Last year’s oil price crash may look like a threat to the industry, but it could prove to be an opportunity for finance professionals working in the sector. Depending on which industry pundit you talk to, the price will recover to its previous level – or it won’t. But where there is no disagreement is that finance professionals have an ever more challenging role to play in the industry in the years ahead.
Historically, the engineers have often called the shots when it comes to decision making in many energy majors, argues Colin Pearson, oil and gas tax partner at EY. Given the formidable technical complexity of major extraction projects, that is hardly surprising. But times are changing.
‘With pressures to manage costs and cash, standardise processes, and manage everything more effectively, the balance of power will shift to finance professionals,’ Pearson predicts.
Simon Constant-Glemas, vice president corporate and UK country controller at Shell, believes that finance professionals have a big opportunity to provide the analysis and insight that can help to inform better decisions in the future.
‘We are a bit of a spider in the web in that sense,’ he says.
There is little doubt that the oil and gas industry is facing some unprecedented challenges. A new ACCA state-of-the-industry report, Oil and Gas – Priorities and Challenges for the CFO Enterprise (see 'Related links'), spells out key issues on the future agenda – managing the volatility that hits firms’ cost bases, capex and funding; developing better forecasting and decision-support capabilities; handling new corporate reporting challenges; and forecasting the impact of asset impairment and stranded assets.
Dealing with all these issues will put a premium on the talent available in the finance function at a time when many companies have offshored key elements of their finance functions. Offshoring has enabled finance functions to demonstrate they are able to cut their own costs – a confidence-building step when demanding other departments trim their budgets.
‘I think the CFO is in a golden age in the oil and gas sector,’ says Dr Steve Priddy FCCA, a former ACCA director of technical policy and research who now leads the London School of Business and Finance’s oil and gas programme. ‘But they are going to be asked very challenging questions. They’re already fantastic experts in what they do, but that’s going to be stretched to the limit.’
Take the question of cost and cash control. Return on capital has taken a big hit in recent years, points out Pearson. The pressure may increase in the future as the industry embarks on increasingly ambitious projects to recover more inaccessible assets. Because every drilling project is different, it is not easy to impose the kind of one-size-fits-all processes typically found in manufacturing, says Pearson.
‘When you’re dealing with oil and gas fields – all of which have different geology, chemical components and pressure in them – to what extent you can standardise is a big question mark in my mind,’ he says.
There are no easy answers, but Alison Baker, head of UK oil and gas at PwC in the UK, argues that one of the challenges for finance professionals is to help companies reshape their operating models. She sees technology being a key driver of the innovation and collaboration needed to take out overhead cost. ‘For example, if a number of operations are extracting oil from one field, why can’t they share some back-office costs in the field,’ she asks.
There is a significant focus in the industry at the moment on how best to conserve cash. ‘There is a lot of modelling around portfolio realignment and optimisation,’ says Baker. ‘There’s an appreciation that there is a finite amount of cash, so there needs to be more focus on how to use it.’
Constant-Glemas agrees that there is a lot of industry attention on what is driving the various cost bases. Developing better analysis and deeper insights in these areas can help a business understand more about the choices that could be on the table at different levels of revenue. This is an area where finance professionals could be playing a more vigorous role – thereby placing themselves at the heart of the strategic debate within their companies.
One industry watcher expects private equity houses to start investing heavily in the industry in the next 12 to 18 months.
If that proves correct, it will put more pressure on finance professionals to improve forecasting and decision-support capabilities. Typically, private equity features activist investors with a passion for detailed monthly numbers. They seek precision and granular detail. They will be heavily focused on driving costs down as well as maximising revenue, although they may find that even their alchemic skills at revenue generation are thwarted if there is a prolonged collapse in the oil price.
Finance professionals need to become a strategic partner to the chief executive and the board, says Baker. But, she points out, being a strategic partner involves the ability to manage a wider range of stakeholders than finance professionals normally do.
Communication skills will become increasingly important, she suggests. For example, how do you help them understand that what is inherently a long-term business is going through a short-term price correction? And, in the light of that, how do you make the case for continued investment, for employee training and for new asset acquisition? These are big questions and will take some finance oil and gas industry professionals outside their traditional comfort zone.
Yet providing positive answers could be the key to success 10 years or more downstream.
This article was originally published in Student Accountant magazine. Read the original article