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IPA05-B-185

PROCEEDINGS, INDONESIAN PETROLEUM ASSOCIATION


Thirtieth Annual Convention & Exhibition, August 2005

DEVELOPING SUPPLY CHAIN HUBS: A MOVE TOWARDS OPERATIONAL EXCELLENCE


IN INDONESIA’S OIL AND GAS INDUSTRY

Khairul Rizal*
Dyah Erowati*
Mujiono*

ABSTRACT value for their operations. However, to accomplish


this, a significant change in mindset is required in all
The Indonesian oil and gas industry faces many participants.
challenges in improving production-related
operational efficiencies. The inefficiencies identified
are primarily associated with a lack of regional and INTRODUCTION
national planning among operators, under-utilization
of facilities, redundancy efforts, a lack of shared According to the Indonesian Oil and Gas Directory
information and little or no measurement of 2004, there are 73 operators and 163 petroleum
performance. This situation has caused the average contract areas in Indonesia. Of these, 51 are in
operating cost per barrel to be higher in Indonesia production; the remaining 112 are in the exploration
than in other countries in the region. and evaluation stage. The Indonesian oil and gas
industry is also subject to a “ring fencing” constraint,
Based on BPMIGAS report 2002-2004 where revenue generated from one production block
(www.bpmigas.com), total expenses in 2004 can not be used to recover costs from another block.
approximately US$ 7 billion to explore and produce In practical terms this means that operators are to
840 million BOE, or US$8.06/BOE. Although just a manage each block in isolation from the others with a
US$1/BOE reduction in total costs would result in separate team or at least within a separate
saving nearly US$ 1 billion annually, it is suggested administrative structure.
here that a committed application of optimization
alternatives could achieve an annual savings of up to In most cases, to ensure that the operations in each
US$ 2 billion for the industry. block are running smoothly, the operator develops its
own exclusive supply chain infrastructure for each
Although Indonesia has raised the KRIS (Cost block. The operator conducts its own procurement of
Reduction Indonesian Style) initiative, no Goods and Services and mobilizes needed logistics
recommendations have been implemented. Similar support facilities on an exclusive basis. As there is no
initiatives in the United Kingdom (CRINE or Cost effective collaborative planning among the operators,
Reduction in the New Era) and in Malaysia (CORAL each operator may have infrastructure support in
or Cost Reduction Alliance) have become major place in excess to its needs; resulting in higher
successes following collaborative planning among the operating costs. Parallel to this each operator also
participating stakeholders and the elimination of carries its own risk profile. The operators within a
wastage and reduction of risk following effective given operational area often do not liaise or exchange
utilization of shared facilities and resources. any gained knowledge regarding logistics
efficiencies. In fact, many operators may not even be
Shared facilities, which are designed and developed at familiar with each other’s ongoing or planned
designated locations, are referred to as SUPPLY activities. At the governmental level, BPMIGAS has
CHAIN HUBs (SCH). A SCH will facilitate both yet to become an effective prime mover in facilitating
operators and suppliers in optimizing and creating a much-needed logistics planning and implementation
effort in these regional operational areas.
* Star Energy (Kakap) Ltd.

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As a consequence of the current operating system and prospective contractors must enthusiastically embrace
methodology, many issues persist regarding excess the added responsibilities given by the operators and
capacity in logistics support, high mobilization costs deliver the agreed services or products on time, in full
for individual projects and redundancy in and without defects - within budget. The common
procurement management. The volume of materials focus is to be on cost reduction and performance
and services are being used collectively by the enhancement within the entire supply chain, without a
operators still exceeds optimum levels. The loss of margin to the contractors.
redundancy effort, especially in the procurement
management process, creates a high administration The operational focus of a SCH should be on the
cost, reduced competition and is often not conducted 3(three) R’s:
within a market-driven price environment. The
current practices are also resulting in excessively-high 1. Reliability
inventory levels, lower inventory turn-over ratios and, 2. Responsiveness
ultimately, unusually high levels of surplus materials 3. Relationships
in stock.

Currently most operators are unable to determine The characteristics of this focus are three-fold: (1) a
where they are in terms of performance level - Are physical component, which by nature is high friction
they efficient or not? Few precise performance and capital intensive; logistics is a core competency.
measurements for a particular functional area or (2) a cyber component, which is low friction and
geographic area are available. Without this dynamic: logistics is not necessarily a core
information, our industry cannot develop (1) competency and (3) a relationship component, which
transparent, (2) accountable and (3) disciplined Key reflects the commercial relationships, protocols &
Performance Indicators (KPI’s), the first step towards regulations within a supply chain network, the
becoming proactive and initiating strategy-driven prevailing culture and socio-economic aspects.
activities.
Within a SCH structure, all parties have to align their
The situation described above has contributed to objectives and goals on an integrated basis through
Indonesia having one of the highest average operating developing a common vision & mission. These
cost per BOE in the region. Local goods and services objectives are to meet the participating parties’
needed by the industry are not properly promoted and anticipated values and needed returns and should
used. Many of the national service companies are address and try to minimize any prevailing risks. A
reaching a critical situation - they cannot compete set of minimum standards for behaviour, service and
within the current global environment. A clear product quality, HSE and performance must be
strategy and action plan need to be developed and agreed to in advance. The underlying commercial
executed now in order to improve both of these relationship is one of an alliance and/or partnership.
conditions. Participating contractors will be part of a team
striving to attain the Operator’s objectives to
maximize return.
SUPPLY CHAIN HUBS

The Supply Chain Hub (SCH) concept is The regulator and government must act as facilitators
recommended to facilitate and improve the strategic to encourage regional and national collaborative
operational objectives of operators within a planning, while actively endorsing optimization, risk
geographic area. A SCH provides both physical and reduction and elimination of wastage in field
virtual facilities as well as many other associated operations. A SCH requires strong teamwork,
support services that can be shared by operators in a appropriate levels of empowerment, and must stay
particular geographic operating theatre. focused on continuous improvement. An effective,
nation-wide network of SCHs would undoubtedly
To develop a SCH, operators must demonstrate reduce the current average operating cost per barrel
willingness to trust and empower contractors to and create additional value for Indonesia’s oil and gas
provide needed services. On the other hand, industry.

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The SCH may be initiated by either operators or Of Materials And Information From Suppliers To
contractors - or by both jointly. In order to have a End-Users.
significant impact on the national oil and gas
operations improvement program, the development of Supply Chain Management
a SCH has to be an integral part of a national
efficiency program. Involvement and full The Management Of Upstream And Downstream
participation of the regulator and government is Relationships With Suppliers And Customers, To
required for determining the appropriate geographic Deliver Superior Customer Value, At Less Cost To
location of the SCH and to facilitate collaborative The Supply Chain As A Whole.
planning between the operators in a particular
operating area. Synergy and integration among all Logistics
participating stakeholders, parties and participants is
of paramount importance. Logistics Is The Process Of Strategically Managing
The Procurement, Movement And Storage Of
With in context above, development of commercial Materials, Parts And Finished Inventory (And The
relationships can only be achieved by addressing Related Information Flows) Through The
these key rules of engagement: Organization And Its distribution channels in such a
way that current and future profitability are
1. Commercial relationships must be developed on maximized through the cost-effective fulfillment of
the basis of transparency, accountability and orders.
discipline – it must be harmonious and
complementary in principle; The following SCH development concept is
2. Governance, standards and norms, quality, HSE, recommended given the widespread nature of current
security and performance execution must have a petroleum licences in Indonesia. It is designed to
minimum common platform regarding cover the major operating areas from Sumatra to
achievements and compliance. At the same time, Papua and encompasses SCH’s currently under
there must be a constant pursuit of the highest development.
levels of excellence;
3. The prime objective is to meet the operators’
needs on time, in full and with no defects; National coverage
4. The commercial relationships network must
reflect the required capacity, ability and scope, as Since the Indonesian Petroleum Working areas are
a whole; scattered throughout Indonesia, SCH’s are proposed
5. Participation by for the stakeholders must be to be created in the most effective locations for
profitable and commercially valuable; supporting the operators. Figure-1 shows the key
6. Execution of work must meet the necessary potential areas for future SCH’s. Some of these
protocols, regulations and statutory laws; locations have already begun to develop services
provisions. However, as of today, these have not been
7. Work performance is to be measurable (against designated as shared facilities by communities nor
KPIs), accountable and is to be continuously become part of a strategic industry action plan to
improved; improve efficiency. The prime potential areas for
8. The concept and execution must incorporate immediate SCH development are Batam, Jambi,
strong business ethics Jakarta, Matak (Natuna), Lamongan/Tuban,
Balikpapan and, in the future, Sorong.
The following definitions are commonly used in the
context of SCH development:-
Central points of shared facilities
Supply Chain
To realize the optimum value of a SCH, it must be in
A Network Of Connected And Interdependent the most effective location for shared facilities. A
Organizations Mutually And Cooperatively Working SCH must provide the most economical and viable
Together To Control, Manage And Improve The Flow infrastructure that can be shared among adjacent

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operators. With regard to physical and cyber • Supermarket for consumables items
components, optimum connectivity with global and The SCH is designed to have a Risk – Reward
regional markets is a must, as is inter-connectivity working arrangement between operators and
with other SCH’s within Indonesia. suppliers. In knowing the operators’
requirements, a vendor may stock the materials
and deliver to the operators upon demand. A
Physical Facilities Vendor-Managed Inventory approach results in a
win-win solution for both operators and suppliers.
As a major support facility, a SCH should be Operators do not need to maintain expensive
equipped with an integrated physical infrastructure inventories on their books, yet will have a wide
which includes: choice of inventory items readily available when
needed. The vendors will have a “captive”
• Jetty/Port and Supply Base market with a minimum guaranteed supply
A SCH should have open sea access and must requirement, assuring them of a base level margin
possess a seaport specifically designed for PSC of profit.
operations. It should accommodate the supply &
service companies’ needs on an internationally- • Bonded Area
recognized standard. The seaport has to have all The presence of a Customs Bonded area at a SCH
the required facilities for stevedoring, cargo will enable the operators to manage all imported
handling, fuel, water, mud plants, waste materials effectively, fulfilling import
management and material delivery. All these requirements just prior to delivering the goods to
facilities need to have access to an Information & their operation areas. Bonded areas further
Communication infrastructure. encourage the development of product
assembling or manufacturing facilities within the
• Marine Transportation country – to the benefit and enhancement of the
A SCH should provide marine transportation Indonesian supply market.
capability, required for exploration, drilling and
production support operations. This capability
will enable the PSCs operating in the area to Virtual Facilities (the Cyber components)
share the services through a “shuttle service
system” from the supply base to all the offshore Described below are some of the shared “virtual”
operational areas – also known as a ‘Milk-Run’ facilities that are now available or under preparation
services provision. in some SCHs:

• Air Transportation • Vendor Management


For some areas, fixed wing or rotary wing To avoid redundancy in tender or bidding
services may be provided as an alternative processes, a system has been designed to manage
transportation option. Shared usage among vendors’ administration including registration,
operators will bring benefits through optimum pre-qualification and evaluation. This system is
cost per passenger utilization. also equipped with a “reminder notification”
feature, which automatically identifies eligible
• Warehouses and Support Facilities vendors, and provides information on when
The SCH should be equipped with open yard and vendor documentation needs to be renewed or is
covered storage areas. The storage can warehouse still incomplete.
both materials which have been purchased by
operators or vendors’ materials as part of a
Vendor-Managed inventory “supermarket” • Catalogue Management
scenario. These areas, often referred to as Vendor To ensure the standardization on material
Parks, must also include a provision for specialist management & coding, the SCH can provide a
third party services, e.g., Mud Plants, Waste list of catalogs using the current KIMAP (Kode
Plants, Tubular Care Centers, Marine Specialists, Identifikasi Material Pertamina) standard. The
Machine Shops, etc. SCH will be able to link between the vendor-

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cataloging systems and the operators’ applicable under Keppres 80/2003 and the BPMIGAS
cataloging systems. Comprehensive information supply chain operating procedures.
on materials such as description, part number,
manufacturer, price either new, used or surplus
materials can be easily accessed. Central Point for Information Technology

• E-Procurement Application • Extended ERP concept as a driver


This application allows operators to conduct The SCH should be developed based on a concept
procurement through electronic means. Eligible that all participants will be connected into an
and pre-qualified vendor databases (i.e. the integrated system utilizing information
vendors, which have passed the pre-qualification technology. The SCH IT support system will be
criteria) are made available through the SCH. E- available to integrate with applications used by all
Procurement becomes the key application through operators and vendors. SCH also provides an
which competitive bidding can be conducted. Enterprise Resource Planning (ERP) application
for operators and vendors. The ERP system
• Messaging and Collaboration provided by the SCH is ready to integrate with a
This application is provided to ensure messaging and collaboration system (mail,
communication and resource information-sharing document management, workflows, news, forum,
among the operators, vendors, regulators, services etc.) and other applications within Exploration &
providers and all other related parties. The Production operations. The system’s real strength
facilities consist of corporate email, forum, shared is its ability to measure Key Performance
folders, address book, sms engine, calendar, Indicators (KPI) for the operators, SCH provider
polling, etc. This facility speeds up and service companies. Continuous KPI
communication and lowers the risk of lost, measurement will provide a baseline reference for
mislaid or incomplete data. improvement plans established by the participants
(or for the entire supply chain!). This integrated
Central Point of Integrated Logistics and HRD solution combining ERP, a collaboration system
support services and technical applications represents a new trend
towards an effective decision support system
• Integrated Customs, Immigration and Permit known as Extended ERP or ERPII (Figure: 2).
Services
• Information as the catalyst
To achieve the optimum economies of scale, lead The SCH will offer an application to manage
time effectiveness and elimination of clerical shared information as required by the
work, the SCH may also provide integrated participants, for instance, providing tender
logistics support for functions such as: customs information for vendors, materials price database,
clearance, formalities, required permitting and vendor performance, or surplus materials
vendor verification and vendor audits. These accounting. This information is managed
services will enable operators to concentrate their continuously and will provide a real-time option
focus on more strategic issues rather than on for any information to be shared. This
routine clerical and administrative-related information becomes the catalyst to effectively
activities. link all participants within the supply chain hub.

• Center for Supply Chain Human Resources SUPPLY CHAIN HUB OPERATING
Development PRINCIPLES
A SCH with an internationally-accredited SCM
training center will also have a workshop and To ensure all parties in the oil and gas industry attain
training facility to upgrade the quality of human the national objective of improved operational
resources working within the supply chain. This efficiency, it is suggested that guiding principles be
service is also to anticipate the certification adopted from the CORAL initiatives to ensure that a
program for SCM professionals, as stipulated SCH is run effectively. These principles include:

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• Commitment
All parties must be committed to the concept that • Partnering
the SCH is one of the best alternative solutions Trust, common objectives and teamwork are key
for productivity improvement. A SCH provider values of this business arrangement. Cultural fit
must continuously measure the service levels between companies is an essential ingredient for
provided and improve the SCH’s performance. success in implementing the arrangement.

• Shared Risks and Rewards WHERE ARE THE POTENTIAL SAVINGS?


This is an incentive program, which serves to
focus the contractor's activities to achieve the Based on E&Y’s report on CRINE (North Sea
desired results and promote continuous operators’ success story in improving operations
improvement. Participants in a risk and reward efficiency), potential savings can be achieved on
scheme will be motivated to accept a higher every supply chain operational/link or stage, whether
degree of risk in exchange for a chance to earn exploration, drilling or production.
higher profits. A move to vendor-managed
inventory will transfer the inventory risk to • Cost Saving Activities during the Exploration
vendor, but provides as a reward, a chance to gain stage
value from the operators’ long-term commitment
to purchase the vendors’ products. Figure-3 is a summary of the improvements
which were achieved in the UK on- and offshore
The common driver for all participants in the operations during the exploration phase.
SCH is to reduce the total risk prevailing
within a supply chain. The X-axis categorizes the initiatives into easy,
medium and difficult to implement. The Y-axis
• Trust indicates the percentage of savings achieved
The operators must be prepared to empower and following implementation.
trust the contractor. The contractor, on the other
hand, must enthusiastically embrace the added In the management of seismic operations, major
responsibilities and deliver the agreed services or costs were incurred during mobilization and field
products on schedule, in full, without defects and parameter design. Maximum savings were
within budget. A win-win operating scenario realized adjacent operators shared the
must be implemented effectively, where all mobilization costs and utilized similar acquisition
parties and participants are aligned to make it parameters.. Collaborative planning among
work. adjacent or area-specific operators can contribute
to a significant cost saving for the industry.
• Teamwork
This approach will result in people working • Cost Saving Activities during the Drilling stage.
closer together in an open and communicative
relationship within a positive working Figure-4 shows that during the drilling phase,
environment. It will subsequently eliminate work initiatives which resulted in significant cost
duplication and unnecessary reporting savings included batching of work, sharing
requirements, improve turn-around time and will related risks with contractors, improvement of
reduce the size of project teams. performance monitoring, standardizing work
processes. All of these initiatives recorded
successes due collaborative planning.
• Aligned Objectives
The creation of a performance-driven relationship • Cost Saving Activities during the Production
designed to reward the contractors for their stage.
performance should result in alignment of the
operators’ and contractor's objectives. As a result, Figure-5 confirms that during the production
the contractor will strive to attain the operators’ stage significant cost savings were achieved
objectives in an effort to maximize his return. through shared inventory and industry-wide

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logistics planning which confirms the optimum participants’ competencies and increase value to all
utilization of the Supply Chain Hub as discussed stakeholders in the oil and gas community.
and illustrated earlier in this paper.
A successfully-applied and implemented SCH can be
HOW DO WE START? an extremely valuable driver not only in achieving
national cost reduction and value creation initiatives,
The biggest challenge always centers on “how to but also in leading the way to operational excellence,
start?”. How can we transfer from a conceptual a goal in every company’s mission statement.
framework to implementation and realization?
BPMIGAS, as the regulatory body in the Indonesian
oil and gas industry, must identify the best possible ACKNOWLEDGEMENTS
locations for SCH development within Indonesia.
This is can be achieved by evaluating the SCH The authors would like to thank Mr. Supramu Santosa
development plan proposed here or, alternatively, the (President and CEO, Star Energy), Mr.C.W Zeliff
Government may encourage operators and vendors to (Sr.VP Exploration & Production, Star Energy) for
develop & commit to utilizing the SCH concepts allowing the authors to present this paper. Dyah
needed for achieving efficiency improvement targets. Erowati (PT Lamongan Integrated Shorebase) and
Mujiono (PT Knowledge Hub International) as the
Once all participants in an operational area agree that author partners in developing this paper. Many thanks
a designated SCH represents the best alternative also for the valuable input and comments received
solution for improvement, the parties must be from Mr Lourens J Hinrichs (Energy Partners
committed to fully utilize the SCH and adhere to a International currently assigned to PT BALIKPAPAN
continuous improvement plan. A close monitoring of Synergistics) during the paper’s development.
the service levels and Industry KPI’s is the key
success factor required for managing this
improvement process. The Government (or REFERENCES
BPMIGAS) as the largest benefactor of all cost
savings, must aggressively pursue the role of E&Y Consultant 2000, The Implementation of
champion for the coordination, facilitation and control CRINE (Cost Reduction in the New Era) report 2000
of the initiatives proposed and pursued.
Debindo Multi Expo, Indonesian Oil and Gas
CONCLUSION Directory 2004

In several countries, the SCH concept has CORAL (Cost Reduction Alliance) Malaysia,
been implemented to improve efficiency, develop Petronas Publication, 2001

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Figure 1 - Potential Locations for SCH Development.

Figure 2 - Supply Chain Hub Stakeholders.

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Figure 3 - Cost Saving Activities during the Exploration Stage. (Source E&Y report on CRINE2000)

Figure 4 - Cost Saving Activities during the Drilling Stage. (Source E&Y report on CRINE2000)

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Figure 5 - Cost Saving Activities during the Production Stage. (Source E&Y report on CRINE2000)

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