Jun-2018

Innovation in supply chain planning

Software that can be configured to solve any problem in the supply chain is critical to planning in the oil and gas industry.

DENNIS OSTENDORF
Quintiq

Article Summary

The oil and gas industry experienced the most severe downturn in recent history with the price of oil declining by 75% from mid-2014 to early 2016, throwing oil and gas companies into a state of survival. Many resorted to cost cutting measures such as drastic reductions in their workforce, cancellation or postponement of new projects, and reduced investments in large scale capital projects.

Today, companies are cautiously optimistic as the industry continues to recover. While prices are still far below the pre-downturn peak of $115/bbl (March 2011), they are slowly but surely stabilising. An unprecedented agreement between OPEC and non-OPEC nations to reduce production and tighten imbalances in supply and demand have contributed to this positive outlook. Additionally, global energy demand is expected to rise by a third over the next two decades, while the shale revolution and advances in oil recovery technology are expected to provide an abundant supply to meet that demand.

While the downturn was devastating, it has led to an increased focus on exercising capital and operational cost discipline. Efficiency improvement was emphasised, resulting in projects with break-even prices as low as $25/bbl, as claimed by Statoil for its flagship oil project in the North Sea. This is a level that would have been unthinkable prior to the downturn and signals the possibility of even lower break-even prices as planning processes continue to improve. A move towards sustainable profitability is the new norm, with many companies looking to achieve optimal profits while reducing expenditure.

Why innovate?
While the worst has passed for now, the crisis is far from over. It will take years for the industry to recover, and companies that invest in innovation to reduce costs and increase their profit margins will be the ones to come out of the crisis stronger than before. Shell’s takeover of BG Group is a prime example of a post-downturn investment in innovation. This mega-merger grants Shell extensive access to LNG assets and accelerates its global LNG and deep water strategies, enabling the company to adapt and thrive in a changing energy landscape.

Oil and gas companies can also look beyond the industry for inspiration to innovate. Even before the downturn, innovations in other sectors have benefitted the oil and gas industry – both directly and indirectly. Advances in manufacturing and transportation have increased demand for innovative solutions in refinery processes to produce more and better fuels, while breakthroughs in exploration and extraction have increased the options for supply. Efficiency improvements in planning have proven especially beneficial, particularly for primary distribution. In 2015, BP reported record profits on the back of major efficiency improvements in its downstream sector, which in turn partially offset the negative effects of a weakened environment in its upstream division. The company plans to continue streamlining its downstream operations to deliver annual cost savings of $1.6 billion by 2018. With optimised logistics planning in the downstream sector, products can be delivered to storage facilities in the right amounts and the right time, with an emphasis on cost effectiveness.

Ideally, innovations to increase efficiency would be applied before a crisis happens, enabling companies to be more robust in challenging conditions. However, innovation during a crisis can also help to mitigate its adverse effects. It is never too late to innovate; in the current oil and gas climate, innovating can mean the difference between surviving the crisis and falling even further behind.

Three core capabilities of innovation in planning
The oil and gas industry is extremely complex – while there are key concerns that affect all players, no two companies will have the exact same planning issues. Oil and gas companies have historically focused on maximising production, with many innovations developed to strive towards that goal. A long history of economic dominance and high margins resulted in many companies paying far less attention to the need to maximise efficiency. In the current reality, increased efficiency throughout the supply chain is crucial, and many companies are now working to find solutions to weather the recent downturn and prepare for a challenging future. There are three core capabilities that every company needs in an innovative planning solution:

Visibility
What if you could see the operational efficiency of your fleet a month in advance? Could you still make the improvements?

Oil and gas companies operate on a very large scale, often with operations spanning different regions across the globe. Adding complexity to the planning effort is the scale and scope of their operational environments, with diversified business interests being pursued in separate regions.

Visibility over these operations is crucial, but for it to be truly valuable it has to result in something actionable. A key factor in enabling actionable visibility is the effective use of existing data to plan for the future. This includes taking into account relevant business KPIs that can still be improved upon, rather than belatedly trying to rectify past errors.

Integration
What if your upstream and downstream planning processes are fully aligned? Could you increase your margins?

Integration is the next step in enabling an innovative planning solution. Once visibility has been achieved, oil and gas companies can proceed to planning optimal connections throughout their organisations from production to distribution.

Previously, planning operations in isolation was the norm for departments in the oil and gas industry. Post-downturn, there is an increased emphasis on the importance of integrating the supply chain – both internally and with external parties – in order to improve visibility and efficiency. Full visibility over operations gives companies a single source of truth that all departments can draw information from. This in turn enables these departments to cohesively and effectively integrate to achieve high level goals.

Optimisation
What if you could enhance your planners’ knowledge and experience by giving them the support they need to create not just feasible plans, but optimised ones? How much value do you leave on the table due to suboptimal planning?
The final and most elusive capability of innovative planning is optimisation. True optimisation is the result of visibility and integration – it cannot be attained without first achieving success in these capabilities.

True optimisation goes far beyond forecasting outcomes and providing decision support based on existing knowledge. It examines possible scenarios based on analysed historical data and uses the best option as a basis for planning. It can be applied across all aspects of planning (see Table 1).