Of swings and roundabouts

Paul Boughton
Alistair Mackenzie looks at the the wild and unnecessary swings that occur in buyer/supplier relationships within the oil and gas sector.

The collapse in the price of oil, from $147 a barrel in July 2008 to a low of $40 last March 2009, turned the tide for the buyer/supplier dynamic as spending on projects and exploration activity hit the buffers.

Before the dramatic fall in the market, suppliers had been in the comfortable position of generally being able to command very healthy prices on contracts, but now - even with oil having recovered to nearly $80 a barrel - the pendulum has swung back the other way and suppliers are coming under intense pressure to trim costs substantially.

Interestingly, we are seeing a substantial upsurge in competitive tendering activity. But this is not because of any real increase in demand for project work, or planning for further exploration, it's more to do with buyers positioning themselves for better rates on future contracts. For many suppliers, delivering a large reduction will be painful, especially if investments have been made in capital equipment and personnel on the basis of future expectations.

Of course, in times of high oil prices and booming demand for services, many suppliers also took advantage by hiking up prices and by being selective on tendering.

Such posturing, be it by buyers or suppliers, may be in accordance with the natural law of supply and demand economics, but does it really deliver the best long-term value for either party? Could it even be mutually destructive to value? It may be tempting to leverage market advantage for short-term gain, however, a more satisfactory solution may be to draw strength from collaborative partnerships that are built for the long-term delivery of value to both parties, by aiming to smooth out fluctuations and wild swings in the market.

Somewhat reminiscent of the mid 90s when oil crashed to $10 a barrel, the oil and gas industry has once again made an attempt to work together by engaging in collaborative sessions to address the issues of 'operating cost base' and 'efficiency challenges', and much has been said about the need to use the industry tools at our disposal to maximise efficiency and eliminate cost, but is this enough? Are leading suppliers and buyers serious about collaborating?

If potentially damaging and draconian practices based on 'short-termism' are to be avoided, a long-term strategic approach is required, one that leverages the mutual advantages that can be achieved by working in true partnership for the delivery of value for all concerned.

Through strategic collaboration gains can be made on both the swings and on the roundabouts.

Alistair Mackenzie is director of UK Oil & Gas, Achilles Information, Abingdon, Oxfordshire, UK, which identifies, qualifies, monitors and evaluates suppliers on behalf of major organisations worldwide. www.achilles.com.

Recent Issues