Case Study: BP’s Procurement and Supply Chain Management 1) 4-5 pages written response* outlining the results of their analysis of the case questions. Any data (e.g. academic articles,

Case Study: BP's Procurement and Supply Chain Management

1) 4-5 pages written response* outlining the results of their analysis of the case questions. Any data (e.g. academic articles, case, industry journals, periodicals, videos, or other sources of relevant information) relevant to the case and/or question response should be included.

2) Power Point Slides

Case Study Questions

Do you recommend the consolidation effort of PSCM? Why or Why not? Justify the answer and include a plan of action if you decide to consolidate the pipe inventory. The plan should include the following points:

1. A breakdown of current inventory carrying costs on an annual basis using the information provided in the case study. What information is missing that would be helpful? Include any assumptions you make such as fill rate and inventory holding costs.

2. Develop a strategy for consolidation or standardization that includes which pipe specifications will be kept and which specifications will be excluded and justify your reasoning. The plan should include expected annual cost savings, improvements to inventory management, and a plan to phase out or dispose of obsolete inventory if applicable.

3. There are two groups that will likely oppose such an effort: BP engineers working on the various projects and joint-interest partners that help fund each project. Describe how you would approach the different groups to obtain approval for your consolidation plan. Describe the drivers that each group faces and identify potential points of conflict and how you would overcome such opposition if challenged

The Southern Inspection master service contract expires in four months. Make a recommendation for or against the Louisiana relocation effort. This recommendation should include the following:

1. Propose an evaluation process and scorecard, along with any performance metrics that may apply. Perform a financial health analysis on all the suppliers using the available information in the case. When financial statements are not provided, what other methods can be used to better understand supplier health? How does this information or lack thereof, weigh in to supplier selection?

2. Identify the locations that would be suitable. Justify why the site or sites were selected.

3. Identify the switching costs from the incumbent supplier. What risks are involved when switching suppliers? How will these risks be mitigated?

4. How does the pipe inventory consolidation agenda play into the relocation effort? Would the outcome of one action affect the outcome of the other? Why or why not? If relocation is recommended, should both inventory consolidation and relocation efforts take place concurrently? If not, which should take precedence and why?

Due 4th March 2023

Academic_bp-cscmp-case-study.pdf

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CSCMP ACADEMIC CASE STUDY SERIES

Case studies can supplement a course and be used to teach application of supply chain

management concepts to real-world situations. Others can use the case studies to learn

about supply chain challenges and to analyze the situation to develop solutions.

BP’s Procurement and Supply Chain Management

An Academic Learning Case Study written for the Council of Supply Chain Management Professionals

Written by: Arunachalam Narayanan, Texas A&M University, College Station, Texas Malini Natarajarathinam, Texas A&M University, College Station, Texas Brandon Winn, Procurement & Supply Chain Management, BPs

Jeffrey Kirkpatrick / Dallas Baptist University Order # 82146 / Order Date: 1/5/2023 Copyright

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BP’s Procurement and Supply Chain Management

This case was developed solely for the purpose of classroom discussion. Some details of

the case have been disguised. This case is not intended to serve as endorsements, sources of

academic or business data, or illustrations of effective or ineffective management of the

personnel or company.

OVERVIEW OF BP

BP p.l.c. is one of the world’s largest energy providers of fuel for transportation, energy

for heat and light and petrochemical products for everyday items. BP has interests in both

upstream and downstream segments in over 100 countries worldwide making it a fully

integrated energy company. Upstream refers to finding and extracting crude oil and natural

gas from deep underground reservoirs. Downstream operations consist of refining and

marketing oil and gas into usable consumer products.

The United States subsidiary of BP p.l.c., BP America Inc., is one of the nation's largest

producer of oil and gas. They own and operate oil and natural gas fields, refineries, chemical

plants and lubricant processing facilities in 22 states that are worth over $40 billion in fixed

assets. BP America has both onshore and offshore drilling operations in the United States.

This case focuses on upstream procurement activities in the Gulf of Mexico. Figure 1

depicts BP’s offshore platforms. Assets in the development stage have project teams and

robust drilling programs to bring newly discovered oil and gas to the market. Once "first oil" is

achieved and the asset is fully commissioned, it transitions to the production group that

operates the newly drilled wells. Overall demand for drilling products and services decreases in

the production stage. A typical oil field in the Gulf of Mexico can produce for up to twenty

years or more before the reservoir is fully depleted and the asset is decommissioned.

Jeffrey Kirkpatrick / Dallas Baptist University Order # 82146 / Order Date: 1/5/2023 Copyright

BP’s Procurement and Supply Chain Management

Figure 1. BP assets in the Gulf of Mexico

BP’S PROCUREMENT AND SUPPLY CHAIN MANAGEMENT

The Procurement and Supply Chain Management (PSCM) group of BP America is a

partially decentralized organization. Their function is to develop plans for the management of

third party spend and to motivate and engage the broader BP workforce to achieve maximum

value from suppliers and contractors. Within their Gulf of Mexico operations, BP spends about

$3-$3.5 billion on third party suppliers.

The goal of PSCM is to achieve maximum value from third party spend while mastering

the associated risks. To deliver this goal the group must leverage BP's scope and scale by

developing foundational and strategic PSCM capabilities such as standardization, aggregating

demand, building strategic relationships, and developing supply chains in emerging economies.

The PSCM group is responsible for sourcing all goods and services required for drilling and

producing hydrocarbons.

Jeffrey Kirkpatrick / Dallas Baptist University Order # 82146 / Order Date: 1/5/2023 Copyright

BP’s Procurement and Supply Chain Management

Figure 2. Pipe placement in the wellbore

A key product category for BP's business is steel pipe that is cemented into the drilled

well to protect and isolate geological formations from collapse and contamination. The other

purpose of the pipe is to allow hydrocarbons to flow from the reservoir to the wellhead. Well

depths in the Deepwater Gulf of Mexico region are often 25,000 feet from the ocean floor

down to the reservoir. This product category is known in the industry as Oil Country Tubular

Goods (OCTG). The terms OCTG and pipe are used interchangeably throughout this case. Figure

2 illustrates pipe placement in the well and the corresponding name of each pipe section.

There are three general classifications of OCTG material: carbon, alloy, and chromium.

Carbon pipe is of a lower grade and strength, and is often used in onshore wells of low criticality.

Wells in the Deepwater Gulf of Mexico have high pressures and aggressive corrosion conditions

requiring more expensive high grade alloy and chromium pipe for corrosion resistance.

Jeffrey Kirkpatrick / Dallas Baptist University Order # 82146 / Order Date: 1/5/2023 Copyright

BP’s Procurement and Supply Chain Management

Wellbore placement is noted in Figure 2. Each joint of pipe is mated together via male

and female threaded connections machined onto each end. When a section of the well is

drilled and ready for pipe placement, workers on the drilling rig vertically stack the pipe and

lower it into the well one by one by twisting each connection together with large iron tongs.

After being lowered and set into the well, cement is pumped through the pipe and then

pushed out the bottom and up the sides between the outside of the pipe and the rock. After

the cement is dry, the next hole section is drilled.

DOMESTIC OIL AND GAS INDUSTRY

Since 2003, there has been an increase in drilling activities both in the US and around

the world. As the selling price of oil and natural gas increases, more capital were available for

drilling projects. According to the America Petroleum Institute (API), completion of US oil and

gas wells have consecutively increased since 2003, and in 2014 reached the highest levels in

nearly 35 years. The following figure shows the number of US oil drills versus the West Texas

Intermediate (WTI) crude oil price.

Figure 3. US oil drilling rig count versus WTI crude oil price

Jeffrey Kirkpatrick / Dallas Baptist University Order # 82146 / Order Date: 1/5/2023 Copyright

BP’s Procurement and Supply Chain Management

The upward trend in drilling has put a strain on the OCTG supply chain. According to

one supplier of pipe, the total US OCTG inventories were relatively low at about four months'

supply (or 1.2 million tons) at one point of time. Wary of fluctuating steel costs, pipe

distributors have also kept inventory fairly lean in case of a price drop. These developments,

coupled with the capacity limits in the OCTG supply chain, results in long lead times for the end

user and forces energy companies such as BP to carry large amounts of inventory to meet the

drilling demand.

SOURCING PIPE AT BP

Since OCTG accounts for only one percent of the global steel market, the manufacture

of pipe for the oil industry is scheduled at the steel mills' convenience. The recent economic

boom in China and India caused steel producers to focus on metal goods used in building

construction and the automotive industry (the two largest users of steel). This bias toward

other industries and the scarcity of raw materials result in 2 to 24-month lead teams for

certain OCTG, making demand planning at BP especially difficult.

While steel pipe may sound like a commodity, metallurgy and manufacturing quality is

paramount. BP carefully selects steel mills located in the United States, Europe, and Japan

capable of manufacturing API standard pipe grades with the engineering ability to develop

unique metal alloys set by BP's own standards. Only a handful of steel mills meet this criterion.

To help ease the inventory burden to BP, a single domestic distributor that represents

most of the selected steel mills is utilized. The distributor will only carry products manufactured

to API specifications; any custom pipe made for BP is purchased directly from the mill. The

agreement with the distributor allows for unused or defective products to be returned,

preferred pricing, and consignment-based inventory. When custom pipe is ordered, BP owns it

at the time of manufacture. These direct mill orders are non-cancelable and non-returnable.

Jeffrey Kirkpatrick / Dallas Baptist University Order # 82146 / Order Date: 1/5/2023 Copyright

BP’s Procurement and Supply Chain Management

A further complication to the purchase of pipe used in the Gulf of Mexico is the

threaded connection itself. Premium threads are proprietary thread designs manufactured by

select companies. These proprietary thread designs achieve a gastight metal-to-metal seal that

standard API threads cannot. BP has standardized on two brands of premium threads for pipe

used in offshore wells. These premium threading companies, Seal Tight and Interlock, have

strategic relationships with either the steel mill or distributor. Most pipe orders specify the

thread type so the threading operation is performed at the mill. However, there are some

instances (less than 15 percent) where the pipe is received plain-ended, and BP is responsible

for having the pipe threaded at a local Seal Tight or Interlock facility.

ORDER PLACEMENT PROCESS

The order placement process of pipe for drilling operations involves the following steps:

First, the engineer defines the pipe specifications after analyzing the drilling location.

The specification includes size, weight, length, grade, and connection types based on the

pressure, corrosion requirements, and well depth. Most of the pipe specifications are based on

API standard grades carried by the distributor. However, exploratory wells present a high level

of uncertainty and sometimes require engineered solutions beyond any standard grade of

pipe. In these instances, BP must work directly with the mill to develop a solution.

The engineer provides these specifications to the materials coordinator (buyer) through

an internal requisition process. The materials coordinator then places the order with the

distributor based on pre-agreed terms and pricing in the master contract. In most cases, BP

would receive staggered shipments of its pipes. For example, if the project requires 100,000

feet of a specific pipe, they would receive 20-40% of it in the first shipment based on lead time

and rate of consumption and accept the remaining quantities in subsequent shipments. In

cases of unique purchases, the approved mills will submit proposals and a purchase order will

be awarded to the selected bidder.

Jeffrey Kirkpatrick / Dallas Baptist University Order # 82146 / Order Date: 1/5/2023 Copyright

BP’s Procurement and Supply Chain Management

Once the order is placed, the domestic distributors schedules the production in steel

mills based on pipe specifications, availability of capacity in the steel mill, and its threading

capability. The pipes are mostly ordered on the basis of consignment, while in some cases BP

owns the inventory. The steel mill after receiving the order from the distributor, places it in the

long production queue based on the priority of the request. After production, the pipe is

shipped to storage yards in Houston. If a domestic mill manufactures the pipe, it is shipped via

rail car to Houston and unloaded directly into the yard, or placed on a truck that delivers to the

yard location. Pipe ordered from foreign mills is shipped into the Port of Houston where it is

then trucked to the storage facility. In one case, airfreight was used to transport a very urgent

order at a cost of $1 million. Approximately 60% of all OCTG is ordered from foreign mills.

STORAGE, INSPECTION, AND SHIPMENT TO DRILLING RIGS

BP stores their inventory in a third-party facility located in Houston that specializes in

pipe maintenance and inspection. At the storage facility, pipe is inspected using EMI

(Electromagnetic Inspection) and FLUT (Full Length Ultrasonic Testing) techniques to identify

the presence of any manufacturing or stress induced flaws. Pipe inspection must be performed

at this stage of the supply chain because steel mills will not inspect pipe to the standards

required by BP because the process is too time consuming.

Although the storage facilities are not owned or operated by BP, safety of the workers

is the number one priority. BP pays a premium to have its own segregated section of the pipe

yard with specially trained contract personnel to handle the movement of pipe inventory to

and from the inspection facilities. Since pipe is kept in storage for extended periods of time,

corrosion prevention becomes quite important. To maintain the integrity of the pipe, they are

stored at least 18 inches above the ground and stacked up to no more than six feet. The six-

foot height restriction is due to an industry safety code that requires personnel to be tethered

in a safety harness. Pipe can be stacked up to ten feet if a tie-off is available. Recycled plastic

Jeffrey Kirkpatrick / Dallas Baptist University Order # 82146 / Order Date: 1/5/2023 Copyright

BP’s Procurement and Supply Chain Management

timbers are placed between each stack and the threaded portions of the pipe (most

susceptible to corrosion) are protected by composite thread protectors. The racks are

constructed so that the pipe is slightly slanted to allow for water runoff. Such racks cost

approximately $1,500 to $2,000 to construct.

When the operator from the drilling rig requests the pipe, the yard crew prepares it for

the drilling rig, which includes a full-length drift, addition of pipe accessories such as float

equipment and centralizers, and bolstering for offshore platforms. They are stacked on trucks

with 44,000 lbs load limits using a forklift with a loading cost of about $200 per truck and

shipped to Port Fourchon in Louisiana at a cost ranging from $3 to $5 per mile per truckload.

The pipe is then loaded and shipped on a vessel to the drilling rig.

PIPE PURCHASE: SHOULD THEY CONSOLIDATE?

BP's inventory consists of 35 different pipe specifications. Specifications refer to outer

diameter, measured in inches, weight, measured in pounds per foot (refers to thickness of

pipe), and grade, which refers to the metal composition. Most pipe specifications are standard

API, except for those used in exploratory wells, which are typically proprietary grades.

Appendix "A" shows the 35 different pipe specifications stored in Houston. The grades

of the pipe increase in material strength and corrosion resistance as you read down the table.

When HC is denoted in the grade, it refers to high collapse which means the pipe has higher

yield strength and can withstand high pressure wells. 13Cr110 grade pipe provides carbon

dioxide corrosion resistance, but cannot be used in sour gas (hydrogen sulfide) producing

wells. 25Cr125 can be used in both sour gas and carbon dioxide producing wells, but is only

utilized by one project. Outer diameter and weight increase when read from left to right. The

table provides information on the average annual usage of each type of pipe in thousands of

feet as well as the standard deviation of demand. There is a large variability in usage due to

project specific orders.

Jeffrey Kirkpatrick / Dallas Baptist University Order # 82146 / Order Date: 1/5/2023 Copyright

BP’s Procurement and Supply Chain Management

Appendix "B" provides the price per foot of each pipe specification and the associated

lead time in weeks. Generally, there is a premium price paid for the higher grade pipe and in

most cases, they have longer lead times. Pipe of lower grade can be substituted with pipe of

higher grade if it is within the same outer diameter and weight range. Also, the price per foot will

decrease with increase in annual usage. The pricing chart provided is associated with the annual

usage in Appendix "A". A forty-foot length should be assumed for all pipe identified in the table.

Project economics are determined by the price of oil. Exploratory and appraisal wells

are typically the first to be canceled or delayed when oil futures trade low. These types of

projects also require custom engineered pipe that remains in inventory, sometimes for years, if

the project is canceled. Even for sanctioned commercial projects, individual teams often work

in silos and develop different solutions for the same problems. Also, factors such as weather

and lead time may affect project schedule, making demand forecasting even more unreliable.

Lack of standardization and a fragmented project approach leads to excess inventory that

cannot be shared between different projects. When considering inventory carrying costs,

which include the cost of capital, opportunity costs, material handling costs, and inventory

control costs, it is not economically feasible to store the pipe for long durations. In most cases,

the pipes that are left in the pipe yard would probably be written off as scrap, unless an

engineer requests the same grade.

PSCM is looking for ways to coordinate the purchase of pipe to avoid excess inventory

in the system. The plan is to buy a common specification of pipe, which is acceptable to most

locations in the Gulf of Mexico, so that inventory consolidation is possible. Two likely sources

of resistance to this initiative are the engineers and joint-interest accounting. Engineers on the

project teams want their pipe optimized for each individual well. Joint-interest partners have

trouble justifying the cost difference between the grades of the pipe. For example, a pipe

designed for high-pressure environments can be used in locations where the pressure is low,

but at a greater unit cost thereby increasing the cost of the drill rig.

Jeffrey Kirkpatrick / Dallas Baptist University Order # 82146 / Order Date: 1/5/2023 Copyright

BP’s Procurement and Supply Chain Management

A leaner inventory can be troublesome if pipe cannot be expedited. If the pipe is not

available when needed, BP is still obligated to pay for all costs of the drilling rig even when idle.

Non-productive time costs the same as productive time, which can be anywhere from $400,000

to $1,000,000 per day. The drilling rig costs alone often justify a fully stocked pipe yard.

STORAGE AND INSPECTION FACILITIES: CURRENT SITUATION

The supply market for OCTG storage and inspection has seen significant consolidation.

In years prior, BP utilized four pipe yards in the Houston area. Currently, Southern Inspection,

a subsidiary of a large oilfield supply conglomerate, acquired all four of these facilities. Each

service contract was transferred to Southern Inspection, and the pricing was honored until their

expiry in the following year. When a new contract was negotiated, unprecedented price

increases ensued. The average price of inspections rose by 15% and pipe movement costs

increased by 25%. Southern Inspection cited increased demand for storage space and

investments in new inspection equipment as the primary drivers. BP found itself in a weak buyer

position, and accepted the new pricing. The negotiated price list is provided in Appendix "C".

Soon after the new contract was signed, a study was conducted by the BP Logistics

group to evaluate the possible relocation of the present storage facility for OCTG in Houston

to a site or sites in Louisiana. The study looked at the cost of handling, taxes and logistics

capability in the region. The findings of this study indicated potential savings in dollars and time

through such a move, provided comparable facilities and services were available in Louisiana.

Because this study was limited to transportation and tax issues, additional information as it

pertains to the other services required for OCTG storage and inspection is necessary.

BP currently occupies approximately fifty acres of storage space at the Southern

Inspection yard and expects to increase this space requirement by five percent annually for

the next three years. A compelling reason for moving inventory to Louisiana is the fact that

Jeffrey Kirkpatrick / Dallas Baptist University Order # 82146 / Order Date: 1/5/2023 Copyright

BP’s Procurement and Supply Chain Management

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Case Study: BP’s Procurement and Supply Chain Management 1) 4-5 pages written response* outlining the results of their analysis of the case questions. Any data (e.g. academic articles,

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