How to deal with risk when sourcing crude oil from emerging markets? The case of Middle East

Details

Supervisors

Blome, Constantin

Faculty

Louvain School of Management

Degree label

Master [120] en sciences de gestion

Abstract

Without any doubt, the energy industry is one of the most critical assets for our today’s society and even more compelling for our daily lives (Urciuoli et al, 2014; Mast, 2005). Any disruption can cause tremendous impacts on companies dealing with energy products, as well as on our economy. It is especially true when it comes to the oil and gas industry, which faces an array of risks and uncertainties. As a matter of fact, long and complex supply chains increase uncertainties that companies face (Manuj & Mentzer, 2008). In this context, the supply chain risk management (hereafter SCRM), the crisis management and resilience became relevant topics and have been discussed by previous researches. Christopher (2011) argues that the company with better logistics and supply chain management can improve and sustain their competitive advantage over the rival companies (Cited by Szusek and Hassen, 2012). Chima (2007) stated that oil and gas companies’ main challenge is not the scarcity of the resource but rather the production and delivery of petroleum products to the final consumers at a competitive cost. Hence, a robust supply chain management is paramount, as it will enhance this objective. Thus, oil companies strive for a vertical integration as it enhances the control over the chain. Moreover, previous researches have highlighted the relevance of governmental implications to ensure the resilience of energy supply chain (Urciuoli et al, 2014). The purpose of this investigation is to determine how oil industry in Belgium deals with risks when sourcing crude oil from emerging markets, and in relation to those, what are the mitigation strategies to manage disruption to enhance a low-risk supply chain. We can assume, given the high dependency of Western countries and especially Belgium from the oil producing countries, that the governments and the oil corporations have established strong plans to not interrupt the flow of oil supply. In this master thesis, investigating through supply chain risk management practices when sourcing crude oil from emerging countries has led to an array of propositions generated from the empirical findings. First and foremost, it has been expressed that the hypothetically accepted notion of specific standards applied when sourcing crudes from the Middle East was rejected. Indeed, the interviewees highlighted the standardisations of procedures when sourcing from emerging countries do not differ from sourcing in more developed countries. In terms of risk management techniques, one of the principal strategies developed by oil companies is the vertical integration. Unanimously, the four interviewees pointed out the importance of vertical integration as a way to enhance the market’s dynamics response but also to control costs. Besides, at every stages of the oil supply chain, formal techniques, strategic alliances and operational measures are performed by entities. It also seems that the supplier selection phase is of primacy to minimize risks related to suppliers from the emerging countries (or not). The case study has revealed that the level of due diligence is highly performed when it comes to supplier selection. Security is of major importance for the interviewees. In this study, the macro-environment factor also plays an important role in the supply chain risk management’s decisions. As such, the four interviewees admitted their concerns about geopolitical risks carried by the Middle East countries. It has been demonstrated that countries where natural gas or crude oil commonly originated from, are politically unstable and foreign companies are at constant risk of terror attacks, and wars, e.g. in Qatar, Nigeria, Algeria and Egypt (Fernandes et al., 2010 and Vakhshouri, 2011). Researchers confirm that some risks cannot always be avoided and suggest to focus on the enhancement of resilience instead of trying to avoid them (Christopher and Peck, 2004; Rice et al., 2003; Sheffi, 2001, 2005). In this study, it has been evidenced that oil supply chain are resilient enough to not interrupt the continuous flow of oil supply to Belgium, and that can generally be extended to other Western countries.