Summary: What Happened?

In late March China launched its first oil futures contract that may fully appeal to non-Chinese risk managers. Since oil field service (OFS) providers and other companies often peg contract pricing to oil benchmarks such as WTI and Brent, this introduces a new option for contracts. However, O&G supply chain teams should beware the new option: rather than entertaining the new Chinese oil futures, teams should consider less risky and more established alternatives to mitigate risk and avoid unnecessary costs.

Why Have I Not Heard of Chinese Futures Before Now?

Despite surging activity on China’s three main commodity exchanges (the Dalian Commodity Exchange, the Shanghai Futures Exchange, and the Zhengzhou Commodity Exchange), until recently, several factors have precluded Chinese commodity futures markets from emerging as commonly referenced international price benchmarks:

• Lack of cross border access: Foreigners have seldom been permitted to access and utilize Chinese commodity futures. Only a limited number of Chinese state-controlled enterprises have been granted licenses by the Chinese government to transact in commodity derivatives outside China.
• Non-convertibility of the RMB: The Chinese government limits the convertibility of its currency, the RMB. This can make exchange rate transactions costlier to execute than those with other currencies. Market participants have expressed concerns that profits earned on Chinese commodity futures contracts may potentially be difficult to move out of China.

Both factors have contributed to large divergences between Chinese and foreign benchmark pricing across many commodities. These divergences make Chinese contracts unsuitable to hedge commodity exposure incurred outside of China and arguably make Chinese commodity derivative prices less reflective of global market conditions than their foreign equivalents. Traders and supply chain managers have thus been reluctant to use them. 

UPDATE: In a surprising move, President Trump announced on March 1 that he intends to impose sweeping 25% tariffs on steel imports and 10% tariffs on aluminum -- the most severe of the potential trade remedies recommended by the Department of Commerce. Details of the plan are still unknown, but the announcement has already driven dramatic steel and aluminum price increases and spooked equipment manufacturers. Register for our March 13 webinar for the latest updates on Section 232.  

Read on for our initial analysis of the Department of Commerce's recommendations.

As the Texas and Louisiana Gulf Coast recovers from Hurricane Harvey, Supply Chain organizations face the challenge of navigating its effects, from chemicals to logistics to labor.

Key Takeaways

• Since last fall, a surge in drilling and completions activity in the Permian Basin has led to a dramatic increase in sand demand and, in turn, substantial sand price inflation.
• In response, sand mining companies have begun investing in a slew of new mines in the area.
• While new sand mines will deepen the market’s oversupply, prevailing logistical bottlenecks will likely prevent significant sand price deflation from occurring.

Sand Demand and Sand Price Inflation Since Last Fall

Demand for sand used in oil field operations plummeted after the oil-price crash in mid-2014 and the subsequent sharp drop-off in well completions activity. This trend, however, has recently reversed. Since late 2016, a surge in drilling activity in the Permian, coupled with the activation of drilled-but-uncompleted wells (DUCs), has led to a massive increase in sand demand in the basin (Figure 1). During the first half of 2017, total US sand proppant demand was 63 million tons per year, a 75% increase over 2016 levels.

Figure 1: Permian Basin Sand Demand

Sources: United States Energy Information Administration, Baker Hughes, PowerAdvocate

Over the last five years, the United States has significantly increased its production of oil and natural gas, a phenomenon referred to as the Shale Revolution. US crude oil production has increased substantially, especially in the inland parts of the Gulf Coast and Midwestern states (Figure 1). This shift has impacted the economics of downstream operators; however, the benefits for specific refineries have varied depending on location and refinery crude slate.

Buckeye Partners presents a webinar in our Q&A with the Experts series. 

In this webinar recording, Buckeye Shares:

• How they've used data to achieve >$10M in cost reduction through improved supplier negotiations and bids
• Specific strategies they've used across CapEx and OpEx categories
• How they've prioritized and executed on specific cost reduction opportunities
• And lots more... 

We’re thrilled to share that more than 60 Oil & Gas executives attended our Annual Oil & Gas Executive Forum on June 22, for our best event yet.

The 2017 Executive Forum provided a platform for sharing and discussing new cost-cutting strategies

Each Executive Forum is designed to enable operators to exchange innovative approaches to cost reduction with one another. This year’s event featured:

• A keynote speech by the Vice President of Global Supply Chain at Hess Corporation

• Spotlight presentations on pressing Supply Chain concerns led by 7 industry leaders:

A New Mindset for a New Market. Former CEO of Maersk Oil Houston discussed the importance of cost control in Oil & Gas and provided a new perspective on the market

Cost Reduction in Practice. Director of Strategic Sourcing at DCP Operating Company, Sr. Commercial Manager at Motiva Enterprises, and Head of Procurement at Jonah Energy shared how supply market insight and data were used to decrease their operating costs

Cost Reduction Outside the Box. Vice President of E&P Services at WPX Energy and Head of Procurement at Statoil explained how rising costs were averted by their companies

Elevating Costs. Director of Supply Chain at Southwestern Energy spoke about the factors that drive business unit engagement and their effects on category management success

• Networking opportunities that brought together over 67 executives across 38 firms

A keynote speech on current economics of Oil & Gas and how to envision Supply Chains of the future

We want to extend our gratitude and appreciation to all who attended the Forum and shared their perspectives on the Oil & Gas market. If you would like more information about any of the presentation topics, please send us an email at costinsights@poweradvocate.com.

In this latest clip from our Energy Intelligence Group, we share how recent political actions could affect Oil & Gas supply chains.

Specifically, we share which categories would be at risk in the event of a NAFTA renegotiation, as well as the impact of recent Executive Orders on "Buy American" rules and the importation of steel and aluminum. 

Recently, the O&G world has been faced with challenges around supply and prices for critical materials. Just a few months ago, we covered the risks facing O&G firms when President Trump issued a first-of-its-kind memorandum mandating that American pipelines use only domestic steel. And just last week, the Department of Commerce (DOC) made a tariff decision that will affect supply and prices, this time around OCTG. Read on to learn what happened, what the risks are, and how Supply Chain teams can tactically reduce risks.

Oil & Gas Supply Chain teams have built up a tried and true toolkit of approaches to cost reduction spanning everything from negotiation strategies to RFP’s to demand planning.

But beyond that standard toolkit, what are the most innovative Oil & Gas firms doing to drive cost out of their organizations?

In today’s article, we provide specific examples of out-of-the-box ideas that other Oil & Gas firms are using to creatively reduce costs. We’ll also share several tools from renowned creativity experts to help Supply Chain teams think about how to brainstorm their next big idea.