The Four Pillars of Supply Chain Compliance In Oil & Gas

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Tim Haïdar
05/22/2014

The oil and gas supply chain is one of the most complex webs of organisations, activities, information, and resources in global business today.

Straddling the six inhabited continents and spanning disciplines from seismic scanning to point of sale at the pump, the hydrocarbon supply chain consists of thousands of companies, millions of employees and just as many potential compliance nightmares waiting to happen….

In this article, we take a look at the four areas that you need to excel in to ensure that your compliance programme is absolutely watertight.

1^st pillar - Supplier Risk Management

Supplier risk management has evolved with the fragmentation of the contemporary supply chain. Factors like outsourcing and globalisation have enabled companies to shrink overall costs and grow quickly into new markets but have also led to a much more fragmented model.

The global financial downturn that has affected industry since 2008 has greatly influenced the exposure of companies to the risk of a supplier suddenly going bankrupt, ceasing operations or being acquired.

Key factors in the maintenance of a buoyant and workable relationship with suppliers - both domestic and international – are clear oversight and regular contact to ensure reliability in spend management and the promotion and incentivisation of on-time performance.

2^nd pillar - Customer Risk Management

In any industry, customer concentration – an overreliance on one or a handful of big-hitting customers - can spell disaster for a business. To ensure that the risk potential of customers reneging on their commitment to your brand or services is limited, this needs to be appropriately identified, monitored and managed in alignment with your canon of corporate objectives and policies.

Effective customer risk management will hinge on a number of aspects, from the thorough understanding of your customer base and what might cause a customer not to pay, to diversification within a customer company as soon as possible to foster champions and advocates across multiple silos.

It will be important to focus on the length of engagement stipulated in any contracts as this can provide you with good opportunities to mitigate risk. For example, a long-term repeat client that has weathered the economic troubles of the past half decade or so will often be more reliable than a customer that has not had to ride out the storm of economic hardship.

Concentrating on the dependability of revenue recognition – that a company’s income is counted as revenue whenever the company delivers or performs its product or service and receives payment for it – is an essential way to gauge whether a customer is reliable or not.

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3^rd pillar - Third-Party Risk Management

More than most, the oil and gas industry is dependent on third-party contactors for a range of integral services and solutions. Working at arms length from these organisations and across unfamiliar cultural divides and international borders can be a minefield when compliance is involved.

A lack of judgement or a failure to effectively assess how parties from agents and distributors to business partners and other third-party intermediaries operate can leave your organisation open to a whole gamut of worst-case scenarios - ranging from reputational damage and government investigations, to operational risk, financial penalties and criminal liability.

Promotion of compliance under international regulations including the U.S. Foreign Corrupt Practices Act (FCPA), the UK Anti-Bribery Act and security and exchange and consumer and data protection regulations is of the utmost importance in an area where eternal vigilance is necessary to stave of disaster.

4^th pillar - Regulatory Management

To expand on the aim of our third pillar, the successful navigation of the international regulatory environment must be a cornerstone of any supply chain compliance framework. As well as the aforementioned international legislative requirements, some states and jurisdictions will have binding conditions on recruitment and procurement quotas.

These quotas - so-called "local content" requirements - mandate that a certain percentage of goods and services should be sourced indigenously. Failure to comply with these demands could lead to your company being stripped of its ability to operate in the host nation.

On top of local content, companies will have to steer through the treacherous waters of import and export regulation and control, breaches of which may incur the suspension or revocation of trading licenses.

Tim Haðdar is the Editor In Chief at Oil & Gas IQ. Reach Him At Twitter Or OGIQ

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