In between the Teams and Zoom calls, which now fill our days, and the odd webinar or two, it’s becoming increasingly evident that the oil and gas industry needs to have some serious conversations about value.
Someone once said that many (not all, I hasten to add) procurement departments in oil and gas know the cost of everything, but the value of very little.
The combined impact of the global coronavirus crisis and the collapse in oil price, has resulted in the inevitable rounds of cost-cutting. Much has already been made of the behaviours among the operators and the tier 1 contractors who are, in some cases, seeking large reductions from their supply chains. For a fragile supply chain which was only starting to emerge from the wreckage of almost 5 years of a downturn, this pressure on margins is simply unsustainable.
Many, particularly the smaller, subsea firms are ill-equipped to deal with these demands which add to the growing malaise and accusations of bad behaviours.
These firms must get better at selling their value and articulating their compelling proposition.
In many cases, they’re not dealing with commoditised procurement but with a service that delivers a value that is greater than the cost of that service. Subsea firms should be able to speak to the relevant people at the right level in the client company. And during those conversations, they need to be able to articulate the value they can deliver.
Putting ever-increasing pressure on the supply chain is short-sighted and the danger is that those simply looking to make sweeping cuts across the board, with no recognition of value, will push the supply chain to breaking point.
Another unintended consequence is that the subsea industry, which every year increases its foothold in other sectors, could shift away from oil and gas.
While oil and gas remains the largest market for the subsea industry, other markets are vying for the specialist skills and technology the subsea sector has accrued. Indeed, the latest findings in our Subsea Business Review revealed that almost a quarter of the sector’s GBP 7.8 billion output is generated from renewables, with revenues from aquaculture, defence and subsea mining also rising.
Coupled with the fact oil and gas has an image problem among the public, including current and future generations with the skills it needs, the industry cannot afford to further alienate its subsea supply chain.
Instead, companies must work even harder to explore how they get more value out of the supply chain through a willingness and eagerness to enter into more constructive and collaborative contractual conversations. This was beginning to happen in many parts of the industry, following the previous downturn, and we must not let the progress dissipate as we struggle with the current challenges.
It’s necessary for larger companies to demonstrate to shareholders that they’re making dramatic cost savings, but at what price? The bad feeling this generates, and the longer-term damage, should be avoided where possible. The focus should be more around cost efficiency and generating additional value, and much less about squeezing margins, especially when there is nothing left to squeeze.
The skill sets required by both parties to realise value and achieve performance are sometimes not available within organisations. Guidance in how and with whom to engage in negotiations may be required, along with a greater understanding of how to articulate a value proposition.
To protect the oil and gas subsea supply chain, we must build and lock-in value. Only then will we get on the road to recovery and achieve growth for all stakeholders and shareholders.
Neil Gordon is chief executive of Subsea UK.