As the president of the Energy business unit with logistics services provider DHL, Steve Harley pays close attention to emerging trends to gauge the health and direction of the energy sector. In the case of oil and gas, he sees reasons for optimism.
“I’m very pleased to see the industry is coming through what has been a difficult two years,” said Harley. “Energy is a very resilient industry and one which continues to adapt to the times and our customers’ end-consumers’ wants and needs.”
Logistics companies that serve the oil and gas industry are paying attention to changes in the industry, and DHL is “strengthening and preparing supply chains for what comes next,” continued Harley. “Innovation and a keen awareness will continue to be critical in the coming months and years, and we continue to invest in those areas, particularly developing deeper collaborative relationships with our customers and meeting changes such as the increased focus on unconventional oil and gas, the move from offshore to onshore and the consequent shift away from deep-water countries.”
Want to know which specific supply chain indicators give Harley reason to believe that growth is on the oil and gas horizon for 2018? Read on for excerpts from his recent conversation with Rigzone.
Rigzone: What are some of the most prominent supply chain indicators that provide clues about the health of an industry, in this case oil and gas?
Harley: At the macro level, oil demand growth is expected to exceed expectations and is forecast at 1.6 million barrels per day (mbpd) – versus a 1 mbpd average in the last 10 years. We anticipate that this will foreshadow an increase in supply chain activity. Adding to this positive trend, in terms of new projects, global final investment decisions (FIDs) are on track to double in 2017.
When there is an uptick in industry activity, we begin to see an increase in demand, too, for inventory – that is, parts – which indicates that stockpiles are now being depleted. This happens when parts needed for operations – whether that’s in exploration, extraction or downstream refining – have been stored as a result of declining activity, from being cut-back or just not needed to the same extent. When markets rebound, these stockpiled inventories are used first, then supply chains will quickly need to ramp up in order to fulfill demand. This is the observation we’re making now. However, this unprecedented change in the industry since late 2014 has meant a much higher focus on sustaining business in a low-cost environment so inventories will be better managed in future. Better procurement systems, increased visibility and improved catalogue management are the norm now.
We also see increased dialogue on value delivery and making supply chains more future-proof. That means working together with customers on more proactive coordination, integrating all parts of the supply chain from pre-procurement to final mile delivery, and generating a greater focus on increasing the customer experience – by that I mean doing things like positioning products closer to where the customer needs them to be, actively engaging with them and increasing service levels in ways that bring greater value.
Rigzone: What are some of the clearest oil and gas indicators you’re seeing nowadays?
Harley: What we’re seeing now is a shift from a high cost of production offshore, to onshore and unconventional energy sources with rapidly falling break-even costs. Technology has had a huge part to play in that. We have also just seen the oil majors release their Q3 results, their best since 2014, and they are generating very healthy cash flows – despite the continued depressed oil price, which in the industry people are now treating as the new normal. Perhaps more obviously, in recent times there has also been quite a shift from oil to gas. That’s not to say gas will take over from oil in the long run, but it does indicate a change in the ratio of demand for different energy sources.
In the $100-a-barrel days, 80 to 90 percent of oil majors’ profits were generated by upstream activity, but now we’re observing more balanced revenues across all their businesses. It looks like diversification and an investment in innovative processes is paying off.
There has been a big change in the landscape in the past 18 months or so, too: 2017 to date has been the biggest year on record for oil and gas companies diversifying and merger and acquisition activity. This says to us that companies are really searching for and driving value creation closer to the point of consumption: meaning downstream refining, chemicals and gas station retail. New energies also have a part to play here – the cost of renewables has reached parity, and that means that the competitive entry of wind and solar into the energy mix has taken the gauntlet to traditional energy. Diversification and efficiency are major drivers now.
Major players in international oil and gas have responded through a shift in their geographical focus – for example, shale in the U.S. and Argentina. However, they’re also keeping a strong presence and making good developments in the Middle East.
DHL is supporting customers in making these shifts – to alternative energies, new markets, and efficiency programs in traditional energy – by working in collaboration with them on innovative solutions to their shifting supply chain needs. We need to be ahead of the curve here, staying agile, and working hand-in-glove to ensure supply chains keep – and in some cases even drive – the pace of change. In doing that we’re focusing more on retail, chemicals and downstream and developing stronger logistics services to support customer needs.
Rigzone: What impact has this year’s active hurricane season, particularly Harvey, had on the oil and gas supply chain?
Harley: We were devastated to learn of the impact on the communities in the South due to the extremely harsh hurricane season. Many of our colleagues have, and do, live and work in Houston and Miami and surrounding areas. It was a very tough time and we know people are still rebuilding and recovering. From a supply chain perspective though, the hurricane there had limited impact. There were some emergency deliveries to get facilities back up and running quickly, but overall, with a few exceptions, most production downtime was just a few days. Some plants used that downtime to do additional maintenance. Output volumes for some facilities have been suspended for some time, and of course offices for some of our customers were badly affected. But it’s a true testament to the resilience of the communities and the industry they work in that it was really back to business as usual very quickly.