Logistics and Operations
You have been employed as a Logistics and Operations Management consultant at Cairn Energy, one of Europe’s leading independent oil and gas exploration and development companies with headquarters in Edinburgh (Scotland) and operational offices in London (UK), Stavanger (Norway) and Dakar (Senegal).
Cairn Energy has decided to drill two appraisal wells on the SNE Oil field in 2017. Cairn, as the operator, has a 40% Working Interest (WI) in the three blocks offshore Senegal (Sangomar Deep, Sangomar Offshore, Rufisque Offshore) and is working with partners: ConocoPhillips (35% WI); FAR Ltd (15% WI) and Petrosen, the Senegal National Oil Company (10%). The three blocks cover 4,490km2.
A memo handed to you by Simon Thomson, the Chief Executive at Cairn Energy stated that the successful appraisal of the world-class SNE discovery in Senegal has significantly increased 2C oil resources to 473 million barrels with associated 2C Oil in place in excess of 2.7 billion barrels.
He further stated that drilling operations were scheduled to re-commence in Senegal shortly, benefiting from lower costs across the sector. The program contains options for multiple wells and in addition to ongoing appraisal of the SNE field, the Joint Venture continues to assess optimal locations for further exploration drilling on the acreage.â€
It is understood that, following the discovery of two basin openings, SNE-1 and FAN-1, in Senegal in 2014 and approval of an extensive evaluation plan by the Government of Senegal in 2015, Cairn and its JV partners completed four appraisal and exploration wells in the SNE field in first half-year of 2016. The company noted that drilling operations were completed ahead of schedule and under budget with four wells completed at the forecast cost of three.
Based on the five well penetrations so far, the current best estimate, independently assessed by ERC Equipoise, for oil in place on the SNE field is more than 2.7 billion bbl. gross, with estimated gross recoverable contingent oil resource of 1C 274 million bbl., 2C 473 million bbl., 3C 906 million bbl. C = Contingencies
Cairn said that, as the JV plans future activity, it can see clear potential to access additional cost savings from the current lower cost operating environment.
The company added that a rig tender and services process is well advanced as the JV prepares for stage three of the campaign and is benefiting from the lower cost environment and significant availability of high quality rigs
Based on the above and your own research, you are required to write a REPORT for a panel of senior executives. The report should cover the following:
1. Conduct a review of theoretical and practical aspects pertaining to the management of logistical and operational activities in the oil and gas industry.
The following TWO elements must be covered:
â€¢ Discuss and evaluate the need to have clear methods for configuring and coordinating an efficient Operations Supply Network.
â€¢ Analyse behavioural issues arising from work organisation and discuss methods, which might be used to mitigate them in the context of an O&G operations strategy.
Upstream sectors in the oil and gas industry involves exploration, appraisal of oil wells and all activities that are involved in bringing crude oil and natural gas to the service. Logistics and operational challenges abound in this sector. One of the main challenges is ensuring rig uptimes are maximized as down turns could cause the company millions of dollars in losses. Additionally, rig down times have substantial implications on midstream and downstream operations. Cairn Energy, a company domiciled in the United Kingdom, has identified substantial oil and natural gas deposits in various off shore locations in Senegal. These operations will face various logistical and operational challenges for which solutions must be identified to make the operations economically viable. Some of these challenges include transport of daily supplies to the rigs, ensuring safety measures are put in place to control oil spillage and fires and meeting challenges posed by workers. Various strategies have been identified to address these challenges. Some of them include leasing appropriate supply vessels fitted with top of the range capabilities to manage fires and oil spillage and provide supplies seamlessly to the offshore oil installations. Contracting logistical companies who will be involved in the design and operationalization of logistical solutions is also of paramount importance.
Operations management includes all activities that result in the design, improvement and management of processes that transform inputs into value added outputs through a transformation process. These inputs could include raw materials, direct overheads or labor, while output could be goods or services which are needed in a target market. The focus of operational management is how to make systems operate better, be more efficient, effective, and operate at a much reduced cost. Operational management is also concerned with reducing environmental emissions and being compliant with environmental regulations (Silvestre and Dalcol 2010, p. 727).
Logistics management is a component of supply chain management. Some of the activities that are undertaken as part of logistics management include setting logistical plans, implementation of the logistical plans, controlling the efficient and effective forward, reverse flow and storage of goods and services from origination to consumption stage to satisfy the needs of an organization’s customers (White and Longley 2009, p. 78). Logistics and operations management in very important in oil and gas industry as logistics and operations activities in the industry are very complex and costly. It is therefore, very important for a player in the industry to use the latest and best logistics and operations management model to achieve business viability and sustainability (Orogun 2010, p. 460). This paper, therefore reviews theoretical and practical aspects pertaining to the management of logistical and operational activities in the oil and gas industry; with a specific focus to Cairns Energy.
Question 1 a)
1- Configuring and coordinating an efficient Operations Supply Network
There are mainly three sectors that make up the oil and gas sector namely the upstream, midstream and downstream sectors. Upstream sector is also known as the exploration and production sector and includes searching for potential underground and underwater oil and gas fields. It also includes drilling of exploratory wells, appraisal of the wells to determine whether they have oil and gas quantities that are commercially viable and bringing the gas and oil to the surface through drilling and operationalization of the wells (Orogun 2010, p. 500 ). Midstream sector involves transportation, storage and marketing of refined petroleum products and/or crude oil. Downstream sector generally refers to all activities that include refining of crude oil and processing and purification of natural gas. This sector also includes marketing and distribution of refined petroleum products and purified natural gas products to consumers in various markets (Silvestre and Dalcol 2010, p. 727).
Cairns Energy can derive maximum benefit by efficient and effective supply-chain configurations in its upstream operations. There is a wide array of shipments that will be moved to Senegal oil fields such as gloves, pipes, valves, cranes, chemicals, cement, steel and drilling rigs that are frequently used. These supplies will have to be moved in large quantities almost on daily basis (White and Longley 2009, p. 78). Logistics and operations management in the upstream oil and gas industry is, therefore, one of the most challenging tasks. Project costs are usually very high because most of the oil and gas wells are located in areas that are hard to reach (White and Longley 2009, p. 78). The company should buy or lease supply vessels that will be transporting supplies to the offshore installations to avoid downtimes. Rig down times are very expensive as they will cost the company millions of dollars per hour. Identifying and contracting suppliers of the main supplies needed for efficient operations is one of the main supply configurations that is very critical. Putting in place a competent and experienced team to oversee operations is a very critical step. Installations should have adequate storage facilities for critical supplies to ensure operations do not stop. Configuration of storage space on the offshore installations should mirror configuration of storage space in the supply vessels.
2. Analysis of behavioural issues arising from work organisation
On work organization, a lot of issues might arise. The first issue that will definitely arise is a demand from the local community to be given first priority in filling of job opportunities that may arise. This is likely to create pressure groups that would push for the company to employ more Senegalese people in the offshore sites than employees from other nationalities. The other challenge that will arise will be from local fishing communities who have been fishing in the offshore waters for centuries (Funk 1999). These will demand that the company allows them to continue fishing in the surrounding areas of the installations or be compensated for losing their traditional fishing grounds. This will pose a health and safety challenge to the company. The other issue that is likely to arise is the demand by Senegalese professionals to be paid at the same pay rate per hour as the expatriate staff. Pay discrepancies between local and expatriate staff will pose operational and organizational challenges. The last issue that may arise is conflict in culture between the foreign workers and the locals. The culture of the local people will pose a huge challenge to the company (Aas, Halskau sr, and Wallace 2009, p. 315).
3. Methods which might be used to mitigate them
There are various ways which the company could mitigate these issues in the context of an oil and gas operations strategy. On the demand by locals to be given first priority in employment, the company could overcome this challenge by recruiting the local populace for non-skilled jobs which are mainly manual in nature. The company could also engage in and finance corporate social responsibility activities to cultivate good neighborliness and be a good corporate citizen. On local fishing communities losing their fishing grounds, the company could compensate them. Since the cost of land in such areas is cheap, the company could overcome this challenge by paying the farmers for the areas acquired. This will not only solve the problem but enable the company to cultivate goodwill from the local population (Childers 2015, p. 1). On payment of staff, the company should implement a pay structure that is equitable to local and foreign staff. Local staff should be paid in such a way that they don’t feel discriminated as that would sabotage the company’s operations and create internal wrangles which could lead to higher costs in the long run. On cultural differences, the company could train foreign staff on local culture to enable them cope with any new challenges that they may face (Caputo and Souza 2013, pp. 36)
i) Supply challenges in the oil and gas sector
Most oil and gas fields are located in areas where there is poor infrastructure as the areas are usually remote or wastelands. Most of the equipment required in such areas are heavy and oversized and has to be delivered very fast. The financial implication of upstream activities on downstream activities is very high as downtimes will lead to huge losses that run into millions of dollars. Another challenge is that accessibility to the rigs is usually a challenge as companies cannot transport goods along major trunk roads and some are even located in offshore locations (Urciuoli, Mohanty, Hintsa and Else 2014, p. 50). It is very critical for an operations and logistics manager in charge of downstream activities to be innovative in transporting goods to rigs located in remote areas. Transporting goods and supplies to remote areas can affect efficiency in operations. One of the main logistics and operations challenges that Cairns Energy will face is keeping rigs actively engaged all the time. The cost of rig inactivity runs into millions of dollars. The other challenge is putting in place health and safety measures to prevent fires and oil spillage. The next challenge in operations and logistics is determining the lead time for moving equipment from one location to another (Silvestre and Dalcol 2010, p. 715).
ii) Maintaining Deepwater drilling operations’ costs and quality under control
Viable solutions must therefore be identified before commencing operations to keep rigs busy and avoid rig inactivity. The company could either hire a professional logistics company to oversee logistics in the oil field or maintain parts and supplies scientifically in which case supplies could be categorized as critical, important and for normal consumption (Scott 2012, p. 28). Categorization of parts is based on statistics of usage frequency. The best way of ensuring rigs are not inactive is by ensuring strategic cross-stocks are located where the rigs are located. The next challenge in operations and logistics is determining the lead time for moving equipment from one location to another. The cost of moving equipment should be included in the cost of each operation. The company must understand the local terrain very well and how customs operate. The company should factor the issues in determining the lead time in moving equipment from one oil field to the next (Ray 2013).
b) -Managing stocks and planning available capacity to ensure a 24/7 hour operation
Supply chain management is a very important component of logistics and operations management. Expenditure on third-party goods and services in the oil and gas industry exceeds 70% of the total expenditure. The company could explore outsourcing most of its logistics activities to firms that have a track record in that area. It is supply chains that compete in the oil and gas industry rather than individual companies competing (Scott 2012, p 28). To enable smooth operations the company must take certain steps to ensure smooth supply chain management. One of the very first steps is that the company must ensure early involvement of selected suppliers in the design phase. This is expected to reduce the cost per drilled foot through integrated planning by about 20 percent. The company should conduct an assessment of the equipment to be supplied with its selected suppliers as this would yield savings of about 20 percent of total costs. The company should enter into a long-term contract for maintenance activities which should be underpinned by a reward and risk strategy (White and Longley 2009, p. 79). This is expected to reduce equipment shutdown intervals and increase equipment uptimes. To fully derive the benefits of smooth supply chain management the company should develop a strategic framework for supply chain management. This kind of framework will provide practical tools and techniques that will be used to secure improvements and identify activities that could be executed across operational areas (Oke and Kareem 2013, p. 178).
In order to avoid huge costs associated with equipment downtime, regular supplies must be made to the offshore operations in Sangomar Deep, Sangomar Offshore and Rufisque Offshore once operations commence. The company could do this by using supply vessels to transport supplies to the offshore rigs. The company could either charter supply vessels or lease them from charter companies at affordable rates. This will solve one of the largest logistic nightmares that companies dealing in offshore drilling encounter in their operations. The company will, therefore, be in charge of scheduling and routing of the supply vessels. (Harris and Luftglass 2013, p. 1).
c) Health and safety mitigation measures
Health and safety in upstream operations is of critical importance to Cairns Energy. This comes in the wake of BP’s Gulf of Mexico incident in which several workers died and the resultant oil spill lead to an environmental catastrophe. The company was forced to pay fines running into billions of shillings. To overcome the challenge, Cairns Energy should put in place measures that would control the challenge. One of these includes, putting in place fire extinguishing infrastructure in the installation such as various types of fire extinguishers and fire blankets among others. Water hydrants and fire detection equipment should be placed also in strategic areas to detect and put out fires(Hussain 2005). Supply vessels should also be fitted with fire extinguishing equipment and oil spillage control capabilities. In addition, the company should develop a policy on health and safety measures which should be well understood by all workers in the installations. A code of conduct should be developed and fire safety measures placed in strategic areas. Fire management and oil spillage management measures should be tried and tested occasionally to ensure they are working at well each time. Each worker should be aware of his responsibility in case of fire or oil spillage (Hussain 2005).
Question 2: manufacturing (Production) and service operations Challenges
The main operational related challenge involves transporting supplies to offshore installation in remote shores. Other operational challenges includes leasing the right supply vessels and lastly managing employee challenges from the local community. Service related challenge involves ensuring critical supplies are available at the right time and at the right quantities. The next service challenge involves ensuring safety and health is upheld to avoid spillage of oil into the ecosystem and safety of all workers in the installation. The last challenge involves obtaining all necessary approvals and permits from the authorities (Modarress, Ansari and Thies 2016, p. 15).
To ensure offshore activities are carried out as planned and cost effectively, important supply issues in upstream logistics must be considered. Offshore drilling and production units located in remote locations need different types of support services to operate. These support services can only be provided by specialized vessels such as Anchor Handling Vessels, Offshore Supply Vessels, Rescue vessels and crew boats among others. It is important to note that offshore producing installations have demand that is more predictable and smoother than exploring installations. There are, however, certain levels of uncertainty in any form of offshore installations (Hussain 2005). Uncertainties in supply chain in offshore installations makes logistics a task that must be handled with a lot of care. Offshore installations require a constant flow of provisional supplies. Offshore installations have a limited amount of storage space and hence require frequent visits by supply vessels to avoid buildup of return cargo or shortage of critical supplies at the installation offshore sites. The company will have to rent drilling equipment daily and at very high rates to run the operations at the offshore sites. This equipment must be returned as soon as possible to the owners to cut costs and avoid high rent charges and penalties (Mcmullin 2001, p. 80). Offshore installations are usually located in close proximity to each other mainly because oil and gas discoveries are naturally limited geographically. It is also more beneficial to the company to have the installations close to each other as it is able to design lean and agile operations and logistics management plan that is highly responsive, flexible and costly effective.
Supply vessels will be used to transport supplies from offshore installations and the supply base in the value chain (Collins 1999, p. 29). Bulk cargo and deck cargo are the two main types of supplies that are ferried by supply vessels. Bulk cargo is usually transported at the below decks of a supply vessel while deck cargo is everything else that is transported on the deck of a supply vessel. The offshore installation storage facilities mirror these kinds of arrangements. The supply vessels are also fitted with fire management equipment to control any fire outbreaks in offshore facilities. The supply vessels are also equipped with the capability to control and clean oil spills. Supply vessels are, therefore, multitasking kind of vessels. They are designed to perform various types of tasks (Collins 1999, p. 29).
Most oil companies do not own supply vessels but rather obtain them through lease arrangements from owners of such vessels. The rate paid on such vessels depends on supply and demand variables; in that when demand is high the rates are high and vice versa. The rate also depends on features that have been fitted on the vessel, the length of the charter or lease period and location of the supply vessel i.e. where the vessel will be operating from. The oil company also pays harbor dues, bunkers oil and fuel for the vessel (Carr, Wedemeyer and Pearson 2012, p. 50). The supply vessel market is well developed and the company will be able to charter supply vessels for the long run or for the short run. One of the largest logistics costs that Cairn Energy will have to bear is the cost of chartering and operating a supply vessel. It should, therefore, be the objective of the company to get a vessel that meets the needed capacity at the lowest possible rate and ensure that its utilization is maximized to achieve cost savings. The vessel should maximize the number of loaded days at sea and ensure transport capacity is maximized at anyone given trip (Anderson and Boulanger 2005, p. 59).
Summary of key findings
Logistics and operational challenges abound in upstream sector in the oil and gas industry. One of the main challenges is ensuring rig inactivity does not occur as rig downtime could lead to losses running into millions of dollars. The company must ensure it maintains an efficient supply chain in the company to ensure no stock out of important supplies occur. Obtain a supply vessel through a lease agreement is indeed one of the key methods of cutting costs and ensuring operations go on without interruptions. Indeed, competition in this sector is determined by how efficient logistics and logistics operations are managed. The company should put in place efficient health and safety measure to prevent oil spills and fire incidents. Supply vessels should be equipped to enable them control oil spills and extinguish fires in off shore installations.
Cairn Energy will face a lot of operational and logistical challenges in its upstream activities and especially in its offshore installations. One of the ways to manage these costs is by developing a strategy framework for operational and logistics management. The company should bring on board a logistics company that is experienced in this area to manage the logistics aspect of the business (White and Longley 2009, p. 78). The company should be engaged at design stage to enable it manage its costs from the start. The company should also select supply vessels that minimize costs and meet other operational challenges. It is important to pinpoint that even though managing costs is very important, its reliability and ability to provide supplies as and when needed that matters as costs of rig inactivity run into millions of dollars (Aas et al 2009, p. 302)
This question has been answered
Aas, B., Halskau sr, Ø. and Wallace, S.W., 2009. The role of supply vessels in