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Upstream logistics (general information)

In the oil and gas industry ‘downstream logistics’ is defined as bringing oil and gas to onshore customers while ‘upstream logistics’ is defined as supplying the offshore drilling and production units with the necessary supplies.

Important issues in upstream logistics are to support offshore and onshore (supporting) activities so that these can be carried out as planned and in a cost-efficient way. To be able to operate from remote locations, offshore drilling and production units need different types of support services which are provided by specialized offshore vessels. Examples of such vessels are Anchor Handling Vessels, Offshore Supply Vessels, Crew Boats and Standby / Rescue vessels. 

The end customers of the value chain are the offshore drilling and production units. The high value of the production, and the high cost of delaying offshore operations dictate the design of the upstream chain.

There are many types of offshore drilling and production units representing different logistical challenges. It is common to distinguish between two types of units. First we have units that are mainly producing (but might also be drilling) and stay at the same position for a longer period, such as (production) platforms or production ships. Second, we have those moving around on commission, doing exploration or production drilling, so called exploration (or wildcat) rigs /ships. The size of offshore drilling and production units can vary from small unmanned units to large constructions where several hundred workers are needed onboard.

In general, installations that are drilling have a more fluctuating and uncertain demand patterns for supplies than producing installations. The demand uncertainties are characterized by uncertain volumes and due dates, and which customers need to be visited. Producing installations usually have a smoother and more predictable demand. However, a certain level of uncertainty is always present.

Installations do not only need to receive supplies. There is also a need for return transport and the directional balance is in general good. The returned cargos are empty load carriers, waste, rented equipment and excess back-up equipment. In general, offshore installations have a rather limited storage capacity so it is important to have rather frequent visits to avoid a shortage of supplies or a build-up of return cargo. Much of the equipment used is rented with high day rates, hence it is also financially important to return such equipment quickly.

Often installations are located in clusters. The main reasons for this are that discoveries of oil and gas are usually naturally limited geographically and that economies of scale related to both the upstream and downstream part of the chain make it more beneficial for the oil companies to cluster offshore production facilities. However, this leads to a clustering of heterogeneous installations with regard to their demands and storage capacities. When supplying such a cluster by the same upstream chain, the challenge is to design an upstream chain that is both lean and agile. While the main focus of lean supply is on reducing costs, the main focuses of agile supply are high responsiveness and flexibility. In bothe concepts; information sharing is the key to sucess.

(Source: Bjørnar Aas, Upstream Logistics in Offshore Petroleum Production”, Molde University College, PhD theses in Logistics 2008:3, ISBN-13: 978-82-7962-098-3).

Upstream logistics is important for the oil comapnies and Norway!

The Norwegian petroleum production started in 1971 when the Ekofisk field came on stream. Since then, the petroleum sector  has grown rapidly and is today Norway’s largest industry. 

Since the start up, the petroleum sector has created enorumous values. Obviously, this has been very important for the economical growth and the standard of living in Norway; a country with only 4.7 millions inhabitants. The income from the petroleum sector has amongst others made it possible for Norway  to build one of the world’s largest funds named ‘the Government Pension Fund Global’. This fund is administered by ‘Norges Bank Investment Management (NBIM)’ and has per 1 July 2011 reached a market value of approximately 400 millions €.

Presently the major oil and gas producing areas of the Norwegian continental shelf are the northern and southern parts of the North Sea plus the Norwegian Sea, and a total of 52 oil fields are producing. The fields are developed by the use of manned and unmanned surface installations, and subsea solutions. Pipes are used for gas transportation. Additionally, a continuous search for new discoveries leads to an at all times presence of many exploration rigs. 

The offshore activity is extensive and the infrastructure is gradually getting more complex. Obviously, to ensure a continuous production is of utmost importance for the country and the oil companies operating on the Norwegian continental shelf. And in this matter, the logistics play a very important role, especially since all of the country’s production of oil and gas takes place at offshore installations. 

From a financial perspective, upstream logistics is important for several reasons. First, because the costs of running the upstream logistics in general is high. Second, because the financial consequences (the shortage costs) if the logistics fail, could potentially be tremendously high. Finally because a cost-efficient logistics is necessary to be able to produce profitable at low production volumes (tail-production). The latter is a topic of significant current interest since many of the oil fields at the Norwegian continental shelf recently have passed their peak production volume.

  (Source: Bjørnar Aas, Upstream Logistics in Offshore Petroleum Production”, Molde University College, PhD theses in Logistics 2008:3, ISBN-13: 978-82-7962-098-3).