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) ... 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