Sourcing and Procurement Challenges in the Oil and Gas Industry
The oil and gas industry is recognized as the engine for development in most economies. However, the companies in this industry are known to operate in dynamic and complex environments, where they constantly face challenges, especially in terms of supply and demand. But in the current market scenario, it is advisable for companies in this […]READ MORE >>
The oil and gas industry is recognized as the engine for development in most economies. However, the companies in this industry are known to operate in dynamic and complex environments, where they constantly face challenges, especially in terms of supply and demand. But in the current market scenario, it is advisable for companies in this sector to evaluate the supply chain, sourcing and procurement techniques, and costs. Furthermore, as the industry faces the likelihood of a long-term low-price environment, procurement teams need to look beyond short-term tactics and take a more proactive and strategic stance within their organizations—for example, working further upstream in project design and collaborating with the engineering and design teams to reduce complexity before it is locked into long-term procurement cost. Although the technology is helping oil and gas companies to find and extract more oil, there is a need to seriously consider more effective sourcing and procurement systems that provide additional real value. But the catch here is that the process is not easy as it sounds. Here are some of the key sourcing and procurement challenges in the oil and gas industry:
Locally sourced supplies
In many cases, there is a requirement for the oil and gas sector to award various contracts to local companies (i.e. tool and dye operations, pipefitters etc.). That requirement can be the result of government regulations, or due to location (oil and gas companies often work in remote locations and will deal with service companies located near their operations). But these contracts can often prove to be lucrative and are “sought after by local companies.” That competition can result in circumstances where there is a higher risk of bribery, fraud, corruption, and other abuses.
Single-supplier sourcing and procurement
There is a general tendency for oil and gas companies to purse sourcing and procurement contracts with sole suppliers. Sometimes, companies offer specialties and expertise that make sole-supplier sourcing and procurement a reality. However, this could lead to undisclosed conflicts of interest and kickback schemes. Additionally, in case the processes have not been conducted properly, financial losses can be incurred that can compromise the quality of goods and services provided.
Companies in the oil and gas sector need to be aware when third-party companies specializing in sourcing and procurement, engineering, and construction management work on their behalf. The sourcing and procurement activities carried out by these firms are susceptible to improper practices, and companies may find themselves liable for the acts of third parties. Oil and gas companies that operate in remote locations may end up working with third-party sourcing and procurement companies. And in those remote locations, the difficulty in monitoring these companies is higher because they are often not connected to corporate systems and electronic controls. Geographic isolation could further cause challenges and limit internal audit monitoring, thus paving the way for fraud, bribery, and corruption.
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