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New procurement strategies to manage inflation and supply chain challenges

Goods and services used in the energy industry are far from commodities. Procurement professionals at project developers and suppliers need to shift their focus from simple purchasing to more advanced procurement strategies to manage the increasing risk in the supply chain. Every category and sub-category poses different challenges for different market players in various regions. However, there are some common challenges expected within the supply chain over the next few years, including high category pricing, challenging supplier capacity, increasing procurement and sourcing risk, increasing overlap across energy sectors and renewed focus on greenhouse gas (GHG) emissions in the supply chain.

Read our special insight from Audun Martinsen, Head of Supply Chain Research at Rystad Energy.

Goods and services used in the energy industry are far from commodities. Procurement professionals at project developers and suppliers need to shift their focus from simple purchasing to more advanced procurement strategies to manage the increasing risk in the supply chain. Every category and sub-category poses different challenges for different market players in various regions. However, there are some common challenges expected within the supply chain over the next few years, including high category pricing, challenging supplier capacity, increasing procurement and sourcing risk, increasing overlap across energy sectors and renewed focus on greenhouse gas (GHG) emissions in the supply chain.

The severity of these challenges vary across typical oil and gas categories and low-carbon categories. Category pricing is high for many input factors in oil and gas developments and is expected to remain high or even inflate further over the coming years. In contrast, some low-carbon categories, such as solar cells and batteries, have seen prices drop and even stabilize recently.

When it comes to supplier capacity, we see the drilling rigs, subsea, and marine sectors as the most pressing. In the low-carbon categories, there is generally a global overcapacity, but with governments increasingly pushing to home shore more of these supply chains, we do see much difference in regional utilization, which is a concern for buyers. This contributes to procurement and sourcing risk, with the diversity and nationality of companies being highly concentrated.

With environmental concerns becoming more important, alongside an increased focus on energy security in recent years, supply chains are facing stronger scrutiny. Scope 1 emissions have been the main focus for abatement measures in recent years, but as a larger share of these emissions is being mitigated, attention will turn to Scope 2 and 3 emissions. Rigs, vessels, trucks, and shipping, as well as the fabrication industry and original equipment manufacturers, will see the spotlight grow on them in the coming years.

With this flurry of risks and challenges also comes opportunities and a clear need for procurement organizations to think differently. If companies want to stay in control and procure rather than only purchase, they must take a wider view of their short-term and long-term needs for goods and services. To ensure the right capacity, technology, location, price, quality, and timing, companies need to explore new ways to mitigate the challenges mentioned above.

Audun Martinsen, Head of Supply Chain Research

Some strategies procurement teams can adopt to reduce risks and maximize opportunities include optimizing the time to market for tenders and entering long-term frame agreements and volume-guaranteed contracts that help solve the capacity challenge.

Vertical integration with suppliers is another strategy both exploration and production companies (E&P) and renewable developers have adopted in recent years. On the other side of the scale are contra-cyclical contract awards, which involve daring to secure goods and services at the trough for a minimal or speculative demand over the medium term.

The energy industry is still in the early stages for some of these new energy sources. As market players strive to reduce costs and make adequate returns, new procurement strategies could hold the key. However, an integrated procurement approach is required across individual company business units, energy sectors, and geographic operations. Additionally, it may also require increased government intervention. What is clear is that buyers and sellers must dare to make bold moves and shift the focus from transactional purchases to more value-generating procurement for the energy supply chain to prosper.

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