Driving business benefit from financial planning for exploration and production

31 October 2013

Mark Fidler

Mark Fidler

Former Interim Head of Energy & Natural Resources

An increasingly complex landscape gives rise to challenges measuring, managing and predicting financial performance.

The upstream oil and gas industry is becoming ever increasingly complex to manage from a financial perspective, largely due to the following industry trends:

  • Volatile pricing curves driven by complex and often disconnected economic models
  • Increase in complex Production Sharing Contracts (PSCs) and Joint Ventures (JVs)
  • Increased mergers, acquisitions and divestiture  due to vertical integration in gas and disintegration in oil
  • Complex capital expenditure cost models (E&P) evolving through production asset life cycles
  • Frequently changing local and global regulatory reporting requirements

Upstream margins are largely driven by oil and gas prices and exploration and development costs. Crude oil prices can fluctuate dramatically ($150 a barrel to $40 a barrel between 2008 and 2009) and with the advent of the US shale gas market, LNG prices are hard to predict with the markets beginning to favour a shift to complex gas hub and hybrid pricing models. In addition, although easier to plan with more certainty, the exploration and development costs that make up the lion’s share of capital  projects expenditure are in themselves complex, and along with prices, vary over an assets lifecycle.

To compound the issue of the increasing complexity of the financial models there is still widespread use of disparate spreadsheets and poorly integrated performance management processes that give rise to lengthy planning/reporting cycle times, inaccuracies or gaps in the numbers and little or no capability to scenario plan or quickly re-forecast when market conditions change.

The lack of integration in the performance management processes and the enabling technology creates an environment where Finance Business Partners lack confidence in the accuracy of their actual results and are constrained in their ability to drill into aggregated results to identify the business drivers causing variances to budgets and plans. Furthermore when changes to key assumptions on which bottom up budgets have been built occur or actual results are not as expected they lack the agility to quickly re-forecast, spending more time on producing an up to date view than focussing on corrective actions and interventions.

Driver based financial performance management solutions are well suited to meeting the challenges in E&P.

Driver based performance management is the business tool used to deliver on strategic objectives through the finance led processes of planning, budgeting, reporting and forecasting. Metrics, KPIs and business drivers are the common components throughout these processes translating strategic aims into tangible measurable objectives for the individuals and teams within your business.

This approach to performance management seeks to create a business process and enabling technology solution that provides a seamless link from business drivers through to the outcome KPIs and Metrics. By doing this you can deliver significant business benefits:

  • Linking operations with strategy: By integrating the performance management processes and technology your business leaders can cascade top down targets through the organisation providing a clear and transparent mechanism for target setting and management of business drivers that are in the control of operational management
  • Improved decision making:
  • Increased transparency and traceability of actual results enabling you to perform route cause analysis (let’s look back) and causal analysis of variance to latest forecasts and budget
  • Improved agility to re-forecast by leveraging the driver based models you will be able to quickly recalculate and aggregate forecasted profit and loss, balance sheet and cash flow when key assumptions change or risks and opportunities become apparent (let’s look forward)
  • Improved ability to assess investment decisions by leveraging the driver based assumptions and outputs of economic models you will be able to quickly evaluate the financial impact of exploration investment decisions based on different scenarios and pricing assumptions
  • Improved operational efficiency: By building driver based integrated data models on a single technology platform and taking opportunities to automate manual data collection processes and reporting, planning cycle times can be significantly reduced in order to re-focus finance staff on providing insight and commentary on performance

Looking to the future we predict an increasing focus on effective financial planning for E&P companies. The market is ever evolving and becoming more complex, driving a necessity to have more sophisticated and agile financial planning capabilities. Optimising these capabilities will allow organisations to make quicker and more precise decisions regarding which markets to explore, which capital projects to fund and whether to go out it alone, make strategic acquisitions or spread risk by entering into partnerships and joint ventures.


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