COVID-19 has dealt a massive blow to the energy industry, and national energy companies in the Middle East must pursue bold structural cost-reduction measures to mitigate the impacts and emerge stronger from the crisis, according to a new report by Boston Consulting Group (BCG). The report, titled ‘Procurement post COVID-19: A new reality for national energy companies’ explains how companies must act now to balance near-term supply chain management urgencies and redesign the supply footprint and supply capabilities.
BCG conducted the 2020 National Energy Operator Survey in April and May 2020 to understand the COVID-19 related supply chain challenges encountered by these companies. According to BCG findings, 75 percent of participants have encountered supply disruptions that have impacted operations and national energy companies have taken several prudent measures to safeguard the supply chain during this time of crisis. First and foremost, many have focused primarily on supply chain de-risking – 92 percent of BCG’s survey respondents have set up COVID-19 response teams, more than 75 percent of these are already engaging with key suppliers, and close to 70 percent have identified alternative suppliers for critical materials and increased inventory and monitoring. Secondly, most teams have initiated quick-win cash and control measures – 90 percent of respondents are actively negotiating down prices of metal-based items as commodity metal prices fall, while 70 percent are either considering or already working on reducing discretionary spend and repurposing existing wherever possible to defer future purchases.
“National energy companies need to consider structural cost reduction exercises. The majority of companies we surveyed have not yet initiated those changes; only less than 30 percent of respondents are working with their functional counterparts to identify alternative materials, reduce demand, and cancel non-critical procurement,” said Arun Bruce, Managing Director and Partner, BCG.
BCG analysis indicates that most service providers to the energy industry will likely experience cost deflations in the range of 20-30 percent over the next 12 months. This will be driven by declining demand due to steep CAPEX cuts, commodity price drop, salary/wage reductions, and financial distress within the supplier ecosystem which leads to reduced overheads and profit margins. CAPEX-related services and materials such as drilling and OCTG would see prices fall by 20% to 30% in the next 12 months. OPEX-related services will see marginal price declines while savings on OPEX materials including piping valves and fittings could be in the 5% to 15% range. However, there is an underlying need for caution since excessive bargain hunting could permanently damage the supply chain by forcing financially distressed suppliers out of business
Furthermore, as per the BCG study and analysis, the future of supply chains will be centered on three major objectives: supply security, cost efficiency and supplier innovation. To rebound and move forward, BCG has proposed five key levers that companies should adopt while pursuing these three objectives:
- Establish complete category, supplier, and COVID-19-related market intelligence: The current situation is highly dynamic, and it is critical companies have a comprehensive view of the market so they are equipped with precise information to determine how much reduction to seek and from which suppliers. As a result, they can develop differentiated strategies for achieving cost efficiencies across strategies.
- Forge stronger collaborations and partnerships with key suppliers and end user: Unlocking lasting supply chain value requires working closely with suppliers and end users. This enables the supply chain teams to take a hard look at the current operating model to reduce costs, accelerate innovation and drive continuous improvements.
- Embrace digital ways of working: COVID-19 has brought forward to need to digitize supply chain management and a comprehensive digital strategy will not only improve cost efficiency but also prepare these companies for future crises.
- Institute end-to-end supplier risk management: National energy companies need better visibility into both their direct and sub-tier supply chains. Several respondents have admitted to maintaining large inventories to mitigate the risks of supply disruptions and such strategies will not be viable in the coming years.
- Support local content and national supplier ecosystem: Supply chain disruptions brought on by the pandemic is providing a new impetus to secure supply of critical goods and more than 75 percent of respondents are interested in discussing localization and regionalization strategies for critical items.
“Although crises are known to cause significant economic strain, they also provide opportunities for growth and companies that flourish during downturns share common traits of preparation, preemption, growth orientation, and lasting transformation,” said Cristiano Rizzi, Managing Director and Partner, BCG. “Based on the 2020 National Energy Operator Survey and our independent analysis, we are confident that the supply chains of national energy companies will recover and rebound. But in order to achieve objectives in this regard, several key levers must be utilized to ensure they act in earnest, starting right now.”