london conference 2012

Specifics of Supply Chain Managementin the Oil & Gas field in Russia.SCM in the environment of aggressive growth.

Global Procurement and Supply Chain Management for the Oil and Gas Industry conference in London, September 2012

Global Procurement and Supply Chain Management for the

Oil & Gas Industry 2

Managing partner

• Worked for major oil and gas companies for

over than 15 years (Yukos, TNK-BP,

Slavneft)

• SCM project director

• M&A leader for oilfield services

• The European SCM Excellence Award

Consulting partnership

• SCM

• Management consulting

• Joint venture organization and support in Energy,

Oil & Gas, Metals & Mining

• Av. partners’ experience in SCM – 11+ years

• Over 60 headcount

Major clients:



We are here for:

Musings on best practices and perspectives of

SCM in O&G, greenfield & brownfield, etc.

Practical benefits (cases, contacts, leads, etc.)

It’s all about this



billion barrels

billion barrels per year

Proved reserves:

Production:

44,6 trillion cubic metres

0,6 trillion cubic metres per year

1st

Proved reserves:

Production:

2nd

Source: BP Statistical Review of World Energy June 2012

Rank in the world



Significant amount of

local capital is available

for JVs:

Source: RA Expert research 2011

“Light” taxes Government investment &

government programmes

Investment in Oil & Gas

exploration from Russian

Federal funds by 2020

Local capital

Company Capitalization

Gazprom over $140 bln.

Rosneft over $70 bln.

Lukoil over $50 bln.

Novatek over $35 bln.

Source: The General scheme of oil &

gas industry development up to 2030 (Russian State

Programme)



Reserves, billion

barrels of oil

Capitalization,

billion USD

0

5

10

15

20

25

30

0

80

160

240

320

400

480

GAP

Source: Company`s annual reports, Bloomberg data



Source: IHS Upstream Spend Report, 2012

69,0 94,0 109,0 103,0 132,0 144,0 167,0 80,0 123,0

189,0 194,0 238,0

286,0 323,0

67,0

76,0

91,0 85,0

93,0 100,0

110,0

63,0

86,0

112,0 106,0

133,0

151,0

181,0

137,0

223,0

322,0 301,0

392,0

477,0

528,0

62,0

79,0

107,0 102,0

121,0

143,0

163,0

52,0

72,0

102,0 97,0

119,0

138,0

163,0

0,0

200,0

400,0

600,0

800,0

1000,0

1200,0

1400,0

1600,0

Russia &Caspian

Latin America

North America

Middle East

Europe

Asia-Pacific

Africa

Summary upstream CAPEX and OPEX spending – By region

US

D b

illi

on

2004 2006 2008 2010 2012F 2014F 2016F

Forecasted CAGR for the world: 9.2%

Forecasted CAGR for Russia: 9.6%



Arctic – next step

Greenfields

Brownfields



… all of these factors are pretty attractive for the world’s

leaders to come to the Russian market in all their glory

…bringing Best foreign

technology Expertise

Global

agreements Capital

Market

recognition



The oil & gas “shoot-on-target”: extraction investments are

primary, but not the only to be considered

Oil & gas extraction

investments

Investments in services

(exploration, drilling

etc.)

Investments in

infrastructure (transport,

communications, support

etc.)



Foreign giants working in Russia face significant pitfalls as a

result of unevaluated risks of local content and culture

specifics

«The pressure on the Sakhalin-2

has been seen as «softening-up»

exercise to force the

international oil companies (IOCs)

to revise the terms of their

investments to allow greater

Russian participation in their

projects».…Shell surrendering its

controlling stake in Sakhalin

Energy»

Royal Dutch Shell Blog

«Gazprom officially admitted that

the giant Shtokman project on gas

production in the Barents Sea was

frozen for n undefined period of

time: the costs proved to be too

high».

Energy news

«For much of its eight-year

history, Russian oil company

TNK-BP Ltd. has seen its two

shareholders at odds. BP PLC

and a group of Soviet-born

billionaires known as AAR have

done battle in courtrooms and

boardrooms from Siberia to the

Caribbean»

The Wall Street Journal



Despite well-grounded decisions at the design stage, project

execution and spend effectiveness are lacking. And

considerable part of challenges lies in the field of Procurement P

rac

tic

al e

ffic

ien

cy/ va

lue

ge

ne

rati

on

(R

OI)

Spend

Construction,

Execution &

Operations

Engineering &

Technology

Financial decision,

Strategy and project

design

• Need to comply with local

technical standards

• Poor local technologies

• Harsh environment

• Lack of infrastructure

• Harsh environment

• Remote locations with undeveloped

logistical infrastructure, complicated

supply routes

• Expensive mobilization for non-local

suppliers

• Undeveloped local suppliers

• Low qualified local staff

• Fraud as common practice

• Non-transparent local

decision maker structure

• Undervalued importance

of long-term planning



Real-life example: key issues

1. No business needs (demand) management

suitable for SCM.

2. No Category management process.

3. Roles & Responsibilities. Lack of healthy

cross-functional interaction and no creative

tension between technical and commercial

(procurement) roles. Technical roles prevail.

4. Low compliance.

5. No Supplier performance management and

proactive supplier development planning.

6. Poor data management (catalogues) does not

properly support SCM process requirements.

7. Insufficient SCM Staff competences to

properly perform within defined processes.

Overall

procurement

function

Inventory

Management

Perform inventory control

Plan and manage inventory

Supplier Performance

Management &

Development

Measure and drive performance

Establish, negotiate and manage supplier

development plans

Contractor Selection

& Contract Award

Negotiate contract

Strategic Sourcing

Management and

Category Management

Define sourcing strategy by category

Analyze spend and assess opportunity

Analyze supply market

Business needs

management (demand

management)

Planning of business needs for the next period

Manage business needs

ProcessesFunctions Sub-processes

Publish plan

Clear needs of on-hand material stock

Prepare pre-qualification

Select supplier

Contract award

Contract Management

and Order PlacementCreate purchase orders

Pro

ce

ss c

on

tro

ls a

nd

co

mp

lian

ce

Org

an

iza

tio

n &

ca

pa

bili

tie

sMonitor and enforce contracts

IT s

yste

ms &

to

ols

Conduct supplier reviews

Create contract

Conduct RFx/ auctions

High-level Procurement & SCM processes classification framework

Background: JV between major world and largest Russian oil & gas players.

Best operational practices taken directly from the international shareholder.

Healthcheck trigger: shareholders not satisfied with SCM. Internal audit rates SCM unsatisfactory.

Healthcheck findings:

Core reason: best practices implemented as they were,

without taking local factors into account



Implementing best practices and end-to-end business focus to

project design, implementation and operation to deal with

capital projects risks and pitfalls is particularly important in

the oil and gas sector

Strategy & Long-term planning

Collaboration with local business and

government

Attention to the local specifics,

adaptation of global practices

Early involvement of procurement and

suppliers in the project lifecycle

Engineering, procurement and construction

(EPC) contractors iteration

Procurement strategy, smooth handover of materials

from project to operations

Leading trends

– critical

success factors



Fields of reengineering

Supply Chain

Management

SCM strategy

Supplier management

Catalogue IT

Materials management and

planning

Procurement processes

Risks and controls Organisation

1 2

3

4

5 6

7

8

Fields of changes:

1. Strategic management of SCM function (goals, KPIs, key principals,

segregation of duties and responsibilities).

2. Function and organisation structure (separation of SCM function (vertical),

multi-functional groups, centralization for major groups of services and

materials)

3. Implementation of services/materials catalogue, matrix of accountability

segregation due to category.

4. Reference model and corporate SCM framework (demand planning,

purchases, contract administration, management of commitments,

materials management, etc.).

5. Supplier evaluation, supplier efficiency data base

6. Optimisation of materials management system, including illiquid and non-

liquid assets

7. It-strategy based on integration SCM processes with linking processes

(production planning, investment and business planning, management

accounting).

8. Risk matrix, Control matrix, risk management procedures.

First we need to evaluate existing system and create reference models to initiate future changes: Reference model oriented on strategic goals and long-term targets;

Transition plan and first priority activities for model reengineering, based on Company readiness to change and real opportunities to get

visible value

Example on effects of the implementation of

initiatives for improving supply systems efficiency

3 - 6%

Accuracy of planning

Reduction of delivery time Reduction of downtime

3 - 10%

Consolidation of needs; coverage with procurement strategies, counterparties efficiency management

Automation of procurement, electronic bidding

Standardization and unification of technical solutions

Coverage of total cost of ownership

Saving by increase in supply system efficiency

Saving by increase in planning

system efficiency

2 - 4%

Decrease in unclaimed high liquid positions

Increase in stock turnover and funds in transactions

Reduction of unfinished construction due to supply shortage

Reduction of working capital

Reduction of non-current capital

Improving reliability of production

Cost reduction

Optimization of capital

Resulting benefits

$ 8 - 30%

$ High-level indicators Basic KPIs

Decrease in low-liquid positions

Complete and timely satisfaction of needs

Reduction of administration costs

The model is based on an average scenario and a conservative estimate is used, the level of accuracy is (+-50%). If any of the current processes corresponds to the level of "best practices“ the value of the “Resulting benefits” will be reduced by the improvement value of such process. The

dynamics of the “Resulting benefits” with regard to experience enhancement and process automation. Динамика «итоговых выгод» с учетом набора опыта и автоматизации процессов: 1st year - 2-6%; 2nd year - 6-12%; 3rd year - 8-20%.

16



The better practices are well known, complex tools,

approaches and frameworks are important, but much more

critical is the value generation by right implementation

Complex approach

to supply chain

transformation

Core elements of

best practices

Organization

structure

… … … … … … …

…

…

… …

… … …

… …

… …

…

… … …

…

Map of target

processes Process

schemes

Quantity

optimization

Security

schemes of

investment

projects

Financial

responsibilities

allocation

matrix

Establishment

of regional

procurement

centers

Bundles of

regulatory

documents

Delivery time

management Management of

competencies Automation

requirements

Integrated

development

plan

Implementation

of IT systems

Organization

structure

Procurement

function

maturity model



Case: info and background

70 ml tons of oil

equivalent

Exploration

8 regions

of upstream

operations in Russia

4 bln USD

In annual Upstream

spending (CAPEX)

1.7 – 2.5 bln USD

In annual Upstream

spending (OPEX)

Background

• The company was created as a strategic partnership between one of the world's leading

international oil and gas companies and a group of Russian businessmen with the aim to jointly

hold their oil assets in Russia and Ukraine.

• The international company owned 50% of this JV shared not only capital, but its corporate best

practices, technology and expertise.

• Indeed many of Procurement related practices just haven`t worked: tendering procedure was

unclear, independent controls was not working, level of bureaucracy was too high to make the

company flexible, planes wasn`t fulfilled.

Company`s info: Major vertically integrated Russian oil company, among the ten largest private oil

companies in the world.



Case: key issues

Overall

procurement

function

Inventory

Management

Perform inventory control

Plan and manage inventory

Supplier Performance

Management &

Development

Measure and drive performance

Establish, negotiate and manage supplier

development plans

Contractor Selection

& Contract Award

Negotiate contract

Strategic Sourcing

Management and

Category Management

Define sourcing strategy by category

Analyze spend and assess opportunity

Analyze supply market

Business needs

management (demand

management)

Planning of business needs for the next period

Manage business needs

ProcessesFunctions Sub-processes

Publish plan

Clear needs of on-hand material stock

Prepare pre-qualification

Select supplier

Contract award

Contract Management

and Order PlacementCreate purchase orders

Pro

ce

ss c

on

tro

ls a

nd

co

mp

lian

ce

Org

an

iza

tio

n &

ca

pa

bili

tie

s

Monitor and enforce contracts

IT s

yste

ms &

to

ols

Conduct supplier reviews

Create contract

Conduct RFx/ auctions

High-level Procurement & SCM processes classification framework

• Low level of procurement centralization

• Lack of strategic approach to category

management

• Inefficient greenfield procurement process

• Law requirements for business needs planning

• Reactive vs. proactive controls and inefficient

P2P compliance function

• Law level of P2P



Case: value-added solution

Results:

• Transparency and standardization of processes of planning, procurement system control,

performance management and control

• Automation of procurement processes including precise procurement and operational

functions distinction

• Automation of payment processes, segregation of duties related to payments approval

and operational control

• Supplier management via long-term framework contracts

• Inventory control, online receipt and replenishment of materials; improved inventory

turnover, reduced free inventory

• Reengineering of the procurement system*

• Implementation of the uniform integrated solution based on the ERP system SAP

End of the day result – $300 mln in 5 years

* The project has won the “SCM Global Awards” international competition as the best Procurement Reengineering Project in Oil & Gas sector

Solution:

BRIGHT is a successful Russian company which provides consulting services and expertise in the field of supply chain management, planning and control, project management, development and implementation & operation of integrated business processes based on ERP-systems.

Our services are aimed at achieving global standards in business processes and control mechanisms in the Russian market. © 2012 BRIGHT Group. All rights reserved .