Direct Sourcing From An Operator’s Perspective [Guest Post]

Guest Contributor Introduction From Joseph Triepke:
Kicking off our Fridays In December 2018 guest post series is Jessica Barton, an E&P sourcing specialist with nearly a decade of supply chain management experience for leading operators in US shale. Jessica is currently the category manager for proppant and last mile logistics at Southwestern Energy.

Jessica has been involved with unbundled supply chains for most of her career, and her experience with the strategy precedes it becoming a widespread practice. She was at EP Energy in 2011 when the company first started to evaluate direct sourcing, following in EOG’s footsteps.

For almost eight years at EP Energy, Jessica participated in the company’s direct sourcing implementation, with progressively increasing responsibility culminating in her role as category manager for proppant, proppant logistics, diesel fuel, and MRO materials for all company assets. She left E&P Energy to join Southwestern in January 2018.

Jessica is part of an elite group of E&P direct-sourcing experts that are now being aggressively recruited by E&Ps that are earlier on the self-sourcing adoption curve. We are very excited to be able to turn the platform over to Jessica today to share her views on direct sourcing from an operator’s perspective. Her insights born from experience are a must-read for both other operators and OFS firms – for direct sourcing is fast becoming the norm in the Lower 48 completions supply chain.

Direct Sourcing From An Operator’s Perspective

Jessica Barton
December 7, 2018

The prospect of direct sourcing proppant is daunting.

It’s a significant risk to assume the potential cost of non-productive time that could occur if frac sand doesn’t make it to the wellsite, and I can personally attest to the fact that it’s an enormous amount of work to get the contracts and processes in place. But in this operator’s opinion, the juice is worth the squeeze.

More and more E&Ps are beginning to direct source because there are huge cost savings and efficiencies to be gained. It’s never been easier to take the reins than at this moment.

While Murphy’s Law will always be at play in the oilpatch, I believe you can succeed and prepare for the majority of the issues I’ve encountered over the years by following these guidelines.

Supplier Selection

As with many services, alignment with a reliable partner is essential.

Sand contracts have traditionally been long-term deals, and their level of service should be evaluated just as seriously as the pricing and specifications of the product they provide.

Flexibility of contractual terms is absolutely critical. I look for suppliers who will work with me to adapt to deviations from the daily plan, significant swings in the completions schedule, modifications to the ratio of our product mix, and more.

They should understand from experience that operators don’t necessarily have the ability to level out their work like the Halliburtons of the world with multiple customers per region, and demand won’t be the same every month.

Not every supplier will offer direct access to the person handling the logistics and assurance that someone will answer emergency calls at 2 am, but a responsive 24/7 customer service team is vital for success.

A supplier’s transload agreements and/or local mines are also a major determining factor. A shorter distance between the loadout point and wellsite means less expensive loads, more turns achieved per driver’s shift (their #1 incentive), and the ability to catch back up if deliveries fall behind. But it’s also important to note how efficiently a facility is run and the average wait time to load a truck, because a recurring three hour wait in line can easily run you out of sand on location.

Communication Is Key

Internally, it’s crucial to have a clear line of communication with the completions engineers.

It may not be intuitive for someone accustomed to relying on an accommodating pressure pumper to regularly update supply chain personnel, or understand the impact of major schedule movements and the lead time necessary to place an order.

The sand buyer must be notified of any changes regarding the volume of sand required for a job on a daily basis, including adjustments in stage count, volume of stage design, proppant intensity, zipper order if well designs vary, delayed or expedited schedules, and pace of the frac crew if drastically different than anticipated.

They need a realistic estimate of how many stages per day each crew can hope to achieve, and how quickly the next job will start. It’s not advisable to simply rely on the completions schedule, which may be conservative in timing to make sure that initial production dates are met.

Accounting should also be involved in the direct sourcing strategy from the start, as they’ll need time to prepare for the flood of invoices and work out a plan for the verification of shipments and accurate coding to AFEs.

We as operators also have to recognize that sand mines are essentially manufacturers and need to be kept informed. While they’re aware of the volatility of this industry, there’s an inherent mismatch between the consistent output of established mines and unpredictable demand of operators.

I recommend at minimum a weekly call with each sand supplier to align on present and future operations and communicate any updates. Suppliers need a rolling forecast to know how much volume to reserve for each customer on a monthly basis and a daily pull plan to line up their shipments.

The volumes will never match up perfectly, but if your suppliers know the minimum amount required all the way up to your record breaking pace, they can plan accordingly.

Before the first purchase order is placed, establish your expectations regarding the circumstances in which they should send notifications of issues, the content of reports needed (loadout reports, trucking logs, bill of ladings, etc) and how often reports should be prepared.

Quality Control

One other issue that’s not immediately obvious to someone new to direct sourcing is that trash in the sand is a problem industry-wide.

With previous suppliers, I’ve seen pieces of cement scraped from the transload floor, rocks from dragging hoses on the wellsite, Rotex screen balls, corn, screws, fertilizer pellets, rail tags, a hammer head, cigarette butts and more.

While some of this debris is harmless, much of it can damage pumps, and that’s just pouring salt in the wound of stimulation companies that are no longer making margins on sand.

In your initial discussions with sand and trucking suppliers, it’s best to find out if there are QC procedures in place, how frequently their facilities and equipment are inspected, and if you have the ability send out a third party inspector at random.

Keep in mind as you set up your contracts that the more suppliers you use, the harder it will be to identify the source and get them to take responsibility for the debris.

Make Your Plan B (And Maybe C)

In spite of all your (and your vendor’s) best efforts, disruptions in the supply chain are inevitable.

As you build out the process, identify each potential pitfall and prepare a backup plan. That could entail utilizing more than one sand source, maybe maintaining a separate stockpile of your own inventory nearby, and creating relationships with numerous sand suppliers.

It’s totally up to chance who may have a few thousand tons lying around when it’s most needed.

In summary, operators have a buffet of options these days. We can rail in premium Northern sand or pull in-basin sand if you’re lucky enough to have that option.

Many suppliers are willing to fully manage the logistics from mine to the wellsite or allow you pick and choose which segments you want to control. But in any case, you must understand your entire supply chain from start to finish and ensure that both internal customers and proppant suppliers are aligned with that strategy and vision.