Late delivery of equipment the case study of korea national oil corporation vietnam office

UNIVERSITY OF ECONOMICS HO CHI MINH CITY International School of Business MASTER OF BUSINESS ADMINISTRATION LATE DELIVERY OF EQUIPMENT - THE CASE STUDY OF KOREA NATIONAL OIL CORPORATION VIETNAM OFFICE LE THI TUNG ID: 20150077 SUPERVISOR: Prof TRAN HA MINH QUAN Ho Chi Minh City - 2017 CONTENTS Excecutive summary Introduction Overview of oil & gas industry in Vietnam CHAPTER 1: PROBLEM IDENTIFICATION 1.1 Company background 1.2 Problem symptoms 1.3 Problem definition and importance of the problem 10 1.4 Problem existence 11 1.5 Potential causes of problem and the justification 11 1.5.1 Ineffective company policy 11 1.5.2 Inappropriate procurement procedure 14 Conclusion 19 Cause and effect map .21 Chapter 2: ALTERNALTIVE SOLUTION .22 2.1 Solutions 22 2.2 Solution comparison 22 2.3 Solution selection 23 2.4 Solution details 24 Chapter 3: ACTION PLAN 31 Appendix A: In depth Interview information 32 Appendix B: Terms and conditions 38 Appendix C: Procurement Procedure 48 Reference 61 EXCECUTIVE SUMMARY Korea National Oil Corporation is production sharing contract with Petro Vietnam Its activities take place in exploration, development, and production of oil & gas in Block 11-2, approximately 320 kilometers offshore Vietnam Procurement of equipment is considered one of the most importance works of the company such as a factor determinant of revenues, expenditure costs To build and maintain a significant effect to organization, the procurement department needs to know that problems are affecting its business When interviewing procurement manager, the writer realizes that procurement department is facing with lots of problems including late delivery of equipment, poor quality of equipment, wrong item Among many issues, late delivery of equipment will create significant impact to the project objective, specifically for the project in the remote area such as offshore where access for transportation and delivery is geographically limited Its existence, importance and causes have also been justified by interviewing with KNOC’s Procurement Manager The consequences are clarified late delivery of equipment leads to cost overrun and poor production capacity Moreover, in order to find solution for central problem, the writer makes an attempt to discover its possible causes which are ineffective company policy and inappropriate procurement procedure From those points, the solution for central business problem is determined to build a process for supplier selection and performance evaluation in order to work well for further purchase orders The company will take action on the third quarter of 2017 INTRODUCTION Global business trends have led the oil and gas industry to seek better solutions to overcome the emerging challenges and critical issues, such as the need for procurement process based on new values and contextual factors including multi-cultural complexity One way to overcome some of these critical issues is to adopt new innovative approaches to suit different locations, countries or regions while trying to incorporate the differences in business philosophy, culture or values within the oil and gas organization themselves into these approaches New innovative approaches to procurement process are also required to meet the contextual needs found in different locations and countries around the world These approaches also need to accommodate specific project needs and different values either in the business philosophy or culture within the oil and gas organization themselves Oil and gas exploration and production is a highly risky business in a very complicated industry It links government, owners of the natural resources with operators, investors of private capital, technology and equipment necessary for resource development, in a single industry where the stakes and risks, as well as the possible profit margins, can be very high Effective procurement of equipment will have an impact on company's competitive advantage The quality of equipment inputs to finish products’ quality as well as stakeholders’ satisfaction and revenue If the procurement process management is not effective and efficient input costs will rise and be a large part of the total cost Being an important factor in determining revenues and cost, it is obviously seen that procurement has recently been receiving more attention within business industries A comprehensive procurement guideline on selection processes to be used by decision makers in the industry should be developed and produced comprising a set of phases and critical steps that needs to be followed and performed during the selection process The thesis will focus to identify and validate the existence of problem of KNOC and to improve the procurement procedure Overview of oil & gas industry in Vietnam Petroleum is currently one of Vietnam’s most promising areas for foreign investment, and it could be the engine that carries the nation into the ranks of Asia's newly industrialized countries As a source of desperately needed hard currency and a catalyst for private sector growth, the petroleum industry could play a vital role in Vietnam’s economic development Oil and gas projects in Vietnam are implemented through joint ventures partnerships involving multinational companies like British Petroleum, Petronas, Nippon, Chevron etc Such partners supply capital and high technologies needed for oil and gas projects which Vietnamese partners are still lacking The participation of foreign partners makes the projects suffer from risks such as differences in practices between domestic and foreign partners, policy and political risks, financial risks, legal and political risks The inflation rate in Vietnam is quite high; while the national currency is relatively weak Vietnam is located in South East Asia, a region considered the most dynamic and challenging in the world The quality of management in Vietnam is still below world standard as the country is emerging from a planned economy The oil and gas construction projects in Vietnam pose lots of risks that can cause adverse impacts on project implementation Today, the industry continues to grow strongly implying demands for construction of new oil and gas facilities Oil and gas construction projects are often capital intensive Hence, their successful implementation is strategically important However, oil and gas construction projects are exposed to risks because of large capital investment, involvement of many stakeholders, using of complex technology, high environmental and social impact CHAPTER PROBLEM IDENTIFICATION 1.1 Company background The Vietnamese full name: Korea National Oil Corporation- VPĐH Vietnam The English name: Korea National Oil Corporation - Vietnam office Address: 10th Floor, Diamond Plaza, 34 Le Duan Street, District 1, HCM city, Vietnam Korea National Oil Corporation Vietnam office (KNOC VN) began its operation in Block 11-2 by signing a production sharing contract (PSC) in May 1992 After confirming gas reserves in the block through the drilling of three explorative wells, the company signed a tentative gas sales agreement with Petro Vietnam to secure a stable sales channel in December 2004 It soon concluded a construction contract and placed a construction order, beginning full development of the block As the sole operator, KNOC VN carries out exploration, development, and production activities in Block 11-2, approximately 320 kilometers offshore Vietnam KNOC VN holds 75% of participating interest in this block on behalf of the Korean Consortium which consists of LG International Corp., Daesung Industrial Com., Daewoo International Corp., Hyundai Corp., Samwhan Corp., and Seoul City Gas Co Ltd PetroVietnam Exploration and Production Company (PVEP) holds the remaining 25% of the interest in the block Production began on December 25, 2006 The average daily production of natural gas from the seven production wells in the block reaches 171 million standard cubic feet The block’s recoverable volume is 770 billion standard cubic feet Production will continue until 2024 Total reserves are 770 billion cubic feet Daily production is 108 million cubic feet Production period is from 2007 to 2024 (17 years) It is KNOCVN’s first overseas operating project Successful production in the Rong Doi and Rong Doi Tay fields marked a milestone not only for the company, but for Korea’s oil and gas industry KNOC VN employees were involved in all stages of exploration, development, and production, including important negotiations, drilling, reserve estimation, and engineering and construction of offshore facilities Number of employees: 164 Departments: (Admin & Finance, Operations, Drilling, Sub-Surface) Procurement Team belongs to Operations Department Procurement team has five members (one Procurement Manager and one Sr.Procurement Officer, three Procurement Officers) take care of purchasing mechanical equipment, electrical equipment, logistic services and consumable All are generally called equipment 1.2 Problem symptoms To find out what are the current problems that procurement team is facing with, the writer carried out in-depth interview with Ms Giang, Procurement Manager of KNOC VN According to the review result as well as the date she shared, the transportation cost from onshore to offshore has been increasing for the period of 2013 to 2015 Payable amount is higher than approved budget even though the price of transportation cost remains unchanged Report for yearly flight Year 2013 2014 2015 104 104 104 11 14 111 115 118 Description Scheduled flights Adhoc flights Total flights (Source: Report of KNOCVN) Report for transportation cost of chopper Currency 2013 2014 USD 2015 Description Scheduled flights Adhoc flights Total Q'ty Price Total Amount 104 26,000 2,704,000 104 32,000 224,000 11 2,928,000 115 111 Q'ty Price Total Amount Q'ty Price Total Amount 26,000 2,704,000 104 26,000 2,704,000 32,000 352,000 14 32,000 448,000 3,056,000 118 3,152,000 Approved budget 2,704,000 2,704,000 2,704,000 Actual payment 2,928,000 3,056,000 3,152,000 % increasing 8% 13% 17% (Source: KNOC VN’s yearly report) the stable operations Procurement activities will be carried out in accordance with this procedure and related procedures, taking account of adherence to PetroVietnam Production Sharing Contract for Block 11-2 Offshore Vietnam (1) TCO - Total Cost of Ownership (2) T&Cs - Terms & Conditions (3) TT - Telegraphic Transfer RESPONSIBILITY Managing Director is responsible for allocating resources and ensuring that this procedure is integrated with business objectives and process Line Directors are responsible to ensure the procurement activities are carried out in accordance with this procedure and requirements of company for efficient production Procurement Manager is responsible for supervising procurement activities to make sure that the requirements are dealt with in good way in accordance with this procedure and meet the requirement of the daily production Procurement Officer/ Coordinator/ Assistance, (herein after indicated as Buyers) Procurement Officer/ Coordinator/ Assistance is responsible for all procurement activities to make sure materials, equipment and services are procured in good manner according to this procedure and met the requirement of daily production They are in charge of required reports and filling documents in proper way ETHICS All purchasing activities are to be conducted in such a manner that Sellers will value KNOC’s business Good procurement practice requires that the most competitive, fair price for goods and services is fairly obtained from suppliers, while meeting the operational need of KNOC, and without compromising safety and quality OPPORTUNITY 4.1 Equal opportunity Purchasing activities must not only be fair and ethical, but must also be seen to be fair and ethical All bidders invited to bid on a particular transaction must be afforded an equal opportunity to quote and to compete on the same terms No bidder is to be asked to submit a quotation if it will not be given proper consideration or if another source of supply has already been definitely chosen Quotations and specific information received from bidders are to be considered strictly confidential Sources of supply, prices or price differentials or any other information that would tend to prejudice other bidders is not to be disclosed No re-bidding should be allowed with the intention of giving a favored bidder a "second chance" All personnel associated with procurement must never hint or imply that they, as individuals, can prevent or influence the placement of an order 4.2 Entertainment or gifts from vendors Personal financial interest or benefit of any kind accruing from purchasing authority is forbidden Bidder entertainment of any kind during the bid evaluation period is strictly forbidden APPROVAL AUTHORITY Final approval of procurement recommendations and signature of commitment documents shall rest with the KNOC Managing Director Due to the necessity to obtain approvals and signatures as quickly as possible, there may be some delegation of authority to cover instances where the prime approver/ signatory is not available KNOC Managing Director will be the final approver for the following documents: Recommendation For Award (RFA) for PO with value equal or over USD2,000.00 Purchase Order (PO)/ Contract documents with value equal or over USD2,000.00 Purchase Order Variation (POV)/ Contract amendment, etc ICS for PO/ Contract with value equal or over USD2,000.00 KNOC Director will be the final approver for the following documents: Recommendation For Award (RFA) for PO with value less than USD 2,000.00 Purchase Order (PO)/ Contract documents with value less than USD2,000.00 Purchase Order Variation (POV)/ Contract amendment, etc with value less than USD 2,000.00 ICS for PO/ Contract with value less than USD2,000.00 PROCUREMENT WORKFLOW The flow charts below are for general purchases of Operational phase only For other phases such as Field Development Project, Exploration and Drilling, etc, due to the nature of their procurement activities, KNOC may pursuant to this procedure or may issue separate procurement procedure(s) to apply In case of urgent purchases, to accelerate the work flow, some steps may be revised to shorten the time required for carrying out all the emergency activities PROCUREMENT PROCESSES 7.1 Issuance of PRs PRs are raised by End-Users and sent to Line Supervisor/ Manager for review and approval PR must clearly include all necessary specifications of items or services to be purchased including but not limited to availability of budget, descriptions/ specifications, quantity, delivery/ required date 7.2 Acceptance and Check of PR Procurement must ensure that all purchase of materials and services are covered by an approved PR Any unclear or insufficient detail in PR has to be discussed and resolved with the Requester and get approved by Line Supervisor/ Manager 7.3 Selection of Bidders Bidders shall be selected based on their technical and financial capabilities The following criteria may be considered for companies to be included in the Bidder List: experience, track record, previous performance, financial statement, key personnel experience of company The Bidder List is a confidential document which contain the names and addresses and full details of Bidders who are technically competent and experienced, financially sound and who have the capacity and capability to work strictly in accordance with the required technical specifications and delivery schedule The recommended Bidder List is to be compiled, issued and approved prior to issue of the RFQ package Single Bidder selection In certain circumstances it may not be possible, or desirable to competitively bid an enquiry package In this situation a Bidder List, for a single bidder only, shall be prepared and approved in accordance with the above clause (7.3) Single Bidder justification shall be based on one or more of the following: The equipment, materials or services are unique and manufactured or conducted solely by the single company Competition is precluded by patents, copyrights, proprietary process, or other exclusive activity Supply/services of a proprietary nature are required, such as maintenance, repair, alteration or inspection of equipment The urgency of a situation or a construction schedule mandates the fastest possible delivery, a delivery which would be jeopardized by the time required for competitive bidding Standardization is economically justified in order to minimize inventory and inventory carrying costs The price is low and the savings potential would be offset by the administrative costs of competitive bidding The requirement is for materials or equipment of a similar nature to that which has previously been competitively bid and it can be assumed that further competitive bidding will result in the same vendor being selected 7.4 Request for Quotations (RFQ) Due to the nature of goods to be purchased (i.e value and impact on production schedule), the sourcing strategy can be adjusted to get the maximum benefits to KNOC The number of quotations to be obtained will be increased as per the total value of Purchase Order For items/ services with value below USD1,000, one (1) written quotation can be acceptable For goods and/or services which value in range from US$1,000 up to US$10,000, at least two (2) written quotation shall be provided and is acceptable but in some urgent cases or a single source needs to be justified, one written quotation is acceptable Where it is anticipated that the goods and/or services are greater than US$10,000 and up to US$50,000, at least three (3) written quotations from three different suppliers shall be obtained except for single source or constraint suppliers For goods and/or services which value in range from US$50,000 up to US$500,000, the process will follow the Quick Tender Process For goods and/or services which value over US$500,000, the process will follow the Bidding Process 7.5 Recommendation For Award (RFA) A Recommendation For Award (RFA) shall be completed by the Procurement Team for all evaluations The RFA shall combine the TBE and CBE, and result combined scoring where appropriate, and detail the commercial and technical reasons for a bidder selection and recommendation The RFA shall be presented in a neat, clear and easily understandable format and must always be checked for arithmetical errors prior to distribution for review and approval On the basis of the recommendation made, the Procurement Team shall immediately commence drafting the formal purchase order The completed RFA shall be reviewed and signed-off by the relevant Procurement team member, endorsed by Discipline Engineer and Procurement Manager The RFA shall then be forwarded to Line Supervisor/ Manager, the Director; and the Managing Director (for PO with value equal or over USD2,000.00) for final approval 7.6 Award of Purchase Order/ Contract Once all necessary approvals are in place, the Procurement Team arrange for award of the Purchase Order/ Contract to successful Bidder Award by email or fax is acceptable The successful Bidder is required to acknowledge receipt and acceptance of the award No Purchase Order or Contract is valid until the Procurement team received the duly authorised acceptance from the Bidder bearing the company seal Notification of Unsuccessful Bidder: Procurement Team must notify unsuccessful Bidders promptly in writing This should take place only after the successful Bidder has officially accepted the award 7.7 PO/ Contract distribution After getting internal approvals, Buyer sends PO to Vendor to get acknowledgement and distribute as follow: PO after approved will be filed in designed folder in Company’s drive PO acknowledged by Seller shall be collected and filed by Procurement team in Company’s drive One copy to be sent to Warehouse to arrange which space to receive goods and checking delivery upon arrival One copy to be sent to Requester to conduct QC check (if any) 7.8 PO/ Contract management The day-to-day running of the PO/ Contract is the responsibility of the User, assigned Buyer, or other relevant designate that is responsible for monitoring performance and compliance with the provisions of the PO/ Contract Processing of Disputes and Claims: Procurement team shall be pro-active in the timely identification and resolution of disputes and claims, and ensure that a fair and balanced interpretation of the PO/ Contract is ensured For PO/ Contract which has the advance payment with value of equal or more than USD100,000, it is required a Bank guarantee or a Performance Bond of at least same value of the advance payment to be issued to KNOC Processing of Warranties and Guarantees: Procurement team shall be closely coordinate with the User to timely identify any possibility of breach of PO/ Contract Warranty and Guarantee Provisions 7.9 Changes to original Contract / Purchase Order Any changes to any already signed Contract/ Purchase Order shall be effected by a Purchase Order Variance (POV) Form (Appendix 08 - Purchase Order Variance) Completed POV shall be reviewed and signed-off by the relevant Procurement team member, endorsed by Discipline Engineer and Procurement Manager The RFA shall then be forwarded to Line Supervisor/ Manager, Director; and the Managing Director (for PO with value equal or over USD2,000.00) for final approval 7.10 Goods receipt and cargo check off Upon receipt of distributed PO, Warehouse makes store arrangement and receiving plan When items are delivered to the KNOC Warehouse, QC inspection may be carried out by Requester/ QC Engineer With “QC pass report”, items are input to the inventory system Any discrepancy in quality and quantity is informed to Procurement to prepare claims to Vendors 7.11 Invoicing and Payment Upon receipt of invoices and supporting documents from Vendors, the Procurement Team will register on the Receipt Book and prepare ICS to send to Accounting Upon acceptance of Invoice and ICS, the Accounting section has to check the amount and compare to the Purchase order/Contract The original invoice will be used for payment and will be grouped with other supporting documents and stored in payment voucher Term of Payment for purchase and/or service can differ from PO to PO, but the most efficient term is by Telegraphic Transfer 30 days after receipt of goods and submission of correct invoice For domestic orders, invoices must be in compliance with Vietnam Taxation Regulation 7.12 PO Closeout For Procurement, POs are closed when all items received and payment made A complete set of closed order includes: PR Quotations/ bids from Suppliers Comparison sheet/ Bid opening assessment, RFA PO/Contract Delivery note (for Domestic Suppliers) or Shipping documents (for Oversea Vendors) Tax Invoice Store Receipt Voucher 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IDENTIFICATION 1.1 Company background The Vietnamese full name: Korea National Oil Corporation- VPĐH Vietnam The English name: Korea National Oil Corporation - Vietnam office Address: 10th Floor, Diamond... including late delivery of equipment, poor quality of equipment, wrong item Among many issues, late delivery of equipment will create significant impact to the project objective, specifically for the. .. concluded that the issue of late in delivery materials and equipment is the central problem 1.3 Problem definition and importance of the problem Al-Momani stated that late delivery of equipment was