The crisis in Ukraine has shaken the entire world. As the Russian invasion rages on, governments and companies are responding swiftly and decisively. Russia has been jettisoned from banking platforms and trade with Russia has evaporated almost overnight. Organizations, including o9 Solutions, have pulled out of fledgling projects, ongoing business deals, and long-standing relationships with Russian entities and companies. There are supply and demand shocks rippling throughout global markets. The global oil, gas, and chemicals industries will be particularly hard hit. So how should the industry respond in the face of volatility?
The demand for oil and gas
Fossil fuel is a commodity that underpins the world’s economy. Natural gas is essential for heating, cooking, and electricity generation. And oil is used to create more than 6,000 products—from gasoline in cars and jet fuel for planes, to products as diverse as fertilizers, nail polish, or antihistamines. It is a key ingredient that enables convenience in our modern life. In short, the oil and gas supply chain is critical to our global economy.
Just when executives were starting to see a light at the end of the tunnel following a very disruptive 2021, Russia invaded Ukraine and Western countries are considering banning the import of Russian oil and gas. This is significant as Russia is the world’s top exporter of crude oil—with exports of approximately 7 million barrels per day or 7% of the global supply—and its natural gas exports equal 40% of the EU’s consumption. The decision to forgo Russian imports was not taken lightly, as the current demand for natural gas within the EU is almost impossible to satisfy via alternative sources. If this situation deteriorates any further, it will leave customers across the continent without enough supply to meet their needs. Further, the current terminal and pipeline infrastructure in the EU isn’t sufficient to support a large increase in LNG transport and processing from the West and will require a long-term strategy to handle the demand.
A situation changing by the day
As of March 8, the US and the UK governments have moved forward without the EU to ban the import of Russian oil. However, the impact will spread far beyond this decision as many refineries and traders have already taken a proactive stance to avoid Russian operations as a source of raw material. Tom Kloza, the global head of energy analysis at the Oil Price Information Service, told the New York Times “The enablers of oil exports—the banks, insurance companies, tanker companies, and even multinational oil companies—have enacted what amounts to a de facto ban.”
Cutting off available supply would set the industry up for a mad scramble to coordinate with the remaining suppliers and out-maneuver their competition for limited resources. Companies will need to factor in the impact of reduced service levels while managing customer expectations, as well as the financial implications of buying oil at the highest price recorded in 13 years.
As the Russia-Ukraine situation unfolds, there will be major upheavals in the market and could send the price soaring to $150-$200 per barrel. This future would erode demand and drive market inflation to new heights, impacting financial performance of all companies across all sectors. It will be critical for oil, gas, and chemical companies to understand and factor in the broader market drivers as they navigate the very unstable geopolitical stage.
The way forward
The current level of volatility is severe and has the potential to cripple the industry. But it’s important to remember that this is not a standalone event. It’s another in a long line of disruptions that have pushed oil, gas, and chemicals supply chain leaders off-balance. They’ve learned that the legacy methods of forecasting, planning, and collaboration aren’t able to deliver the granular level of analysis needed to guide their businesses. To find the right path forward, new planning approaches and tools that bring greater levels of transparency, flexibility, analysis, and responsiveness are required.
There are three major improvements to a supply chain planning process that oil, gas, and chemicals companies can adopt to respond to these types of situations.
- External Data Feeds Given the speed at which the Ukrainian invasion and Russian bans have moved, it’s clear that having real-time data is a critical component for success in supply chain planning. Planning platforms like o9’s Digital Brain will deliver this through a combination of external market data, internal data, and a highly sophisticated digital twin of the entire supply chain. The use of advanced analytics will pull insights from the data delivering improved trend analysis, more accurate forecasts, and better financial performance guidance. This is a competitive differentiator for oil, gas, and chemicals companies because an integrated business plan decreases the risk and increases confidence among investors.
- Scenario Planning When supply chain disruption happens, business as usual isn’t always an option. Defined processes and set expectations based on known variables might not address shortcomings or increased Scenario planning through what-if analysis using digital twin capability can alleviate this challenge. This gives planners the ability to test different approaches to solve the problem. By changing different supply chain variables (such as pricing and availability of raw material, expedite costs, order prioritization, increasing or decreasing capacity, etc.), planners are able to simulate the impacts to every node of the supply chain—from sales to operations to finance. The value of this solution comes from the speed of analysis. Historically, the complexity of these calculations would require hours, if not days, to complete in Excel or other legacy software. An AI/ML-enabled planning platform like o9 will provide the necessary analyses quickly and keep the supply chain connected, informed, and moving at speed.
- Supplier Collaboration The oil, gas, and chemicals industry has many companies involved along the entire supply chain. This creates a big risk for miscommunication, inaccurate data, and confusion. In a market as tight, dynamic, and fragmented as this, it is important for organizations to improve communication and transparency upstream and downstream to get better and faster alignment, ideally with clear expectations for all parties. This capability is best supported in a cloud-based, integrated platform that allows real-time collaboration across the enterprise and externally with suppliers.
The o9 Digital Brain is a platform that helps enterprises respond to demand changes and supply disruptions in real-time with advanced demand/supply scenario simulation aided by the most sophisticated supply chain digital twin in the market. To learn more about the value o9 Solutions and our Digital Brain platform brings to volatile situations visit our Oil, Gas, and Mining industry page.