A global procurement chief at BP has said sending letters to suppliers demanding price reductions is “disrespectful” and “absolutely the wrong thing to do” for the oil and gas industry.
Leigh-Ann Russell, head of procurement and supply chain management at BP, did say the company was negotiating on prices with suppliers, where appropriate.
But Ms Russell, from Aberdeen, said the best way of delivering gains was to work closely with service companies to cut out the high levels of “waste” which continue to beset the sector.
Oil and gas companies have been cutting their costs in response to the recent oil price cash, caused by oversupply and a drop in demand brought on by the Covid-19 pandemic.
Stuart Payne, supply chain director at the UK Oil and Gas Authority, said during a recent webinar that some smaller suppliers had received letters from operators and large service companies ordering them to cut their rates by 35-40% overnight.
Ms Russell, who will become BP’s senior vice president of procurement on July 1, said it was “simply in no one’s interest” to employ such strongarm tactics and that “none” of those letters would have come from BP.
She said: “We were very clear during Covid-19 with our businesses, and I was with my team, that we would not be going out to the market and sending letters to people asking for a blanket drop in costs because we thought that was absolutely the wrong thing to do for our industry and the supply chain.”
Ms Russell said the supply chain is in a different place compared to the start of the downturn that struck in 2014, sparking job losses and business failures.
Six years ago, a lot of service companies had big margins, which meant there was plenty of fat to trim.
Oil and Gas UK calculated that operating costs were cut in half, to $15-16 per barrel of oil equivalent, between 2014 and 2016, and have remained at that level.
The supply chain is currently a lot learner and most companies cannot deliver significantly deeper price discounts without getting into severe financial difficulty.
However, Ms Russell believes there are some firms which are still making big margins that could threaten the viability of projects.
She said: “We are bidding and negotiating where it’s appropriate, but we’re doing that with a heavy understanding of where each of the supply chain companies is from a financial perspective.
“If we see a company in financial distress, we won’t ask them for rate negotiations.
“Getting prices right is going to be important for stability and keeping projects going in the short term but what we really need to do is come together and tackle waste.”
Ms Russell said the oil and gas industry still had “masses of waste” that can only be addressed in partnership with suppliers.
Companies are still ordering equipment that isn’t standard and which has a “gold-plated spin” on it, she said, adding that the industry could improve on its auditing and inspection programmes.
Ms Russell said: “If you’re a Schlumberger or another well services company, you maybe have Shell come and audit you and then the next day you have BP come and audit you on the same thing.
“That comes at a cost because you are tying up resources and stopping manufacturing to let these audits take place, so there needs to be a lot of industry collaboration, working with the supply chain to take costs out.”
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