Case Study 14-2 centers around Bob Engel, the procurement supervisor for Marathon Oil Company, and whether or not in his capacity in procurement, he should take the initiative in submitting a plan to justify an additional International Purchasing Office based in the Sakhalin Island. The Sakhalin Island Project, a primitive piece of land with little infrastructure to work with and challenging climate located in Russia, will be home to Marathon's Oil for many years and needs facilities at the site location.
How Marathon Oil came to this pressing dilemma, and the solving, by researching Marathon's roots and past global ventures brought them to the Sakhalin Island Project. In the early 1990s, Marathon Oil Corp. was a pioneer in the development of Russia's resource-rich offshore fields in the Sea of Okhotsk in the Far East. The U.S. Company, had vast experience of more than a century in the oil business, participated in the international consortium developing oil fields and gas fields offshore the Sakhalin Island under a Production Sharing Agreement. Sakhalin Island is located between Japan and Russian Maritime Territory. It is separated from the Asian continent by a narrow strait and for that reason; Westerners thought it should be a peninsula. Sakhalin is one of the territories disputed between Japan and Russia and its belonging has not yet been definitely settled.
The population, approximately about 600,000 people, 12 people per square mile, is mainly located in the southern part of the isle. This low population density creates a big separation between south and north of the isle. Sakhalin is rich in the natural resources with untapped oil, gas, and coal. Marathon Oil Company under the Production Sharing Agreement embarked on this territory by heading-up the exploration and development offshore. A major world supplier in international trade, their global supply in oil and gas took them to Europe, with a office located in Scotland; Japan, with an office in Tokyo that handled affairs in surrounding countries, several offices in Canada and site offices in Mexico. With the Sakhalin Island Project, and a long time commitment to see through several phases of the project they needed an onsite purchasing office, but at what price?
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Marathon's corporate offices are located in Houston, Texas. The late 1980's until the mid 1990's the company reorganization, mostly by downsizing and delegating duties to other onsite offices, knew that they would have to create additional manpower to oversee the project from the US or to locate an office in the Sakhalin Island. With millions of dollars invested and the prospect of millions in return, the elements associated with the island, climate is severe; arctic in the north, with heavy snowfalls and strong winds and in the south; churning seas create flooding, typhoons, and heavy rains. The geographical terrain is very mountainous, no roads, bridges, or utilities in the area of the designated offshore mark. By employing additional workers from other countries, it was still a real possibility the drilling would not start on time and this could cost many millions of dollars.
So, should a procurement department supervisor submit his plan for an IPO and the research or justification for his decision? Yes, if the department's team is for global affairs. Their overall purpose is providing increased economy in procurement activities and to maximize the best value. His team is responsible for the buying, purchasing, renting, leasing, or otherwise acquiring any good, services, or construction. This includes inventory management and surplus property management. By providing all information/appropriate disclosures about Sakhalin Island, not only constructs safeguards of the procurement process but the quality and integrity of the project.
Bob Engel, the supervisor, felt that with all impending obstacles, Marathon Oil could still venture into a setup facility on the island and collaborate with the Tokyo office. All equipment had to come from the outside and brought in for site construction and with some form of communication; faxes, emails, and phone service could work until the facility was completed. However, as history would have it Mr. Engel did not have the deciding vote for the location of the new IPO.
Sakhalin was an excellent project, but for Marathon it was the right project, but at the wrong time. High levels of capital investment for several more years without near to mid-term returns simply did not fit their strategic needs. With this decision to pull out they swapped its 37.5 percent stake with a major partner in the consortium, Shell Oil in 2000. Marathon Oil walked away with 28 percent interest in Shell's UK operations, all Shell's interests in discoveries and prospects in this UK region as well as an eight-block area in the Gulf of Mexico, including the Ursa and Princess field discoveries.
Shell Oil Ltd., with this swap, became a major shareholder in the Sakhalin Island Project. This Houston-based oil giant, pioneers in global management, with exploration and development soundly rooted international, has now embraced its place in Russia with only a few international oil majors involved in oil production in the country. This acquisition has already paid off, 35 percent of the oil supply exported to Europe and the 65 percent will stay in Russia delegated by their newly Russian based IPO. In conclusion, I would have voted for the Tokyo Office to oversee the project. Japan has a base facility and with this country in close proximity to the island and for legal residency, Japan had as much claim and or knowledge as Russia, the additional expense would be better suited with offshore and environmental issues.
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