Fueling the Oil and Gas Supply Chain
New possibilities and partnerships get energy companies pumped.
Every vertical industry presents unique supply chain challenges, but none is as complex as oil and gas. Transporting product requires special equipment, strict regulatory compliance, and extensive safety procedures. It often requires multiple modes, and involves everything from supplying materials for oil rigs to moving extremely heavy equipment and hazardous materials.
"Logistics in the oil and gas industry demands a great sense of urgency and need for visibility," says Bill Heathcock, regional director for Philadelphia-based third-party logistics (3PL) provider BDP International. "Oil and gas companies rely on 3PL partners to come through under difficult circumstances."
Few industries are as financially vulnerable when complications arise. Often, oil and gas operations take place in remote regions of the world, and run 24/7/365. If materials aren’t delivered on time, the consequences are considerable.
"If an oil rig goes down as a result of not having the proper materials in place, it can mean the loss of $1 million every day," adds Brian Murphy, director of business development for San Francisco-based Menlo Worldwide Logistics. "Logistics reliability is paramount—oil and gas companies will invest in outsourcing to ensure there is no service interruption, rather than risk a problem."
What’s The Difference?
The oil and gas industry is generally divided into two areas: traditional operations—such as those that take place off the coast of Santa Barbara, Calif., in the Gulf of Mexico, or in Canada and Alaska—and exploratory operations, which include fracking. Each type of operation requires a different logistics strategy.
"The exploration and extraction supply chain is different than the supply chain from a well site to a refinery, especially in the people and processes involved," explains John Love, senior vice president and senior architect for Raleigh, N.C.-based logistics technology developer TMSforce.
Traditional oil and gas operations rely on fundamental logistics activities such as trucking and warehousing. The nature of the business, however, can make even these functions hard to manage.
"Unlike the retail environment—where a vice president of supply chain directs strategy and the organization reacts—oil and gas companies drive their own operations," says Murphy. "It’s a costly, inefficient approach that tends to lack transparency and visibility."
Consequently, producers often derive significant value from logistics providers that can re-engineer traditional oil and gas supply chain processes.
Menlo recently made its first foray into the oil and gas sector, looking to leverage its experience in chemical logistics. It is collaborating with Shell Canada on a project that includes two traditional drill locations in western Alberta. Menlo works with the producer’s exploration and production teams at the drill site, coordinating truck transportation. The 3PL is also helping local carriers improve safety ratings and compliance, and audit incidents.
One drill site alone utilizes more than 80 local carriers. "The exploration and production companies have committed to using local truckers rather than large carriers or contractors," says Murphy. "So part of our work involves helping local trucking companies meet Shell’s stringent safety requirements."
Menlo also deployed a global oil and gas control tower in Calgary. There, it manages day-to-day operations, and provides strategic oversight to help Shell drive costs out of its supply chain. In addition, the 3PL helped centralize many of Shell’s logistics- related activities.
"We work closely with Shell’s logistics team," says Murphy. "We look for opportunities to consolidate activities such as freight bill audit and payment, and claims processing, allowing Shell to benefit from a shared-services approach."
The fact that oil and gas companies drive their own operations has been one of the most difficult challenges for 3PL partners. "Trying to affect change in an environment where we have no power is difficult," says Murphy. "To be successful in the oil and gas industry, 3PLs have to bring a continuous improvement mindset; immediate engineering value; and the ability to interface with the operations team."
Fracking Breaks Ground
The second type of oil and gas operation, hydraulic fracturing—or fracking—has changed the North American oil and gas industry significantly over the past few years. Abundant reserves have fed projections that the United States will be producing much of its own energy by 2020. But the emergence of domestically sourced natural gas also means significant changes to the North American energy market—especially in the way suppliers and producers move product.
Extracting fossil fuel from shale below the earth’s surface requires horizontal drilling, charging the fueling mechanism to create fractures, and inserting large amounts of sand and water to open these fractures in order to pull out the fuel. Sourcing and organizing the assets necessary for extraction is complicated. If not managed well, energy companies can incur heavy liabilities—high costs, wasted resources, and safety compliance failures.
"Fracking involves a lot more expense, and it’s also less profitable, than traditional fuel operations," says Murphy. "Many fracking companies are asking their logistics partners to not only drive the transaction safely, but also find ways to engineer better solutions, and bring value and continuous improvement."
Challenges arise well before drilling begins, when large and expensive pieces of equipment need to be mobilized on site. For example, each drill head can cost tens of thousands of dollars, while the piping and fitting that goes into the well can cost millions.
"The size, weight, and bulk of some of this equipment can tax logistics providers," says Heathcock. "Some pieces of equipment might equal the size of a conference room, and weigh 20 tons. That size and weight creates difficulties in moving freight from Point A to Point B, especially into remote areas."
Preparing a site for extraction can be a significant undertaking. A new drilling operation often requires new roads, holding ponds for water, or even a liquefying plant because fuel is more difficult to move in a gaseous state.
"Managing the logistics around extraction operations creates new complexities," says Love. "All the extraction equipment has to arrive to a site in a particular sequence. Tons of sand, and huge quantities of water, have to be moved. Transport costs are high."
Consider that one asset might involve 25 or 50 miles of activity, while many different trucks serve the wellheads. It takes hundreds of bulk tankers full of water to fill one fracking well—capacity demand that even the largest bulk carriers can’t meet at a moment’s notice. To fill the gap, oil and gas companies rely on smaller carriers.
"By necessity, energy producers have entered the dispatch business—coordinating the daily movements of hundreds of individual carriers," says Murphy. "In the area surrounding any major wellhead, hundreds of these bulk tankers can be found parked on the side of the road, all waiting for direction."
TMSforce is involved with one fracking site that is moving 2,000 loads of sand and water daily within a 100-mile radius, says Tim Sensenig, chairman of TMSforce. "That’s a lot of loads—and doesn’t include moving the material that has been extracted," he explains.
To ensure the job gets done right, some energy companies are hiring fourth-party logistics (4PL) providers to manage, oversee, and improve certain aspects of upstream operations.
"A 4PL can markedly improve the economics of these large fracking sites by taking over dispatch, systematically monitoring resources, and planning ahead for changing capacity needs," Sensenig adds. "With this guidance, energy companies can be prepared for high-demand times without paying for underutilized assets."
Another example of how 3PLs and 4PLs can add value is in safety compliance, which is a critical aspect of the oil and gas industry. BDP International, for example, employs its own global compliance officer and safety trainer, who travel to all its sites to ensure consistency.
"Compliance heads the list of priorities for the oil and gas industry, especially in the last seven or eight years, as substantial penalties and fines have been imposed in areas such as the Foreign Corrupt Practices Act," says Heathcock. "Logistics providers working in the oil and gas vertical have to take safety very seriously or they won’t last."
Setting the Standard
Standardizing compliance across a number of different carriers, many of whom are small and localized, is a difficult task for energy companies to take on internally, explains Murphy.
Logistics providers, on the other hand, have the experience and expertise to drive uniform measures all the way down to the carrier community. They can establish a baseline compliance expectation, meet regularly with carriers, and develop safety programs—specific to each wellhead—that can be monitored, managed, and improved as conditions change.
"Safety is one of the highest priorities," agrees Sensenig. "Energy companies do not want to cut any logistics or supply chain costs that will affect compliance. Solutions providers should be focused first on safety and compliance, then on identifying ways to reduce costs."
These expectations and standards transcend the entire supply chain. But the stakes grow even higher when oil and gas companies need to transport end product, especially given the potential for combustion. With the Keystone Pipeline XL expansion project currently on indefinite hold (in April 2014, the Obama administration announced another delay in a process already beset by political and legal challenges), this translates to more pressure on railroads to ensure safe oil and gas transportation. "The railroads will invest substantially in new rail car containers and improving rail safety," says Sensenig.
In the wake of several high-profile crude-by-rail accidents, U.S. regulators are under pressure to phase out the DOT-111 tanker fleet. Canadian authorities have already begun this process. Advanced rail cars introduced in 2014 include thicker steel and jacketed shells with ceramic insulation designed to inhibit discharge of contents during a derailment.
The oil and gas supply chain presents considerable challenges and opportunities for energy producers and logistics service providers—whether it’s coordinating the transport of heavy equipment and drilling materials, managing the just-in-time requirements of drill sites, or ensuring safety compliance across the supply chain. By partnering with 3PL service providers, energy companies can streamline logistics processes, reduce costs, and add value.
Now that’s what you call cooking with gas.