The oil and gas industry in the U.S. is facing a significant challenge in the area of procurement, but it isn’t a new problem. It is just one that hasn’t been solved effectively as of yet.
There are competing agendas at work. On the one side, there are buying companies trying to streamline their systems, increase efficiency, and protect their businesses, and on the other side, there are suppliers with exciting new products that are unable to deliver the technology to market due to the barriers put in place by the buyers. The buyers are predominantly focused on reducing spending as much as possible without adversely affecting performance or reliability. However, simultaneously, they are risk averse because change, in and of itself, can be costly (i.e. with the systems in place, there is a lot of work required to set up new vendors). The sellers or suppliers have a long list of items that require dedicated attention. These include product development (to make products or provide services that can be differentiated from competitors in the market), marketing (to get the word out about the products or services to get potential customers interested), and sales (to convince potential customers the new product or service is worth the cost of introducing a new vendor), not to mention everything needs to happen properly in the supply chain to deliver the new product or service.
The downturn has made this problem even worse than it was historically. In a time when controlling cost has been of paramount importance to survive during a period of dramatically reduced activity, one would think investigating new vendors in an effort to either lower cost or increase value would be a logical step, but the opposite has occurred in many cases. I recently visited with someone in a supply chain position with a major U.S. oil and gas company and was told their company has had a policy of “no new vendors” for a significant portion of the downturn period. In cases like this, the decision has been made that the administrative efforts required to switch to a new vendor are too onerous to justify even trying to find better products or services. Imagine, therefore, an exciting new company has developed a game-changing new technology in this environment. The customer/buyer mentioned above that is not accepting any new vendors would therefore risk falling behind their competitors simply due to their procurement strategy. While this is an extreme case example, even without a game-changing new technology in the discussion, the practice of “no new vendors” has far reaching ramifications, especially when practiced by large, influential companies in the industry.
So, an extra level of difficulty has been added where the opposite was the intent.
Another major hurdle that exists in the U.S. oil and gas marketplace is the requirement for Master Service Agreements (MSAs) as a prerequisite for doing business. The letters ‘MSA’ are dreaded by many smaller companies in the industry as those three letters prevent them from being able to do business with many of the largest companies/customers in the industry. This situation is so severe it is not uncommon for investors to acquire existing small businesses solely because the existing business has MSAs in place with key customers. In other words, in situations where it would be more effective to start a new business from the ground up, investors instead opt to purchase existing companies. It’s not for any benefit seen in the existing business, not for the people or products or technology, but simply for the fact the business has agreements in place and is on the approved vendors list with targeted customers. Again, this is not a new problem. I have heard stories of this situation going back decades in the oil and gas business. Because the process of getting an MSA in place or getting on an approved vendors list is so difficult, it becomes a very similar situation to the “no new vendors” case mentioned above. I believe this is a key factor in the relatively slow pace of technological advancement in the oil and gas industry compared to other industries and a key opportunity to address that discrepancy.
The MSA situation is further complicated by a similar set of competing agendas to what was mentioned above. In an attempt to streamline the process, the buyer’s legal team has drawn up one agreement that covers any possible vendor situation, which includes insurance requirements to satisfy the riskiest situations (i.e. very high insurance level requirements). As an example of how this can be challenging to the process of signing up new vendors, consider the case of a small drill bit company. The product provided is a drill bit, it contains no chemicals or explosives, it does not require personnel on the well site, and it cannot adversely affect the environment, and yet, the drill bit company is required to provide expensive insurance coverage to satisfy the MSA requirements which were drawn up to cover things like explosives, hazardous chemicals, and well site services (to name a few). Some customers are open to adjusting the MSA on a case by case basis to better fit the product or service being offered, but some are not. In either case, it is an inefficient system. One possible remedy to this situation might be to develop a standard set of MSAs and insurance requirements that each company can use for each category of product or service typically required in the industry. This is something that can be developed by a committee of representatives to satisfy the concerns of the majority of companies.
There have been many new companies that have been created in the U.S. over the past decade to try and address this problem, but in some cases, they have added to the problem as much as they have provided solutions. In this situation, I am referring to companies that specialize in ensuring vendors have all the proper insurance, certificates, and quality systems in place to satisfy the requirements of customers/ buyers. In theory, this is an excellent idea, because it has the opportunity to remove many of the barriers discussed above. However, in practice, there have been some issues partly because there are so many of this type of company, which therefore means potential suppliers/sellers now need to satisfy the requirements of these companies in addition to the requirements of the customers who don’t use these services. Additionally, some customers who use these services still have requirements that go above and beyond what the service requires, which means the supplier/seller now must satisfy the requirements of the vendor management service as well as the customer. So, an extra level of dif culty has been added where the opposite was the intent. Having said all of that, there is hope this effort will one day result in the desired goal of streamlining these systems to help break down some of the barriers to the adoption of exciting new technologies.