Chevron Case Competition

Team 7

02 Presenters

Global Petroleum Corp.Scandy

Logistics Marine CategoryRahul

Shore Base Support ModelsAnand

SummaryZac

Global Petroleum CorporationGPC, Challenges &

Cost Reduction Opportunities

Current Challenges 04

• Increased Supply and

Decreased Demand

• Declining Revenues & Tighter

Profit Margins

• Decreasing Return on Capital

• Maintain Strong Financial

Position vis-à-vis Competitors

About GPC Current Challenges• Leading energy company

• Fully integrated

• Operates in 120+ countries

• Revenue $30.1 Billion

• 90% Upstream segment

• 10% Downstream segment

• Gulf of Mexico

• 6 Rigs

• 21 Support Vessels

Cost Reduction Opportunities05

Operating expenditure model

Source: IHS Energy

•Simplifying organization•Lean processes

•Standardize specs•Spend consolidation•Global sourcing

•Simplify well design•Drive learning curves

•Standardize Skills•Competitive bidding•Rate optimization•Contract compliance

Cost Reduction Opportunities

Machinery & Parts

Well Delivery Costs

Contracted Services

OperationsExploration Development Installation Operations Abandonment

Cost Reduction Opportunities06

8%-12% 15%-25%

1%-5% 6%-10%

Procurement Teams with Basic Savings Capabilities Can Reap

Best-in-Class Procurement Teams Can Still Improve by

Narrow Set of Sourcing Levers:Price, Mix, Specs & Volume

Full Set of Sourcing Levers:Price, Mix, Specs, & VolumeWhile Reducing Complexity,

Increasing Transparency & Consider Total System Costs

Depending on Whether They Apply

Source: Bain & Company

Estimated cost savings based on our calculation:• 30% of PSV Vessel Charter Spend • 18% of FSV Spend OR $43.51M

Potential Savings07

Cost Reduction Approach08

Short Term Medium Term Long Term

Speed Sourcing • Price Alignment• Supplier Rationalization• Volume Consolidation• RFQ• Auction

Strategic Sourcing• Strict methodology - TCO based• X-functional teams• Thorough Internal/External Analysis• Request for Proposal • Implementation Planning & Savings MGMT

Deep Sourcing• Redesign Business Model• Redesign Supply Chain

Basic Procurement• Spot Buying• Simple Price Requests

Cost Savings

Price Focused | Low Touch

Long Term Relationship | TCO & Fact Based

Strategic Partner | High Engagement

Logistics Marine CategoryVessels & Fuel

Model Assumptions10

1. Capacity Utilization = Deadweight Tonnage2. Number of Vessels Does Not Affect Service Level3. Fuel Efficiency of All Vessels Is Equal4. All 21 Vessels Service All 6 Gulf of Mexico Rigs5. Vessel Rates Are Day-Rates6. Vessel Rates Include: Rental, Maintenance & Operation Except Fuel7. Rates Are Fixed For Contract Duration8. Similar Vessels Have the Same Rate9. Rates Can Be Renegotiated

• FSV Utilization Is 78.6%*• PSV Utilization is 76% **

BenchmarksSources:*Federal Reserve**IHS Energy

Vessel Cost Optimization & Sourcing11

Original ProposedNumber of Vessels 15 11

Total Deadweight tonnage (t) 71250 53800

Total Capacity Utilized 42480 42480

Capacity Utilization 59.62% 78.96%

Total Cost $ 480,000 $ 338,300

Utilization Improvement 19.34%Cost Savings $141,700

Percentage Savings 30%

PSV FSVOriginal Proposed

Number of vessels 6 5

Total Deadweight tonnage (t) 2660 2190

Total Capacity utilized 1655 1655

Capacity Utilization 62.22% 75.57%

Total Cost $74,200 $60,500

Utilization improvement 13.35%

Cost Savings $ 13,700 Percentage Savings 18%

Market Analysis &Negotiation

Strategies12

• Demand Tied to Oil Price*• Trend for Using Large Vessels** • 2015 PSV Spot-Rate for Gulf of Mexico**

• Small ->1000t-2000t = $12,000/day• Medium -> 2000t-3000t =

$23,500/day• Large -> 3000t-4000t = $31,600/day• Super Large -> +4000t = $35,500/day

Sources:*Professional Mariner.com**IHS Energy

• Standardize Contract Start & End Dates• Negotiate Price Based Upon Share of

Business• Use Spot-Market Rates to Negotiate Better

Rates for Each Vessel Class• Use Open Bid Auctions• Renegotiate Rates Every 6 Months• Use Floating Contracts for Spikes in Demand• Explore Opportunity to Move Pricing Model

from Fixed to Retainership + Variable

Shore Base Support Models

Model Assumptions14

1. No Programming Needed for Proposal 2

2. No Long-Term Software Solutions & ERP Integration Considered

3. No. of Days in a Year = 280 days

4. Implementation & Integration Occur in 75 Days Each

5. 6 Members per Implementation & Integration Team

6. Consumable cost - $150/day

7. Lodging Cost - $200/day

Operating Model Options15Current Proposal 1 Proposal 2

GPC Model Safe Mariners & Logisticians (SM&L)

Shorebase Logistics & Crew (SL&C) Technology

• GPC Personnel• Existing

Technology & Software Solutions

• Use SM&L Personnel• Implement &

Integrate Proprietary Tech. & Software Solutions

• Use GPC Personnel & Retain critical activity

• Implement & Integrate SL&C‘s Tech. & Software Solutions

• Potential to Transform to Hybrid Model

Total Annual Cost $13.25M

Total Annual Cost $16M + 15% Annual

Savings

Total Annual Cost $14M

Proposed Pre-RFP Process16Steps Activity

Skill Inventory by Role

Critical Activities VS

Non-Critical Activities

IT Solution

Perform Value-Stream Mapping

Define Skills for Each Role

Define IT Requirements

Define Implementation Scope & Timeline High-Level Implementation Plan

Keep Critical Activities In-House & Outsource Non-Critical Activities

Rate Card

Customized VS Off-the-Shelf

Cost, Resources, Timeline & ROI

Output

Negotiation Strategies17

• Push for Open Book Costing with 3PLs

• Implement SL&C Software & Tech. Solutions World-Wide for

Shore Base Operations

• Replace GPC Contractors with SL&C’s Personnel to Share Cost

Savings

• Invite Open Bids from Suppliers to Benefit from Competitive

Costing

Summary

Q1 Q2 Q3

Implementation Timeline19

Analyze Current ContractsRedesign Current Network

Re-Negotiate ContractsUpdate Network Design

Launch Pilot

Map Out Current ProcessRedesign Process

Configure System to New ProcessesTrain Employees to Use New System

Run Pilot Debug & Fix

Launch

Re-Evaluate

Vessels

Shore Base Ops.

Risks201.At High Capacity Utilization There Is Little Room for

Demand Variability 2.Fuel Efficiency of All Vessels Is Not Equal3.Reduction in Number of Vessels Does Affect Service Level4.Reliance Upon Fewer Suppliers5.SL&C’s Software Mismatch to Needs6.SL&C Lacks Implementation 7.SL&C’s Lack of Change Management Capability8.SL&C’s Tech Solution Cannot Scale World-Wide9.Natural Disasters

Mitigation Strategies 21

1. P/SCM Works With Lawyers to Write and Re-write Contracts2. Contract Terms that Provide for Indemnification3. Have Strong Monitoring of Suppliers’ Performance4. Pre-Qualify 1-2 Potential Suppliers for Needed Extra Capacity5. Have Strong Governance Model for Implementation6. Hire a RMO & Risk Mgmt Team to Create Disaster

Preparedness Plans & Purchase Insurance

Summary21

• Leverage Sourcing Levers Across Spend Categories

• Optimize Vessel Capacity Utilization• Rationalize Number of Vessels• Explore Opportunities to utilize Medium PSV’s

• Deploy SL&C Technology to Improve Planning & Execution

• Explore Potential Hybrid Partnership with SL&C

Questions?

Sources15Dom Yanchunas, “The Gulf’s hiring boom comes to an abrupt end,” Professional Mariner (Apr. 30,2015) www.professionalmariner.com/May-2015/The-Gulfs-offshore-hiring-boom-comes-to-an-abrupt-end/

Anders Brun, Guus Aerts and Marte Jerkø, “How to achieve a 50% reduction in off-shore drilling costs,” McKinsey & Company (May 2015).

Federal Reserve, ”Industry Production and Capacity Utilization,” Federal Reserve (Mar. 16, 2016) http://www.federalreserve.gov/releases/g17/current/table7.htm

IHS Energy, “Market Survey System– Upstream Spending & Industry Trends,” IHS Energy www.ihs.com/pdf/ENE-Upstream-Spend-Market-Trends-Brochure-Update-HiRes_223535110913044932.pdf

Francesco Cigala, Lodewijk de Graauw, John McCreery and Hasan Shafi, “Adopting a More Strategic Approcah to Procurement in Oil and Gas,” Bain & Company (Sep. 16, 2015) www.bain.com/publications/articles/adopting-a-more-strategic-approach-to-procurement-in-oil-and-gas.aspx

IHS Energy, “IHS Petrodata: Offshore Marine Monthly,” IHS Energy (Jan. 2015, Vol. 31, No. 1) www.ihs.com/pdf/IHS-Offshore-Marine-Monthly-Free-Report-Jun-2015_166218110913044932.pdf