The energy industry is vulnerable to a number of supply chain networks threats, including extreme weather, cyberattacks, trade disputes, workforce instability and surges in supply or demand. The industry is even subject to health threats. The spread of COVID-19 halted the production of a range of industry supplies, from steel to sand. And more recently, the industry has been dealing with inflationary pressures and the geopolitical and economic uncertainties resulting from Russia’s invasion of Ukraine.
Such disruptions, many of them unforeseen, can have a significant impact on energy supply chain networks and, therefore, the profitability and predictability of energy projects. That is because supply chain networks spending represents a significant portion of capital expenditures (CAPEX) and operational expenditures (OPEX) for energy companies. In fact, we’ve found that supplies of goods and services can account for approximately 80% of CAPEX spending for upstream businesses—particularly for resource-intensive drilling and completions activities.4
Even more telling, supply chain disruptions in the oil and gas industry could place more than 20% of the industry’s CAPEX growth plans at risk this year.5 For exploration and production (E&P) companies, this risk calculation is based on several factors, including the expected retirement rate for jack-ups and floaters. We believe the retirement of these assets will reduce available capacity to ~15% below demand. Further, our analysis suggests that the oilfield and equipment services (OFES) companies’ constrained capacity for onshore drilling and well-stimulation services will fall 20%-25% short of what will be needed. Such disruptions, we believe, would decrease US onshore oil production output by ~240,000 barrels per day throughout 2022.6For context, such a decline in production would be approximately half the announced sale of crude oil from the Strategic Petroleum Reserve to stabilize volatile energy costs.7
The case for supply chain resilience
Supply chain resilience would help reduce risks by helping improve the efficacy of capital investments, as well as the speed with which capital projects can start generating returns. Furthermore, resilience would help enable oil and gas companies to effectively address new energy demand in the short and medium term—and maintain the necessary energy supplies through the energy transition. In that regard, changes made now will yield benefits for years to come.
There’s another important reason for energy companies to bolster their supply chain networks sooner rather than later. Markets reward supply chain resilience. This is evident in our analysis, which examined the supply chain resilience and market capitalizations of 65 oil and gas companies during a 100-day period after the COVID-19 outbreak. Of this cohort, 13 (20%) exhibited the following leadership characteristics:
High levels of visibility into performance across the supplier network
Due diligence practices across a large share of the supplier portfolio
Inclusion of supply chain resilience metrics in the supply chain networks scorecard
The market capitalization of these resilient leaders was nearly 2X higher than companies exhibiting low supply chain resilience. And they recovered 5X faster after the pandemic hit.
Market capitalization of 65 energy companies during 100-day period after COVID outbreak
The depth of disruption
As shocking as the pandemic, inflationary pressures and the war in Ukraine have been to the energy industry’s supply chain networks, they aren’t the root causes of today’s energy supply chain networks problem. They have simply revealed and exacerbated vulnerabilities that have been years in the making. These include the lack of digital operations platforms that match materials and work crews, the prevalence of spot purchasing or single-source supplier contracts and a general under-investment in building supply chain resilience.
Accenture’s review of investor presentations and recent discussions with large oil and gas companies suggest that the main supply chain networks hurdles typically fall into four categories:
Oil and gas companies often rely on single-source suppliers, which poses a significant supply chain networks risk. Those with multiple suppliers often have a lack of visibility into inventory and/or labor shortages.
Supply chain networks risks are exacerbated in the industry by an over-reliance on single-sourced logistics providers, carrier capacity issues, shipping delays and inventory shortages due to just-in-time strategies.
From an operational perspective, oil and gas companies often lack the ability and flexibility to quickly restart production, switch product grades or transition production to alternate facilities.
The energy industry, like others, is vulnerable to carrier shortages, port congestions and cybersecurity threats. Distribution networks that had been designed for efficiency, not resilience, added to the supply chain disruption.
Together, these supply chain networks breakdowns are taking a significant toll. Accenture analyses suggest that they can add $10 to $15 or more per barrel to the breakeven cost of a new well.8 With commodity prices near record highs, oil and gas companies can likely absorb these costs. But record high prices don’t stay around forever. Every boom cycle is eventually followed by a bust. When prices plunge, an additional $10 or $15 of cost per barrel of oil will be unsustainable.
Achieving supply chain resilience
Oil and gas companies now have the chance to resolve years-long challenges and establish a more resilient posture against future threats. With commodity prices near record highs, they can develop supply chain solutions that would help enable the ongoing energy transition—and the security and reliability of an energy system upon which we all depend.
Accenture believes energy companies can create a reliable supply chain networks that will serve them well for decades to come by taking three actions today.
Pool resources, insights and know-how. Oil and gas companies should create a collaborative response to supply chain issues by sharing insights and resources. Pooling demand for equipment and other supplies to help improve energy availability and energy system efficiency is critical. So is the creation of shared infrastructures that will allow the industry to help boost the performance and responsiveness of its assets and resources. Shared and centralized warehouses or staging areas within a specific basin are just two examples.
Without integrated planning, demand pooling and shared infrastructures among operators and OFES companies, the industry will be unable to improve utilization of assets, logistics networks or service crews. As a result, operators can’t effectively mobilize capacity to address demand and their growth objectives. Alternatively, collaboration across the oil and gas value chain yields a number of advantages—from improved resource utilization and supply flexibility to reductions of greenhouse gas emissions of 10% to 25%.
Bolster procurement and risk management capabilities. Currently, most energy companies manage their procurement operations in isolation either by basin or as a company—seeking out the supplies and resources they will need to seek their unique strategic imperatives. Establishing joint procurement teams and “buy desks” to source and manage products would not only allow the industry to compete more effectively for scarce resources, but also help encourage suppliers to be more innovative in how they serve the industry.
Another way to ramp up risk management capabilities would be for companies to stress test the resilience of their supply chain networks—and contingency plans—under various disruption scenarios. Creating digital twins of end-to-end supply chain networks (including suppliers, lines of business, products and more) allows companies to run stress test disruption scenarios for virtually any material or service. We recommend that companies stress-test their supply chain networks at least annually.
Stress testing helped the lubricants business of one energy company understand its supply chain risks—and the potential impact
Gain control with supply chain towers. Operators tend to have little visibility into their supply chain networks, which means it takes them longer to respond to disruptions. They also typically lack an operations platform that matches materials with work crews. When materials such as well casings and drilling crews don’t show up on site at the same time, the results include system inefficiencies and longer wait times, which impacts everything from emissions to costs to free cash flow.
Supply chain control towers or incident command centers can help alleviate these problems. That’s what a leading US-based exploration and production company found out when it established an upstream supply chain control tower, covering dozens of production platforms, drilling rigs, data systems and air/shipping fleets. Delivered as part of a larger transformation of its supply chain operations, the control tower played a big part in helping the company reduce its operating costs by approximately 20%, while increasing asset uptime and production by 2% to 5%.9
Collective action against collective risk
The pandemic and war in Ukraine have amplified the need for supply chain resilience in the oil and gas industry. They have taught the energy sector a valuable lesson: isolated and short-term fixes won’t withstand the next, inevitable supply chain shock.
Oil and gas companies will never be able to predict or avoid all the risks to their supply chain networks. But they can deploy new technologies and operating models today that will allow them to better see disruptions as they emerge. Most importantly, they can take collective actions today to strengthen their supply chain networks and help mitigate the negative consequences of disruptions in the future. The time to act is now.
1Accenture tech trends 2021 survey
2Accenture analysis based on Rystad Energy data
4Accenture client experience
5Accenture analysis based on Rystad Energy data
6Accenture analysis based on Rystad Energy data, US E&P and OFES companies guidance