Premier Oil

Premier Oil
Premier Oil to strike rich returns on contract management plan
The last five years has seen the longest sustained period of sub-$70 price oil for more than six decades. The result has been a significant change in the oil industry which has had a dramatic effect on both oil firms and their contractors, since around 70% of activities are outsourced are outsourced in some way. For leading independent producer Premier Oil, it meant less choice in the supply market as supply chains contracted, lowering buyers’ leverage with existing contractors.

Russell Dandie, global supply chain manager, says: “Since the oil price dipped below $60 or $70 a barrel the supply market has been more than a bit moribund, and the contracting capability has definitely diminished. The contractors that are left are either very large (Tier 1) or really small (Tier 3 or 4 or below). If you’re not careful, you end up becoming a price and quality taker, and the contractors can almost pick and choose their clients, especially where those clients are comparatively small.”

With annual group revenues of approximately $2 billion, Premier Oil operates in the UK, Brazil, Mexico, Indonesia, Vietnam and the Falkland Islands. During 2017, it brought the North Sea’s Catcher oil field on stream and made notable discoveries in the Zama oil field in Mexico via its non-operated investment in Block 7 where Talos is the operator.

New sector economics force rethink of contract management

As the supply market changed profoundly, it revealed how Premier Oil’s approach to managing contractor relationships could be improved. The oil and gas firm has historically invested very little in contract management and SRM, preferring instead to require even contractors delivering critical scopes to constantly re-bid for contracts, possibly every three years. This has long been seen within the industry as a means of accessing the lowest price for outsourced requirements. Longer term or strategic framework agreements did not feature in any significant part of the firm’s global or regional supply chains, Dandie says.

Given clients are “king” when specifying how scopes will be delivered, there is a natural end point where this approach becomes  less effective in driving down prices as the nature of the market changed. Contractors were being forced to endure minimal profitability or even bidding under cost as scopes and specification were left unchanged. Meanwhile, there was also a risk of further value leakage from contracts where the relationships were poor through a lack of systematic or strategic control from the client, Dandie says.

“We recognised that in the life-cycle of a contract, we were not putting the right measures in place. It was just about getting as quickly as we could to the “starting line” (contract execution) and thereafter letting the contract run. We needed to help the contractor manage how the contract is executed and be aware how the contractors’ view of us might impact that execution, as well as how we view them. People tend to forget that when they are used to a command-and-control approach,” he says.  

Dandie’s team saw that implementing effective contract management for Premier’s Tier 1 and 2 contracts should help differentiate Premier Oil from its competitors. Becoming a client of choice among contractors, and properly managing contracts, would offer benefits of between 4-8% on performance value when measured across cost, schedule, quality and health and safety commitments held within these contracts.

Engaging contract owners

However, the supply chain teams within Premier Oil needed help to get effective contract management in place. “Basic contract management was not seen as value-add or something that should be committed to.  Ownership of contracts was seen to reside with the supply chain teams across large parts of the business.  So, contract and supplier relationship management has largely been ignored as our contracting infrastructure did not lend itself to operationalising the concept,” Dandie says.

Having worked on supply management process and procedure prior to joining Premier Oil, Dandie was aware of State of Flux’s reputation in this area and approached the consultancy to become involved. “We were looking for consultants who had expertise and know-how, who have experience of doing this work not necessary in the oil industry, but in other environments that are largely outsourced but also work at low margin. These are the sectors that traditionally execute contract management in a professional manner and who tend to gain significant value from the investment, we didn’t see any other oil company expertise in this area.  We engaged State of Flux to help develop the process, the deliverables and the workshops and education needed to land a new core competence to our organisational skill set,” he says. 

State of Flux also helped to design a voice-of-the-supplier survey. It gathered responses from 40 Premier Oil tier 1 and 2 contractors for the UK Business Unit all of whom would play a part in the contract management process. The business was surprised by the results.

Listening to the voice of the supplier

“The business thought we were quite good at contract management. But we found the contractors did not share that view. It turns out they liked us because they saw us as a cash-cow. Clearly, we needed to be more robust in some relationships and have an open conversation with contractors regarding what good performance looked like,” Dandie says.

State of Flux also helped build a segmentation model for Premier Oil to determine which contractors to include in the contract management process. The segmentation tool has now been completely embedded within Premier’s Contract Management system, SCIMITAR, and is standard across all of its business units. The system links the segmentation tier to the need for various deliverables, for example, the production of contract briefs and contract management plans for tier 1 and 2 contractors.

The team has now carried out approximately 30 workshops and distributed State of Flux’s eight module contract and relationship management process to more than 200 people within Premier Oil.

Because the training has been ongoing since the 2Q of 2018, it is currently too early to see measurable outcomes so far, Dandie says. However, there is a general buzz of excitement through the organisation from the board of directors down to the executive committee and on into business units from this move towards a different range of interactions with our critical contractors, Dandie says.

Contract management performance will be measured against the value proposition on an annual basis. After two or three years of contract management, Dandie expects the team to work towards SRM with around 10 of its most important strategic contractors to capture aspects of the relationship beyond contract performance.

As volitivity in the oil price continues to play a significant role in determining industry fortunes, Premier Oil is preparing the groundwork for SRM with sound contract management. It will stand the business in good stead no matter what the future holds.

We needed to be more robust in some relationships and have an open conversation with contractors regarding what good performance looked like.

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