Supply and logistics partnering improve use of vessels, distribution

Gulf of Mexico alliance shares savings

Anthony Ross
Texas A&M University

Figure 1 depicts a general view of supply chain structure in the E&P segment. The initial focus will be on the upstream segment of the supply chain. [63,643 bytes]

PART I: This article is the first of a two-part series describing common offshore producing structure logistics and the supply chain replenishment structure in support of exploration and production. Part I summarizes a supply chain alliance between Mobil Oil and Energy Logistics for the provision of contract logistics services for oil production platforms operating in the US Gulf of Mexico.

Shared resource alliances designed to spread costs, risks, and rewards among participants are projected to play a prominent role in the management of the oil and gas industry's supply chain.

Consider the precedents in supply chain management (SCM) partnerships formed between UPS and JCPenney, or between Federal Express and Sun Micro systems. These partnerships also exist among the major airlines and in the containerized shipping industry.

It is no surprise then that such arrangements can quite possibly work in the E&P segment. In fact, a recent SCM al liance was formed in the North Sea to provide integrated logistics services for Conoco and BP Ex ploration Operating.

Many difficult strategic issues influence supply chain structure and the formation of alliances. Supply chain structure and partnerships must achieve the following:

Add value to a product or service by im prov ing distribution times, repair times, or time to market
Increase access to new market channels
Strengthen operations by improving ef ficiency or decreasing cycle times in the system (core competencies)
Add technological strength by improving the technological skills base of all members.

Opportunities for developing a competitive advantage may be developed at any point in the supply chain. This includes business function interface points (e.g. between shore base operations and supplier networks), internal logistics components (e.g. warehousing, such as transport between shore base and production platforms), and across the total supply chain (e.g. combined material transport from many shore bases to many platforms owned by competing E&P firms).

Houston-based Energy Logistics (ELI) and Mobil Oil have recognized such opportunities through partnering and therefore provide a robust and timely illustration of SCM principles in practice. In early 1997, Mobil Oil began considering outsourcing its platform re-supply operations in the US Gulf. By October 1997, Mobil was clearly sold on the concept of outsourced logistics service and resource sharing.

The company committed its entire complement of US Gulf shore bases and workboats to ELI as its third party logistics provider. This agreement was structured in a win-win scenario; Mobil provided the physical resources while ELI provided dedicated service management and developed the expertise for providing marine logistics services. SCM philosophy is quickly gaining acceptance and recognition as an approach for improving competitive advantage.

Production platforms

Production platforms are either manned or unmanned. Manned platforms are continually staffed with a typical crew size ranging from two to ten or more workers. The platform crew provides all required activities necessary to extract oil and gas from the ground and route it to shore-side facilities.

Typical activities include preventive maintenance, as well as monitoring and controlling the production process. Unmanned platforms are typically assigned to the nearest manned platform for maintenance and production control. Platform crews may be assigned to a variety of work shift schedules.

A typical work shift is seven days on and seven days off, working 12-hour days (or some similar format). Crew changes are usually performed by helicopter shuttle or crewboat transport to and from shore base operations.

Manned platforms generate a variety of logistics support requirements associated with maintaining the crew and production operations. These include deliveries of items such as potable water, fuel, lubricants, equipment, spare parts, and groceries. Due to the limited storage space available on the platform, regular (e.g. weekly) replenishments of many items are necessary.

In addition, emergency shipments may be required for spare parts in order to keep production on schedule. Besides performing platform delivery, marine vessels also transport waste products (used parts, refuse, broken tools) back to the shore base. Material flows are two-way - between the shore base and supplier network, and the shore base and platform sites.

Demand requirements vary by platform depending on the number of unmanned platforms maintained, the number of personnel required, equipment age, whether or not the platform is equipped with a water maker, and whether the platform is fueled by natural gas extracted during production or diesel fuel that must be delivered from shore.

Replenishment cycle

Supply replenishments are triggered by the platform superintendent (PS) or shore base logistics manager (LM) who schedules and coordinates all production and maintenance activities for his/her platform group.

The PS or LM identifies demand requirements, places replenishment orders with vendors for delivery to the shore base, and supervises the unloading of material upon its arrival at the platform. The cycle works similarly for exploration operations.

The shore base consists of docking facilities, warehousing, loading/unloading equipment, and administrative offices. The shore base dispatcher receives inbound shipments from vendors, stages it in warehouse space allocated to its destination platform, schedules boat loading, and coordinates with platform superintendents for the release of the boat to begin its delivery run.

A variety of crew and supply boats are available to provide platform delivery service. Boats involved in supply operations typically run fairly regular, scheduled routes. However, emergency runs and one-time deliveries to platforms occur as needed. Various vessel types are available and may be equipped to handle a variety of cargo characteristics including bulk storage tanks for potable water, fuel, and drilling mud. Each platform is equipped with cranes for loading/unloading cargo. The boats have pumps for unloading liquid bulk products.

Boats are capable of loading and unloading cargo 24 hours a day, depending upon the boat crew's familiarity with the platform, the weather conditions, and the platform docking facilities. Boat crews consist of a captain, first mate, and deck hands. Typical crew size is four to six men. Boat crews operate a variety of work shifts, with routes lasting up to two weeks in duration. Typical routes may last one to three days and are usually served by either small crewboats or large utility (or supply) vessels, depending on route characteristics.

Delivery cycle

A boat delivery cycle begins at the shore base where the boat stands by, awaiting orders and instructions while it is loaded. Bulk cargo such as potable water, fuel, and drilling mud are pumped into the boat's storage tanks at specialized loading sites. Other materials are loaded at the shore base utilizing cranes.

Upon release by the dispatcher, the boat travels to the sea buoy, where it begins its delivery route. At one of ELI's sites, the sea buoy is approximately 42 miles and usually three hours steaming time from the Morgan City (La.) shore base.

There are also seasonal and other weather-related influences on scheduling, and the general boat delivery cycle. Departure scheduling must satisfy the LM's and PS's general desire for all platform loading and unloading to occur during daylight hours. Safety is always the priority.

During late fall and winter seasons, there are fewer daylight hours, so boat scheduling must maximize the productive use of daylight hours at all platform sites for loading and unloading. Night loading may take place out of necessity, but not as a general practice for this firm.

Weather patterns also affect loading/unloading operations at the platforms. Rough waters, such as "choppy seas," make the operation very risky, since heavy-duty lifting equipment is used to load and unload the delivery boat. Also, darkness may complicate this operation.

In contrast with the general supply chain replenishment cycle discussed earlier, many firms operate platforms (in this case drilling rigs or production wells) in much shallower water depths of up to 200 ft. This implies that they are generally located no more than 20 miles offshore.

These smaller firms typically use smaller vessels to make several deliveries per day. Other small-sized firms may outsource all logistics functions in such a way as to "piggy-back" the major oil companies, but only on a space-available basis and subject to indemnity charges.

This method may be unreliable, because boat space may not be available to these small firms when needed. Such logistics service strategies are determined on an individual basis. The major point, however, is that the replenishment cycles and requirements remain very similar, regardless of firm size and operations scale.Therefore, opportunities to share resource capacity (such as unused boat capacities) in this scenario also appear attractive to the smaller companies.

The general supply chain replenishment cycle is comprised of several sub-cycles and interfacing activities which must be integrated to provide effective operations. These sub-cycles include, but are not limited to:

Procurement and purchasing by PS
Land-based order delivery to shore base by vendor
Warehousing and storage at shore base
The boat pickup/delivery cycle.

Efficient management and coordination of products and materials requires well-managed, reliable information flows for delivery schedules, crew schedules, boat schedules, supplier schedules. Only then can competitive advantage be sustained. It is clearly incumbent upon all participating parties, and not just the service provider, to allow coordination of information and material flows between the platform operations, shore base operations, and vendors.

Summary

Particular emphasis, in this first article, has been directed at understanding the supply chain structure while also pinpointing where, in this chain, sources of potential competitive benefit can be identified. A salient point is that while general E&P is expensive for large-scale firms like Mobil, they are also very expensive, although on a smaller scale, for smaller firms operating in the US Gulf of Mexico.

The production and logistical requirements are identical. This initial supply chain alliance between ELI and Mobil is a win-win scenario. ELI has achieved the following:

Developed into a leading provider of logistics services in the Gulf of Mexico with the technical expertise
Gained access to additional markets through its partnership with Mobil
Added value to the logistics service through improved planning and coordination of replenishment cycles for its other (non-Mobil) customers at competitive prices.

Mobil has remained focused on its core competencies, and receives a portion of the ELI's (non-Mobil) revenues generated from leveraging the unused boat capacity to outside customers.

Part II will discuss some results from an analysis of delivery route economics, which result from sharing assets, platform densities, and operations scale. Such analyses provided insight into the identification of true cost drivers, and therefore the development of better pricing strategies for ELI's logistical services, and more generally which supply chain components drive costs.

The concept of managing the supply chain by sharing resources has produced savings estimates of 24% for Mobil. This supply chain alliance between Mobil and ELI effectively has leveraged the production/logistics interface. ELI currently is expanding this supply chain concept throughout the Gulf of Mexico, consistent with its strategy to provide integrated logistics services to multiple E&P firms.

Author

Anthony Ross is an Assistant Professor in the Information Systems and Operations Management Dept. of Texas A&M University's Mays College and Graduate School of Business.