A “very different kind of company” is how the CEO of BP Plc described the future direction of the supermajor. Low oil prices, geo-political uncertainty, economic uncertainty, and climate change have all contributed to an end-of-days atmosphere in the industry. Whether that’s irrational under-exuberance or an accurate assessment depends on the industry itself. It’s down to us collectively as a sector to react and stay deserving of our social licence to operate—including governments, oil companies, supply chains and all the individuals within those organizations.

It’s not all doom and gloom though: we know that oil and gas is going to be required for a long time. Exxon Mobil Corp. have reconfirmed their commitment to oil and gas exploration and production. The International Energy Agency predicts that 70% of global primary energy consumption may be met by fossil fuels in 2040. The industry is going to need to continue to provide energy whilst alternative sources and technologies develop scale and overcome specific hurdles such as energy storage. [Editor’s note: find more detail in part one of this series.]

So, the oil and gas industry will be around, but what will it look like, and how will the supply chain that supports that industry look?

A Happy Outcome

Let’s start with a positive view. Commercial pressures create a more efficient industry that delivers more consistent economic returns and reduces its impact on the environment. This means that oil and gas projects are more predictable in terms of cost and outcome. The industry will create more streamlined assets that are easier to build and easier, more cost effective and more environmentally friendly to run. How can we as a supply chain support this outcome?

  • It starts with alignment between the customer and supply chain: moving the relationship from a transactional engagement to a more partnership-based engagement based on shared goals. 
  • The longer-term alignment creates partnership conditions in which process and technology improvements (including environmental impact improvements) are developed in partnership between customer and the supply chain because both benefit from the improvements.
  • The relationship continues to seek improvements to process and technology as the supplier and customer longer-term goals are aligned and both supply chain and the customer benefit from continuous improvements.

That’s a nice and easy conceptual flow—but really difficult to deliver in a multi-layered, complex industry under financial pressure. Developing trust during times of financial stress is a challenge, however I’m seeing positive signs of much more partnership-style engagement with some of our customers. These customers are the ones that know they need to change to survive. Others are responding by doubling down on their existing approach to supply chain, which creates a more pessimistic likely future.

An Unhappy Outcome

What if we get it wrong? Customers and supply chain fight it out—customers use their buying power to reduce supplier prices. Suppliers reduce prices to such an extent that they reduce their quality of products and services. Lots of supply chain companies fail as margins fall, cash flow suffers, and banks reduce exposure to a risky industry.

Oil and gas projects become more expensive and riskier as supplier competition reduces, and a lack of investment by suppliers leads to poorer products and services. Investment in oil and gas projects continues to reduce reflecting this increased risk.

Large oil and gas price volatility due to lack of exploration and production investment compounds investor fear. Oil and gas price volatility may be great for oil traders but is bad for nearly everyone else. The industry’s fortunes suffer.

Maybe this picture sounds eerily familiar? It should because this is the path the industry has already begun to go down. We still have time to change course though.

What’s Likely to Happen?

“No one knows” is the simple answer. The outcome is likely to include some disordered retreat and some phoenix-from-the-ashes style efficiency improvements and innovations.

What we do know is that an industry under pressure needs to perform better and there are some really clear needs that can be met by the supply chain:

  1. Create more value—suppliers often have expertise that would allow them to help end-users generate more value from their assets. The supplier of the future will focus on how they add value to their customer rather than simply provision of products and services. 
  2. Cost less—lower investment in oil and gas and sector aversion from the finance industry mean that we all need to reduce the cost of our products and services—but we need to reduce these costs smartly without risking HSE and environmental impact and whilst generating enough profit to fund R&D.
  3. Work together with customers—working together can be as simple as trust developed in a transactional relationship or it can be an ambitious partnership agreement to align goals—but it’s clear that working together more closely will allow us to improve project delivery and asset operations.

The main obstacle to overcome is habit. Let me leave you with a few questions:

  • Can we harness the risk of a sharp decline in our industry to break the habit of adversarial, short term customer and supply chain relationships?  
  • Can we change our focus from order-to-order and project-to-project to longer-term outcomes?
  • Can we develop trust and utilize it to generate mutual value rather than simply maximizing short term profit? 

Next time, I’ll work through how the positive scenario could work specifically for the valve and piping supply chains. 

Dan Munro is owner and CEO of PJ Valves. Established in 1976, PJ Valves is an independent, family-owned and managed business and one of the world’s first specialist project valve supply companies. The company are headquartered in the U.K. with sales/service and manufacturing locations in Houston, Singapore, Pune, Turin and London.