BPs Procurement and Supply Chain Management

Contents

Overview of BP OCTG introduction Gulf of Mexico OCTG supply chain Typical OCTG ordering process Case study introduction

Overview of BP

BP p.l.c. is one of the worlds 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 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.

What is OCTG?

Oil Country Tubular Goods (OCTG) Casing large diameter steel pipe that is cemented into openhole to protect and/or isolate formations Tubing small diameter steel pipe used to complete the well and allow hydrocarbons to flow from reservoir to wellhead

Conductor pipe

Surface casing Tubing

Intermediate casing Packer Perforations Production casing

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BP domestic drilling regions

Rockies San Juan, WY J55, K55, P110 Well Depth: 8,000ft 10,000ft

Western Oklahoma J55, K55, P110 Well Depth: 10,000ft 16,000ft Alaska North Slope L80, 13 Chrome Well Depth: 10,000ft Tuscaloosa P110, Q125, C110 Well Depth: 20,000ft

West Texas J55, K55, P110 Well Depth: 5,000ft 12,000ft Gulf of Mexico P110, Q125, C110, 13 Chrome Well Depth: 20,000ft 30,000ft Water Depth: 4,000ft 7,000ft 5

Gulf of Mexico

BP is one of the largest acreage holders in the deepwater Gulf, owning more than 400 gross blocks in water depths of 1,200 feet or greater. Between 2000-2010 BP has a $15 billion investment program in the Deepwater Gulf of Mexico. The company anticipates its total deepwater production to exceed 450,000 barrels of oil equivalent per day by 2010 and remain at that level through the next decade. Gulf of Mexico Assets include Pompano, Marlin, Horn Mountain, NaKika, Holstein, Mad Dog, Atlantis, Thunder Horse and the Mardi Gras Transportation System that exports oil and gas to shore.

Gulf of Mexico assets

circa 2006

New Orleans Houston Fourchon

Marlin Pompano

Horn Mtn. Na Kika

Thunder Horse
600

Holstein
2500

Mad Dog
5000

Atlantis

LEGEND
0 Miles 100 7500 10000

Production Development

Gulf of Mexico PSCM

Primary areas of accountability of the GoM PSCM team include the development and implementation of procurement and supply chain management policy, processes and procedures Procurement strategy development including supplier prequalification, RFQ development, bid evaluation, negotiations, contract drafting and award Development and implementation of Supplier Performance Management processes Consultancy advice with respect to materials management, QA/QC, the resolution of contractual disputes, and accountability for the ongoing support and maintenance of PSCM systems

GoM OCTG contracts

Global framework agreement with foreign distributor/mill 13 and 25 chrome only for United States Cannot import carbon/alloy pipe due to U.S. government restrictions on imports (antidumping tariffs) U.S. contract with domestic pipe distributor for alloy Qualified and selected most capable domestic and foreign steel mills Chose largest distributor that represented the BP qualified mills Five year contract length with six month pricing reviews Standard API spec pipe is based on consignment with the distributor Order is cancelable and returnable Custom pipe is owned by BP at the time of manufacture Order is non-cancelable and nonreturnable Materials Coordinators call-off from these agreements via Purchase Orders

Ordering/call-off process

1. Casing specifications are defined by drilling engineer 2. Engineer informs Material Coordinator of design through requisition 3. Material Coordinator places order in distributor forecast 4. Distributor places order will steel mill 5. Steel mill rolls, threads, and inspects pipe 6. Pipe is received into distributor/BP inventory and inspected if necessary 7. Pipe is stored and maintained until needed 8. Rig prepped and shipped to well site

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OCTG specifications
1. Specifications 2. Requisition 3. BP Purchase Order 4. Distributor order 5. Manufacture 6. Goods receipt 7. Storage 8. Deployment

Casing size, weight, grades Based on pressure and corrosion requirements, and well depth Length R1, R2, R3 Seamless vs. ERW Connection types API Premium Steel mill choices Domestic Foreign
OD Size 16 14 10 7/8 7 3/4 Weight 109 ppf 112.49 ppf 73.00 ppf 46.10 ppf Grade P-110 Q-125 C-110 C-110 Connection Hydril 511 Hydril 513 SLIJ-II Hydril 523

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Internal requisition
1. Specifications 2. Requisition 3. BP Purchase Order 4. Distributor order 5. Manufacture 6. Goods receipt 7. Storage 8. Deployment

Requestor contact info Budget identification

Delivery information

Material description

Authorization sign-off

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Purchase order
1. Specifications 2. Requisition 3. BP Purchase Order 4. Distributor order 5. Manufacture 6. Goods receipt 7. Storage 8. Deployment

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Distributor order/forecasting
1. Specifications 2. Requisition 3. BP Purchase Order 4. Distributor order 5. Manufacture 6. Goods receipt 7. Storage 8. Deployment

Oil and gas wells are planned far in advance Long lead-times from steel mill (as long as 2 years) OCTG accounts for 1% of global steel market Dependence on mill schedule Distributor or operator must carry inventory

Order placement
BP Distributor Mill

Inventory burden
BP
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OCTG manufacturing
1. Specifications 2. Requisition 3. BP Purchase Order 4. Distributor order 5. Manufacture 6. Goods receipt 7. Storage 8. Deployment

Time of manufacture is determined by mill schedule Either seamless or electric resistance welded Threaded connection may be machined at mill or shipped plainended Inspection/QA check before shipment to customer

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OCTG receiving
1. Specifications 2. Requisition 3. BP Purchase Order 4. Distributor order 5. Manufacture 6. Goods receipt 7. Storage 8. Deployment

Pipe is packaged and shipped to storage yard from mill Rail car Ship/barge Truck Airfreight (only on rare occasions) Physical and electronic receipt into distributor/customer inventory Incoming pipe inspection if necessary Full-length drift and visual inspection Electronic inspection (EMI or FLUT)
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OCTG storage & maintenance

1. Specifications 2. Requisition 3. BP Purchase Order 4. Distributor order 5. Manufacture 6. Goods receipt 7. Storage 8. Deployment

Safety is number one priority Pipe is horizontally stacked 18 above the ground No more than 6 feet high (up to 10 with safety system) Recycled plastic timbers Box and pin orientation and angle Thread protectors and storage compound Dedicated yard crew OCTG inventory management Distributors proprietary system Physical inventory counts

Pipe rack, timbers, bumper rings, thread protectors

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Deployment to drilling rig

1. Specifications 2. Requisition 3. BP Purchase Order 4. Distributor order 5. Manufacture 6. Goods receipt 7. Storage 8. Deployment

Pipe is prepped for drilling rig Full-length drift, thread compound, addition of casing accessories Bolstering (offshore only) Trucking specifications How is it stacked? (stripped & strapped, 44,000# limit per truck) Trucked from storage yard to BP shore base Shipped on vessel to offshore drilling rig Lifted and stored on rig until it is run into the hole and cemented in place
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Case study

Case study introduction

OCTG inspection and storage market experienced consolidation through 2002 2004. As a result, only one service providers pipe yard is utilized in Houston. Provide inspection, storage, and maintenance services Inventory is kept on their proprietary system A 2004 study involving logistics and taxation suggested savings if pipe was stored in Louisiana instead of Texas. Study was limited only to transportation and taxes and additional information on the OCTG service industry in Louisiana was necessary to support pipe yard relocation. PSCM conducted a market analysis on inspection and storage companies as well as threading facilities located in the Gulf Coast Region.

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Market analysis

Market analysis included a Request for Information sent to Inspection/Storage companies and premium threading facilities in Houston and Louisiana Pipe inspection and storage facilities Storage capacity, access, racking Inspection capabilities and thru put Inventory management capabilities Health and Safety questionnaire Financial statements Premium threading companies Proximity to pipe yards Thread sizes, types, capacity Licensees

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Considerations
Financial Health Analysis Market Characteristics
PESTLE Analysis

Porters Five Forces

Threat of New Entrants Bargaining Power of Suppliers

SWOT Analysis

Strengths
Bargaining Power of Buyers

Weaknesses Opportunities Threats

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Rivalry Among Firms

Availability of Substitutes

Deliverables

Inventory consolidation Breakdown of inventory carrying costs Strategy, reasoning, and justification of standardizing/consolidating pipe inventory Describe change management approach to engineering group and joint-interest partners Pipe yard relocation Develop an evaluation process and analyze the suppliers identified in the market study Identify the selected yard locations and justify your choice Identify switching costs and risks associated with changing suppliers How does inventory consolidation play into pipe yard relocation?

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Questions?

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