Providing Value in Relationships of the Oil & Gas Industry
In all industries, building valuable relationships is an essential skill. Particularly in the supply chain process, that is getting goods or services from the point of origin to the end user, relationships need to be credible and reliable.
Research in the oil & gas industry reveals that “parties entering into a supply chain relationship sometimes feel dissatisfied within five to nine months after entering into that relationship”. The oil & gas industry faces the challenge of maintaining healthy business relationships while facing an environment with high price volatility and unique legal frameworks.
In this article, we will review how to provide value in contractual relationships in the oil & gas industry.
Learning from Best Practices
When drafting a contract for the supply of Oil Country Tubular Goods (OCTG), Nexen Petroleum and Tenaris wanted to build and maintain a transparent relationship based on clarity and trust. While the concepts of transparency and trust are implicit to any successful business partnership, the two companies explicitly listed all enablers of their business partnership.
Nexen and Tenaris selected integrity, transparency, clarity and trust as the enablers to guide the planning of their transactions. The companies built a relationship management plan that focused on:
- Performance management
- Process improvement
- Process planning through integrity, transparency, clarity and trust
Contract and Performance Management
Having a clear relationship management plan like the one from Nexen and Tenaris is very useful when drafting clauses in a contract. For example, if your process planning is based on transparency, then all processes need to have enough detail so as not to leave room for ambiguity. For example, include meaningful key performance indicators and other specific contract details.
By mutually agreeing on acceptable ranges of KPIs, parties can accelerate the drafting process of future contracts and change requests. Also, if they’re using contract management software, they’ll have a library of mutually-agreed clauses that can be used to populate new contracts and accelerate the drafting process. Additionally, supervisors can receive alerts when managers create contracts that have clauses that fall outside of pre-approved ranges.
Gary Crag, Procurement Manager at Nexen Petroleum U.S.A. Inc. pointed out that through transparency, the company built value in its relationship with Tenaris in terms of performance management. Their transparent formula adjustment and materials renegotiation was even able to reduce costs for Nexen by 15% .
Complex and highly technical contracts in the oil & gas industry need every ounce of help they can get to increase their chances of success. Certain projects, such as exploration and production, have an industry average 20% success rate.
As the example from Nexen and Tenaris clearly shows, it’s possible to provide tangible value in business relationships through guiding principles. More than just “fuzzy” concepts, integrity and transparency can act as catalysts in building mutually beneficial contracts and building value in relationships.
If you would like more information about how to optimize contract process for oil processing and refineries and gas Processing and Pipelines, learn about the oil and gas contract management systems and solutions from Contract Logix.