Over the past few years, fuel production in the United States has seen a marked increase, largely due to the widespread adoption of hydraulic fracturing, or fracking, whereby pockets of natural gas and crude oil trapped deep in the shale layer far below the earth’s surface are extracted via a horizontal drilled well. During the extraction process, the lower, horizontal portion of the well is perforated and flushed with millions of gallons of fracking fluid, which is water, sand and a lubricating chemical. The sand acts as a mechanism that creates perforations in the shale allowing oil and gas to release into the well and to the surface.
Energy companies entering the fracking market bring vast experience and capability to handle the downstream process, but the more uncharted territory of upstream logistics — the sourcing and organization of assets needed for extraction — has presented challenges. If not expertly managed, this undertaking carries heavy liabilities in the form of high costs, wasted resources, and even safety compliance shortfalls. So to ensure the job gets done right, energy companies are beginning to hire fourth-party logistics providers (4PLs) to manage, oversee, and improve certain aspects of their upstream operations. Below are just a few areas where 4PLs are meeting the needs of this growing industry.
Dispatch Management: It takes hundreds of bulk tankers full of water to fill one fracking well — a demand that even the largest bulk carriers lack the capacity to meet at one time. To fill the gap, throngs of “mom and pop” carriers flock to these wellheads and are rewarded with steady employment. And by necessity, the energy producers have entered the business of dispatch — coordinating the daily movements of hundreds of individual carriers. In the area surrounding any major wellhead, hundreds of these bulk tankers can be found parked on the side of the road, all waiting for direction. They’re paid premium rates by the energy companies to remain nearby and at the company’s disposal, with the flexibility to respond to frequent changes in fresh water sources and wastewater destinations. A 4PL can drastically improve the economics of these situations by taking over the task of dispatch, systematically monitoring the resources, and planning ahead for changing capacity needs. With this guidance, energy companies can be prepared for high-demand times without paying for underutilized assets.
Centralized Systems and Resources: Beyond dispatch, 4PLs are also bringing other traditional transportation management services to these job sites — things like freight audit and payment from a regional control tower. Energy customers also stand to benefit greatly from shared services from a global control tower, and access to a fleet of assets — offerings traditionally associated more with the 3PL model. Consequently, 4PLs that can also deliver 3PL resources have an edge on market share in the upstream energy refinement space.
Inventory Management: An enormous amount of expense goes into materials for a drill site: tens of thousands of dollars for a drill head, and millions of dollars for OCTG (the piping and fitting that goes into the well), as examples. Despite the value of these resources, many companies cannot say with exact certainty what their pipe yards or warehouses contain, let alone what lies beyond the fence line. This is a sizable issue because the ability to account for these high-cost materials has a quantifiable effect on how Wall Street views an operation. 4PLs with expertise in warehousing and inventory management can be invaluable partners here by developing systemic solutions and processes to increase visibility of materials.
Compliance with Safety Standards: Standardizing safety compliance across the array of carriers working at a wellhead is one of the most intimidating tasks for energy companies to take on internally. A 4PL has the direct experience and expertise to drive uniform safety models all the way down to the carrier community. To make this happen, they are augmenting energy producers’ teams with boots on the ground, establishing the baseline compliance level, meeting regularly with carriers, and developing safety programs specific to a wellhead to be monitored, managed, and improved as conditions change.
A Continuous Improvement Approach: Energy companies will rarely use the term “Lean,” but they certainly understand and appreciate the strategic project management that a 4PL brings to the table. By successfully mitigating current problems at the wellhead, preempting emerging ones, and developing systems that add value and drive costs down, the 4PL industry has placed its foot firmly in a door long closed to outside partners.
Whether 4PLs will become permanent players in the upstream remains to be seen, but we do know that in this application, our industry offers invaluable resources that energy companies have only just begun to tap.
Brian Murphy is Director, Business Development at Menlo Worldwide Logistics. During his tenure with Menlo, Brian has helped build out the company’s Oil & Gas market offering and practice. With an extensive background in business development and marketing, Murphy has worked with customers in the logistics and supply chain industry for more than a decade.