Authored by Fayaz Haq and Henry Shepperd
Representing 30% of the global oil production and boasting some of the highest global per capita GDPs, it isn’t hard to quickly uncover what makes the six member state countries (Saudi Arabia, United Arab Emirates, Qatar, Kuwait, Oman and Bahrain) representing the Gulf Cooperation Council (GCC) so distinct. There is no doubt that the state owned Oil and Gas industry can be a very profitable industry, however, it comes with a price. Significant investments must be made to ‘set up shop’ in the upstream domain for exploration and extraction, and in the downstream area of refining.
The dynamic regional industry is also exposed to key challenges including:
• Cost visibility and risk mitigation with bundled capital and special projects awarded to known Engineering, Procurement and Construction Management (EPCM’s) and Project Management Consultants (PMC).
• Local source/local supplier requirements whereby one must procure and enter into contracts with local supply sources. This results in local suppliers acting as ‘agents’ for multiple global and sometimes competing manufacturers.
• Single sourcing for items such as specialized / OEM equipment for technical or IT projects.
• Splitting requirement up in such a way to come under the relevant thresholds for conducting formal tendering exercises.
As with any opportunity involving large scale investments, large sums of monies are exchanged and the stakes are high for all involved. Historically with trade being conducted in the region for centuries, it was not uncommon for individuals to exert influence on outcomes along the selection and decision making process. And because procurement was front and center in the process - and responsible for massive amounts of spend - it was often perceived as a target for fraud. To address the risk, and provide the groundwork for true transformation, regulators and organizational management set up controls and established governance mechanisms to manage costs and maximize profits. Detailed procurement policies and processes were put in place, internal tendering or bid opening committees were established, supplier code of ethics and rules against ‘gifting’ were developed and of course internal audit aided the pathway to success!
Procurement Objective
The corporate focus for both upstream and downstream oil and gas organizations is production in a sustainable manner. Much like every other function across organizations, the objective is to make sure the procurement function is aligned with corporate objectives by following the established protocols, operating efficiently, mitigating risk and making informed supply decisions. This can be manifested in many ways but in summary, it is to ensure the identification, pre-qualification (primarily placing an importance on quality as well as health and safety), selection and management of suppliers who can assure a continuous (although not always optimal) provision of goods and/or services.
Half a century later, there is no doubt that procurement processes with the Oil and Gas sector are mature and well defined, but many are still manual, not executed in an efficient manner and prone to errors along with the risk of not maintaining a proper audit trail.
Technology Transformation
The deployment and adoption of Strategic Sourcing technologies is a relatively new trend for the Oil and Gas industry across the GCC. There is particular emphasis on data security whereby organizations prefer to house their own data rather than leaving it on the cloud. The Oil and Gas sector has realized that sourcing applications allow companies the ability to continue to follow their mature and defined processes, but in a more automated, efficient and streamlined manner through secure solutions and numerous interfaces which link back to their transactional systems.
Having addressed the extremely important aspects of efficiency, control and governance, auditability / management reporting and security, the oil and gas companies are moving into new frontiers. They are starting to optimize costs by requesting the lowest technically qualified supplier to submit their best and final offer and/or piloting more advanced negotiation tools such as eAuctions into their overall processes.
Because state owned oil and gas companies in the GCC have solid financial backing, they continue to allocate funding for technology. This means they have some of the best tools, but at the same time, they have not been able to influence or challenge some of the historical processes that are transactional in nature or duplicative within the organization.
Talent Vision
As a new generation of decision makers with western education enters into the workforce, that is younger locals with modern and innovative ways of thinking, they are challenging the past and providing new transformational thinking adopting a broad technology perspective. These ‘tech-dopters’ recognize that considering strategic suppliers as partners is beneficial to their own successes and this approach has started changing relationships in a way such that it has encouraged the industry to begin looking into Supplier Relationship Management to build partner relationships, mutual success and increased opportunities for innovation. This has increased technology throughout the Procurement processes, enabled visibility across the organizations and focused the employees in the right direction.
Long and Winding Road
While the maturity has been slow, technology and talent is making a difference for the GCC Oil and Gas Industry. But it is nascent and that means more improvement will come as the technology evolves and brings more visibility, the talent drives the agenda for change and organizations start moving beyond the historical to reap greater future rewards.