WHITE PAPER

SELECTING ERP FOR

OIL AND GAS INDUSTRY
CONTRACTORS AND
VENDORS

CONTENT
THE PRICE OF OIL......................................................................................................... 1
ROLE OF TECHNOLOGY................................................................................................. 2
CONCLUSION............................................................................................................... 5

SELECTING ERP FOR OIL AND GAS INDUSTRY CONTRACTORS AND VENDORS

SELECTING ERP FOR OIL AND GAS

INDUSTRY CONTRACTORS AND
VENDORS
B Y M A G N E HA L VO RS E N
B US I N E S S A N A L Y S T, I F S

Executives at contracting, engineering, equipment suppliers and professional service

companies serving the asset-intensive oil and gas industry know that this is a
challenging time to be in the industry. Customer organizations are more demanding
than ever, and are asking their vendors to take on more risk, compete more aggressively on price and toe the line on quality.
Information technology certainly has a role to play in meeting these challenges,
particularly since many companies serving the industry are still running their
businesses on older enterprise applications not really suited for the informationintensive nature of the industry. Enterprise applications designed to meet these
needs are relatively new to the market, and ought to be considered carefully by
industry executives charged with succeeding in the market today.
In this whitepaper, we will discuss the market trends affecting vendors to the oil
and gas industry, how these trends are affecting operations and specific ways that
enterprise technology can automate the best practices that will ensure success.

THE PRICE OF OIL

Whereas vendors in the oil and gas industry are affected by the same economic
megatrends as everybody else, they are more directly affected by wild fluctuations
in the price of oil than most other industries. Since the financial crisis in 2008, where
we saw a steep drop in oil prices, we have seen a steady growth in the oil price and
in the past two years, price stabilization at pre-recession levels. In addition, over the
past few years we have seen annual double digit growth in offshore investments and
in oil services. This large investment growth has led to intense competition for talent
and resources, similar to what happened in the years prior to the financial crisis. In
combination with increased global competition, this has caused cost levels to increase
significantly, with the ensuing strong pressure on margins. As a result, wages and
the other costs associated with oil exploration, extraction and processing have never
been higher. This dynamic has created the need for oil companies to increase capacity
while placing downward pressure on what can be spent to build new production
assets or expand or extend the lifecycle of existing assets. Because of the stresses this
combination has placed on the industry, many of the project owners in the industry
have found that the vendors are more frequently not meeting their quality expectations.

SELECTING ERP FOR OIL AND GAS INDUSTRY CONTRACTORS AND VENDORS

Deadlines are missed, cost over- runs have become more frequent, and specifications
are not met or are not communicated adequately between the different disciplines
involved in these asset-intensive projects. Even though the blame for these problems
probably lies jointly with the operator and the contractor, the oil company/operator
is the customer, and they are demanding more accountability and greater control of
their contractors and vendors.
This demand for accountability is one reason project owners/operators are
moving over to an engineer, procure, construct (EPC) business model. With separate
engineering, fabrication and construction, there is a lot of room for finger-pointing
and blame-throwing when projects go wrong. To ensure that EPC contractors and
other vendors have the capabilities necessary to meet budgets and timelines, operators
are paying more attention to the IT infrastructure their suppliers are using. Technology
is seen as the key to vendors ability to collaborate better internally, as well as with
customers and sub-contractors. And this technology- enabled collaboration is the
way to ensure that an EPC contractor, equipment vendor or other partner can plan,
communicate and execute effectively enough to meet project deliverables.

ROLE OF TECHNOLOGY
Suppliers to this industryequipment fabricators, maintenance and operations service
companies and EPC contractors or those on their way to becoming EPC contractors
have slightly different technology needs. But they have one thing in common. They
are being asked to do more with less, are being asked to take on more risk and need
to collaborate more effectively internally and with trading partners and customers.
Moreover, as industry needs and the type of project available change, suppliers
need to prepare for these new projectswhich might have more to do with extending
the life of existing assets than building new ones. Economic pressures may also drive
many industry vendors toward new revenue streams, including aftermarket service
and warranty work.
All of these changes place new demands on an IT infrastructure. In order to
succeed in the industry now, oil and gas industry suppliers need enterprise
applications that:
Harmonize the working processes across disciplines, including engineering,
fabrication, on-site construction, aftermarket service management and project
management.
Standardize processes to better secure quality, including work performed
internally as well as work performed by outside contractors and subcontractors.
Provide a complete overview of project risk, along with tools to manage risk
pro- actively and in real time.

SELECTING ERP FOR OIL AND GAS INDUSTRY CONTRACTORS AND VENDORS

Given the multi-disciplined nature of EPC contractors and their need to manage
often large and far-flung teams of contractors and subcontractors in a deadlinesensitive environment, their needs are perhaps the most extreme. But as more and
more engineering, fabrication and contracting outfits are pressed into EPC contracts,
they ought to consider the full EPC scope when selecting an enterprise application
to ensure that all of these areas are supported.
Following is a breakdown of the specific needs of the various oil and gas industry
suppliers, starting with the EPC contractors whose needs are, perhaps, the most
complex.
EPC contractors need to pay attention to four essential elements:
1. Project-driven materials management. Instead of letting a product structure
and traditional manufacturing resources (MRP) planning system drive
functions like demand, fabrication and testing, an EPC contractor needs to
ensure that its enterprise application provides robust project resources
planning tools. This allows it to better schedule tasks in parallel rather than
in sequence. In an EPC environment, for instance, fabrication starts long
before drawings and product structures are completed.
2. Multidiscipline engineering register. Integration between engineering and
purchasing/fabrication and other disciplines is beneficial for any industry,
but is absolutely essential for an EPC contractor. Engineering functionality
and a centralized engineering register deliver what is in essence a combined
ERP and PLM solution. For companies that are involved in both engineering/
design and purchasing/material managementand maybe even fabrication/
installationthis central repository for engineering data that is shared
throughout the enterprise allows for efficient and error-free handover of data
between functions. It facilitates handover from engineering to purchasing,
between fabrication and installation and maybe even, in the case of lastminute changes to the design, between engineering and installation. This level
of integration delivers detailed tracking of those difficult and unexpected
project changes. These changes are often difficult to manage because when
there are design changes, it is not the part numbers that change, but rather
the attributes of those part numbers, the documents attached to the part
number and the tagged information. These details are lost if communication
from engineering consists of a simple list of part numbers released to a fabrication department, hindering the ability to handle changes and increasing
project risk.

SELECTING ERP FOR OIL AND GAS INDUSTRY CONTRACTORS AND VENDORS

3. Re-contracting and Subcontracting. Traditional purchase orders are fine

for acquiring materials and receiving them into inventory. But are they as
good for specifying the amount and qualities of concrete to be put into place
or outlining the scope of services for a subsea cabling contract? Contracts
and subcontracts are not items received into inventory, but rather, represent
complex agreements that involve careful development of the scope of services
and then require careful performance management culminating in the
application for payment process. Technology designed to handle the typical
customer orderas is found in a traditional ERP applicationwill not
adequately deal with the complexities of the subcontract, once again exposing an EPC contractor to risk due to the inability to proactively manage
contractors and subs.
4. Forecasting and project accounting. This enables project controllers to look
at project data and make future projections of project performance rather
than just seeingafter the facthow they wound up over budget, behind
schedule or off of the specification. This allows better project forecasting
than many generic MRP-driven enterprise tools that are the equivalent of
reading a newspaperyou can see what happened, but only when it is much
too late to do anything about it, and it is impossible to look into the future.
This real-time view of the project, which provides visibility into how project
milestones are on-track or off-track and the implications for the project
going forward, also enables cut-offs, reporting and forecasting independent
of traditional transaction periods. It presents automated features for fetching
cost data that need to be reported into the general ledger each period. It will
also allow for automation of routines for revenue recognition, an important
task to ensure timely payment by the customer.
Service companies working in the oil and gas industry are a diverse lot. Companies
that undertake project-driven services will need to ensure that their enterprise
environment addresses the critical process of mobilizationensuring that you have
people and equipment available to do your job at the right place and at the right
time. An enterprise application will also need to allow for the charging of equipment
that you have for hire, and tracking of revenue generated by each piece of equipment.
Services can encompass a broad spectrum of business models ranging from well
servicing to cutting and abandonment, and it is hard to make generalizations of how
enterprise needs will change over time. But many of these companies are also
expanding their offering into elements of EPC, taking on more risk and managing
the work of more outside entities, so they should plan to move onto a technology
platform flexible enough to handle these potential future needs with minimal business
disruption.

SELECTING ERP FOR OIL AND GAS INDUSTRY CONTRACTORS AND VENDORS

Equipment fabricators and manufacturers serving the industry often operate in an

engineer to order (ETO) mode. ETO manufacturers have some of the same needs as
EPC contractors in that they require the ability to handle material management
through project-driven structures, using Project ERP to automate the demand and
supply processes. These companies also, early in many projects, need to buy long
lead-time materials well before engineering has been completed. This means that
they need a system that allows fluid movement of data back and forth between
engineering, purchasing and fabrication. At later stages, they need to be able to
record what long lead time items they used as the project progresses. They also need
to be able to match what parts and materials they have in inventory with what they
need at a certain point in the project. You will not be able to do this with traditional
MRP, which does not allow parallel processes. Traditional MRP relies on product
structures, and as an ETO company, you do not have any static product structures.
While these equipment manufacturers or fabricators are not technically in the
contracting business, they will do well to implement strong contracting/subcontracting functionality, because they often purchase assemblies or subassemblies from
other companies. They can operate more as systems integrators than companies that
own all of their own technology. That means their needs in the area of product data
management are much more complex, since they need to maintain specifications and
information not only for what they fabricate but for the technology and components
they purchase from others. They also need technology that facilitates innovation so
that, working with their extended supply chain and subcontractors, they can develop
new products as the market requires.
Like services companies, equipment companies will want to be prepared for an
eventual, opportunistic, move into at least some aspects of EPC or aftermarket
service. One valuable asset the equipment manufacturer has, particularly if they
have powerful PDM capabilities, is in-depth knowledge of the equipment asset
installed on the customer site. More and more of these equipment manufacturers are
expanding their business model beyond simple fabrication and into aftermarket
service by selling maintenance contracts, parts or other services for installed systems,
turning that product data into an ongoing revenue stream. But this paradigm shift
requires supporting technology that goes beyond what the equipment company may
currently require, so it would be very smart if executives in these firms ensured that
their technology platforms could easily be expanded to allow for service management and maintenance functionality.

CONCLUSION
Many suppliers to the oil and gas industry went through a software selection prior
to the turn of the century in an effort to avoid problems associated with Y2K.
Unfortunately, in 1998 or 1999, application suites designed to meet the specific

SELECTING ERP FOR OIL AND GAS INDUSTRY CONTRACTORS AND VENDORS

needs of the industry did not exist. Many companies chose and implemented
traditional manufacturing solutions that were a poor fit for their complex project
business processes, or opted for an assortment of point solutions that result in a
fragmented IT infrastructure and disjointed business processes. Others developed
their own homegrown solutions that lack the reliability, 24-7 support and flexibility
of modern, SOA-driven technology. The lack of industry-appropriate enterprise
project software has reduced the efficiency of these companies over the years. It is
hurting them now as they try to adapt to a more competitive market and it will
prevent them from pursuing new revenue streams in the future. Fortunately, today,
project-enabled offerings are available that cater to the specific needs of the industry.
The above points should help executives in these companies understand how these
offerings can help them adjust to current market demands and identify the best
enterprise application for their business.

Magne Halvorsen is Senior Business Analyst with IFS AB, the global enterprise software company.
In this capacity, Halvorsen helps companies involved in engineer, procure construct (EPC) and
other complex business models meet their enterprise software needs with IFS Applications.
He has deep experience in Shipbuilding and Oil & Gas industries. He has held multiple advisory
positions with IFS global and Scandinavian operations. Halvorsen holds a Master of Science
Degree in Production Engineering from Narvik University College, Norway. He has previously
worked as Manager of IT Planning for Kongsberg Maritime, a supplier of electronics to the
shipping, offshore, oil & gas, subsea, navy, coastal marine and fisheries, maritime training,
port and harbor surveillance industries.

ABOUT IFS
IFS is a public company (OMX STO: IFS) founded in 1983 that develops,
supplies, and implements IFS Applications, a component-based
extended ERP suite built on SOA technology. IFS focuses on agile
businesses where any of four core processes are strategic: service
& asset management, manufacturing, supply chain and projects.
The company has more than 2,000 customers and is represented
in some 60 countries with 2,800 employees in total.
More details can be found at www.IFSWORLD.com.
For further information, e-mail to info@ifsworld.com

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