Learn how AI-powered procurement strategies bolster the oil and gas sector’s resilience against 2024’s record-breaking hurricane season.
The 2024 Atlantic hurricane season is proving to be one of the most intense on record, threatening to wreak havoc on the oil and gas industry. Potential infrastructure devastation, supply chain chaos, and economic upheaval loom large, especially for offshore and remote operations. In the US, 45% of oil refining capacity and over half of natural gas processing, as well as a fifth of crude oil production, is located near the Gulf Coast. According to Colorado State’s Tropical Weather and Climate Research Center, the Gulf Coast is the US coastline most likely to be impacted by a severe hurricane (Category 3 through 5). To withstand these challenges, oil and gas companies must take significant measures to fortify industry operations against impending disruptions, including having proactive conversations with key suppliers.
When it rains, it pours
This year’s hurricane season has already shown unprecedented levels of activity, with storms intensifying at a rapid pace. According to the National Oceanic and Atmospheric Administration (NOAA), there have been more named storms in the first half of the season than the average for the past decade. This presents a number of potential challenges for oil and gas companies.
For instance, a single storm can severely damage parts of offshore and coastal rigging equipment, which are difficult to replace on short notice. Offshore rigs are often located in geographically remote locations, making last-minute deliveries or staging additional inventory and safety stocks in nearby distribution centers or supplier warehouses either difficult or impossible.
Hurricanes can also disrupt coastal suppliers and create inventory issues for those relying on overseas shipping. This presents a massive headache for oil and gas procurement teams, whose role involves filling orders for spare parts and equipment service requests quickly.
Prepping for the season
To navigate these challenges, oil and gas companies are embracing flexible and autonomous last-mile logistics, including uncrewed aviation, warehouse automation, and so-called vendor-managed inventory (VMI). However, these approaches alone won’t solve the challenge of procuring or replenishing parts stocks immediately after hurricane-related damage or delays.
Supermajors, exploration, and oilfield equipment companies are turning to predictive procurement platforms to reduce the time between ordering and receiving parts, including re-pricing supplies during dramatic or unexpected shortages such as those that take place during an extreme weather event. By analyzing the past purchase data from previous hurricanes, companies can use predictive procurement models to help suppliers group, kit, stage, and bundle parts ahead of a potential hurricane, and in some cases, may even seek to pre-order sets of parts that are likely to need replacement following a severe storm. They can also align on a response plan with key suppliers.
Analyzing historical procurement data to evaluate responses to past hurricanes is crucial for fortifying operations – especially looking at purchase price variance (PPV) in parts following previous hurricanes. Was the previous response effective? Where were there shortages or fires that needed to be put out? What are the single points of failure or single/sole source parts? Are there patterns that can inform a more effective or efficient procurement response plan?
These are the questions companies should ask when developing and staging a basket of items for rapid reorders, shifting demand to alternative sources of supply in the event of a disruption, and identifying high-risk sources.
For procurement nerds reading this, Pareto analysis (which solely focuses on share of spend by supplier) may obscure these failure points. Ahead of a hurricane, it may be advisable to perform a Kraljic supplier segmentation analysis (which focuses on the optionality of suppliers by item) to identify the allocation splits for items that qualify as bottleneck spend. With this information, companies can effectively partner with suppliers to kit, stage, and pre-order relevant parts and services in relevant geographies for rapid response to rigs, pipelines, and facilities.
Conducting a geographical audit of the supplier’s production facilities is also essential. Procurement teams need to determine how many suppliers have facilities and sites that are likely to be impacted by a hurricane. For an effective geographical audit, it’s critically important to focus on physical production and distribution sites rather than the suppliers’ corporate headquarters, which means looking at internal shipping data rather than top-level spend data or solely leveraging third-party business identity data providers. Procurement should also assess which suppliers have an incident response plan that explicitly discusses extreme weather events.
The role of AI and ML
While gathering this information is essential, there is no better resiliency strategy than short cycle times with clear audit trails to tap alternative sources in the event of an unexpected crisis. In the event of an unexpected shortage of a critical part, shorter, auditable procurement cycles create the data foundation that allows teams to quickly pivot and source from alternative suppliers.
Predictive procurement technologies fortify operations in three distinct ways. First, by identifying alternative sources for parts, equipment, services and materials within an existing supply base of qualified and onboarded suppliers. Second, by enabling predictive pricing so teams can quickly negotiate and approve supplier offers, especially since pricing for parts may change suddenly during a crisis. Finally, predictive procurement leverages AI/ML to help perform rapid, multi-dimensional supplier selection decisions at the item level across a complex technical market basket that includes lead time, minimum order quantity, and INCOTERMS.
By enabling the procurement team to handle supplier data sheets from Excel and quickly cleanse, parse, and integrate offers into their systems of record and ERPs, predictive procurement technologies enhance resilience during extreme weather conditions like hurricanes.
In one case, a procurement team used predictive technology to source spare parts after extreme weather knocked out a plant for weeks. It was critical to find new sources of supply under existing contracts – in other words, quickly sourcing from suppliers in their existing base who had not been supplying these specific parts and materials previously. Using AI, predictive procurement technology was not only able to identify alternate suppliers who were already trusted partners, it also created the necessary data for a market basket and assisted in supplier communications needed to expedite and approve the purchase order.
Taking measures from top to bottom
To effectively prepare for hurricane season, procurement and supply chain management teams must adopt both top-down and bottom-up approaches.
A top-down approach focuses on broad and long-term strategies like dual or multi-sourcing, regionalizing certain supply networks, and building strong, strategic, win-win supplier relationships. This includes collaborative demand planning and integrated business planning, reviewing the impacts of previous hurricanes on inventory levels, and addressing both foreseeable hurricane impacts and ripple effects throughout your suppliers’ suppliers.
A bottom-up approach involves conducting a detailed impact assessment and creating a specific response plan for hurricanes for each geography. This also means working closely with key suppliers at the site level, staging critical replacement parts in advance, and establishing secondary and even tertiary suppliers for each site to handle unexpected shortages.
In any season, but especially during hurricane season, oil and gas companies must expect the unexpected. With the right insights, technology, and supplier network, companies can navigate any storm – even one that brings floods and grid outages – with clarity, calm, and resilience.
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