By Matt Collins
PLUMMETING oil prices have prompted oil and gas companies across the world to renew their focus on cutting costs and managing risks out of the supply chain.
But new figures suggest that despite mounting pressure, some oil and gas firms are potentially still leaving themselves vulnerable to experiencing unnecessary risk.
A recent global market survey found that a significant portion of oil and gas companies do not have even basic information about their main suppliers’ performance in business critical areas such as health and safety, environment or quality.
In total, key supply chain professionals from 64 large oil and gas companies from across the globe completed telephone interviews about the key supply chain risks and challenges they are facing.
The survey found that more than a quarter of oil and gas firms admit they were issuing tenders and awarding contracts without obtaining financial information from their main suppliers.
Furthermore, one third of oil and gas businesses did not have a copy of their main suppliers’ anti-bribery and corruption policies and one in 10 had not obtained their main suppliers’ health and safety policies.
Without this basic, business critical information on suppliers within their supply chains, it would be almost impossible for oil and gas companies to make educated decisions about their suppliers.
The research also found two thirds of oil and gas companies were failing to conduct simple checks, like internet research or telephone calls, on their main suppliers’ anti-bribery and corruption policies and one in five were failing to conduct basic checks on their main suppliers’ health and safety policies.
Further, almost half of oil and gas firms were failing to visit suppliers’ sites in order to check their anti-bribery and corruption policies. One in five were also failing to perform on-site checks of health and safety, environment, quality, CSR policies and almost half were failing to perform on-site checks of financial records.
The market survey was commissioned by Achilles – which works on behalf of 200 buying organisations in the oil and gas sector to manage information about their suppliers. It was carried out by independent research company IFF.
While the survey focused on Europe, the US and Latin America, in our experience, Australian firms face exactly the same challenges.
In a recent analysis we found that Australian oil and gas firms are spending $79.9 million a year on the pre-qualification, verification and auditing of suppliers’ information – half of which could be saved.
This avoidable spend seems difficult to understand at a time when Australian oil and gas companies, including industry heavyweights, are cutting costs by reducing both capital expenditure and staff.
We believe some of the necessary checks and balances are not being made because a number of Australian oil and gas firms are struggling to cope with the administrative burden of obtaining, validating and maintaining supplier information. But it’s a challenge they should avoid at their peril – with up to 80 per cent of revenue spent on suppliers.
In our experience, it is up to 10 times more efficient to work collaboratively with firms to reduce supplier related risk.
By working together and sharing the administrative burden by working with Achilles to gather and maintain supplier information using industry agreed common standards, firms can not only ensure they have the correct protections in place but also achieve significant savings.
We saw Australian firms leading the way on this when Arrow Energy, Santos, Drillsearch, Senex, QGC, ConocoPhillips and Origin Energy came together to agree on standardised criteria that suppliers must adhere to in order to be considered for work. The team also developed a joint risk model to identify and mitigate risks in a consistent way.
The rest of the Australian oil and gas industry should follow their lead. It is not an option for oil and gas companies to ‘trust’ their suppliers to act in a safe, ethical and sustainable manner – without so much as a policy to safeguard them. Carrying out full due diligence is the only way to mitigate potential risks. This will also help ensure they are upholding their responsibility to protect people working on their sites, their own reputation and the investments of shareholders.
Suppliers themselves will receive benefit by alleviating costs associated with duplication of effort for prequalification and audits, by operating under an industry standard. They also benefit from knowing exactly what expectations the oil and gas companies have of suppliers when they are wanting to award commercial contracts,
which in itself raises the awareness and capabilities of local suppliers.
In a time when margins are being greatly scrutinised, Australian oil and gas companies need to take steps to ensure they are taking all the necessary measures to ensure they are validating supplier information efficiently without increasing their exposure to risk.