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Vietnamese As the world continues to move towards renewable energy, the oil and gas industry will face increasingly steeper technical, operational, and organisational challenges. Having a streamlined budgeting process is among the most daunting ones.
This also leads to another question about the effectiveness of traditional budgeting tools that oil and gas companies typically use, and the common challenges that companies might face with the budgeting process.
Read more: 5 Most Common Budgeting Approaches and Their Pros & Cons
Factors affecting oil and gas budgeting
Price volatility in the global market
The market is still very much uncertain and volatile. The looming economic recession coupled with ongoing geopolitical turmoil makes oil price forecasting a highly tricky business.
Oil prices directly impact the bottom line of oil and gas organisations and the exploration and development of new fields. If oil prices are expected to rise, oil companies are more likely to boost investment in new oil and gas fields. Conversely, exploration and development projects would be put on hold if big drops in oil prices are on the horizon.
Read more: How Oil Companies Adapt to the New Normal of Low Prices
Operational costs
The oil and gas industry is highly capital-extensive. In addition to that, there is a myriad of factors driving the operational costs of an upstream oil company.
The more burdensome the regulations are, the costlier a project becomes. Labour costs are also a major concern. Couple these with global price volatility, and you have a real headache.
Ever-increasing energy demand
Exxon Mobil forecasts that the world will need new oil supplies to increase by 8% a year in the near term to meet rising demand as existing oil fields run out. Demand for new gas fields is increasing by 6% a year, too.
Read more: How to Turn Budgeting into a Value-Adding Process
Common challenges in oil and gas budgeting
Despite facing unprecedented financial and operational challenges, many oil and gas companies still rely on outdated budgeting systems and tools. As a result, the budgeting process consumes a lot of resources. This practice is not sustainable for the industry.
Needless to say, the process can be stressful and overwhelming to follow, and mistakes are common. Therefore, we have identified major challenges companies might face with the traditional financial planning and budgeting approach.
Case study: Singapore Petroleum improves budgeting with Infor d/EPM (formerly known as Infor Corporate Performance Management)
Uncoordinated
The finalisation of a budget involves lots of back-and-forth data exchange with different department managers. For larger organisations, the challenges and complexities can be inflated exponentially.
Complex
The traditional budgeting process feeds on information from various sources and systems, such as the CRM or human resources systems. One of the reasons the traditional budget takes up too much effort is the use of spreadsheets and continuous adjustments. Whenever there are changes to the spreadsheets, numbers need to be consolidated, formatted to match the company’s standards, and reviewed not just once but multiple times.
Thus, constant changes can further delay and increase the complexity of the already convoluted processes of budgeting.
Read more: 7 Worst Financial Fiascos caused by Excel errors
Time-consuming
The traditional budgeting approach can take up to three months or more to manually complete. You have to invest time in comparing the previous year’s budget with the actual results or analysing the impacts of unexpected expenditure, inflation, and other factors. This takes loads of time to sort things out and, thus, can take away your precious time for other mission-critical tasks.
Inaccurate
Dependence on spreadsheets might lead to inaccuracy and misleading goals and results. Since it is natural for humans to make mistakes, especially when they spend too much time looking at many spreadsheets at a time, there is a high possibility of risk in consolidating Excel files.
Besides, there can be intentional frauds, such as manipulating the results to make them more attractive to help ease the investors and employees. Eventually, mistakes become too costly for companies.
More than ever, we are seeing companies opting for a Zero-Based Budgeting approach, which focuses on allocating resources based on efficiency, necessity and value, rather than any historic budgeting.
Today, being financially stable matters. To stay afloat, businesses need to plan well in advance to prepare for changes in the market. Download our whitepaper and learn how to properly plan, budget, and forecast in a highly volatile, uncertain, complex, and ambiguous world like today.
