SHAPING THE FUTURE - INTELLIGENT ENERGY LOGISTICS: A ......company can save up to 10% or $ 50 million A company with annual CAPEX of $ 20 billion can save up to ... subject will be

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SHAPING THE FUTURE - INTELLIGENT ENERGY LOGISTICS: A CONSULTANT’S VIEW

Global Energy Conference | Houston | 7 October 2014

Jim Pearce, A.T. Kearney

A.T. Kearney is a leading global management consulting with

broad activities within the oil & gas sector

A.T. Kearney Limited

Lansdowne House

Berkeley Square

London W1J 6ER

+44 20 7468 8000

+44 20 7339 6709 Direct

+44 796 716 6709 Mobile

[email protected]

Shaping the future - intelligent energy logistics

Introduction

• 4 of the top 5 IOC’s

• Multiple NOC’s & Independents

• 5 of the top 15 downstream companies

• 4 of the top 10 EPC companies

• 57 offices in 39 countries

• 200 projects in O&G in the last 5 years

• Cross-geography projects

• Clients from a variety along the full O&G

value chain: E&P, Refining and Retail,

Midstream and Oilfield Services

Top tier clients

Global offerings

Sector diversity

Source: A.T. Kearney

Your speaker: Jim Pearce Partner

2 Global Energy Conference | Houston | 7 October 2014

Upstream is changing at an unprecedented pace – large

opportunities are paired with higher cost and risk

Macro developments in oil & gas & implications for Upstream

• More remote, challenging and expensive production locations such as deep water and Artic will drive cost and capex needs further up

• > US$ 700 bn annual capex flow will be required to uphold development at current pace

• Increasing political instability and uncertainty in Middle East, Africa and Russia

• Alternative energy is on the upswing; with fossil fuel subsidies still being five times those of renewable energy may put policy makers under pressure

• +30% increase in energy demand by 20351)

• Oil price is expected to continuously increase from an average of around US$ 110 to US$ 128 till 20351)

• Estimates for recoverable resources continue to grow as a result of technology developments, Brazil alone is expected to add ~4 mn bbl/day in production till 2035

• Unconventional has unleashed an energy revolution within the US but bigger opportunities exist in other regions


3 Global Energy Conference | Houston | 7 October 2014

1. 2011 to 2035 with 2035 in 2012 US$ Source: IEA World Energy Outlook 2013; A.T. Kearney

Opportunities for the topline Risks for the bottom line

Unconventional will bring significant change: North America is

only the beginning with larger expectations in other regions

7,299

9,405

9,405

665

2013 resources

(trillion cubic feet)

2012 production

(billion cubic feet)1

United States Rest of the world

Production

1. Annual estimate based on daily U.S. production 2. Ksa reserves, based on information from Baker Hughes Source: EIA 2013, Baker Hughes A.T. Kearney analysis

Resources

Overview shale gas play

Production/Resources

Countries with significant potential for shale gas recovery

Technically recoverable resources (2013, tcf)


Outside the US the supply chains are often more challenging, countries like China are struggling!

Global Energy Conference | Houston | 7 October 2014 4

Unconventional development faces significant supply chain

challenges due to their specific characteristics

1. Note numbering standard is superscript without parenthesis in text and followed by dot in note section Source: EIA Annual Energy Outlook, A.T. Kearney analysis

Unconventional supply chain characteristics

The fragmented Unconventional supply chains require an industrialization approach to achieve necessary efficiency levels

Characteristics

MCF/year

Production profile Evolving footprint Subsurface uncertainty

Supply chain needs to support quick ramp-up, equipment movements including addressing HSSE challenges

Flexibility to readjust material allocations to the next playing field needs to be embedded

Inventory levels and obsolescence needs to be managed in unsure geologies and technological advances



http://www.google.com/url?sa=i&source=images&cd=&cad=rja&docid=1la4W00hCoEorM&tbnid=ovtAMWIQ_1Z-jM:&ved=0CAgQjRwwAA&url=http://energyforumonline.com/date/2012/08/page/2/&ei=gKZ4UcZbjdjyBMyMgYgB&psig=AFQjCNG6MX4tXEUJvRRLRu19buLt6rzheQ&ust=1366947840055065

Upstream has long pursued the latest strategies to improve

profits, however in logistics / MM they lag behind

Understanding MM/logistics excellence in Upstream O&G

Typical deficit areas

• Risk aversion put forward as excuse to look for optimization

• Lack of actual S&OP process

• Tracking systems often not harmonized; transparency often stops after materials leave the central warehouse

• Many warehouses as each new project is often designed independently

• Historically grown and thus non harmonized coding

• Outsourcing of logistics/MM has often not been done very effectively

Source: A.T. Kearney analysis


Firefighter Controller Innovator World Class

Stages of Excellence (SOE)

Oil & Gas upstream

Stage I

Stage II

Stage III

Stage IV

Breakthrough performance



Automotive Construction Consumer

goods

Upstream can learn from leaders in materials management, however there is a need to tailor leading practices to the energy sector


Complex supply chains combined with high service level

requirements can be a perfect recipe for skyrocketing costs



Logistics/ Materials Management challenges

High logistics cost

High inventory

High waste

+

Different technology

generations and advancements with

need to maintain availability at all

times

Remote and difficult-to-access locations with often undeveloped local supplier landscape and long lead times

for international supplies

Legacy, fragmented tracking processes

and systems

Multiple suppliers drive interface

complexity and limit visibility and

tracking of materials

Shorter time horizon of

predictability with constant well design

evolution

Large number of wells, moving

locations and high uncertainty in

unconventional plays

Poor service

+

Companies should ask themselves how they can break the deadlock!


HSE issues

+


+

Large IOCs and more and more also independents are

recognizing the value opportunity and are looking for solutions


Opportunities for value creation

• Reduce buffers and poor utilization of logistics networks to secure flexibility and enable JIT operations

• Avoid fire fighting cost through better planning

• Improve cross-wells/pads/assets cooperation

• Implement properly integrated systems

• Leverage well design standardization to reduce obsolescence driven wastage

• Segment and introduce adequate stock-keeping policies (enabled via well design standardization)

• Team with suppliers to improve inventory levels in projects

Logistics cost Waste Inventory levels

Excellent service to the business!

A 1 billion boe/day company can save up to

10% or $ 50 million

A company with annual CAPEX of $ 20 billion can

save up to $ 1 billion

A company with $ 2 billion of inventory can reduce it

by 10 % and free up $ 200 million


Based on project examples


MM/logistics should not be seen as a function but as the

facilitator for an end-to-end supply chain


Best practices of an end-to-end supply chain

Procurement

Contingency, surplus and obsolescence

Storage Issue

• Establish detailed scheduling methods

• Actively manage inventories

• Leverage joint stocking initiatives

• Embed conservation approach

• Monitor performance

Supply chain strategy & design

• Define strategy

• Define enablers (IT /RFID)

• Hook up parties involved

• Establish and integrate

planning

Handover and wrap up (projects)

•Manage handover

•Avoid relying solely on EPC contractor



Along the value chain different players play different roles and

have different capabilities that can be leveraged

Players & capabilities

Procurement

Contingency, surplus and obsolescence

Storage Issue Handover and wrap up

Supply chain strategy & design

Project design & contracting

Strength in specs definition and contracting

Can help during design and enablement (e.g.

systems)

Some suppliers provide Value added services (consignment,

inventory mgt etc.)

Executes transportation

EPC company

Logistics company Can take over ordering/inventory management as well as execute

Equipment &

material suppliers

Transportation &

warehousing

companies

… and someone needs to be the conductor!



For those who want to conduct the orchestra we have a few

takeaways


Our industry is constantly seeking to improve efficiency, reduce costs, and minimize risks, materials management is a huge opportunity ! A few players have launched projects to address the issue - in a few years, this subject will be a top priority and first movers are poised for advantage ! Past failures originate from a lack of priority and cross-functional alignment of conflicting goals - top management support is therefore critical ! Many other industries, such as automotive, construction, and consumer goods are leading the way, they provide ideas to learn from !

Key takeaways



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A.T. Kearney is a leading global management consulting firm with offices in more than 40 countries. Since

1926, we have been trusted advisors to the world's foremost organizations. A.T. Kearney is a partner-owned

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SHAPING THE FUTURE - INTELLIGENT ENERGY LOGISTICS: A ......company can save up to 10% or $ 50 million A company with annual CAPEX of $ 20 billion can save up to ... subject will be