Logistics And Operations Management In The Oil And Gas Industry - A Case Study Of Cairn Energy PLC Essay.

1. Explain theoretical and practical aspects of logistics and operations management in the oil and gas industry.

2. Examine the difference and similarities in logistical and operational problems and solutions between service and manufacturing industries.

3. Determine methods of planning and organising efficient operations network.

4. Analyse behavioural problems arising from work organisation and methods to mitigating them in the context of operations strategy 

Behavioral issues from oil and gas operations strategy

The Cairn Energy PLC is an independent company that is responsible for oil and gas exploration and development. It is Europe’s one of the most leading organization and is also listed on the London Stock Exchange. This organization is continuously working to discover and develop oil and gas reserves in several locations around the world. This company was established in the year of 1981 by Sir Bill Gammell who was a former international Rugby player (Cairnenergy.com., 2017). In its initial days, the operations of this company were limited in USA. Later it was included in the London Stock Exchange in the year of 1988. After that the organization expanded into UK North Sea and other countries such as Spain, China, Australia, Papua New Guinea and Vietnam. However, as mentioned by Ablo (2015), the expansion of the organization was started after a substantial gas discovery in the Gulf of Mexico in 1993. It was followed by another gas discovery at Sangu, offshore Bangladesh near Chittagong in 1996.

In spite of its strong background, the organization is unable to make profits in recent times. Cairn Energy PLC experienced a loss of $556 million in the fiscal year of 2013 which was followed by a loss of $400 million in 2014 and a loss of $500 million in the 2015 (Cairnenergy.com., 2017). Therefore, it is clear that the organization is doing something terribly wrong which is not allowing it to gain profits. Therefore, this report will review the theoretical and practical aspects of Cairn Energy’s logistic system. Besides, the challenges of the same industry related to manufacturing and service operations are also described in this report along with a proper recommendation.

Supply chain operations or logistics operations in oil and gas industry includes five stages which are production, refining, transmission, storage and distribution. From figure one, it can be stated that in order to deliver oil and gas products to the consumers, oil and gas companies have to explore oil and gas resources and then refine them. Then the products are delivered to the end users. According to Yusuf et al. (2014), oil companies require a lot of vendors so that they can continuously re-supply their logistic system. Within the logistic system of oil and gas companies, exploration includes seismic, geophysical and geological operations. On the other hand, operations related to production include drilling, reservoir, manufacturing and facilities engineering. The method of refining is a comparatively complex method where its output is the input to the market.  In the case of Cairn Energy PLC, logistic operations of the organization include local contractors and partnership with other companies. Cairn Energy PLC mostly focuses on executing drilling campaigns each year (Urciuoli et al. 2014). The organization has heavily invested in the local contractors with an aim to increase profit through low manufacturing cost. The areas where the organization is running a drilling project, nearly 15% contractors are domestic where rest of them is non-national. Once the oil is extracted, it is then transferred via large tank barges and pipelines established underground.

Maintaining deep water drilling operations cost and quality

Oil operation strategy on land needs drilling fluids (it is also called as mud) that are injected into the wellbore to lubricate the drilling bit. According to Ford et al. (2014) it is expected that these fluids will be captured in lined pits for dumping. However, most of the times, they are spilled and speckled around the well pad. On the other hand, offshore oil spills which are a regular incident in oil and gas industry are responsible for affecting marine mammals via direct contact inhalation and ingestion of toxic oil. These inhaled and ingested chemical are capable to damage organs of the animals such as liver, kidney and brain. On the other hand, it can also cause severe damage for humans by facilitating cancer. It cal also damage immune system and lead to reproductive failure.

However, for Cairn Energy PLC, it cannot be said that the organization has behavioral issues to the environment. The management of Cairn Energy PLC has integrated its decisions with chain of their consumers and suppliers. In this method, the management of the organization has developed an effective supply chain management that can easily meet the need of the consumers and can satisfy stakeholder relationship. However, it is true that they will have to follow the governing legislations related to environmental sustainability to make sure environment is not harmed through their operations. As mentioned by Chavez and Ramaswami (2013), to make sure that there is no behavioral issue, the management of the organization has appointed security advisor for its HSE project.

In order to minimize the cost of deep water drilling, any oil and gas company can undertake the following steps.

The oil and gas companies can use two of the most useful cost reduction drivers which are learning curve rigorous portfolio and optimization planning at all levels. These will help prevent overtime and will help make the learning curve less steep (Ablo 2015). Optimization can accomplish up to 25% cost reduction in the average cost per well. Three major element of this plan would be maintaining a stable drilling portfolio plan for three years, stabilizing well delivery plan for the entire drilling portfolio and clustering similar wells to develop repetitive works for the drilling crews.

The management can also standardize and simplify well to minimize unit cost. This method has the capability to reduce the drilling cost up to 15%.

Lean initiatives can be used to reduce or eliminate non-productive time (NPT) and enhance efficiency. This process is a combination of several smaller efforts which are assumed to deliver at least 5% to 10% cost reduction in total delivery costs (Tao et al. 2015).

Rigorous performance management can also be used to invigorate the performance rive and can reduce nearly 10% of the well cost.

If there is no transactional discipline, then it would hurt the procedure of managing the stocks in an oil and gas company. This policy will always make sure that all the equipments are properly moved, stored, shipped and returned. This system will also help to keep a record of all the items that are consumed in the company inventory system.

Managing stocks in oil and gas industry

If a third party organization is given the responsibility to count and manage inventory, then it is necessary to label every item properly and clearly (Shuen et al. 2014). It will ensure that nothing is forgotten. This method is most important when the facility is in non-productive stage. Labels that are properly printed and easy to read will also help to change and item as per requirement quickly and efficiently.

If an oil and gas company finds that its inventory management is not working properly, then this effective method can be used. During the times of normal operations, it is important to re-count ten items per month that were counted in the preceding month. If any variances are found, then another sample must be run and counted (Sadaghiani et al. 2015. A number of variances of the re-count must trigger a complete re-count of the last month’s inventory count. If a third party organization is managing the inventory, then during a physical inventory count, managers must check all the variances on a regular basis. This will make sure that settled prospects are met.

All the employees related to inventory management must understand the method of classified inventory. Appropriate inventory classification must be documented in an organization’s policy to enhance accuracy of the inventory.

Inventory management can become efficient with the help of technology. For example, rugged handheld devices can not only save time, but also can be programmed to stream data unswervingly even in distant locations. Besides, programs like RigServ’s Power BI can deliver real time access to dynamic and actionable reports (Saad et al. 2014).

An organization, operating in oil and gas industry must implement a schedule for cycle counting for all the items in the inventory, every calendar year. Those items that have more stock turns must be counted regularly. However, items that are critical to operations should also be counted on a regular basis (Mangan et al. 2016). In the case of an offshore or onshore drilling rig, the storekeeper or materials man must count particular number of items each week to fulfill yearly need of complete count.

Reports related to stocks are extremely important as it truly affects a business. From any organization operation under oil and gas industry must use invest in intelligent systems and reporting that help to identify probable issues become them become critical.

For any long-term health and safety issue (Oil spillage), an oil and gas organization must understand the underlying reason of that issue. This suggestion is provided by HSE in its offshore strategy (Kastalli and Van Looy 2013). This means training all the employees so that they know all the safety methods to minimize any type of problem.

Inspections related to health and safety on oil and gas rigs always involve representatives of workers. Therefore, it is necessary to interact with the workforce in order to gather a better knowledge about the risk.

Organizations must continuously learn and develop its method and procedures. Oil and gas companies, related to health and safety issues must not be any exception. It is important to listen to delegates and learn from practical experiences (Heizer and Barry 2013). It is also necessary to use updated safety equipments and risk evaluation software as ignoring them can cause tremendous risks to the workforce and external people.

By analyzing data related to health and safety, an organization can gain better understanding of where probable hazards can occur. It will help an organization to establish solutions to prevent unwanted incidents before they even take place.

Kastalli and Van Looy (2013) stated that not all oil wells has large facility of oil and if such locations are selected, where there is less oil, the success in exploration cannot be attained up to the standard set by the organization (Halsey 2016). Moreover, failure of the evenhanded portfolio business model and loss of shareholder buoyancy are some downbeat impact of this challenge.

According to Garcia et al. (2014), spontaneous preservation is imperative for the augmentation of the project performance. However, deficiency of these safeguarding results in cost anxiety in the industry both in provisions of manufacturing and carrying it through logistics modes. Moreover, as most of the oil wells are in the foreign countries, Cairn Energy PLC, have to align their business objectives with that of the foreign country’s legislation in order to transfer their business from one place to the other. The misalignment can result in huge loss in the business as they are dependent on these countries.

The 2015/16 Senegal drilling took place in the African state and it is measured as unbalanced political circumstances by business experts. In these political susceptible countries, ecological legislation is represented by soft law and due to less scientific improvement cost of manufacture is high (Cairnenergy.com 2017). The refinery section cannot be installed in these places due to lack of resources and thus have to transfer to other refineries. This also leads to extra cost in supply chin apart from the delivering oil to the final consumers. Moreover, the roads and infrastructures are underdeveloped in these nations that results in delay in oil supply.

In the oil and gas industry, it is tough to find out skilled workers, especially in Nigeria and. Therefore, Cairn energy PLC is forced to continue their operations with less skilled employees. As a result, chances of oil spillage and explosion are always increased. The management of the organization will have to select qualified people for supply chain management and other service related operations.

In the term of service operations, ecological problems are tending to put biggest impact on Cairn energy PLC. Resources and non-renewable and crude oil has become fundamental to the people; therefore it is not possible to omit it from the regular use of society (Fernie and Sparks 2014). Therefore, resources are consumed continuously and the availability is getting lower continuously.

In order to avoid IKM (Information Knowledge Management) Cairn energy PLC has focused on business joint ventures (Dyckhoff et al. 2013). It is causing number of problems among the business partners which is in turn affecting the service of oil and gas products.

If Cairn energy PLC want to eliminate or minimize the issues relate to manufacturing and services, then it will have to alter its organizational strategies. Some methods through which the organization can gain success are hereby mentioned below.

• It is essential for the organization to acquire skilled employees and personnel for operating purposes. It is obvious that if the people working in the organization know their jobs properly, then the chances of problems are automatically reduced. If the management in unable to find such employees, then it can facilitate high level training programs to train existing employees.
• The management of the organization will have to restructure its supply chain management procedures. It will help to mechanize oil supply operations and information sharing. On the other hand, it will also allow the organization to avail web servers that in turn will help to claim revelation and sensible association.
• It is always found that corporate communication plays a major role in shaping efficiency of an organization. If the management of Cairn energy PLC can use appropriate information technology, then they will be able to make sure proper knowledge sharing with the stakeholders.

Conclusion

In the end, it can be concluded that in spite of being one of the leading companies in the oil and gas sector, Cairn energy PLC is facing some major issues within their operation management. That is why; the organization is also facing major losses from past few years. In both of their manufacturing operations and service operations, methods are procedures are not well structured. Currently the oil and gas industry is already facing issues because of lower oil prices, in this situation if the organization does not alter its processes, then it will tough for them to survive in this competitive landscape of oil and gas industry. In order to help the organization to deal with all the issues, some recommendations are provided in the report. If the management of the organization can implement those strategies, then their most of the problems would be resolved. Besides, the management can also follow the strategies of other companies to deal with its issues. 

References 

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