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TRG Blog

Survive or Thrive: Oil Companies Adapting to the New Normal of Low Prices

Posted by Rick Yvanovich on

Depressed demand and increased supply have caused oil prices to fall from over US$100 per barrel in July 2014 to $30 in February 2016. Even though prices have increased somewhat since then, with Brent reaching a five-month high of US$55.99 per barrel on September 15, many experts remain sceptical about the outlook of oil’s US$50-plus status1. Oil and gas companies, therefore, are bracing for an extended period of low oil prices.

There are a number of actions the industry has been taking to lessen the impact of this oil prices slide, ranging from cutting costs to deploying cutting-edge technologies.

Cutting Costs to Survive Low Prices

In the wake of declining oil prices, exploration & production companies find themselves scrambling to cut costs. From changing FIFO (fly-in, fly-out) rosters to sharing rental costs of drilling rigs, operators are aiming for a 20-30 per cent reduction in the cost of new projects2.

According to Wood Mackenzie, during the period from the Q4 2014 to Q3 2015, most industry operators slashed their capital investments by up to 30 per cent, with those in the Middles East region being the only exception2.

These belt-tightening measures may help in the short run, but there must be a more sustainable approach that can ensure long-term success.

Read more: CFOs revamp sustainability performance with financial management systems

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The Digital Oil Field

As other sectors, such as retail and manufacturing, have fully digitalised many key areas of their operations, oil and gas companies are also betting on emerging technologies like the industrial internet of things (IIoT), data analytics, cloud computing and mobility to improve their financial and operational performance.

The market for digital oil field solutions, therefore, is expected to be worth more than US$30.7 billion by 20203, growing at a compound annual growth rate (CAGR) of 7.9% through 2019 and 5.6% up to 20244.

The concept of Digital Oil Field involves the convergence of operational technology and information technology in order to eliminate waste, maximise productivity, and improve profitability of oil and gas production, transportation and processing.

Digital Oil Field is made possible by the increasing ubiquity of low-cost sensors, availability of powerful analytics and high-speed wireless connectivity, and other advanced innovations in cloud computing and artificial intelligence.

Read more: A new robotic revolution in manufacturing

Examples of Digital Oil Field applications include predicting when a piece of machinery can break down and schedule preventive maintenance accordingly, providing workers in the field with real-time information about potential hazards, remotely monitoring assets, and supporting collaboration across upstream and downstream operations.

According to IHS CERA, Digital Oil Field has resulted in production increases of 2 to 8 per cent, operating expense reductions of 5 to 25 per cent, and capital expenditure reductions of 1 to 10 per cent over that last decade6.

Technology alone, however, is not enough. “You can’t expect a sensor or a communications network to produce results,” John Elmer, executive vice president of Endeavor Management, a Houston-based consultancy, explains6.

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Thriving in the New Normal

The impact of the current period of falling oil prices on upstream operators has been greatly amplified by the declining efficiency, ageing assets and escalating costs across the industry over the past few years.

According to EY, over half of worldwide oil and gas production comes from assets that have passed the midpoint of their life cycle5. Meanwhile, the number of barrels of oil equivalent per day (BOE/D) produced per US$1 million in capital went down from 45 in 2008 to just 27 in 2012.

As low oil prices have become the new normal, energy companies have to adapt by fundamentally changing how they operate. Many industry insiders believe it’s past time for oil companies to start vigorously streamlining their operations2, and their financial management systems lie at the core of this effort.

TRG has identified four criteria of advanced accounting systems for upstream oil companies.

1. Going Cloud

It seems increasingly clear that cloud computing is the future of enterprise applications. Despite unfounded scepticism about reliability and security issues, cloud-based solutions continue to thrive.

Read more: Koch rolling out Cloud HR and financial management applications to 120,000 employees

For oil and gas companies, cloud computing offers a much more flexible and manageable subscription-based cost structure. There is no hefty upfront software licence fee. Plus, investment in hardware and other infrastructure is kept at a minimal level. Therefore, capex is sharply reduced.

Freeing up IT resources is another benefit of cloud computing that oil and gas executives will find especially attractive during the belt-tightening period. When a financial management system is in the cloud, there is little need for dedicated IT staff dealing with system administration issues, most of which are taken care by the vendor.

One example is TRG’s Infor SunSystems Cloud, which was first launched in 2016 on Amazon Web Services (AWS), and Microsoft Azure with the same features as on-premises SunSystems application. Apparently, one of the biggest benefits of SunSystems Cloud is to eliminate the problem of housing and maintaining computer hardware and the associated infrastructure. Besides, there are certain benefits that SunSystems Cloud offers:

  • Ease of use: The full functionality of SunSystems including dashboards and Q&A reporting, invoice printing, document management etc. is delivered through web browsers.
  • Accessibility: SunSystems Cloud can be accessed from different locations or even different countries and in real-time. Moreover, it is accessible via various devices such as PC, MacBook, Android or iOS.
  • Scalability: SunSystems Cloud is designed and fine-tuned to scale seamlessly for the growing needs and changing landscape of business.
  • Security: SunSystems Cloud applies AWS Cloud Security and Qualys Vulnerability Management in order to protect financial information from theft or data leakage.

2. Configurability and Quick Implementation

Instead of spending time and money on software customisation, oil companies should opt for solutions that can quickly be adapted to their specific requirements. With Infor SunSystems, for instance, you can easily configure the system for different types of oil and gas businesses, such as joint venture accounting.

The solution’s configurability ensures its speedy implementation and quick response to market changes with minimal IT involvement. Additionally, its flexibility in determining procurement processes and its powerful joint venture cost allocation capability make SunSystems the chosen financial management system of industry leaders like Shell, BP and Exxon Mobil.

Businesses in the oil and gas sector often require strong support for international growth. SunSystems can support a transaction with at least four currencies. The number of currencies that can be stored within the system is unlimited, providing automated currency conversion when entering a transaction.

Read more: An overview of Infor SunSystems 6.3

3. Easy-to-Use Analysis Tools and Real-Time Reporting

Gaining real-time insights into key financial and operational information is critical. Built-in multidimensional analytics allows you to easily keep track of key performance indicators such as lifting cost per barrel of oil equivalent (BOE), working capital interest and profit per BOE. You can customise these indicators to better match your business changes.

Case Study: Ocean & Oil Holdings streamlines financial reporting with Infor SunSystems

The oil and gas industry has highly complex reporting requirements – local statutory reporting, management reporting, joint venture/joint interest billing (JV/JIB) reporting, AFE reporting and tax reporting. They can be simplified significantly when you have multiple views of your data from a single source of truth, i.e. a unified ledger.

As its name suggests, a SunSystems’ unified ledger enables real-time posting across payables, receivables and ledger, with no reconciliation required. It does not rely on a traditional fixed structure of account codes. Instead, it uses a simple chart of accounts plus a range of user-definable analysis dimensions that have independent coding structures – much like an OLAP cube.

As a result of this flexible structure, reporting can be configured to meet the requirements of both operators and non-operators, and create cost centre statements on both a nominal and logical basis. Reports can easily be published and shared in any format across multiple departments.

4. Industry-Specific Features

SunSystems for Oil & Gas is widely deployed among upstream oil companies because of its many industry-specific features such as:

  • Joint venture cost statements, joint interest billing with cash call statements
  • Reports on performance measurements like $ per meter drilled, $ per barrel produced, and margin analysis on pipeline throughput
  • Units of measure (UOM) conversions
  • Tracking of authorisations for expenditures
  • Pre-built KPIs like lifting cost/profit per BOE
  • Inventory movements and transfers

If your business requires more advanced budgeting, financial forecasting and consolidation, and strategic planning capabilities, you can always leverage the SunSystem’s integration with Infor Dynamic Enterprise Performance Management (Infor d/EPM).

Case study: Singapore Petroleum improves budgeting with Infor d/EPM (formerly known as Infor Corporate Performance Management)

For more information, please download our Infor SunSystems Brochure or request a software Demo today and find out how we can help your business.

Request a SunSystems 6.3 Demo

Topics: Financial Accounting Management Software, Financial strategies

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 Rick Yvanovich
 /Founder & CEO/

With TRG International Blogs, it is our mission to be your preferred partner providing solutions that work and we will make sure to guide your business to greatness every day.

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