Assignment II

Supply chain management in Petroleum Industry - General View

Petroleum industry is a major player in a countrys economic development and a vital ingredient of its
GDP. According to Christopher M. Chima, [ Journal of Business and economics research 2007],
Supply chain management in a Petroleum industry is the configuration, coordination and continuous
improvement of sequentially organized operations involved in upstream, midstream and downstream.

Up-stream Activities

Mid-stream Activities

Down - stream Activities

On - Shore
Identification

Exploration

Drilling

Production and
Extraction

Transportation
1. Pipeline
2. Rail ways
3. Road ways
4. Water ways

Temporary
Storage

Refinery

Storage

Off- Shore
Retail
Fig 1: Various Segments Of Petroleum Supply Chain
The Oil and gas supply chain has three functional segments namely the upstream, Midstream and
Downstream. These streams have the following activities involved
Upstream activities
Exploration : Aerial survey, seismic, geophysical and geological operations
Appraisal Drilling: Drilling of wild cat wells / test wells
Production and extraction
De-commissioning and Rehabilitation
Midstream activities
Transportation
Storage
Downstream activities
Refining and processing of crude and gas
Marketing and Distribution

Upstream functions of oil and gas sector starts with exploration, Development, Production, and
Transportation of crude oil to the point of transformation into final products. Midstream involves
infrastructure used in transporting crude oil and petroleum products, and finally downstream
consists of Processing, Transportation of products, Storage, Marketing and Distribution (Briggs,
2010).
Trends in upstream supply chain include: 1. availability of right information at right time for
various stakeholders, 2. Integrating supply chain with vendors and suppliers for each
organization involved in the process, 3. Enterprise Business Solutions to manage multi-modal

transportation, resource tracking, logistics, and cost tracking, 4. Availability of new customized
IT solutions, and off-the-shelf solutions from vendors like IBS, Manugistics and SAP. Also,
various drivers that are typically seen in a generic supply chain can be seen in downstream
supply chain as well.

1.
2.
3.
4.

Driver
Inventory
Transportation
Facilities
Information

Efficiency
Responsiveness
Cost of holding
Availability
Consolidation
Speed
Consolidation / Dedication
Proximity / Flexibility
What information is best suited for each objective

Table 1: Various Drivers In A Typical Supply Chain

For example, facility location of a refinery is determined by transportation costs from exploration
units and transportation to downstream distribution units. Furthermore, it is determined by
proximity to ports and pipeline availability/construction-costs. This also involves, identifying the
products to produce in refinery such as kerosene, jet fuel, diesel, naphtha, etc., and identifying
the right product bundle that will be required by distribution units. For production in refineries,
demand forecasting, supply& distribution optimization, scheduling and replenishment also form
key factors.
Pipeline Crude
Transportation
Exploration and
Production

Commodity Market
Crude Storage Tank

Maritime
Transportation
Storage Facility New
owner

Oil Refinery
Product Pipeline

Retail Storage
Terminal

Product Distribution
Commercial
Markets

Retail Markets
Industrial Markets

Retail Customers

Wholesale Customers

Fig 2: Basic supply chain flow related to oil and gas sector
The upstream processes in petroleum industries incur 72% of total cost of oil supply
chain. Initially, a geological survey is carried out in which sedimentary basins are identified in

promising landscape formation using photographic survey or using advanced Satellite based
image survey technique which has reduced time and cost considerably by giving more accurate
and real information. Then, field geological assessment is carried out using any of three methods:
seismic, gravimetric and magnetic method, for obtaining further detailed information. Once this
is done a wildcat or exploratory well is drilled to analyze the presence of hydrocarbon, thickness
and pressure and temperature of the reservoir. When a well with commercial quantities of
hydrocarbon reserve is found successfully, the well is completed with tubing and a valve
assembly (x-mas tree) is installed, if not the well is sealed/abandoned as per procedure and
restored to its initial condition. Later several appraisal wells are drilled to analyze the extent of
the reserve and increase occupying time of the site. Once the size of the reservoir is estimated,
development wells are drilled and completed. Production, storage and pipeline facilities are
created.
Most wells are free flowing but for those that are not, additional pumping mechanism or
water/gas injection is required to maintain the reservoir pressure. As the hydrocarbon reaches the
surface it is further routed to central production facility to separate the produced fluid into oil gas
and water such that oil is free from dissolved gas and vice versa. Oil is transported to concerned
refineries through pipelines, tankers, ships, rails etc., and gas through pipeline to consumers.
Finally as the reservoir gets depleted the wells are decommissioned and restored to an
environmentally sound site.

Issues Identified in Oil and gas supply chain

As Oil and gas supply chain involves coordination between various tiers, flow of
information, material, and finance, is very important as this sector is highly profit dependent and
even a little discrepancy would impose major effect on SC profitability. Some issues that were
identified in different sector are as tabulated:
Upstream

Midstream

Downstream

Coordination issue
Information/ data flow
Waste management
Environmental impact
Lead time
Inventory tracking
Advanced Technology adoption
Product visibility
Data management
Decision making
Human safety
Environmental issues

Transportation availability
Information/data flow
Order management
Route optimization
Decision making
Coordination issues

Stock out
Customer dissatisfaction
Customer churn
Coordination issues
Lost sales
Information flow
Demand fluctuation
Product visibility
Data management
Decision making
Human safety
Environmental issues

Table 2: Issues identified in Petroleum SCM