BPs Procurement and Supply Chain Management

Written by

Narayanan A., Industrial Distribution, Texas A&M University Natarajarathinam M., Industrial Distribution, Texas A&M University Winn B., Procurement & Supply Chain Management, BP

This case was developed solely for the purpose of classroom discussion. Some details of the case have been disguised. This case is not intended to serve as endorsements, sources of academic or business data, or illustrations of effective or ineffective management of the personnel or company.

BP's Procurement and Supply Chain Management 1

Overview of BP BP p.l.c. is one of the worlds largest energy providers of fuel for transportation, energy for heat and light and petrochemical products for everyday items1. BP has interests in both upstream and downstream segments in over 100 countries worldwide making it a fully integrated energy company. Upstream refers to finding and extracting crude oil and natural gas from deep underground reservoirs. Downstream operations consist of refining and marketing oil and gas into usable consumer products. The United States subsidiary of BP p.l.c., BP America Inc., is the nation's largest producer of oil and gas2. They own and operate oil and natural gas fields, refineries, chemical plants and lubricant processing facilities in 22 states that are worth over $40 billion in fixed assets3. BP America has both onshore and offshore drilling operations in the United States. This case focuses on upstream procurement activities in the Gulf of Mexico. Figure 1 depicts BPs offshore platforms. Assets in the development stage have project teams and robust drilling programs to bring newly discovered oil and gas to the market. Once "first oil" is achieved and the asset is fully commissioned, it transitions to the production group that operates the newly drilled wells. Overall demand for drilling products and services decreases in the production stage. A typical oil field in the Gulf of Mexico can produce for up to twenty years or more before the reservoir is fully depleted and the asset is decommissioned.

Figure 1. BP assets in the Gulf of Mexico

1 BPs official website : http://www.bp.com ; p.l.c. stands for Public Limited Company (UK) 2 House Committee on Energy Independence and Global Warming, April 1, 2008, Bob Malone 3 BP Americas website : http://www.bp.com/genericarticle.do?categoryId=9004470&contentId=7040414 (Retrieved on May 31, 2008)

BP's Procurement and Supply Chain Management 2

C onductor pipe

Surface casing

Intermediate casing

P roduction casing

P erforations

Tubing

P acker

C onductor pipeC onductor pipe

Surface casingSurface casing

Intermediate casingIntermediate casing

P roduction casingP roduction casing

P erforationsP erforations

TubingTubingTubing

P ackerP acker

Figure 2 . Pipe placement in the wellbore

BPs Procurement and Supply Chain Management The Procurement and Supply Chain Management (PSCM) group of BP America is a partially decentralized organization whose purpose is to develop plans for the management of third party spend and to motivate and engage the broader BP workforce to achieve maximum value from suppliers and contractors. Within their Gulf of Mexico operations, BP spent about $2.9 billion in 2004 and $3.5 billion in 2005 on third party suppliers. The goal of PSCM is to achieve maximum value from third party spend while mastering the associated risks. To deliver this goal the group must leverage BP's scope and scale by developing foundational and strategic PSCM capabilities like standardization, aggregating demand, building strategic relationships, and developing supply chains in emerging economies. The PSCM group is responsible for sourcing all goods and services required for drilling and producing hydrocarbons. A key product category for BP's business is steel pipe that is cemented into the drilled well to protect and isolate geological formations from collapse and contamination. The other purpose of the pipe is to allow hydrocarbons to flow from the reservoir to the wellhead. Well depths in the deepwater Gulf of Mexico region are often 25,000 feet from the ocean floor down to the reservoir. This product category is known in the industry as Oil Country Tubular Goods (OCTG). The terms OCTG and pipe are used interchangeably throughout this case. Figure 2 illustrates pipe placement in the well and the corresponding name of each pipe section. There are three general classifications of OCTG material: carbon, alloy, and chromium. Carbon pipe is of a lower grade and strength, and is often used in onshore wells of low criticality. Wells in the deepwater Gulf of Mexico have high pressures and aggressive corrosion conditions requiring more expensive high grade alloy and chromium pipe for corrosion resistance.

BP's Procurement and Supply Chain Management 3

Figure 2 shows how the pipes are placed in a well bore. Each joint of pipe is mated together via male and female threaded connections machined onto each end. When a section of the well is drilled and ready for pipe placement, workers on the drilling rig vertically stack the pipe and lower it into the well one by one by twisting each connection together with large iron tongs. After being lowered and set into the well, cement is pumped through the pipe and then pushed out the bottom and up the sides between the outside of the pipe and the rock. After the cement is dry, the next hole section is drilled. Domestic oil and gas industry Since 2003, there has been an increase in drilling activities both in the US and around the world. As the selling price of oil and natural gas increases, more capital is available for drilling projects4. According to the America Petroleum Institute (API), completion of US oil and gas wells have consecutively increased for the last twelve quarters since 20035, and in late 2005 reached the highest levels in nearly 20 years6. The following figure shows the number of US oil drills versus the West Texas Intermediate (WTI) crude oil price7.

U.S. oil drilling rig count versus WTI crude oil price

100

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200

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350

Jan-

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Jun-

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-03

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. Oil R

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4 Rach N. M. "Worldwide drilling surges ahead", Vol. 103. Issue 36, 39-47, Oil & Gas Journal, 2005 5 Snow N "API: US well completions broke records during 3Q", Vol. 104, Issue 42, 28-29, Oil & Gas Journal, 2006 6 "US outlook : All we need are more rigs and crews", Vol. 227, Issue 2, 43-46, World Oil Magazine, February 2006 7 Data for the figure was obtained from Baker Hughes and the U.S. Department of Energy

Figure 3 . US oil drilling rig count versus WTI crude oil price

BP's Procurement and Supply Chain Management 4

The upward trend in drilling has put a strain on the OCTG supply chain. According to one supplier of pipe, the total US OCTG inventories were relatively low at about four months' supply (or 1.2 million tons) at the end of 2004. Cautious of fluctuating steel costs, pipe distributors have also kept inventory fairly lean in case of a price drop8. These developments, coupled with the capacity limits in the OCTG supply chain, results in long lead times for the end user and forces energy companies such as BP to carry large amounts of inventory to meet the drilling demand. Sourcing pipe at BP Since OCTG accounts for only one percent of the global steel market, the manufacture of pipe for the oil industry is scheduled at the steel mills' convenience. The recent economic boom in China and India caused steel producers to focus on metal goods used in building construction and the automotive industry (the two largest users of steel). This bias toward other industries and the scarcity of raw materials result in 2 to 24-month lead teams for certain OCTG, making demand planning at BP especially difficult. While steel pipe may sound like a commodity, metallurgy and manufacturing quality is paramount. BP carefully selects steel mills located in the United States, Europe, and Japan capable of manufacturing API standard pipe grades with the engineering ability to develop unique metal alloys set by BP's own standards. Only a handful of steel mills met this criterion. To help ease the inventory burden to BP, a single domestic distributor that represents most of the selected steel mills is utilized. The distributor will only carry products manufactured to API specifications; any custom pipe made for BP is purchased directly from the mill. The agreement with the distributor allows for unused or defective products to be returned, preferred pricing, and consignment-based inventory. When custom pipe is ordered, BP owns it at the time of manufacture. These direct mill orders are non-cancelable and non-returnable. A further complication to the purchase of pipe used in the Gulf of Mexico is the threaded connection itself. Premium threads are proprietary thread designs manufactured by select companies. These proprietary thread designs achieve a gastight metal-to-metal seal that standard API threads cannot. BP has standardized on two brands of premium threads for pipe used in offshore wells. These premium threading companies, Seal Tight and Interlock, have strategic relationships with either the steel mill or distributor. Most pipe orders specify the thread type so the threading operation is performed at the mill. However, there are some instances (less than 15 percent) where the pipe is received plain-ended, and BP is responsible for having the pipe threaded at a local Seal Tight or Interlock facility. 8 "Tubular goods suppliers strive to extend 2004s strong performance into 2005", Vol. 2, Issue 3, Oil & Gas Financial Journal, May 2005

BP's Procurement and Supply Chain Management 5

Order placement process The order placement process of pipe for drilling operations involves the following steps:

First, the engineer defines the pipe specifications after analyzing the drilling location. The specification includes size, weight, length, grade, and connection types based on the pressure, corrosion requirements, and well depth. Most of the pipe specifications are based on API standard grades carried by the distributor. However, exploratory wells present a high level of uncertainty and sometimes require engineered solutions beyond any standard grade of pipe. In these instances, BP must work directly with the mill to develop a solution. The engineer provides these specifications to the materials coordinator (buyer) through an internal requisition process. The materials coordinator then places the order with the distributor based on pre-agreed terms and pricing in the master contract9. In cases of unique purchases, the approved mills will submit proposals and a purchase order will be awarded to the selected bidder. Once the order is placed, the domestic distributors schedules the production in steel mills based on pipe specifications, availability of capacity in the steel mill, and its threading capability. The pipes are mostly ordered on the basis of consignment, while in some cases BP owns the inventory. The steel mill after receiving the order from the distributor, place them in the long production queue based on the priority of the request. After production the pipe is shipped to storage yards in Houston. If a domestic mill manufactures the pipe, it is shipped via rail car to Houston and unloaded directly into the yard, or placed on a truck that delivers to the yard location. Pipe ordered from foreign mills is shipped into the Port of Houston where it is then trucked to the storage facility. In one case, airfreight was used to transport a very urgent order at a cost of $1 million. Approximately 60% of all OCTG is ordered from foreign mills. Storage, inspection, and shipment to drilling rigs BP stores their inventory in a third party facility located in Houston that specializes in pipe maintenance and inspection. At the storage facility, pipe is inspected using EMI (Electromagnetic Inspection) and FLUT (Full Length Ultrasonic Testing) techniques to identify the presence of any manufacturing or stress induced flaws. Pipe inspection must be performed at this stage of the supply chain because steel mills will not inspect pipe to the standards required by BP because the process is too time consuming. Although the storage facilities are not owned or operated by BP, safety of the workers is the number one priority. BP pays a premium to have its own segregated section of the pipe yard with specially trained contract personnel to handle the movement of pipe inventory to and from the inspection facilities. Since pipe is kept in storage for extended periods of time, corrosion prevention becomes quite important. To maintain the integrity

9 In most cases, BP would receive staggered shipments of its pipes. For example, if the project requires 100,000 feet of a specific pipe, they would receive 20-40% of it in the first shipment based on lead time and rate of consumption and accept the remaining quantities in subsequent shipments.

BP's Procurement and Supply Chain Management 6

of the pipe, they are stored at least 18 inches above the ground and stacked up to no more than six feet. The six foot height restriction is due to an industry safety code that requires personnel to be tethered in a safety harness. Pipe can be stacked up to ten feet if a tie-off is available. Recycled plastic timbers are placed between each stack and the threaded portions of the pipe (most susceptible to corrosion) are protected by composite thread protectors. The racks are constructed so that the pipe is slightly slanted to allow for water runoff. Such racks cost approximately $1,500 to $2,000 to construct. When the operator from the drilling rig requests the pipe, the yard crew prepares it for the drilling rig, which includes a full-length drift, addition of pipe accessories such as float equipment and centralizers, and bolstering for offshore platforms. They are stacked on trucks with 44,000 lbs load limits using a forklift with a loading cost of about $200 per truck and shipped to Port Fourchon in Louisiana at a cost ranging from $3 to $5 per mile per truckload. The pipe is then loaded and shipped on a vessel to the drilling rig. Pipe purchase: Should they consolidate? BP's inventory consists of 35 different pipe specifications. Specifications refer to outer diameter, measured in inches, weight, measured in pounds per foot10, and grade, which refers to the metal composition. Most pipe specifications are standard API, except for those used in exploratory wells, which are typically proprietary grades. Appendix "A" shows the 35 different pipe specifications currently stored in Houston. The grades of the pipe increase in material strength and corrosion resistance as you read down the table. When HC is denoted in the grade, it refers to high collapse which means the pipe has higher yield strength and can withstand high pressure wells. 13Cr110 grade pipe provides carbon dioxide corrosion resistance, but cannot be used in sour gas (hydrogen sulfide) producing wells. 25Cr125 can be used in both sour gas and carbon dioxide producing wells, but is only utilized by one project. Outer diameter and weight increase when read from left to right. The table provides information on the average annual usage of each type of pipe in thousands of feet as well as the standard deviation of demand. There is a large variability in usage due to project specific orders. Appendix "B" provides the price per foot of each pipe specification and the associated lead time in weeks. Generally there is a premium price paid for the higher grade pipe and in most cases they have longer lead times. Pipe of lower grade can be substituted with pipe of higher grade if it is within the same outer diameter and weight range. Also, the price per foot will decrease with increase in annual usage. The pricing chart provided is associated with the annual usage in Appendix "A". A forty-foot length should be assumed for all pipe identified in the table. Project economics are determined by the price of oil. Exploratory and appraisal wells are typically the first to be canceled or delayed when oil futures trade low. These types of projects also require custom engineered pipe that remains in inventory, sometimes for years, if the project is canceled. Even for sanctioned commercial projects, individual 10 Refers to the thickness of pipes

BP's Procurement and Supply Chain Management 7

teams often work in silos and develop different solutions for the same problems. Also, factors such as weather and lead time may affect project schedule, making demand forecasting even more unreliable. Lack of standardization and a fragmented project approach leads to excess inventory that cannot be shared between different projects. When considering inventory carrying costs, which include the cost of capital, opportunity costs, material handling costs, and inventory control costs, it is not economically feasible to store the pipe for long durations. In most cases, the pipes that are left in the pipe yard would probably be written off as scrap, unless an engineer requests the same grade. PSCM is looking for ways to coordinate the purchase of pipe to avoid excess inventory in the system. The plan is to buy a common specification of pipe, which is acceptable to most locations in the Gulf of Mexico, so that inventory consolidation is possible. Two likely sources of resistance to this initiative are the engineers and joint-interest accounting. Engineers on the project teams want their pipe optimized for each individual well. Joint-interest partners have trouble justifying the cost difference between the grades of the pipe. For example, a pipe designed for high-pressure environments can be used in locations where the pressure is low, but at a greater unit cost thereby increasing the cost of the drill rig. A leaner inventory can be troublesome if pipe cannot be expedited. If the pipe is not available when needed, BP is still obligated to pay for all costs of the drilling rig even when idle. Non-productive time costs the same as productive time, which can be anywhere from $400,000 to $1,000,000 per day. The drilling rig costs alone often justify a fully stocked pipe yard. Storage and inspection facilities: Current situation The supply market for OCTG storage and inspection has seen significant consolidation. In 2002 and years prior, BP utilized four pipe yards in the Houston area. In mid-2003, Southern Inspection, a subsidiary of a large oilfield supply conglomerate, acquired all four of these facilities. Each service contract was transferred to Southern Inspection, and the pricing was honored until their expiry in 2004. When a new contract was negotiated, unprecedented price increases ensued. The average price of inspections rose by 15% and pipe movement costs increased by 25%. Southern Inspection cited increased demand for storage space and investments in new inspection equipment as the primary drivers. BP found itself in a weak buyer position, and accepted the new pricing. The negotiated price list is provided in Appendix "C". Soon after the contract was signed in 2004, a study was conducted by the BP Logistics group to evaluate the possible relocation of the present storage facility for OCTG in Houston to a site or sites in Louisiana. The study looked at the cost of handling, taxes and logistics capability in the region. The findings of this study indicated potential savings in dollars and time through such a move, provided comparable facilities and services were available in Louisiana. Because this study was limited to transportation and tax issues, additional information as it pertains to the other services required for OCTG storage and inspection is necessary.

BP's Procurement and Supply Chain Management 8

BP currently occupies approximately fifty acres of storage space at the Southern Inspection yard and expects to increase this space requirement by five percent annually for the next three years. A compelling reason for moving inventory to Louisiana is the fact that the state of Louisiana does not tax inventory stored for maritime use. BP inventory stored in Houston has an ad valorem tax applied to it by the state of Texas. The tax is approximately 3% of the annual inventory value. This is a significant savings, when considering the cost of pipe inventory, which generally runs above $150 million annually. Another reason for relocation is the savings on transportation if pipe is received into the Port of New Orleans (instead of the Port of Houston) and stored in nearby facilities in Louisiana.

Figure 4. Location of ports of interest in Texas and Louisiana

In order to fill the information gap, PSCM devised a set of objectives to obtain additional information for their evaluation of pipe yard relocation. As the initial study was based only on transportation and tax savings, the second phase of the study was focused on services and capabilities of the facilities in Louisiana. A market analysis of the facilities in Louisiana was performed to evaluate the feasibility of such a move. Supply market analysis Pipe inspection and storage facilities in Louisiana and Houston were sent a formal Request for Information (RFI). General criteria included storage capacity, inspection capabilities, processing volume capacity, pipe handling capabilities and proximity to ancillary services like tool rental, trucking, and cranes. Each supplier was asked to provide a copy of their Quality Management System, financial statements, testing procedures for their inspection equipment, and maintenance procedures for their facilities.

PortofHoustonPortofFourchon

PortofNewOrleans

BP's Procurement and Supply Chain Management 9

Inventory management was also an area of focus. BP utilizes SAP for all of its purchasing, accounting, and inventory control. Suppliers were requested to describe their inventory management system and its customer interface. SAP integration would be ideal, but even the incumbent supplier does not have this capability. A Health, Safety, and Environmental (HSE) questionnaire was included along with RFI to gauge safety culture. A common industry metric is the Total Recordable Incident Rate (TRIR) established by US Department of Labor and administered by Occupational Safety and Health Administration (OSHA). The TRIR measures the total number of recordable injuries and illnesses, injuries resulting in lost time away from work, and fatalities. The total number of incidents is multiplied by 200,000 and then divided by the total number of hours worked in the year. For contractors working at a BP site, such as an offshore platform, the acceptable TRIR is less than 2.0. Since pipe inspection is performed at the supplier's location, this metric is closely monitored for upward trends or otherwise poor performance. The HSE team within BP can veto contract award to any supplier if they feel safety performance is lacking. Threading facilities in Louisiana and Houston were also assessed to understand their ability to machine premium threads, size capabilities, volume capacity, storage capacity and pipe handling capabilities. Local threading facilities are necessary when the pipe is ordered plain-ended. Results of the market analysis Approximately 65% of the solicited suppliers in the Gulf Coast Region responded to the Request for Information and supplier questionnaire. After evaluating the initial results, BP conducted individual site visits to better understand its potential suppliers. The following companies are considered to be suitable bid participants. Inspection and storage facilities in Louisiana: Out of all the inspection facilities in Louisiana, only three have the ability to perform inspections to BP standards. The facilities are typically smaller than pipe yards found in Houston, but there is room for expansion and growth. However, some of them do not have robust software systems to track inventory nor have the ability to communicate with BPs information system. Figure 5 shows the location and access to road and rail networks for all the three facilities in consideration. Houma Tubular Storage. Houma Tubular Storage is a recently constructed

storage facility that currently has any inspection capabilities, but they do own the largest pipe yard in Louisiana stretching across100 acres. Since this is a new development, only 30 acres are occupied, but steadily growing each month. Within their pipe yard, all racks are constructed to BP standards. Inventory is managed on their own system that has a web-based customer interface. Houma also mentioned future plans to develop inspection capabilities, but is reluctant due

BP's Procurement and Supply Chain Management 10

Figure 5. Inspection, storage and threading facilities in Louisiana

BP's Procurement and Supply Chain Management 11

to high capital costs for such equipment. On the safety side, Houma Tubular Storage employs a Safety Manager that holds daily tailgate meetings to discuss job risks. While no safety statistics are available for 2004, their TRIR for 2005 and 2006 are 2.6 and 2.03 respectively. Since this is a privately held company, Houma Tubular Storage did not provide financial information.

Gulf Coast Inspection. Gulf Coast Inspection is a privately owned company located in New Iberia, Louisiana. They are fully capable of meeting BP inspection requirements for ultrasonic testing. They own one FLUT machine with a capacity of 70 pipe joints per shift depending on pipe diameter. Gulf Coast Inspection's pipe yard spans forty acres and is outfitted with BP approved racks. There is room to expand the storage space since Gulf Coast Inspection owns an additional 20 acres of land behind their current yard. One drawback is that customer inventory is tracked using a spreadsheet. They communicate inventory information to customers via weekly emails. Customers include other offshore operators and their yard is 80% full, which indicates the lack of capacity for BP inventory. While Gulf Coast Inspection has no formal safety program, a bonus system is in place for incident-free hours each month. Their TRIR was 1.26 for 2004, 0.89 for 2005, and 0.76 for 2006. No financial information was provided.

Louisiana Pipe. Louisiana Pipe began as a distributor and later expanded in to the inspection business with a location in Houma, Louisiana. They own three FLUT machines with only one meeting BP requirements in regards to flaw detection angles. Their storage yard covers 50 acres and contains pipe racks acceptable to BP. Expansion of storage space is not possible and yard capacity is currently at 60% utilization. Since Louisiana Pipe was originally a distributor, their inventory management capabilities are exceptional. They claim their software can be integrated with SAP, but none of their other customers use this option. BP was concerned with their safety performance. No official safety program is in place and their TRIR for years 2004, 2005, and 2006 are 2.46, 2.78, and 3.15 respectively. This upward trend in incidents would need to be closely managed by BP until a fully codified safety program is implemented by Louisiana Pipe. Although Louisiana Pipe is a private entity, they agreed to provide their audited financial statements that can be found in Appendix "D".

Oilfield Industrial. Oilfield Industrial is another private company located in Lafayette, Louisiana. They have two FLUT machines that can detect flaws at any angle and have a total throughput capacity of 130 joints per shift. The yard is outfitted with BP approved racks covering 60 acres. Current storage capacity is around 50%. Inventory is kept in their own proprietary system and customer access the information via Internet through a read only interface. Oilfield Industrial had a TRIR of 2.87 for 2004, 3.01 for 2005, and 3.89 for 2006. They did not provide any financial statements, but BP estimates this to be a $6 million dollar company in terms of revenue.

BP's Procurement and Supply Chain Management 12

Threading facilities in Louisiana: Seal Tight operates a threading facility in Lafayette, but is roughly half the size of its Houston counterpart. Interlock does not have a location in Louisiana. However, a machine shop in Houma carries an Interlock license to machine any of their designs. This license expires every two years and can be revoked at any time. In the worst case, pipe requiring Interlock threads would have to be transported to Houston for threading and then shipped back to the storage/inspection site in Louisiana. Inspection and storage facilities in Houston: The companies that survived massive consolidation are all located near the Port of Houston. They are Southern Inspection, Proven Inspection, and Offshore Storage & Inspection. Proven Inspection is the only privately owned company. Both Southern Inspection and Offshore Storage & Inspection are subsidiaries of oilfield conglomerates. They manufacture and sell their own brand of inspection equipment; although not to each other. Figure 6 shows the location and access to road and rail networks for all the three facilities in consideration. Southern Inspection. Southern Inspection is the largest inspection and storage

company in the region. After acquiring the three surrounding pipe yards, their total area spans 300 acres with BP occupying about 50 acres. Other customers include competing energy companies and local municipalities that store pipe for water transport. They have five FLUT machines that can inspect 400 joints of pipe per shift. Southern Inspection's yard crew is fully trained in BP specific OCTG storage and handling policies and their inspection personnel have a reputation of being the best in the business. Calibration tests show their equipment to be topnotch. The space that BP occupies is segregated from the rest of their customers and is kept especially clean. In addition, BP rents several office trailers onsite for inspection and logistics coordinators. Inventory is managed by Southern Inspection's proprietary software accessible through a web portal. BP spends over $6 million annually on pipe inspection, and an additional $2 million on storage and maintenance with Southern Inspection. As part of their corporate policy, Southern Inspection employs a dedicated Safety Manager for this location. They have a fully codified safety program and incident reporting system that has been recognized as one of the best in the industry. Their TRIR statistics reflect this: 0.75 for 2004, 0.83 for 2005, and 0.56 for 2006. Southern Inspection is a subsidiary of the oilfield service conglomerate, Enclave Services International; their 2005 10K report can be found in Appendix "D".

Offshore Storage & Inspection. Offshore Storage & Inspection is located a few blocks north of Southern Inspection. With support from its parent company, Grand Valley Group, Offshore Storage & Inspection was able to purchase surrounding pipe yards and undeveloped land behind its current fence line. As a result, 200 acres are enclosed while another 40 acres remain accessible. A rail

BP's Procurement and Supply Chain Management 13

Interlock Seal Tight

Interlock

Proven Inspection

Southern Inspection

Offshore Storage & Inspection

Inspection & Storage

Threading Location

Major Roadway

Railway

Figure 6. Inspection, storage and threading facilities in Houston

BP's Procurement and Supply Chain Management 14

spur runs through the yard allowing for direct unloading onto the racks. Due to all the recent acquisitions, about 60% of the racks located in a segregated 120 acre area meet BP requirements. Of this approved rack space, approximately 40 acres remain unoccupied. On the inspection side, Offshore Storage & Inspection has developed new FLUT technologies that could lend a competitive advantage over Southern Inspection. They currently operate four FLUT machines that have a throughput of 340 joints per shift. Inventory is managed electronically through SAP, which is compatible with the BPs information system. Offshore Storage & Inspection utilizes a behavior based safety program and conducts regular safety meetings with their employees. Their TRIR for 2004, 2005, and 2006 were 1.25, 1.03, and 1.16 respectively. Their financial information is also provided in Appendix "D".

Proven Inspection. Proven Inspection is located east of Southern Inspection in an adjacent lot. The 70 acres pipe yard is currently operated at forty percent capacity. Proven Inspection operates two FLUT machines that average 150 joints per shift. However, the equipment is poorly kept and often found out of commission. Inventory is kept on Proven Inspection's own proprietary system with customer access available via a web-portal. Like the other pipe yards in Houston, Proven also has a safety program and their TRIR was 1.79 in 2006, 1.25 in 2005, and 1.63 in 2006. Its location offers a unique logistical advantage because barge traffic from the Port of Houston can dock and unload shipments directly into Proven's yard. Most of their revenue is generated through transfers of pipe shipped to other facilities. In fact, much of BP's international OCTG deliveries are transferred through Proven. Southern Inspection attempted to attain Proven during its buying campaign, but the offer was refused. The rumor mill suggests that Southern is still engaged in talks with Proven. No financial information was provided for review during the market analysis

Threading facilities in Houston: Both Seal Tight and Interlock have machine shops at various locations in Houston. Capacity has never been a problem in the past with any of these facilities. There is even a small Interlock shop in Offshore Storage & Inspection's yard.

BP's Procurement and Supply Chain Management 15

Action items Do you recommend the consolidation effort of PSCM? Why or Why not? Justify the answer and include a plan of action if you decide to consolidate the pipe inventory. The plan should include the following points:

1. A breakdown of current inventory carrying costs on an annual basis using the information provided in the case study. What information is missing that would be helpful? Include any assumptions you make such as fill rate and inventory holding costs.

2. Develop a strategy for consolidation or standardization that includes which pipe

specifications will be kept and which specifications will be excluded and justify your reasoning. The plan should include expected annual cost savings, improvements to inventory management, and a plan to phase out or dispose of obsolete inventory if applicable.

3. There are two groups that will likely oppose such an effort: BP engineers working

on the various projects and joint-interest partners that help fund each project. Describe how you would approach the different groups to obtain approval for your consolidation plan. Describe the drivers that each group faces and identify potential points of conflict and how you would overcome such opposition if challenged.

The Southern Inspection master service contract expires in four months. Make a recommendation for or against the Louisiana relocation effort. This recommendation should include the following:

1. Propose an evaluation process and scorecard, along with any performance metrics that may apply. Perform a financial health analysis on all the suppliers using the available information in the case. When financial statements are not provided, what other methods can be used to better understand supplier health? How does this information or lack thereof, weigh in to supplier selection?

2. Identify the locations that would be suitable. Justify why the site or sites were selected.

3. Identify the switching costs from the incumbent supplier. What risks are involved

when switching suppliers? How will these risks be mitigated? 4. How does the pipe inventory consolidation agenda play into the relocation effort?

Would the outcome of one action affect the outcome of the other? Why or why not? If relocation is recommended, should both inventory consolidation and relocation efforts take place concurrently? If not, which should take precedence and why?

16

Appendix "A" Annual Average Usage in '000s of feet from years 2001 to 2005 (Standard Deviation of annual usuage in '000s of feet)

ANNUAL PIPE USAGE OD in inches 5 7 7 7 9 9 10 10 11 11 13 13 14 16 18 20 22 26 28

Weight in ppf 23 29 32 38 39 46 53.5 62.8 62.8 64 66 68 71 71.5 65 102 71.8 72 88.2 113 84 97 109 117 166 187 202 225

LOW

GR A D E S

H I GH

GR A D E S

N-80 HC

61 (42)

L-80 100 (98)

T-95 62 (58) 62

(34)

C-110 125 (96) 158

(109) 210

(139) 225(97)

50 (59)

193(84)

185(63)

122 (103)

P-110 27 (19) 18

(10) 282 (67)

138(79)

73 (32)

P-110 HC

106(53)

68 (39)

78 (42)

Q-125 90 (65) 156(87)

77 (58)

140(96)

112(61)

Q-125 HC

187(67)

86 (61)

70 (43)

Prop. Grade

15 (18)

Prop. Grade

33 (21)

30 (19)

Prop. Grade

27 (15)

13Cr110 112(97)

25Cr125 75 (48) 56

(23)

17

Appendix "B" U.S. Dollar per foot (Lead time in weeks)

PIPE PRICING AND LEAD TIMES OD in inches 5 7 7 7 9 9 10 10 11 11 13 13 14 16 18 20 22 26 28

Weight in ppf 23 29 32 38 39 46 53.5 62.8 62.8 64 66 68 71 71.5 65 102 71.8 72 88.2 113 84 97 109 117 166 187 202 225

LOW

GR A D E S

H I GH

GR A D E S

N-80 HC

22.35(7)

L-80 10.52

(3)

T-95 18.76

(4) 19.12

(4)

C-110 12.89

(5) 13.01

(5) 17.78

(5) 20.22

(5) 21.67

(5) 23.88

(5) 24.32

(4) 34.78

(8)

P-110 18.60

(6) 19.13

(6) 24.89

(6) 32.45

(6) 55.78(10)

P-110 HC

40.24(8)

51.12(10)

54.57(10)

Q-125 29.78(10)

41.58(8)

45.62(10)

48.96(10)

55.11(10)

Q-125 HC

33.37(18)

52.12 (20)

55.78(20)

Prop. Grade

123.40 (52)

Prop. Grade

106.11(52)

119.10(52)

Prop. Grade

120.78(52)

13Cr110

57.89(34)

25Cr125 45.36 (104) 50.12 (104)

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Appendix "C"

Southern Inspection 2004 Price List Inspection Charges: Price per foot unless otherwise noted

OD range in inches 4.5" to 5.5" 7" to 7.75" 9.5" to 10.75" 10.88" to 11.88" 13.38" to 16" 18" to 22" 26" to 30"

Full length visual inspection $0.07 $0.09 $0.12 $0.16 $0.20 $0.25 $0.38 Full length drift $0.12 $0.15 $0.18 $0.21 $0.25 $0.31 $0.45 Full length electromagnetic inspection $0.35 $0.40 $0.43 $0.52 $0.65 $0.87 $1.02

Full length ultrasonic testing $0.83 $1.01 $1.21 $1.44 $1.67 $2.89 $3.20 Magnetic particle end area (priced per end) $4.30 /end $4.98 /end $5.19 /end $5.96 /end $6.30 /end $6.98 /end $7.20 /end

Visual end area (priced per end) $0.50 /end $0.59 /end $0.66 /end $0.75 /end $0.89 /end $1.02 /end $1.45 /end Thread cleaning and reapplication of thread compound (priced per end) $0.87 /end $1.00 /end $1.50 /end $1.75 /end $2.04 /end $2.67 /end $3.05 /end

-Above inspection rates include labor and equipment -$1,500 minimum inspection charge

Movement and Storage Charges: Price per hundred pounds unless otherwise noted Miscellaneous Labor and Equipment Charges: Price per hour Service Description Regular Time Overtime Holidays Description Regular Time Overtime Holidays Inbound unloading: Truck to rack $0.25 $0.38 $0.50

Foreman $31.00 $46.50 $62.00

In-yard movements: Rack to services building $0.18 $0.27 $0.36

Laborer $22.00 $33.00 $44.00

In-yard movements: Services building to rack $0.18 $0.27 $0.36

Forklift $75.00 $112.50 $150.00

Rack transfer $0.20 $0.30 $0.40 Tractor w/ trailer $59.00 $88.50 $118.00

Outbound loading: Rack to truck $0.25 $0.38 $0.50 30 ton Crane $210.00 $315.00 $420.00 Storage charges per month $0.45 per ton 45 ton Crane $250.00 $375.00 $500.00

-Above movement rates include labor and equipment -Equipment rates include operator -First 30 days of storage is free

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Appendix "D"

Statement of Income for 2005

In Millions of U.S. Dollars Enclave Services International

Grand Valley Group

Louisiana Pipe

Total Revenue 6055.8 485.6 40.2 Cost of Revenue 4013.2 197.0 24.5 Gross Profit 2042.6 288.6 15.7 Research and Development - - - Selling General and Administrative 754.1 91.1 12.4 Non Recurring 8.1 (5.9) - Others - 46.7 - Total Operating Expenses - - - Operating Income or Loss 1280.4 156.7 3.3 Total Other Income/Expenses Net (12.8) 1.6 0.9 Earning Before Interest and Taxes 1267.6 158.3 4.2 Interest Expense 48.2 0.4 - Income Before Tax 1219.4 157.9 4.2 Income Tax Expense 324.5 61.1 (0.8) Minority Interest (8.7) - - Net Income from Continuing Operations 886.2 96.8 5.0 Discontinued Operations - - - Extraordinary Items - - - Effect of Accounting Changes - - - Other Items - - - Net Income 886.2 96.8 5.0 Preferred Stock and other Adjustments - - - Net Income Applicable to Common Shares 886.2 96.8 5.0

Statement of Cash Flows for 2005

In Millions of U.S. Dollars Enclave Services International

Grand Valley Group

Louisiana Pipe

Net Income 886.2 96.8 5.0 Depreciation 210.6 47.6 0.3 Adjustments to Net Income 53.8 (2.1) (1.2) Changes in Accounts Receivables (508.3) (40.9) (2.3) Changes in Liabilities 413.4 12.7 1.8 Changes in Inventory (612.2) (8.3) (1.1) Changes in other Operating Activities 474.8 (1.3) (0.3) Cash from Operating Activities 918.3 104.5 2.2 Capital Expenditures (230.6) (139.2) (0.3) Investments - - (16.1) Other Investing Cash Flow Items (326.8) 9.3 (1.2) Cash from Investing Activities (557.4) (129.9) (17.6) Total Cash Dividends Paid - (13.1) - Issuance of Stock, Net 33.8 (0.7) 1.2 Issuance of Debt, Net (4.7) 25.5 (0.1) Other Cash Flows from Financing Act 12.4 1.1 25.0 Cash from Financing Activities 41.5 12.8 26.1 Effect of Foreign Exchange Rates 15.8 - - Change in Cash and Cash Equivalents 418.2 (12.6) 10.7

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Balance Sheet for 2005

In Millions of U.S. Dollars Enclave Services International

Grand Valley Group

Louisiana Pipe

Cash and Equivalents 974.5 2.7 11.9 Short Term Investments - - 7.4 Net Receivables 2134.3 155.1 8.4 Inventory 2375.1 28.4 5.8 Other Current Assets 213.2 4.9 0.7 Total Current Assets 5697.1 191.1 34.2 Long Term Investments 230.6 - - Property, Plant, and Equipment 1056.3 245.9 5.3 Goodwill 2435.0 23.1 - Intangible Assets 789.2 - - Accumulated Amortization - - - Other Assets 25.4 4.9 - Deferred Long Term Asset Changes 55.7 - 0.3 Total Assets 10289.3 465.0 39.8 Accounts Payable 2958.6 71.4 5.6 Short/Current Long Term Debt 4.7 - 0.1 Other Current Liabilities - - - Total Current Liabilities 2963.3 71.4 5.7 Long Term Debt 862.2 37.8 0.2 Other Liabilities 124.7 14.5 - Deferred Long Term Liabilities Charges 423.1 19.3 - Minority Interest 34.8 - - Total Liabilities 4408.1 143.0 5.9 Common Stock 2.4 9.6 41.8 Retained Earnings 1815.2 320.3 (2.5) Treasury Stock - - - Capital Surplus 3512.9 7.9 2.8 Other Stockholder Equity 35.2 (3.1) 0.1 Total Stockholder Equity 5365.7 334.7 42.2 Notes: Enclave Services International is a global provider of oilfield products and services used in drilling

and production operations. Products and services include drilling fluids, oilfield tubular inspection and pipe management services, directional drilling, artificial lift, wireline services, rental pipe and downhole tools, and wellbore intervention services. The tubular inspection group, Southern Inspection, manufactures pipe inspection equipment, applies pipe coatings, and manages inspection and inventory for energy companies. The tubular inspection group as a whole accounted for 4% of total revenue in 2005, up from 3% in 2004.

Grand Valley Group provides a broad range of oilfield services to upstream energy companies operating in the United States. Regions include the Gulf of Mexico, Rocky Mountains, and mid-continent. Services lines consist of: hydraulic workover services, drill pipe and drilling equipment rental, coiled tubing services, wireline services, and oilfield pipe inspection and storage services. Grand Valley's pipe inspection and storage operating unit, Offshore Storage & Inspection, accounted for 6% of revenue in 2005 with their operations in Houston, Texas.

Louisiana Pipe acts as an intermediary between domestic steel mills that produce OCTG and oil & gas

companies that use such pipe in the wells they drill. Louisiana Pipe recently expanded into the pipe inspection and storage business to enhance their capabilities as a distributor. Their inspection and storage location in Houma, Louisiana contributed $8 million to total sales in 2005.

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Appendix "E" The following are pictures from the pipe storage yard and inspection facilities located in Houston, Texas. Threaded pipe with composite thread protectors installed

Pipe stacked 18 inches above the ground with recycled plastic timbers separating each layer

Stacks of pipe with inspection facility located at the end of the row

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Yard crew moving pipe with forklift

Electromagnetic Inspection unit