Of swings, roundabouts … and seesaws

  • Author: Alistair Mackenzie
Posted on 05-07-2010

In January, I commented on the supplier to buyer relationship and the changes brought about by market swings. Now, events in the wake of the global economic downturn have occasioned a further interesting perspective to the buyer/supplier dynamic.

The emergence of the previously all but unprecedented eventuality of an operator entity (a buyer) failing has resulted in service providers being left to count the cost. Whilst as yet a rare occurrence, the economic turmoil of the last two years, with the resulting credit squeeze, has demonstrated that it can and has happened. For suppliers the effects can have a devastating impact on their financial performance and may cause some to look towards more stable, long-term relationships. Whilst these may not provide cast iron guarantees, they are likely to offer a greater degree of comfort in these turbulent times.

This emerging risk for suppliers stems, not from the oil majors, but from relatively new entrants to the industry, smaller operators that may be exploring for and extracting oil in areas that have become less attractive in scale and volume to the oil majors. In the healthy market conditions that existed leading up to the recession, a smaller operator’s financial vulnerability may have been less than obviously apparent to suppliers and was certainly not seen as a practical barrier to trading. Following the realisation that operators can fail too, a financial health check on an operator by a supplier is now just as valid a procedure as an operator conducting a check on a supplier.

Closer collaboration between buyers and suppliers create far more stable relationships, involving openness and trust. These conditions help reduce the risks that exist in the supply chain. But in order to achieve closer collaboration, with all the attributes of clearer visibility for planning and investment, it is essential to create long-term relationships that look beyond the short-term gains of market opportunism. It is becoming far more valuable, and less risky, for an enterprise to enter into a longer-term collaborative arrangement – and perhaps, accept the consequence of making a smaller profit – than it is to work within the world of short-term contracts, which may promise higher short-term gains but at a much higher risk.

Of swings and roundabouts

  • Author: Alistair Mackenzie
Posted on 18-01-2010

The collapse in the price of oil, from $147 a barrel in July 2008 to a low of $40 last March, turned the tide for the buyer/supplier dynamic as spending on projects and exploration activity hit the buffers. Before the dramatic fall in the market, suppliers had been in the comfortable position of generally being able to command very healthy prices on contracts, but now – even with oil having recovered to nearly $80 a barrel – the pendulum has swung back the other way and suppliers are coming under intense pressure to trim costs substantially.

Interestingly, we are seeing a substantial upsurge in competitive tendering activity. But this is not because of any real increase in demand for project work, or planning for further exploration, it’s more to do with buyers positioning themselves for better rates on future contracts. For many suppliers, delivering a large reduction will be painful, especially if investments have been made in capital equipment and personnel on the basis of future expectations.

Of course, in times of high oil prices and booming demand for services, many suppliers also took advantage by hiking up prices and by being selective on tendering.

Such posturing, be it by buyers or suppliers, may be in accordance with the natural law of supply and demand economics, but does it really deliver the best long-term value for either party? Could it even be mutually destructive to value? It may be tempting to leverage market advantage for short-term gain, however, a more satisfactory solution may be to draw strength from collaborative partnerships that are built for the long-term delivery of value to both parties, by aiming to smooth out fluctuations and wild swings in the market.

Somewhat reminiscent of the mid 90’s when oil crashed to $10 a barrel, the Oil & Gas industry has once again made an attempt to work together by engaging in collaborative sessions to address the issues of ‘Operating Cost Base’ and ‘Efficiency Challenges’, and much has been said about the need to use the industry tools at our disposal to maximise efficiency and eliminate cost, but is this enough? Are leading suppliers and buyers serious about collaborating?

If potentially damaging and draconian practices based on ‘short-termism’ are to be avoided, a long-term strategic approach is required, one that leverages the mutual advantages that can be achieved by working in true partnership for the delivery of value for all concerned.

Through strategic collaboration gains can be made on both the swings and on the roundabouts.

Alistair Mackenzie is Director of UK oil & gas, Achilles Information.