Low Oil Price Effects on Procurement and Cost Cutting

Low oil price effects on procurement and cost cutting

Mark Ellis Blog, Oil&Gas

2015 was the beginning of the storm to hit the oil and gas industry, with the world’s demand for oil falling and supply increasing, the resulting price of a barrel has plummeted to record lows not seen since the last crash in the early 2000s. This has driven a change of attitude across the industry to really examine expenditure, leading to massive cost saving exercises pushing the procurement function to the forefront on the mission to maintain a healthy profit margin and manage operational spend.

Over this period we have seen a vast change in the procurement function to minimise the base costs in all aspects of the business. The way that the industry has struggled has affected the entire supply chain and the attitude of the buyer and also the seller has had to change, for example, there is far greater pressure on driving down rates of services in all environments, be it on the oil rigs themselves or in the head offices. In the past you would have seen savings around 5 to 10 percent but now in this time of cost cutting saving are nearer double this at 15 to 20 percent.

One of the more successful ways of achieving these savings is working with the industry specialist suppliers in partnerships in a “we need you and you need us” scenario. We have seen this first-hand working with one of the world’s largest oil field services supplier – in the past this company has been the go-to supplier for all big and small oil companies that need a wide range of services from Seismic, Drilling, Associated Fluids, Completion Services, Subsea, Well Intervention and Software. Due to their size and scale, they have been able to corner the market and demand a high price. The industry simply paid it in the high oil price environment and also preferred their service over the cheaper and smaller suppliers. Now, however, this particular company has had to work with the oil companies to keep their share of the market otherwise the oil companies will quite happily go elsewhere. This shift in the power balance has given the procurement function the ability to work more constructively with the large suppliers to start pushing and challenging rates in order for them to keep their market share. This allows us to negotiate on top service and succeed.

Another simple success in the market is the consolidation of Upstream, Downstream and Indirects Procurement Functions moving towards integrating their buying power and consolidating and aggregating spend. The industry is moving more towards sharing capability and capacity and harmonising processes across their operational divisions.

What is highlighted here is that the low oil price environment is affecting not just the oil companies: it also affects the whole supply chain and the operating models. This puts the pressure on procurement and suppliers to work together to drive out costs, in order for the industry to ride the storm.