation going!