By Regina Mayor & Samir Khushalani
The boom in shale plays and natural gas in Texas has given birth to a new crop of producers while creating opportunity for energy-industry veterans. The often-rural nature of onshore shale plays (think Eagle Ford), the geographically dispersed nature of the shale plays, and the recent resurgence of onshore production present logistical hurdles for both newcomers and those accustomed to the integrated, singular supply chain associated with offshore work.
Among the issues specific to onshore producers are differences in scale, which means managing greater numbers of deliveries that contain smaller quantities of supplies to geographically dispersed facilities, and the rapid pace of development and activity in shale production, meaning shorter lead times and competition for resources of all kinds.
As producers grapple with onshore’s fragmented supply chain and accompanying operational issues, they also face practical and ethical considerations arising from their sudden, often overwhelming presence in regions where economic renewal is needed but infrastructure is inadequate. Onshore production dictates a different approach to supply chain and procurement.
The fragmented nature of the onshore supply chain means many more decisions must be made about both large-spend items and smaller supply-chain issues. Decisions about the former (e.g., turbines), concern global players, and in a sense are less complicated. The number of players is smaller, and they all have long-standing reputations and comprehensive professional services practices.
A helpful way to think about supply-chain decisions for smaller-spend items is materials vs. suppliers. That distinction may well dictate whether to source regionally or locally. When deciding on suppliers for materials, ask the following questions: What kind of reach does the company have? Is their product mix varied enough to satisfy the diverse nature of the wells being explored? Are they supplying other operators in the area?
Don’t be afraid to work with companies supplying competitors; success indicates an intimate knowledge of the territory and the terrain, and is proof of their ability to deliver. Working with a supplier who is sourcing materials locally rather than through a centralized distribution network could be a better bet than going with a company with a national footprint. A track record for delivering in North Dakota isn’t important if the drilling is in Texas. Considering a national player? Look at their regional distribution outlets.
For services, the most important considerations are reputations for reliability and whether the supplier has the relationships to ensure a robust pipeline of employees. The competition for workers can be fierce, with the winning companies often being those who pay the best – the suppliers to be associated with. Where adversarial relationships between producers and suppliers were once considered the norm, the goal is now partnership. The mutually beneficial alliances between automakers and their suppliers are an example of why cooperation can be better than contention.
The bottom line: The power rests with the supplier in today’s remote shale plays. It is a supplier’s market rather than a buyer’s market in the Eagle Ford. Consequently, the focus for companies is less on selecting suppliers and more on securing supply. Successful companies will make themselves a ‘customer of choice’ by offering more favorable payment terms, improving their internal processes to drive on-time payments, and deploying effective supplier relationship-management programs.
But intense competition for suppliers of materials and services is no excuse for not having strict qualifying processes. It is especially important with service suppliers, as the barriers to entry can be so low as to be insignificant. Virtually anyone with a truck and a tank can be a water supplier, for example. Ask if the service suppliers are bonded. Investigate their safety record. Any event that shuts the operation down, even for a brief period, will likely have a greater impact on the company reputation than it will the supplier’s.
Improved mastery of the supply chain allows for better planning; for being proactive and predictive rather than reactive and responsive. The fast-moving, competitive world of shale production often results in costly, last-minute scrambles to move equipment and people. Keeping a closer eye on leases and their expiration dates, and making sure that equipment is where it needs to be when it needs to be can avoid such scenarios. Lease acquisition strategy solutions, such as those offered by Tobin, TOW, and Quorum, can help enable smooth, cost-efficient remobilization of resources.
As an industry in its infancy, onshore shale production is one where best practices are still being developed rather than followed and companies are establishing precedent rather than being guided by it. Consequently, it makes sense to heed lessons from other industries. For example, logistics, heavy-equipment rental, and moving companies, all of which map and manage the movement and coordination of their fleets via GPS and other technologies, are great analogs for shale operators. Technology need not be industry-specific; standard supply chain management software, such as that found in leading ERP solutions, is an excellent tool for providing comprehensive, real-time data.
Think about who is in charge of the procurement and supply-chain operations. Are they experts in the technology of exploration and production – as is too often the case — or in the disciplines themselves? If the goal is to better manage and improve procurement and supply chain, hiring someone who understands the advanced concepts that guide these processes is critical. It will also increase the likelihood that a fragmented supply chain could be transformed into a more integrated one.
Finally, think about the effect operations are having on the regions where the work is being done. While there may be a reinvigorated regional economy by creating jobs and generating tax revenues, chances are good these areas lack the infrastructure to accommodate the influx of equipment and people. Tensions between towns and the companies that are helping them prosper may seem inevitable, yet they can be mitigated.
Investment in the needed infrastructure is the most obvious and sensible thing to do, as it will ease operations while providing relief to the community. Local governments tend to be ill-equipped and disinclined to build and/or improve roads and bridges. Rather than spend money touting the benefits being brought to the community and/or emphasizing the need to improve infrastructure, spend the money on improving the infrastructure. Do it with a sense of commitment to the well-being of the community, not just in pursuit of company goals. Don’t think about the cost of such investments; instead, consider the cost of not making them: ill will that could ultimately inhibit the ability to work efficiently in the region.
Texas’ shale industry is still relatively young, with a vast amount of opportunity for growth and expansion. Given the country’s need for low-cost energy, the industry can’t help but prosper, but the pace of growth will depend on how adroitly companies navigate the challenges.
Regina Mayor is KPMG’s National Advisory Energy Sector Leader, and Samir Khushalani is the National Strategic Sourcing & Procurement Leader. Both serve KPMG’s energy clients. They can be reached at email@example.com and firstname.lastname@example.org.
Mar 13, 2017 Comments Off on Business Tax Issues for 2017
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