A. Introductions

The oil industry has had its share of early adopters of technologies. Companies adopted linear-programming models for refinery economics and planning, advance process control for plant operations, 3D seismic studies in upstream and so on, to drive efficiency of decision-making and operations across the petroleum value chain. Technology innovation underwent a major overhaul and changed the way the oil industry operated. 

Cut to 2020, and technology is at its peak, with disruption and explosion in the development of digital technologies. It has started altering the way the oil and gas industry functions. Technology is playing a key role in shaping the future of the oil and gas industry; examples include applied artificial intelligence, big data, intelligent man-machine interfaces, reduced human interferences, enhanced user experiences, prescriptive analytics, virtual realities, and the adoption of drones.

While the COVID-19 pandemic suppressed mobility and industrial activities, and forced lifestyle corrections in society, acute demand disruptions coincided with the steep fall of oil prices early in 2020. This has turned out to be the worst downturn to hit the world economy. The oil and gas industry wasn’t immune to its effects either. Cost cutting, holds or reductions in capital investment, project postponements or cancellations set in with over 25% of the 2020 planned capex investment reduced from over 200 billion (estimated from the GlobalData graph below).

The entire global supply chain has received a jolt, and it does not appear as if a ‘factory reset’ will be feasible when the COVID fades away.  Rather, the supply chain will need to reinvent itself to respond to the new paradigm emerging, adapt to newer ways of balancing and co-existing with newer scenarios, for a long time to come.

This article highlights the need for a healthy debate on how oil and gas planning processes and supply chain operations need to respond, in the prevailing situation.

B. Postulates for the Implications:

With falling output triggered by lower prices (refer fig below), and vanishing cash from operations impacting the ability to cover interest and spend on operating expenses, the business models of big oil and gas companies are in need of disruption. When there is tremendous wealth, inefficiencies can hide behind the same. Now is time to bring in efficiencies and work to optimize the entire value chain. In addition, uncertainties have crept in. Over 80% of the COVID-19 infections are in the top 22 oil-consuming nations that contribute approximately 80% to the global gross domestic product. Several factors such as a shrinking economy, reduced fuel consumption, potential fuel slate changes, and a circular economy, will have an acute impact on the oil and gas planning processes and supply chain. The industry will be looking to “blue sky thinking” to imagine how the future will evolve in view of new fundamentals, a low-touch economy, social distancing, work-from-home practices, supply disruptions, and an impact on currencies and rising inflation leading to structural cracks in the economy. The oil price collapse is causing new break-even points to be set; where production is not economically feasible, companies are compelled to cut production, and drop major capital projects, with over 25% of the capital cost budget reduced for 2020. Companies are focusing on the levers that drive efficiency and adopt technology, review the workforce hierarchy and structure for better agility, inclusiveness of young workforce, decision-making processes and tools to squeeze the last drops.

Possible implications and reactions – The oil and gas sector is undergoing rapid transformation, and some of these changes will be permanent and structural:  

1. New ownership structures including joint ventures and the consolidation of businesses to extend the petroleum value chain. Large and strong market players will be consolidating in the sector. Oil majors and independent refiners are reconsidering their investment plans. Some might consider importing refined products from low-cost suppliers leading to inefficient assets and refinery closures.
   
2. National oil companies with disadvantaged sourcing may undergo privatization and/or collaboration with integrated oil companies, oil-field services companies, and OEMs. 
3. New business models will likely emerge. Small, nimble, and innovative organizations will survive the tide due to their agility.
4. An intensified competition in the shrinking fossil fuel market will be marked by an increased interest in gas/LNG due to its lower carbon footprint. An optimized product slate will be focused on squeezing the last cents out of gross refining margin (GRM). 
5. Nimble companies will embrace the adoption of technology to improve the manufacturing and supply chain cost curve. 
6. Technology adoption will also involve knowledge management, the scale of knowledge management within a business, and a new emphasis on or emergence of a learning organization and university within corporations. There will be a shift toward optimizing the supply chain to alter the cost structure. 
7. Companies may move toward changing their crude procurement strategy and supply agreement durations.
8. Revised freight strategy/implication on MARPOL
9. Public and government intervention on environmental impacts, due to the lockdown globally, the positive impact on the environment has been noticed by the public and govt., now onwards, to preserve them, the intervention is expected to be more strong.
10. Midstream and trading-focused oil and gas operations  to be more synchronized with supply shortfalls and/or manufacturing risk
11. A low-carbon economy will be fast-tracked along with the associated supply chain and new investments, with oil and gas companies diversifying into energy transitions and de-carbonization. 
12. A modified and optimized way of operation will include integrated remote efficiency centres, remote operations, and reduced human-machine interfaces will take out a large chunk of the operating expenses resulting in improved balance sheets for businesses.

C. Beyond Today…

Given that the oil and gas supply chain is at the heart of the global business value chain, major disruption will be needed to compel innovative ways of reducing supply chain cost and improving efficiency. The ideas below are offered for debate, as ways to release trapped value and increase profitability across the value chain. The immediate focus is on enduring the current situation to minimize damages and losses. However, transformational steps are required in the medium term to ride a growth path in the coming days. The distinction between leaders and laggards will be very clear: significant re-imagination followed by bold moves will be required of leaders and will set them apart.

The transitions expected in the following areas of supply chain and planning operations:

• The frequency of planning 
  
• The capture of environmental impact in planning
• Crude purchase / product sale optionality
• Locked inventory management
• Changes in the product demand slate
• Usage of plan outputs
• Impact on people and ways of operating
• Field automation for maintenance and operations
• Alternate plans and what-if scenarios  
• Multi-party collaboration to provide wider range of solutions
• Simplified operations
• Simplified contract management
• Reduced coordination cost through seamless integration
• Eliminate multiple levels of contingency from the operations
• Modified equipment designs
• Reconfigured supply chain designs 
• Gamified supply chain operations for visibility and efficiency 
• Use of technology to attract millennials in the workforce mix

End-to-end optimization, squeezing more out of investment and supply-chain operations, real-time risk analysis, increased global competition leading to planners looking for margin improvement areas, supply chain and planning process to become more complex, real-time scenario planning becomes mandatory, real-time demand assessment, competitive intelligence, global/regional logistics simulation.

Some key areas that need serious consideration under the current situation are listed below: 

• Revisiting the upstream supply chain
  • Due to high dependency on material and service providers for the upstream operations that contribute to about 80% of the operating cost, in view of the falling oil prices and social distancing, requires fresh review.
  • Use of blockchain in Scheduling equipment maintenance, Managing exploration acreage records
  • Significant contributions in the cost curve can be realized from the new ways of working; McKinsey has estimated this to be over $10/bbl. 
• Revisiting midstream and downstream planning and supply-chain optimization
  • Inefficient asset consolidation as well as means to optimize refinery operations to squeeze the last cents.
  • Use of blockchain in product exchange, delivery documentation, demurrage, claims management, JV operations, contracting,  risk management, regulatory compliances
  • Use of robotics in terminals, maintenance, and operations for a low touch 
• Identify alternate sources of cost-cutting and revenue generation
  • Virtual collaboration/efficiency centres with field forces as well as WFH nodes integrating into them for end-to-end supply chain capture and improved upstream, midstream, and downstream planning and supply-chain optimization
  • Operating and asset data monetization creating royalty money
• Organizational change and the new BAU (business as usual)
  • Some companies might think about reducing their overheads by completely realigning their bureaucratic layer, combining their business units, which would make the decision-making process more efficient. Big players will increase their investments in new-age digital technologies, artificial intelligence, and big data analytics to improve efficiency and produce data-driven decisions for higher profitability. More site personnel working from home due to the COVID-19 situation has opened up an opportunity for companies to reconsider the number of employees that need to be present on site. Service providers will consider this as an opportunity for remote operations, where the same kind of work can be done from a lost-cost region, which will give rise to the new norm and new operating model.

This article is jointly authored by Dharmendra Kumar Sah, Chandrasekhar Chebiyyam, and Natarajan Viswanathan.    

Dharmendra Kumar Sah

Partner, Wipro

Dharmendra has over 23 years of experience in the Oil and Gas Industry, including ~16 years with Reliance Petroleum Business & AspenTech, where he was responsible for APAC business consulting. With extensive experience in Operations & Business Consulting in Process Plant Operations, Supply Chain Planning and Optimization, Supply and Trading, Oil Movement, and Port Operations, he drives solutions and services across the Oil & Gas value chain including LNG. Dharmendra has been a panel author of the iMOM guidebook by MESA International and has published articles in Petroleum Review, UK, on Supply Chain Management. He can be reached at dharmendra.sah@wipro.com.

Chandrasekhar Chebiyyam

Consulting Partner, Wipro

Chandra Chebiyyam is a Consulting Partner, Energy D/S COE at Wipro Technologies. He has 30 years of experience in the O&G industry. He spent the first half of his distinguished career with the Oil & Natural Gas Corporation, a National Oil Company in India, in various capacities covering production and refinery operations. For the past 15 years, he has dealt with IT within the Oil, Gas & LNG space, covering the entire gamut of Functional Design & Consulting, Implementations, Client engagement, Solution building, and Solution architecture. He is an SAP Certified Application Associate - Supply Chain Planning and Execution with SAP for Oil & Gas and a certified Quantityware – BCP Consultant.

Natarajan Viswanathan

Principal Consultant, Energy - Downstream

Natarajan has over 14 years of experience. He is a chemical engineer with manufacturing experience providing consulting, digital solutions and services, and solution design to oil & gas clients.