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

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

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As a consequence of the current operating system and
methodology, many issues persist regarding excess
capacity in logistics support, high mobilization costs
for individual projects and redundancy in
procurement management. The volume of materials
and services are being used collectively by the
operators still exceeds optimum levels. The
redundancy effort, especially in the procurement
management process, creates a high administration
cost, reduced competition and is often not conducted
within a market-driven price environment. The
current practices are also resulting in excessively-high
inventory levels, lower inventory turn-over ratios and,
ultimately, unusually high levels of surplus materials
in stock.
Currently most operators are unable to determine
where they are in terms of performance level - Are
they efficient or not? Few precise performance
measurements for a particular functional area or
geographic area are available. Without this
information, our industry cannot develop (1)
transparent, (2) accountable and (3) disciplined Key
Performance Indicators (KPI’s), the first step towards
becoming proactive and initiating strategy-driven
activities.
The situation described above has contributed to
Indonesia having one of the highest average operating
cost per BOE in the region. Local goods and services
needed by the industry are not properly promoted and
used. Many of the national service companies are
reaching a critical situation - they cannot compete
within the current global environment. A clear
strategy and action plan need to be developed and
executed now in order to improve both of these
conditions.
SUPPLY CHAIN HUBS
The Supply Chain Hub (SCH) concept is
recommended to facilitate and improve the strategic
operational objectives of operators within a
geographic area. A SCH provides both physical and
virtual facilities as well as many other associated
support services that can be shared by operators in a
particular geographic operating theatre.
To develop a SCH, operators must demonstrate
willingness to trust and empower contractors to
provide needed services. On the other hand,
prospective contractors must enthusiastically embrace
the added responsibilities given by the operators and
deliver the agreed services or products on time, in full
and without defects - within budget. The common
focus is to be on cost reduction and performance
enhancement within the entire supply chain, without a
loss of margin to the contractors.
The operational focus of a SCH should be on the
3(three) R’s:
1. Reliability
2. Responsiveness
3. Relationships
The characteristics of this focus are three-fold: (1) a
physical component, which by nature is high friction
and capital intensive; logistics is a core competency.
(2) a cyber component, which is low friction and
dynamic: logistics is not necessarily a core
competency and (3) a relationship component, which
reflects the commercial relationships, protocols &
regulations within a supply chain network, the
prevailing culture and socio-economic aspects.
Within a SCH structure, all parties have to align their
objectives and goals on an integrated basis through
developing a common vision & mission. These
objectives are to meet the participating parties’
anticipated values and needed returns and should
address and try to minimize any prevailing risks. A
set of minimum standards for behaviour, service and
product quality, HSE and performance must be
agreed to in advance. The underlying commercial
relationship is one of an alliance and/or partnership.
Participating contractors will be part of a team
striving to attain the Operator’s objectives to
maximize return.
The regulator and government must act as facilitators
to encourage regional and national collaborative
planning, while actively endorsing optimization, risk
reduction and elimination of wastage in field
operations. A SCH requires strong teamwork,
appropriate levels of empowerment, and must stay
focused on continuous improvement. An effective,
nation-wide network of SCHs would undoubtedly
reduce the current average operating cost per barrel
and create additional value for Indonesia’s oil and gas
industry.
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The SCH may be initiated by either operators or
contractors - or by both jointly. In order to have a
significant impact on the national oil and gas
operations improvement program, the development of
a SCH has to be an integral part of a national
efficiency program. Involvement and full
participation of the regulator and government is
required for determining the appropriate geographic
location of the SCH and to facilitate collaborative
planning between the operators in a particular
operating area. Synergy and integration among all
participating stakeholders, parties and participants is
of paramount importance.
With in context above, development of commercial
relationships can only be achieved by addressing
these key rules of engagement:
1. Commercial relationships must be developed on
the basis of transparency, accountability and
discipline – it must be harmonious and
complementary in principle;
2. Governance, standards and norms, quality, HSE,
security and performance execution must have a
minimum common platform regarding
achievements and compliance. At the same time,
there must be a constant pursuit of the highest
levels of excellence;
3. The prime objective is to meet the operators’
needs on time, in full and with no defects;
4. The commercial relationships network must
reflect the required capacity, ability and scope, as
a whole;
5. Participation by for the stakeholders must be
profitable and commercially valuable;
6. Execution of work must meet the necessary
protocols, regulations and statutory laws;
7. Work performance is to be measurable (against
KPIs), accountable and is to be continuously
improved;
8. The concept and execution must incorporate
strong business ethics
The following definitions are commonly used in the
context of SCH development:-
Supply Chain
A Network Of Connected And Interdependent
Organizations Mutually And Cooperatively Working
Together To Control, Manage And Improve The Flow
Of Materials And Information From Suppliers To
End-Users.
Supply Chain Management
The Management Of Upstream And Downstream
Relationships With Suppliers And Customers, To
Deliver Superior Customer Value, At Less Cost To
The Supply Chain As A Whole.
Logistics
Logistics Is The Process Of Strategically Managing
The Procurement, Movement And Storage Of
Materials, Parts And Finished Inventory (And The
Related Information Flows) Through The
Organization And Its distribution channels in such a
way that current and future profitability are
maximized through the cost-effective fulfillment of
orders.
The following SCH development concept is
recommended given the widespread nature of current
petroleum licences in Indonesia. It is designed to
cover the major operating areas from Sumatra to
Papua and encompasses SCH’s currently under
development.
National coverage
Since the Indonesian Petroleum Working areas are
scattered throughout Indonesia, SCH’s are proposed
to be created in the most effective locations for
supporting the operators. Figure-1 shows the key
potential areas for future SCH’s. Some of these
locations have already begun to develop services
provisions. However, as of today, these have not been
designated as shared facilities by communities nor
become part of a strategic industry action plan to
improve efficiency. The prime potential areas for
immediate SCH development are Batam, Jambi,
Jakarta, Matak (Natuna), Lamongan/Tuban,
Balikpapan and, in the future, Sorong.
Central points of shared facilities
To realize the optimum value of a SCH, it must be in
the most effective location for shared facilities. A
SCH must provide the most economical and viable
infrastructure that can be shared among adjacent
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operators. With regard to physical and cyber
components, optimum connectivity with global and
regional markets is a must, as is inter-connectivity
with other SCH’s within Indonesia.
Physical Facilities
As a major support facility, a SCH should be
equipped with an integrated physical infrastructure
which includes:
• Jetty/Port and Supply Base
A SCH should have open sea access and must
possess a seaport specifically designed for PSC
operations. It should accommodate the supply &
service companies’ needs on an internationally-
recognized standard. The seaport has to have all
the required facilities for stevedoring, cargo
handling, fuel, water, mud plants, waste
management and material delivery. All these
facilities need to have access to an Information &
Communication infrastructure.
• Marine Transportation
A SCH should provide marine transportation
capability, required for exploration, drilling and
production support operations. This capability
will enable the PSCs operating in the area to
share the services through a “shuttle service
system” from the supply base to all the offshore
operational areas – also known as a ‘Milk-Run’
services provision.
• Air Transportation
For some areas, fixed wing or rotary wing
services may be provided as an alternative
transportation option. Shared usage among
operators will bring benefits through optimum
cost per passenger utilization.
• Warehouses and Support Facilities
The SCH should be equipped with open yard and
covered storage areas. The storage can warehouse
both materials which have been purchased by
operators or vendors’ materials as part of a
Vendor-Managed inventory “supermarket”
scenario. These areas, often referred to as Vendor
Parks, must also include a provision for specialist
third party services, e.g., Mud Plants, Waste
Plants, Tubular Care Centers, Marine Specialists,
Machine Shops, etc.
• Supermarket for consumables items
The SCH is designed to have a Risk – Reward
working arrangement between operators and
suppliers. In knowing the operators’
requirements, a vendor may stock the materials
and deliver to the operators upon demand. A
Vendor-Managed Inventory approach results in a
win-win solution for both operators and suppliers.
Operators do not need to maintain expensive
inventories on their books, yet will have a wide
choice of inventory items readily available when
needed. The vendors will have a “captive”
market with a minimum guaranteed supply
requirement, assuring them of a base level margin
of profit.
• Bonded Area
The presence of a Customs Bonded area at a SCH
will enable the operators to manage all imported
materials effectively, fulfilling import
requirements just prior to delivering the goods to
their operation areas. Bonded areas further
encourage the development of product
assembling or manufacturing facilities within the
country – to the benefit and enhancement of the
Indonesian supply market.
Virtual Facilities (the Cyber components)
Described below are some of the shared “virtual”
facilities that are now available or under preparation
in some SCHs:
• Vendor Management
To avoid redundancy in tender or bidding
processes, a system has been designed to manage
vendors’ administration including registration,
pre-qualification and evaluation. This system is
also equipped with a “reminder notification”
feature, which automatically identifies eligible
vendors, and provides information on when
vendor documentation needs to be renewed or is
still incomplete.
• Catalogue Management
To ensure the standardization on material
management & coding, the SCH can provide a
list of catalogs using the current KIMAP (Kode
Identifikasi Material Pertamina) standard. The
SCH will be able to link between the vendor-
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 cataloging systems and the operators’ applicable
cataloging systems. Comprehensive information
on materials such as description, part number,
manufacturer, price either new, used or surplus
materials can be easily accessed.
• E-Procurement Application
This application allows operators to conduct
procurement through electronic means. Eligible
and pre-qualified vendor databases (i.e. the
vendors, which have passed the pre-qualification
criteria) are made available through the SCH. E-
Procurement becomes the key application through
which competitive bidding can be conducted.
• Messaging and Collaboration
This application is provided to ensure
communication and resource information-sharing
among the operators, vendors, regulators, services
providers and all other related parties. The
facilities consist of corporate email, forum, shared
folders, address book, sms engine, calendar,
polling, etc. This facility speeds up
communication and lowers the risk of lost,
mislaid or incomplete data.
Central Point of Integrated Logistics and HRD
support services
• Integrated Customs, Immigration and Permit
Services
To achieve the optimum economies of scale, lead
time effectiveness and elimination of clerical
work, the SCH may also provide integrated
logistics support for functions such as: customs
clearance, formalities, required permitting and
vendor verification and vendor audits. These
services will enable operators to concentrate their
focus on more strategic issues rather than on
routine clerical and administrative-related
activities.
• Center for Supply Chain Human Resources
Development
A SCH with an internationally-accredited SCM
training center will also have a workshop and
training facility to upgrade the quality of human
resources working within the supply chain. This
service is also to anticipate the certification
program for SCM professionals, as stipulated
under Keppres 80/2003 and the BPMIGAS
supply chain operating procedures.
Central Point for Information Technology
• Extended ERP concept as a driver
The SCH should be developed based on a concept
that all participants will be connected into an
integrated system utilizing information
technology. The SCH IT support system will be
available to integrate with applications used by all
operators and vendors. SCH also provides an
Enterprise Resource Planning (ERP) application
for operators and vendors. The ERP system
provided by the SCH is ready to integrate with a
messaging and collaboration system (mail,
document management, workflows, news, forum,
etc.) and other applications within Exploration &
Production operations. The system’s real strength
is its ability to measure Key Performance
Indicators (KPI) for the operators, SCH provider
and service companies. Continuous KPI
measurement will provide a baseline reference for
improvement plans established by the participants
(or for the entire supply chain!). This integrated
solution combining ERP, a collaboration system
and technical applications represents a new trend
towards an effective decision support system
known as Extended ERP or ERPII (Figure: 2).
• Information as the catalyst
The SCH will offer an application to manage
shared information as required by the
participants, for instance, providing tender
information for vendors, materials price database,
vendor performance, or surplus materials
accounting. This information is managed
continuously and will provide a real-time option
for any information to be shared. This
information becomes the catalyst to effectively
link all participants within the supply chain hub.
SUPPLY CHAIN HUB OPERATING
PRINCIPLES
To ensure all parties in the oil and gas industry attain
the national objective of improved operational
efficiency, it is suggested that guiding principles be
adopted from the CORAL initiatives to ensure that a
SCH is run effectively. These principles include:
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• Commitment
All parties must be committed to the concept that
the SCH is one of the best alternative solutions
for productivity improvement. A SCH provider
must continuously measure the service levels
provided and improve the SCH’s performance.
• Shared Risks and Rewards
This is an incentive program, which serves to
focus the contractor's activities to achieve the
desired results and promote continuous
improvement. Participants in a risk and reward
scheme will be motivated to accept a higher
degree of risk in exchange for a chance to earn
higher profits. A move to vendor-managed
inventory will transfer the inventory risk to
vendor, but provides as a reward, a chance to gain
value from the operators’ long-term commitment
to purchase the vendors’ products.
The common driver for all participants in the
SCH is to reduce the total risk prevailing
within a supply chain.
• Trust
The operators must be prepared to empower and
trust the contractor. The contractor, on the other
hand, must enthusiastically embrace the added
responsibilities and deliver the agreed services or
products on schedule, in full, without defects and
within budget. A win-win operating scenario
must be implemented effectively, where all
parties and participants are aligned to make it
work.
• Teamwork
This approach will result in people working
closer together in an open and communicative
relationship within a positive working
environment. It will subsequently eliminate work
duplication and unnecessary reporting
requirements, improve turn-around time and will
reduce the size of project teams.
• Aligned Objectives
The creation of a performance-driven relationship
designed to reward the contractors for their
performance should result in alignment of the
operators’ and contractor's objectives. As a result,
the contractor will strive to attain the operators’
objectives in an effort to maximize his return.
• Partnering
Trust, common objectives and teamwork are key
values of this business arrangement. Cultural fit
between companies is an essential ingredient for
success in implementing the arrangement.
WHERE ARE THE POTENTIAL SAVINGS?
Based on E&Y’s report on CRINE (North Sea
operators’ success story in improving operations
efficiency), potential savings can be achieved on
every supply chain operational/link or stage, whether
exploration, drilling or production.
• Cost Saving Activities during the Exploration
stage
Figure-3 is a summary of the improvements
which were achieved in the UK on- and offshore
operations during the exploration phase.
The X-axis categorizes the initiatives into easy,
medium and difficult to implement. The Y-axis
indicates the percentage of savings achieved
following implementation.
In the management of seismic operations, major
costs were incurred during mobilization and field
parameter design. Maximum savings were
realized adjacent operators shared the
mobilization costs and utilized similar acquisition
parameters.. Collaborative planning among
adjacent or area-specific operators can contribute
to a significant cost saving for the industry.
• Cost Saving Activities during the Drilling stage.
Figure-4 shows that during the drilling phase,
initiatives which resulted in significant cost
savings included batching of work, sharing
related risks with contractors, improvement of
performance monitoring, standardizing work
processes. All of these initiatives recorded
successes due collaborative planning.
• Cost Saving Activities during the Production
stage.
Figure-5 confirms that during the production
stage significant cost savings were achieved
through shared inventory and industry-wide
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 logistics planning which confirms the optimum
utilization of the Supply Chain Hub as discussed
and illustrated earlier in this paper.
HOW DO WE START?
The biggest challenge always centers on “how to
start?”. How can we transfer from a conceptual
framework to implementation and realization?
BPMIGAS, as the regulatory body in the Indonesian
oil and gas industry, must identify the best possible
locations for SCH development within Indonesia.
This is can be achieved by evaluating the SCH
development plan proposed here or, alternatively, the
Government may encourage operators and vendors to
develop & commit to utilizing the SCH concepts
needed for achieving efficiency improvement targets.
Once all participants in an operational area agree that
a designated SCH represents the best alternative
solution for improvement, the parties must be
committed to fully utilize the SCH and adhere to a
continuous improvement plan. A close monitoring of
the service levels and Industry KPI’s is the key
success factor required for managing this
improvement process. The Government (or
BPMIGAS) as the largest benefactor of all cost
savings, must aggressively pursue the role of
champion for the coordination, facilitation and control
of the initiatives proposed and pursued.
CONCLUSION
In several countries, the SCH concept has
been implemented to improve efficiency, develop
participants’ competencies and increase value to all
stakeholders in the oil and gas community.
A successfully-applied and implemented SCH can be
an extremely valuable driver not only in achieving
national cost reduction and value creation initiatives,
but also in leading the way to operational excellence,
a goal in every company’s mission statement.
ACKNOWLEDGEMENTS
The authors would like to thank Mr. Supramu Santosa
(President and CEO, Star Energy), Mr.C.W Zeliff
(Sr.VP Exploration & Production, Star Energy) for
allowing the authors to present this paper. Dyah
Erowati (PT Lamongan Integrated Shorebase) and
Mujiono (PT Knowledge Hub International) as the
author partners in developing this paper. Many thanks
also for the valuable input and comments received
from Mr Lourens J Hinrichs (Energy Partners
International currently assigned to PT BALIKPAPAN
Synergistics) during the paper’s development.
REFERENCES
E&Y Consultant 2000, The Implementation of
CRINE (Cost Reduction in the New Era) report 2000
Debindo Multi Expo, Indonesian Oil and Gas
Directory 2004
CORAL (Cost Reduction Alliance) Malaysia,
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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