CASE STUDY / PREMIER OIL
Premier Oil to strike rich returns on contract management plan
Premier Oil is responding to changes in its industry with a shift in how it manages its most significant contractors. It finds contract and relationship management can incrementally increase value from its contracts as it prepares for an extended period of low to moderate oil prices.
T he last five years has seen the longest sustained period of sub-$70 oil price for more than six decades. The result has been a significant change in the oil industry which has had a dramatic effect on both oil firms and their contractors, since around 70% of activities are outsourced in some way. For leading independent producer Premier Oil, it meant less choice in the supply market as supply chains contracted, lowering buyers’ leverage with existing contractors. Russell Dandie, global supply chain manager, says: “Since the oil price dipped below $60 or $70 a barrel the supply market has been more than a bit moribund, and the contracting capability has definitely diminished. The contractors that are left are either very large (tier 1) or really small (tier 3 or 4 or below). If you’re not careful, you end up becoming a price and quality taker, and the contractors can almost pick and choose their clients, especially where those clients are comparatively small.” With annual group revenues of approximately $2 billion, Premier Oil operates in the UK, Brazil, Mexico, Indonesia, Vietnam and the Falkland Islands. During 2017, it brought the North Sea’s Catcher oil field on stream and made notable discoveries in the Zama oil field in Mexico via its non-operated investment in Block 7 where Talos is the operator. New sector economics force rethink of contract management As the supply market changed profoundly, it revealed
how Premier Oil’s approach to managing contractor relationships could be improved. The oil and gas firm has historically invested very little in contract management and SRM, preferring instead to require even contractors delivering critical scopes to constantly re-bid for contracts, possibly every three years. This has long been seen within the industry as a means of accessing the lowest price for outsourced requirements. Longer term or strategic framework agreements did not feature in any significant part of the firm’s global or regional supply chains, Dandie says. Given clients are “king” when specifying how scopes will be delivered, there is a natural end point where this approach becomes less effective in driving down prices as the nature of the market changed. Contractors were being forced to endure minimal profitability or even bidding under cost as scopes and specification were left unchanged. Meanwhile, there was also a risk of further value leakage from contracts where the relationships were poor through a lack of systematic or strategic control from the client, Dandie says. “We recognised that in the life-cycle of a contract, we were not putting the right measures in place. It was just about getting as quickly as we could to the “starting line” (contract execution) and thereafter letting the contract run. We needed to help the contractor manage how the contract is executed and be aware how the contractors’ view of us might impact that execution, as well as how we view them. People tend to forget that when they are used to a command-and-control approach,” he says.
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STATE OF FLUX
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