With global operations on the rise, procurement and supply chain professionals are grappling with the realization that many do not have the infrastructure in place to handle the level of usage that will be required for transporting equipment to the plays. Strategies need to be put in place to assess how they assure the delivery and transportation of equipment and ensure it does not become a task that requires huge expenditure and case delays.

Brian R. Smith answered a series of questions written by IFMR before the forthcoming Global Procurement and Supply Chain for the Oil & Gas Industry Conference, June 3-5, 2013 in Houston, TX. Mr. Smith shares his supply chain management experiences and top challenges.

The responses below strictly reflect the views and beliefs of Brian R. Smith and not necessarily those of Talisman Energy.

I recognize you worked as a consultant at PwCC prior to working for Chevron and Talisman. How did you generate an interest in pursuing a career in this area of the oil and gas industry?

Brian Smith: I started off life as a chemist and as I was asked to take on higher roles at Corning Inc, I realized I was quickly running out of tools in my management tool kit to deal with the challenges I was being asked to manage; which funneled me into returning to school to get my MBA. I can thank Enron for my career in Supply Chain as when I came out I was working in the energy trading space, when it was completely blown off the face of the earth due to the scandals. As I was looking for projects as a consultant, I was asked to play a small role in developing a global Supply Chain strategy at Texaco. I worked with some world class supply chain and transformation specialists that really took the time to mentor me and at the end of the day showed me what "good" looked like. The stigmatism of SCM at the time was that it was "Procurement", which is often viewed as two demotions from any good operating job. What few realize is that SCM is actually a great vantage point from which to be a part of the entire energy value chain. The Texaco project turned into a yearlong multi faceted engagement. With that in my experience set, and a bit of luck, my supply chain "career" took off from there. A career in supply chain matches up my career aspirations of "never being bored".

I know that you previously worked in for Chevron in Brazil for 3 years. What were the biggest challenges that you faced in relation to supply chain management during this time?

BS: As a stroke of luck I worked in the best expat location in the energy patch, Rio de Janeiro and the biggest challenge was focusing on the work at hand of starting up an offshore project at the expense of missing out on the "Marvelous City". Brazil is a very challenging place to do business due to the tax regime, local content regulations and the limited workforce with energy experience. From a pure supply chain perspective (i.e. getting things to location on time), if you knew the exact process required and followed it to the extreme, one could manage the supply chain fairly consistently. However, if you missed one small step or form, things would get stuck in the customs importation process. Additionally if you didn't understand the full extent of the tax regime you could incur some significant, unexpected tax obligations. So, the challenge was to get the right people on the team that had the technical, functional and local knowledge required to run this process smoothly.

Could you compare and contrast the supply chain management methods required in North America, as opposed to previous geographical regions that you have worked within?

BS: I think the US is a unique market for Supply Chain professionals. The business model allows supply chain practices to develop without heavy government or partner restrictions. I also find the US to be more analytically driven than other parts of the world that put higher value on relationships. I've seen a major service company in Canada go to great lengths to provide high quality service to a junior oil and gas company due to long standing personal relationships. I'm not saying this doesn't happen in the US, but it is more prevalent outside of the US. To be successful, it is important to understand these cultural differences as you work around the world. I find that in the regions that have relationship driven business models, negotiations do not follow the data driven, models that you often see in the higher functioning SCM organizations in the US.

What are the challenges that you are facing in your current projects and how are you overcoming them?

BS: At Talisman we have a significant gas portfolio in some of the best plays in North America. However, they are uneconomic at low gas prices, which don't appear to be recovering any time soon. Given that frame, our challenge is to leverage technology, lean concepts, operational excellence and category management to become a low cost operator, in order to return something better than our cost of capital. An operator can't do this independently, so we have to build supplier relationships in a way that can tackle this challenge jointly. If we are not drilling due to economics, the operators aren't working. In the 2010 - 2011 time frame, we saw an extreme escalation in fracing costs; our largest expense category. At Talisman we had to get innovative in driving costs down by bringing in dedicated crews, being smart about contracting strategies and looking at areas in the supply chain that were extracting a higher "rent" than reasonable.

Where will the industry be in the next 5-10 years regarding supply chain management?

BS: It is going to be interesting to see what energy prices do in the next time period. If both oil and gas goes higher, then we will see the market really constrict. This in turn will lead to more vertical integration, like we saw happening in 2010 where a number of operators reached back into their supply chains and took ownership of many service lines like trucking, fracing services, rigs, etc. Companies cited the high cost of services or the scarcity of supply as the reasons for vertical integration. From a supply perspective, having only one commodity peak at a time allowed the market to not get overheated. The other end of the spectrum will be if gas continues to stay low, then both operators and suppliers will need to find a way to drill into gas plays at a much lower price. In this scenario you may see stronger partnering across a number of supply chains on longer term commitments that would share profits more evenly across the value chain. In this scenario it will provide security against the boom/bust cycle that we often see in this industry.

Relating to your presentation, do you see joint ventures increasing in numbers in the future and do you see this presenting a new set of supply chain challenges and opportunities?

The simplest supply chain is when a company is the sole owner/operator of an asset. JVs can complicate matters through onerous approval processes and misaligned drivers (production vs. capital efficiency). We are also seeing a lot of Asian companies with tremendous buying leverage partner with western energy companies. I have not seen where the Asian companies have exerted their full buying power, but it will be an interesting inflection point when it does occur.

For more information, contact Michele Westergaard, Senior Marketing Manager at 312-540-3000 ext. 6625 or [email protected].

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