Effective collaboration is the key to a successful operator/supplier relationship

John P. Clement III
Exxon Co. International
Houston

Exxon Co. International achieves its drilling objectives through long-term operator/supplier relationships using competitive bidding among prequalified suppliers.

A strategy that emphasizes process-driven collaboration and improvement has resulted in performance that is the best-of-competition in many areas of the world and is the reason why drilling remains a core competency for the company.

The key principle of process-driven collaboration is not unique to alliances. Success factors are affected more in how strategies are executed than the choice of the contracting strategy itself.

The goals of the drilling process are to cost-effectively and safely extract oil and gas reserves over the entire life of a field. This emphasizes obtaining the best overall value over the life of each well, not just obtaining the lowest initial contract bid, and requires a systematic approach to well planning and drilling that crosses multiple technical and operational disciplines.

Operator/supplier relationships

The relationship between an operator and its suppliers can take on various forms. The matrix in Fig. 1 [168,272 bytes] shows the types of operator/supplier relationships used in the industry today.

The horizontal axis represents the amount of process-driven improvement for each type of relationship. The lowest level is discipline-specific; for instance, a rig mobilization operation where the rig contractor is central to the task. The middle level is a cross-functional relationship; for instance, a cementing operation where multiple parties must work together. The highest level is a systematic approach to the entire drilling process. In this case, all parties execute their tasks in a manner that optimizes the entire program.

The vertical-axis represents the level of operator/ supplier interaction in well planning and execution. At the lowest level, the operator specifies only the desired outcomes of the relationship. The middle level involves a cooperative arrangement between the operator and suppliers. The highest level consists of full collaboration and integration.

Outsourcing and turnkey relationships are positioned in the lower third of the matrix where the operator specifies only outcomes and the supplier focuses on delivering the well bore according to a contract specification.

Preferred-supplier relationships are positioned in the upper-left part of the matrix. These are usually process-specific, and the operator cooperates or collaborates with the supplier. Integrated services span all levels of operator involvement and are cross-functional in nature.

Logic suggests that a collaborative, systematic approach to the drilling process yields the best value. This encourages internal and external teamwork among the multiple disciplines and is critical in creating the most cost-effective well bore over its lifetime. This approach is identified in the upper-right corner of Fig. 1, labeled with the now popular term "alliance." The alliance concept, however, can take on different meanings.

Alliance study

In 1996, the Gas Research Institute (GRI) published a study on the seven factors critical to a successful drilling alliance. ¹ The basis of the study included detailed interviews with operators and suppliers involved in 17 drilling alliances across the U.S. The seven critical factors are:

1. Operators and suppliers must have clearly defined mutual goals.
2. Goals must be tied to profitability for all involved parties.
3. All parties must work together to define the steps in the drilling process with enough detail to eliminate redundancies. All parties must be willing to perform unconventional assignments to improve the process.
4. Employees at all levels must agree with the alliance goals and ideas must be solicited from them.
5. Quantitative tools must be used to measure the success of alliance achievements against mutually established goals.
6. Incentives for all parties must be tied to specific benchmarks.
7. Methods to analyze performance must be built into the process. The analysis results in a well-documented, proactive focus on improving the process.

The study correlated success with these factors and found that the most critical is process definition. When a project or program was process-driven, alliances were found to reduce costs from 10 to 30%.

The study states that "an effective alliance is based upon a detailed description of the technical processes and potential improvements involved. The organizations in the resulting process-driven alliance are linked together through a common set of technical processes, mutually defined bottom-line goals, and shared benefits. Improving the overall technical process, not the individual service designations, is the focus of this relationship." The study also suggests that "most alliances rely too much on relational issues and commercial terms."

Exxon has been able to implement these same processes within a conventional competitive bidding framework.²

Contracting strategy

Exxon focuses on six business fundamentals:

1. Shared values in the areas of safety, health, environment and regulatory compliance
2. Common goals
3. Clear expectations
4. Process integration
5. Measurement
6. Improvement.

Focus on these fundamentals result in value-added benefit, measurable success, and stability for all parties.

The company believes in competitive bidding with emphasis placed on finding prequalified bidders who can provide the best, overall value. Emphasis is not necessarily placed on the price level of the bid. The preferred strategy centers on long-term associations and a stable work program wherever possible and practical. Alternatively, negotiation is an integral part of this contracting philosophy and is used where it makes sense.

For example, Exxon contracted a rig last year that had been working under an alliance arrangement with multiple operators. When the value of the alliance's services was compared to market data, Exxon found that not all services were competitive and elected to source these directly.

The incentive philosophy is simple: Quality performance is rewarded with future work. Moreover, the supplier derives a more marketable product from the relationship that becomes attractive to others as well as Exxon.

The key principles of alliances-common objectives, teamwork, and shared benefits-however, are no different today than what have always made an operator/supplier relationship successful.

Exxon has worked profitably and effectively under existing conventional or traditional contract arrangements. Over the years, the industry has accomplished quality work because of teamwork and pride, not just because there were contractual obligations.

In the end, successful operator/supplier relationships depend on collaborative teamwork. Whatever name is given to this type of relationship is irrelevant; whether it is called an alliance or simply teamwork.

References

1. Technical Process Integration, "The Key to Successful Drilling Alliances," GRI-96/0232, 1996.
2. P. Schaeffer and M. Hartt. "Fast Tracking to a Quality Operation," SPE paper No. 27459, SPE/IADC Drilling Conference, Dallas, February 1994.

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