Material Procurement in Oil & Gas Projects

Material Procurement in Oil & Gas Projects

Introduction

Procurement is one of the most important activities in any project in general and Oil & Gas projects in particular. It would not be wrong if this activity is categorized as the most critical. In terms of monetary value, it occupies the major chunk of the project, while driving its duration when it comes to schedule. In this article, the topic would be limited to material procurement, though it encompasses a wide range of services too.

Figure1_Depiction of Procurement Component in Project

Procurement may be direct or indirect, or combination of both, based on the strategy adopted in the project.

Types of Procurement

Continuing from the previous paragraph, material procurement can be either direct, indirect or a combination of both. The following paragraph will elaborate more on the types of material procurement.

Procurement is considered to be direct, if the company, i.e., the project owner procures materials directly from the supplier/vendor or manufacturer. In this type of strategy, complete procurement cycle is handled by the project owner.

In the indirect procurement, the project owner assigns the responsibility of this job to a third party, which in many cases are their contractors executing the project where the materials are to be utilized/incorporated into the work. In this type of strategy, complete cycle of this activity is handled by the third party.

Figure2_Material Procurement Strategies

In case of combination, owner of the project procures a portion of the materials while the third party procures the remaining.

Categorization of Materials

Materials procured for the project are broadly categorized as tagged and bulk. 

Tagged materials are those which have a unique number, i.e., tag number associated with them. These materials are tracked/traced using the tag number. Examples of these types are pumps, compressors, electrical motors, columns, heaters, reactors, pressure vessels, heat exchangers, control valves, UPS, coolers, etc.

Bulk materials are those bought by numbers, length, volume, lots, etc. They do not have any unique number associated with them. They are procured using a standard description. Examples of bulk materials are pipes, pipe fittings, flanges, steel plates, structural steel materials, etc.

Apart from the above, materials can also be classified as long lead and non-long lead. This classification is based on the time required for the delivery of the materials to the project site.

A long lead material or item takes a very long time to get delivered at work site after the placement of order to purchase. Examples of long-lead items are compressors, pumps, etc. They are the materials that drive the duration of the project.

Figure3_Types of Materials

Non-long lead items do not take long time to be delivered and they include off-the-shelf type ones.

Procurement Cycle

Complete process of procurement is called the procurement cycle. It starts from material requisition and ends with the completion of suppliers’ documents final review. The steps in the cycle are as follows:

  • Material Requisition
  • Request for Quotation (RFQ)
  • Receipt of Quotations
  • Technical Bid Evaluation (TBE)
  • Commercial Bid Evaluation (CBE)
  • Purchase Order (PO)
  • Vendor Drawings & Documents Review (especially in tagged items)
  • Inspection and acceptance of major component materials
  • Inspection at the Supplier’s Manufacturing Facility including Factory Acceptance Tests (FAT) and if applicable Integrated Factory Acceptance Tests (iFAT)
  • Shipping to Site
  • Custom Clearance and Receipt at Site
  • Material Receipt Inspection
  • Review of Suppliers’ documents

Material requisition denotes the requirement of material for the project and it is the outcome of the engineering phase. Based on this requirement, quotation is requested from the suppliers. On receipt of the quotation, they are technically evaluated to evaluate whether they are aligned to the specification and requirement. Once the technical evaluation is completed, the proposal which qualifies therein is evaluated commercially with respect to the lowest cost and subsequently, the purchase order is placed to the supplier whose quotation is lowest in terms of the price.

After the placement of purchase order, the activity starts at the supplier’s location. Here they generate various drawings and documents associated with the material, this is very important when it comes to the tagged materials.

These documents and drawings are reviewed and finalized and the supplier themselves procure materials to manufacture the item ordered. These materials are inspected and accepted. Example of this step is the receipt of plates, tubes, flanges, etc. at the manufacturing facility of heat exchanger supplier for incorporation into the work. These items are inspected and once accepted only; they can be incorporated into the work. During the manufacturing process, there are various stages and points of quality checks/inspection as per the Inspection and Test Plan (ITP).

Upon completion of the manufacturing process, these materials/items are tested in the factory, and this is called Factory Acceptance Test (FAT).

In many cases, the item/material have their other dependent part/components manufactured at other supplier’s location and where integrated testing is also required. In such cases, the components are brought at one facility and assembled to perform an integrated Factory Acceptance Test (iFAT).

Upon successful inspection and test, the material/items are shipped to the project site by either sea, road or air.

Upon receipt at site, the material/item goes through the customs clearance process and then brought to the site where Material Receipt Inspection is done. After this inspection, final review of supplier’s document is done, and the procurement cycle gets completed. Procurement cycle may vary from few months to more than a year.

Inspection and Shipping Logistics

Materials, especially those are manufactured and then shipped to the site require inspection and the supplier’s facility. These are not one-time inspections, rather at different stages, as per the ITP. These inspections are done in one of the following ways:

  • By project owner who procures the material directly
  • By third party/contractor who is procuring the material and/or project owner
  • A third-party specialized agency hired specially for the inspections at suppliers’ locations

Shipping and associated logistics are either handled directly by both the supplier and the party that is procuring the materials or by a specialized agency hired for this purpose.

Pre-qualified Suppliers

Materials are very critical components of the project and they cannot be procured from any supplier in the market. Further, all suppliers may not be in the position to provide the materials as per the specifications.

To have quality control over the procurement, most of the big owner company’s have their approved panel of suppliers. The list of suppliers may be very big and categorized in multiple ways.

In order to be listed in the panel, a supplier has to fulfill certain conditions and the exercise is called pre-qualification. It is a continuous exercise in big owner organization and a dedicated team is assigned for the task.

Criteria for selection in the supplier panel may include the following:

  • Technical Evaluation
  • Financial Stability
  • Past Supply History
  • Buyers List
  • Manufacturing Facility
  • Quality Certification
  • Skilled Review

The above are the examples and each organization has its criteria, which may include more or less checks.

Post Procurement

Once the procurement is completed, the materials are incorporated into the work. Like pipes are prefabricated and erected at site, tested, painted, etc. Similar is the process for steel plates. However, there are Site Acceptance Tests (SAT) for many equipment and items.

Risk in Procurement

Like any other activity, procurement too has its own set of associated risks. These risks may be delayed delivery, which may affect the overall schedule. One of the mitigations may be the procurement of long-lead items by owner of the project as lining up of contractor takes time. There may be the failure of the material at site or once incorporated into the work. Further, there is also a risk of damage while shipping them to the site.

Figure4_Depiction of Material Criticality in Project Schedule

Above are few examples of the risk, which are much more.

Conclusion

In this article, a good summary of the material procurement in projects is provided. This phase or activity has been covered from different angles. While it is short, it gives sufficient insight. This article would be useful to experienced professionals, trainees in this field and also those pursuing their academic specialization in project management.