After a half-decade of plummeting prices, the oil & gas industry can breathe easy once again as prices begin to rise. While the pressure to drastically reduce costs has eased, the need for cost discipline should not be cast aside. Suboptimal distribution planning continues to be a barrier to gaining more value in the oil & gas industry.
Every oil & gas company is unique, and with each company comes a unique distribution reality. While some companies may be content to manage their distribution planning with a 20-year-old spreadsheet from an unknown author, chances are that they are missing out on potential savings by not looking deeper at the possibilities. In fact, the more complicated the challenge, the bigger the opportunity for cost-efficiencies.
We spoke to Dennis Ostendorf, Solutions Director at Quintiq, to gain his insights on optimizing distribution planning in the industry.
How much of a problem is suboptimal distribution planning for oil & gas companies?
What we’ve seen in recent years with the new reality of lower oil prices and increased concern regarding emissions is that the margins have really dropped. This makes it crucial to optimize the entire oil & gas value chain. Both within and outside the oil & gas industry, we’ve seen that cost reductions of up to 20% can be achieved with optimizing distribution alone. In a recent webinar, my colleague Ian Tootell calculated that this translates to $43 million every day, just for the upstream oil & gas industry!
What are some of the most common roadblocks you commonly see in the planning process?
The biggest challenge in optimization is that you need to get it just right, otherwise it won’t add value. What I mean is that every company is unique – even companies that look very similar on the outside are actually quite different when you take a closer look at the details. Take a look at inventory as an example. In general, there are clear rules around inventory levels – it needs to be maintained between certain acceptable levels. But what if your specific company can be flexible in that? For instance, you are able to acquire additional temporary inventory so your tank top limit is less rigid than may be typical in the industry. If your optimization solution fails to include this specific rule, then you leave a lot of value on the table. Still, this is only a case of missed opportunity. An even worse scenario occurs when you don’t fully capture a specific business rule – this means your plans are actually not executable at all and the team has to constantly find workarounds.
Where is the biggest opportunity to add value to the business in terms of improving planning systems and procedures?
In the past, optimization in distribution hasn’t been much of a focus for oil & gas companies. A lot of optimization effort has been put into maximising production, especially in maximizing the efficiency of refineries. As long as there were high margins, this worked fine. Now with the continued emphasis on reducing costs across the value chain, we see a huge amount of potential in distribution planning where we encounter a lot of legacy systems and spreadsheets that are ripe for an upgrade.
What are the most innovative companies doing in terms of distribution planning that others can learn from?
Historically speaking, companies – especially within oil & gas – have been fragmented. They have a tendency to work in silos: one group is responsible for extraction, another for refinery planning, and yet another group for primary or secondary distribution. There is nothing wrong with this segmentation per se, provided that all these silos integrate well with each other. So instead of everyone optimising their own specific segments, an integrated planning solution allows for optimization across the board. Hence, the greatest value comes from an integrated approach across the supply chain.
Want more? Find out what senior planning executives at the world’s leading companies are saying about the challenges in oil & gas distribution in our whitepaper. It also gives insights on the capabilities needed to overcome these challenges.