2 years ago

Opportunity Issue 96

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Opportunity, endorsed by the South African Chamber of Commerce and Industry (SACCI) is the mouthpiece for business in Southern Africa. The aim of the publication is to inform potential investors both nationally and internationally of the most relevant business news: trade, investment, financial, market-related information for each business sector, as well as to inform of the latest developments in business legislation from both the public and private sector.


ENERGY OPINION REBOOTING OF ALL MAJOR CAPITAL-INTENSIVE INDUSTRIES BY IGOR HULAK The oil and gas industry, which was already facing paradigmatic shifts pre-Covid-19, is in a historically unprecedented slump. Mounting pressure for nations to decarbonise; the increasingly viable competition from renewables; and tense political situations globally, were already squeezing the industry’s value chains. Worldwide lockdowns and travel restrictions have caused a severe lull in demand at every link in the supply chain badly exacerbating an already volatile situation across a wide range of sectors. This is a great opportunity for African economies, heavily dependent on oil and gas revenues and where governments and public companies have to look for alternative ways of collaboration with their supply. A radical shift toward tactical alliances focused on cost and position can rejuvenate imperilled industries. It is widely acknowledged that strategic partnerships add mutual value through a less-siloed approach and enhanced efficiencies of operations. Rather than lump-sum risk being pushed onto suppliers, risk is shared proportionally, incentivising outcomes. Instead of expending effort on the “back and forth” of RFP processes, time is spent on identifying problems and fostering buy-in from both parties. Rishad Khan, South Africa operations manager for engineering, procurement, construction and maintenance company, Fluor, believes that early and effective resource-loaded portfolio planning and identification – and engaging strategic alliances upfront – help mitigate risks associated with key performance drivers of safety, cost, schedule and quality. “An example of this early engagement is applying a construction- driven execution approach to enable better-build techniques that drive the engineering and design process, instead of following the traditional engineering and design sequence, and then finding a construction solution and developing an execution strategy. The same methodology can be applied with suppliers. Significant cost savings have been achieved with this approach,” says Khan. “Strategic alliances are needed now more than ever, especially within the constrained business climate we find ourselves in. Alliances with appropriate partners can be extended from the concept phase to front-end engineering and design, through to construction execution, operations and maintenance. “The success of strategic alliances depends on proactive and collaborative engagement, effective planning, relationship management, risk sharing, service and product delivery, and ensuring resource capacity and capability requirements are mutually beneficial to all stakeholders. This list is not all-encompassing, but provides a sample of the key elements required to form a strong strategic alliance,” he adds. The combination of microscopic-level insights into the institutional culture and situation of each unique supplier or client, along with the overarching knowledge of global macro-economic contexts, allows a referee to mediate in an equitable way along the supply chain. With the solid advice of an objective referee, a balance of interests, transparency and operational integrity are ensured from both parties during negotiation and transaction. This obviates the need for dispute since both parties are working towards a common outcome. These shifts toward holistic leadership reflect the increasing sophistication of governance globally and enable the management of often finite resources more responsibly with greater oversight. This stands in stark contrast to the adversarial, myopic paradigms of yesteryear. 34 | Formula pricing usually has a time lag for when the price changes will take effect. If that lag is significant (six months or more), then negotiate with the supplier to reduce the timeframe and capture the savings sooner. A time lag may be a double-edged sword: procurement will experience an increase in the price of raw materials quicker when feedstock prices start to rise. Scenario 4: The raw material price is declining, but the underlying feedstock price is not This situation is rare and is most likely tied to market events such as an oversupply. Here, procurement should take advantage of soft market conditions to engage with the supply base to secure long-term favourable pricing. In all four scenarios, logistics fuel surcharges can help capture more value. Often, inbound transportation is supplier-managed, and fuel makes up a big share of transportation costs. Best-practice carrier contracts have a fuel surcharge line item that is periodically adjusted to align with market indices – capturing value automatically. If these surcharges are automatically adjusted, then review carrier rates to confirm that the surcharges are being adjusted in an accurate and timely manner, such as with contract audits. For fixed-rate contracts, procurement should either renegotiate the fixed-rate portion or convert the contracts to fuel surcharge agreements. THE BOTTOM LINE The oil and gas industry is cyclical: major price changes are not unusual. Even though these changes are typically focused on crude oil or gasoline, they affect the cost structure of many downstream chemicals. To capture the benefits of declining feedstocks prices, procurement needs to be proactive, understand the cost connection to feedstocks, evaluate the current market dynamics, and have a game plan to engage the supply base to capture the associated savings opportunities. ______ __ ___ __ _ _ Best-practice carrier contracts have a fuel surcharge line item that is periodically adjusted to align with market indices ___ __ ___ __ _ _ _ _

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