Fluctuating fuel costs, increased production and a boom in shale gas drilling have created new challenges in the oil and gas industry. Historically, oil and gas company’s soaring profits masked the poor state of logistics operations within its supply chain. Now that profits are thin, oil and gas (O&G) companies are rushing to save money wherever they can. O&G companies realize the savings potential in their disordered logistics processes, specifically transportation management.
The oil and gas industry holds one of the most complex supply chains. Suppliers of pipe, chemicals, drilling equipment, sand and other materials must move products efficiently to and from drilling sites, upstream locations and compressor locations. O&G transportation often involves servicing remote locations with no infrastructure, which slows down operations and contains substantial safety and financial risk. Any shipping disruption results in a significant loss for the companies involved.
Most O&G companies and suppliers are adapting to today’s market challenges by organizing transportation operations to improve service, reduce risks and find cost savings. There are many steps you can take to reduce transportation spend and create efficient freight management practices.
Shale Gas Production, Transportation Requirements and the Industry-Wide Consequences
Shale gas has dramatically changed the energy landscape. According to the U.S. Energy Information Administration (EIA), shale gas production now accounts for 47% of all U.S. natural gas production. The high volume of shale gas drilling is a major factor in the falling oil and gas prices, and, in turn, the turmoil the industry is currently facing.
A study by the New York State Department of Environmental Conservation on the environmental impact of shale gas production examined the significant transportation requirements of drill sites. The study estimated the amount of upstream truck trips required for one multi-well pad to be between 5,850 and 8,905.
The rise in demand for trucks comes at a time of serious capacity shortage in the trucking industry. Flatbed trucks, which typically serve drilling sites, have tighter capacity than any other type of truck trailer. There have been approximately 15.08 loads for every flatbed truck in 2015, as of October. The truck shortage slows down transportation operations for the whole O&G supply chain, not just suppliers.
Changes in the transportation industry have made cargo movement more difficult for the O&G industry. Truck capacity is limited and most O&G companies do not have proper processes in place to secure the necessary truck space it needs. The cost of transportation is rising rapidly, at a time when O&G companies desperately need to cut costs. The result of transportation changes equals extremely slow and expensive transportation operations in the industry.
While freight movement has proven to be an inefficient part of the O&G supply chain, some companies have already found huge cost savings by focusing on its transportation management strategy.
5 Common Transportation Mistakes and How to Correct Them
The capacity shortage across all modes, not just flatbed trucks, has driven up the price of shipping and made it more difficult to provide consistent service. This problem will not go away, as the American Trucking Association (ATA) predicts the industry will be short 240,000 drivers by 2020.
Tight capacity has completely changed the way companies manage transportation. The shift in transportation strategy has proven especially difficult for O&G companies and suppliers who have historically only focused on freight safety, and have not had to worry about timely service or costs.
Here are five common mistakes in transportation management that O&G companies make, and how to correct them.
Mistake #1. Limited Use of Transportation Management Software
Properly using a transportation management system (TMS) in today’s complicated logistics environment is not optional. A TMS can be used for more than just booking loads; it provides historical and real-time data for visibility into the supply chain, which is necessary before any profitable changes can be made.
When inbound and outbound shipments are not managed using a centralized TMS, aggregate data on costs, performance, safety and other critical issues do not exist. Local data may exist on someone’s hard drive, within a file folder, or worse, in someone’s head, but it is not available to the entire organization for analysis and decision support.
A TMS generates standard and custom reports that help identify key business challenges. Through analysis of the data created by the software, you can figure out future capacity requirements, historical and projected freight costs, and whether or not your carriers comply with DOT safety regulations.
Whether it’s a steel pipe traveling on a flatbed or a hotshot delivery to a rig, a central TMS tracks freight moves, which is crucial for freight optimization. Not all businesses can afford implementing a TMS, so outsourcing this function makes sense. Partnering with a 3PL gives you access to all the benefits of a TMS without the capital outlay and hassle.
Example: A large pipe distributor felt it was spending too much on transportation but didn’t know how to reduce costs because it had no visibility into freight processes. The distributor recruited the help of a 3PL with a powerful TMS system. The 3PL implemented and centralized the TMS system, and was able to implement changes based on the data collected. A year later, the distributor saw a 20% reduction in freight costs and benefited from a fuel surcharge 40% lower than the market average.
Benefits of a transportation management system:
- Optimized freight moves
- Automatic recommendations on freight consolidation, continuous moves and cost-saving opportunities
- Visibility into shipment status and overall logistics processes
- Reduced freight risk and improved safety during transport
Mistake #2. Decentralized Transportation Management
Decentralized transportation management means that there is no central system used to manage freight. In O&G projects, buying freight services is typically left to non-logistics employees who don’t have the time or expertise to arrange the best solution. For example, often times the person in charge of arranging transportation at a drill site is a rig supervisor, who is only focused on keeping a drilling site fully operational.
Making decentralized decisions in the field leads to overspending. Non-logistics employees aren’t able to spend the time looking for a good rate, and typically just want the items to arrive as fast as possible.
Unnecessary expedited shipments can be a major factor in transportation spend. The biggest enemy of any drilling project is downtime, so little thought is ever given to the cost of sourcing replacement parts.
Overspending is not the only disadvantage to decentralized transportation management. Without a central system, there is a lack of visibility and control. When freight is managed job-by-job or move-by-move, executives are powerless in establishing freight management policies. Also, there’s no accumulated intelligence to aid in future transportation decisions.
One simple remedy is to partner with a non-asset based 3PL for some or all of your shipments. The right partner gives you access to industrial freight expertise, capacity, technology and can manage and optimize freight moves while you focus on core business competencies.
Example: An on-site engineer at a drilling company used local search to source a carrier for a hotshot move from West Virginia to central Pennsylvania. The PA-based carrier charged $1,300 – a $100/hour rate – for a round-trip to West Virginia and back. A similar delivery was arranged two weeks later by a freight broker, who contacted a driver already in West Virginia with another load and arranged to have him bring the needed load to Pennsylvania for only $350.
Benefits of centralized freight purchasing decisions:
- Instant visibility to shipment status and real-time notifications
- Strategic and enforced freight policy
- Reduction in freight costs
- Streamlined invoicing
Mistake #3. Focusing Only on Over-the-Road Carriers
Many O&G companies and suppliers rely exclusively on over-the-road (OTR) trucking companies to move freight; avoiding rail and barge because it may not understand these more complex, multi-modal moves or it lacks established relationships with railroad, barge and trans-load companies.
O&G companies should consider whether shipments need expedited and if speed is a priority. Barge transport is often overlooked because it is slow, and many businesses don’t have large enough shipments to fill a barge. But, shipping by barge is an extremely cost-effective transportation solution.
Using alternative modes or intermodal shipments instead of OTR carriers is a useful strategy for O&G companies. Although these types of shipments may be complicated, they can help produce freight savings, and a 3PL is always available to help with the complex shipping processes. With the help of a 3PL, O&G companies can consolidate barge shipments to save money on freight. Or, a 3PL can do the complicated work of planning a shipment over several different modes to find cost savings.
Example: A mid-sized steel company sent regular shipments of steel pipe via flatbed from Houston, Texas to Edmonton, Alberta. The company abandoned rail because its carrier and trans-load providers could not hit promised delivery deadlines. Consequently, the company paid three times per-ton to move the goods by truck. A 3PL with a strong industrial experience was brought in to shift the freight moves back to rail. By coordinating the activities of the steel company, carriers and trans-load companies, the 3PL was able to hit promised delivery dates while reducing the customer’s annual cost for this lane by more than $850,000.
Benefits of using alternative freight modes:
- Potential 20 – 40% reduction in per-ton cost
- A wider array of available capacity
- Flexibility to switch modes based on overall costs
Mistake #4. Focusing Only on Carrier Relationships
O&G companies tend to lean heavily on the same set of core carriers due to long-established relationships and a foundation of trust. This trust comes from a comfort of working with carriers that have proven the ability to move freight safely, and with specialized equipment.
Choosing only familiar carriers, and not shopping around for competitive pricing, can quickly drive up costs. As the industry expands to different geographic regions, the strategy of relying on carrier relationships might leave you without the capacity you need, forcing you to pay spot market or expedited rates.
Freight rates for O&G cargo are typically negotiated by sales, purchasing or other non-transportation staff who may not understand the availability of lanes, modes and other options like using a 3PL or negotiating fuel surcharges. It is easiest for O&G companies to rely on known carriers since it isn’t familiar with the transportation industry, but this can lead to rates being overinflated up to 20%.
The simplest solution is to allow a 3PL to negotiate rates for you. Its carrier networks allow it to leverage down costs through a competitive bidding process and they have the expertise to negotiate fuel surcharges lower than the industry average. 3PLs have their own wide-ranging network of carrier relationships to be added to your own. That way, there is a reliable source of capacity and the carriers are pre-approved to be safe and efficient.
Example: A large pipe distributor used a local Texas-based carrier to move pipe from Texas to Marcellus Shale rig sites in Ohio, Pennsylvania and West Virginia. Because this carrier could not arrange backhaul loads to Texas it charged a round-trip rate. After shifting the volume to an industrial transportation specialist with the lane volume to fill the backhaul, the distributor now pays one-third less, saving about $300,000 per year to serve rig sites.
Benefits of shopping freight rates and expanding your carrier base:
- Capacity and specialized equipment when and where you need it
- Better backhaul pricing
- Faster, accurate freight quotes for new business proposals
- Lower operating costs and higher company profit
Mistake #5. No Visibility or Control Over Inbound Freight
Transportation accounts for almost 50% of an average company’s logistics costs. O&G companies can gain more control of these costs when it chooses to make inbound freight management a supply chain priority.
Controlling inbound freight enables a company to track shipment status and create better inventory management. Typically, inbound shipments are in the vendor’s hands, limiting visibility and control over costs. Vendors usually hide the cost of transportation in the price of its products and use freight movement as a source of revenue.
Without control of inbound freight, O&G companies have much less control over its construction schedule, which hurts operating efficiency and costs. For example, midstream companies often face unexpected crane and labor costs of up to $6,000/day due to delays in transportation. Inbound freight for midstream O&G companies is extremely expensive, and vendors make nearly as much on shipping freight as they do by selling its products. Since midstream companies don’t understand its actual transportation costs, they do not understand the true cost of building a plant or compressor station.
Optimization of inbound freight starts with gaining control, however, management of inbound materials can be a complicated process, as internal operational changes are often required. Working with a 3PL is the best solution to fix inefficient inbound freight processes. A 3PL will control inbound freight and vendor relationships and implement tracking and management software to begin making profitable changes.
Example: A large drilling company allowed their vendor to move loads of 80-foot pipes from Houston, Texas to a site in Arkansas for $4600 per load. They decided to enlist the help of a large industrial transportation and logistics company. After working with the 3PL, the company was able to bring these costs down to $3,900 per load, saving $560,000 on one, high-volume project.
Benefits of gaining control over inbound transportation:
- Visibility into inefficiencies and hidden savings
- Reduce vendor markups by 15 – 50%
- Faster, safer cargo movement
The Benefits of Outsourcing Transportation Management
Transportation cannot be a secondary consideration for O&G companies. As the O&G industry matures, there will be increased competition and margin pressure, improved executive oversight, demand for lower transportation spend, and more use of alternative modes to ensure capacity.
The transportation environment is changing rapidly, becoming more expensive and complicated while the O&G industry needs to save money and time on transportation. A 3PL overcomes challenges by partnering with clients to create solutions that produce results. With a 3PL, O&G companies will find profitable solutions and keep businesses moving while revenue is decreasing.
The top functions that O&G companies outsource are:
- Transportation operations
- Yard and dock management
- Track and trace features
- Freight audit and payment
3PLs have the ability to handle a few loads each month or manage inbound and outbound shipments, acting as a company’s transportation department. 3PLs work best in collaborative, long-term business partnerships so they can identify inefficiencies and provide custom solutions which drives continuous improvement.
There are many benefits to fully outsourced and managed transportation:
- Save Time and Money. A 3PLs expertise, transportation management system, carrier network and reporting capabilities assure time and cost savings for the shipper.
- Resource Network. 3PLs leverage industry relationships and shipment volumes to get lower prices. It can negotiate lower fuel surcharges, too. 3PLs have thousands of carriers in its fleet network, so carriers bid on freight which lowers the price significantly.
- Continuous Optimization. A 3PL will continuously search for ways to cut costs and add value to your logistics operations. There’s a dedicated team of experts monitoring, analyzing and optimizing processes every day. A 3PL will make sure transportation operations never fall victim to the constantly changing supply chain environment.
- Risk Management. Outsourcing transfers the risks of transportation operations to the logistics provider, protecting your organization from penalties and fines. If a shipment is lost, stolen or damaged it’s the 3PLs responsibility. A 3PL lowers claims.
- Technology. A 3PL with a TMS is instrumental for insight into the supply chain. TMS technology provides the custom data you desire. TMS software is very expensive, so when a 3PL integrates the technology, you save money, plus get more accessibility to capacity. Shippers benefit from increased load consolidation, more frequent backhauls and optimized routing and distribution.
- Operational Control. Through a 3PL partnership, your operational control will increase. Outsourcing is a two-way street. A reputable 3PL will collaborate and report to you regularly which creates necessary visibility and real-time metrics into your transportation processes.
PLS Client Case Study
- A leading provider of midstream services in the natural gas industry.
- Engaged in gathering, processing and transportation of natural gas and crude oil.
- Had always relied on vendors to manage transportation of their supplies and capital equipment.
- Multiple locations operating key energy regions: Marcellus, Huron/Berea, Woodford, Granite Wash and Haynesville.
- Vendors had always arranged and paid for transportation.
- Vendors were marking up transportation between 15% and 50%.
- There was no transportation department.
- Had very little visibility
- There were significant costs associated with delayed deliveries.
- No visibility to what they actually spent on transportation.
- PLS set up a dedicated account management team.
- PLS procured highly qualified and cost effective carriers.
- PLS set up strategic and cost effective storage yards.
- PLS provides daily updates on all shipments, segmented by project.
- PLS G/L codes invoices to allow them to properly allocate and budget transportation costs.
- More control.
- Shipment visibility.
- Detailed cost visibility.
- The ability to create an accurate budget on large capital expenditure project transportation costs.
- Client gets more bandwidth/resources while they save money.