First of all, let’s start by explaining what does this commercial strategy mean. Bundling is a marketing tactic that involves offering two or more goods or services as a package deal (consolidation of requirements) for a discounted price, which is negotiated and mutually agreed between Buyer and Seller.
My broad experience in the field of Purchasing and Logistics Management and Strategic Negotiations, as purchasing leader in offshore well exploratory campaigns in Africa (Tanzania, Namibia, Angola, Benin) and South America (Colombia, Peru), allows me to introduce this innovative strategy for optimizing the exploratory project costs.
In 2011, I had the opportunity to apply this strategy as part of the planning and execution of the contracting processes required to support a well exploratory campaign offshore Tanzania. During the planning phase of the project, the six (6) drilling services listed below were identified as potential targets to apply the Bundle Services Discount strategy:
- Directional Drilling & MWD/LWD/PWD, Real Time Data Acquisition;
- Wireline Logging Services;
- Drilling and Completion Fluids and Services;
- Mud Logging Services;
- Liner and Casing Accessories; and
- Well Testing (DST) & Coiled Tubing & Nitrogen.
As part of the Invitations to Tender (ITTs) sent to the four (4) selected vendors to participate in the above-mentioned processes, the following commercial condition/strategy “Bundle Service Discounts”, was included in the ITT document package:
“BIDDER may submit the present commercial proposal with commitment for additional discounts in future BIDS related to the current project, which BIDS may result in multiple equipment/services packages awarding. The packages to be tendered for this project are:
- Directional Drilling & MWD/LWD/PWD, Real Time Data Acquisition;
- Wireline Logging Services;
- Drilling and Completion Fluids and Services;
- Mud Logging Services;
- Liner and Casing Accessories; and
- Well Testing (DST) & Coiled Tubing & Nitrogen.
To avoid future doubts and questionings, in the future BIDS the prices to be offered shall be stated without the previously proposed discount for the package so the Company (Buyer) will analyze the commercial proposals as they are and will apply the proposed discount in the previous BID at its own discretion.”
With the purpose to standardize the commercial proposals to be submitted by Bidders, the following “Matrix of Discounts for Consolidated Services” was designed and provided to Bidders. They should simulate and submit various rate discount scenarios for the provision of the requested services.
Throughout the operationalization of this original and innovative commercial strategy, Bidders had to simulate several price discount scenarios for the provision of the drilling services listed above, in response to the Request for Quotation (RFQ). The objective of this strategy was Bidders to offer as much discounts in the quoted prices as possible, based on the Bidders’ possibility to consolidate the largest quantity of services (Bundle Services) with the purpose to optimize their costs and reduce the quoted prices. In response to the RFQ, Bidders submitted their prices for the drilling services package (six services).
It is important to highlight that, as a result of the bidding process, the evaluations considered two GLOBAL price discount options, i.e., (i) price discounts in the case of the services were partially awarded to two (2) or more Bidders, with individual discounts ranging between 1% to 10% (average of 3.5%); and (ii) price discounts if FULL services package was awarded to only one Bidder, with discounts ranging between 2% to 11% (average of 5.3%).
After intensive negotiations with the best-classified Bidder, a revised proposal of discounts for the provision of the drilling services for the Tanzania exploratory project was received from such vendor. Emphasizing that, even though the revised price discounts continue ranging between 2% to 11%, as originally quoted by this Bidder for the FULL package option, the price discount for the drilling and completion fluids and services was increased, from original 6% to 8%, which improved the average price discount for the services package from 5.3% to 6.5%.
As a result of the bid processes execution, evaluation and negotiation under my responsibility, one (1) vendor was awarded with five (5) contracts for the provision of (i) Directional Drilling & MWD/LWD/PWD, Real Time Data Acquisition; (ii) Wireline Logging Services; (iii) Drilling and Completion Fluids and Services; (iv) Liner and Casing Accessories; and (v) Well Testing (DST) & Coiled Tubing & Nitrogen. This was a big professional challenge, even more considering to operate in a remote location, which supported the operations in the reliable provision of the drilling services, and contributed with the successful execution of the exploratory well drilling campaign in Tanzania. This negotiation approach was the first experience in regards to consolidate the supply of the offshore drilling services to a major operator, and represented a paradigm change with respect to the traditional scheme of individual/isolated contract negotiations with clients, resulting in financial and operational benefits to the parties, as well as the following gains to the Contractor:
- Cost reduction as per consolidation of the services provision;
- Optimization in the use of resources (personnel, materials, equipment);
- Service rates reduction due to economies of scale, based on a proportionate saving in costs gained by an increased level of production;
- Increase the Vendor’s Competitiveness in the Oil & Gas marketplace (service rates reduction).
- Reduction in the logistics activities and costs involved in mobilization and demobilization of personnel and equipment from the shore base to the drilling unit.
- Creating differentiation and greater value, enhancing the offer to the customer for a basic rate.
As a result of the aforementioned commercial strategy, 45 agreements for a total value of USD 232,000,000.00 were successfully executed; involving financial benefits of USD 6,000,000.00 because of the “Bundle Services Discounts”, obtained for the drilling service contracts (Mud Logging, Wireline Logging, Directional Drilling, Drilling Bits, Drilling Fluids, and Well Testing).
Other successful experience related with this commercial strategy was also applied in 2013 in an exploratory project in Colombia. I accurately identified seven (7) drilling services (mud logging, wireline logging, directional drilling, drilling & fishing rental tools, drilling bits, drilling fluids and well testing) representing between 10% (if Drill Stem Test was required in the well) and 15% (if Dry Hole well) in cost with respect to the total value of the contracts portfolio required in this exploratory project, which were potentially supplied by the same group of top-quality vendors. I determined these references after analyzing the Authorization for Expenditure (AFE-Budget) of the project. Because of the complex and productive negotiations conducted with the service companies, the seven (7) drilling services mentioned above were awarded to one Service Company involving price discounts per Bundle Services ranging between 3% and 15% (average of 7%). This effort resulted in savings for Operator of approximately USD 3,400,000.00 due to the consolidation of the provision of the drilling services in only one (1) vendor, increasing the commercial discounts when compared with the scenario to award the contracts to different providers and supported the first gas discovery in deep waters of the Colombian Caribbean Sea.
It is important to highlight that this innovative and brilliant initiative designed and implemented in these projects can be applied in the United States with a high possibility to generate cost efficiency and profitability increase of the Oil & Gas Industry, as a result of obtaining potential rate discounts ranging between 8% and 12%. However, the above-mentioned potential discounts will be greater in the U.S. due to the existence of a large number of contractors in the Oil & Gas marketplace, which increases the competitiveness and demands from contractors an optimization in costs resulting in discounts increase, improvement of the business financial health and increase in cash flow.
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