Our business partners, suppliers and contractors are critical to Hess’ overall success and our ability to maximize the efficiency of operations while minimizing operational risks. We work collaboratively with our supply chain to improve performance and create shared value.
We jointly review processes, procedures and data with our suppliers to help drive the right actions and foster continuous improvement. For example, we are working with our suppliers to implement Lean principles across our assets. Through Lean, we are finding new ways to integrate our efforts to create win-win solutions that have sustainable benefits. At our onshore assets, Hess has worked with suppliers to develop standardized approaches to various categories of maintenance jobs, including standardized work instructions and material requirements. This standardization and repeatability helps improve work efficiency and quality.
In 2016 we purchased more than $5.5 billion of goods and services from more than 5,000 suppliers, whose manhours comprised over 70 percent of our total workforce hours. Engagements with our suppliers are conducted so as to comply with applicable local laws and requirements, and practices may differ from those described below in certain instances.
We continue to enhance our capabilities to categorically manage our suppliers with a cross-functional team that works collaboratively to reach safety, quality, delivery and cost targets. Using this approach, our category management team members, who represent critical organizational functions such as operations, engineering and finance, each focus on a discrete category of spend. This enables them to leverage their procurement decisions companywide, creating efficiencies while also building long-term, strategic relationships with key suppliers.
We consistently embrace Lean principles in collaboration with our suppliers. First in our shale oil and natural gas business and more recently at our deepwater assets, we are finding new ways of integrating our joint efforts to create win-win solutions that have sustainable benefits.
Hess follows a standardized approach to evaluate and measure the performance of key potential and current suppliers on the basis of total value, including safety, quality, delivery and cost. We have a centralized global system in place that houses contract templates and other key materials and manages the procurement process. We also use a central global electronic sourcing system to collect bids and evaluate suppliers. This system supports the efficient creation of online Requests for Proposals and encourages the use of best practices.
We employ a systematic prequalification and selection process to help ensure we are working with qualified and safe suppliers. Prospective suppliers are given a scope of work and environment, health and safety (EHS) expectations during the sourcing phase. Where appropriate, potential suppliers – as determined by a risk-based decision matrix – undergo a risk review, an anti-bribery and anti-corruption and legal compliance review and a review of EHS performance and programs. In addition, our procurement staff reviews the potential suppliers’ insurance, tax and quality information. If discrepancies with our applicable standards arise, the relevant department within Hess conducts an additional review and develops corresponding mitigation plans as needed.
Contracts that involve higher risk, due to either the number of manhours the supplier will work for Hess or the scope of that work, automatically trigger an EHS review in the procurement process. As one part of the EHS review, we use recognized industry prequalification systems for our areas of operation in the U.S. and Europe. Outside of these areas, we use a standardized process with a questionnaire based on our 14 EHS management system elements.
When performed, the EHS review includes a review of training qualifications, safety programs and performance, environmental management systems and measurement, and emergency preparedness and response. Potential suppliers receive a grade based on this review; suppliers receiving an EHS grade that does not meet our requirements must develop an improvement plan before they can contract with Hess. These formalized improvement plans are housed internally at the asset level using our existing EHS data system. Should an operational situation occur (such as an emergency) that requires the use of a supplier that has not completed the prequalification process or that has received an unsatisfactory grade, the asset vice president or director must approve the use of the supplier, and asset management must provide increased oversight.
In early 2016, after a year-long assessment process of our Bakken asset, we completed improvement plans for all contractors receiving less than a satisfactory grade.
Supply Chain Transparency and Compliance
The companies that supply Hess with goods and services must comply with applicable laws and regulations in areas such as EHS, drug and alcohol use, conflicts of interest and anti-corruption laws, and must maintain any licensing or permitting requirements with respect to their activities. Suppliers are also required to abide by our Code of Conduct as well as Hess’ Voluntary Commitments regarding labor and human rights. Standard contract clauses include requirements with respect to ethical business practices, human rights, social responsibility, business integrity, search and seizure, quality and EHS. For activities deemed as high risk, we pursue bridging documents – as appropriate – prior to contract execution where gaps exist between the supplier’s EHS management system and Hess’ EHS requirements.
In addition, clauses that cover federal contractor requirements are included for suppliers supporting our U.S. operations. Contracts typically also include a requirement that suppliers allow access to all offices and facilities and cooperate fully with all audits and inspections.
Our Code of Conduct prohibits the use of local military or law enforcement personnel except where required by local authorities or in emergency situations. If the use of local military or law enforcement personnel is unavoidable, asset managers are required to seek prior approval from Hess’ Legal and Global Security functions.
In operating locations where security services are necessary, we contract for these services locally with support from our Global Security and Global Supply Chain functions. Contracts with security service providers include clauses covering security and human rights expectations. These clauses detail our requirements that security providers adhere to applicable international law enforcement principles, humanitarian law and human rights law. They also require our security service providers to communicate our human rights, social responsibility and ethical expectations to their employees and subcontractors, as well as demonstrate compliance. The aim is to deliver a consistent message of performance expectations for security service providers and drive consistency across Hess operations. These expectations are also detailed in our enterprisewide Security and Human Rights Policy. We have developed a Security and Human Rights Toolkit that can be used locally for training security personnel on human rights issues.
In the event of a security incident with human rights implications, a report is made to the head of Global Security. Reports are also issued for those occurrences, such as peaceful community protests, that highlight potential future risk. We are not aware of any incidents where public or private security forces engaged community members in 2016, and no incident reports were filed. Global Security continues to leverage our existing incident tracking system for reporting of security incidents.
Internationally we often prioritize local suppliers when performing under production-sharing contracts or other agreements with host countries. These agreements vary, but may include use of an approved supplier list, requirements for government approval of suppliers or threshold specifications for local companies or workers.
In Malaysia, for example, we use an approved vendor list that includes Malaysian-owned companies, and we also commit to holding our suppliers accountable to hiring local staff. In Equatorial Guinea, Hess works with the government to identify qualified local suppliers and include them in tenders as applicable.
Supplier Engagement and Sustainability
Hess continues to engage with suppliers on issues that are important to our industry and our stakeholders. Since 2009 we have worked with current and prospective suppliers of hydraulic fracturing services to define acceptable fracturing fluid systems, including restrictions on the selection and use of certain chemicals. We require suppliers to publish fracturing fluid chemical composition and quantities via the FracFocus website. While the majority of chemicals are identified by unique identification numbers issued by the Chemical Abstracts Service (CAS) and are listed on the publicly available CAS Registry, we allow our suppliers to use generic names for proprietary ingredients. Our reporting, through FracFocus or otherwise, may therefore exclude details on chemicals protected by claims of confidential business information by our suppliers. Our close relationships with strategic suppliers and monitoring of the market also help mitigate risks of inferior chemicals being used.