Challenges ahead for CFOs in oil and gas sector
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.
Of course, there have been finance stars who have risen to play key roles on the boards of the world’s biggest oil and gas companies. Yet there is a lingering sense that finance professionals have not always exercised as much influence as they might. 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, 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.
But it has meant that professionals joining a finance function in an oil or gas company with considerable offshoring may find they receive less breadth of experience as they develop their careers. No wonder a senior industry finance professional says: ‘Many oil and gas companies are beginning to get a bit concerned about where the next CFO might come from.’
This ought to be a genuine concern for the industry’s major players, as senior management teams will need to tackle a whole range of new issues. Those CFOs who can rise to the challenge may find they play a more strategic role than ever before. ‘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.
Baker acknowledges that it is not easy to change direction once capital projects are agreed. And that poses a problem, because while projects are measured in years – even decades – oil price fluctuations are measured in months, sometimes weeks or even days. There is, in effect, a serious disconnect between the horizons for capital investment and revenue projection.
‘When there’s a need to save money, finance professionals are first going to look at what can be deferred,’ argues Baker. ‘But once projects are decided, it’s difficult to change them because of capital commitments, not to mention commitments to governments.’ But she argues that decision-makers could seek to break long-term projects into modules. ‘You could give yourself a bit more agility rather than having to commit to a 20-year project,’ she says.
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.
It is no surprise that the short-term focus in the oil business has been on how to react to the slump in price – and also therefore on revenues. Models that show the price creeping up to its previous level, after time, may or may not prove correct. But what is probably more significant are the longer term trends that have big financial implications – such as the fact that major new oil reserves lie in geographically challenging locations or inside countries with unstable political regimes.
Then there is the growing threat to carbon fuels from renewables. Priddy believes this ought to be higher up oil and gas companies’ agendas. ‘The cost of producing energy from solar is coming down faster than anyone predicted,’ he says. He notes that it is forecast that the cost of generating solar power in the US will reach ‘grid parity’ – the point at which it is as cheap to generate power from solar as from oil or gas without subsidies – in the next two to three years.
‘If I were the board director of an oil major, that issue would be perplexing me a lot,’ he says. ‘I would switch investment plans more into renewables than is currently the case. And I’d be looking to recruit people who know about renewables because there could be a major skills shortage.’
Yet despite predictions of tough times ahead, there seems to be no loss of desire to invest in oil and gas or in the appetite for M&A activity, as this year’s Shell takeover of BG illustrates. And the new investors on the block are expected to be hedge funds and private equity houses. 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.
One issue that will certainly be on their agenda – as well as that of traditional investors – is the question of asset impairment and stranded assets. One industry insider points out that the last round of impairment testing took place in January, when oil prices were more buoyant than now. Depending on price movements between now and next January, there could be some disagreeable surprises.
There is also concern about whether the worldwide drive to meet global-warming targets may mean that some existing assets may have to remain in the ground indefinitely, unless scientists develop effective ways to handle waste gases from carbon fuel burning.
As finance professionals become involved in dealing with this broad range of future issues, they need to become a strategic partner to the chief executive and the board, argues 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. In the past, the oil and gas industry has reacted to price corrections by cutting back on graduate and other recruitment. As a result, companies have sometimes been faced with a kind of talent ‘generation gap’ a few years later.
Baker says that finance professionals should play a positive role in persuading the business to hold its nerve so that it continues with essential investment and is, therefore, in a better position to reap returns when the upside comes.
So does all this mean that the industry needs a new breed of finance professional? Accountants who reach the higher levels of oil and gas majors will tend to be those with genuine leadership capability and the ability to communicate how they are adding value to the organisation, says Pearson.
But finance professionals who want to move up in the industry must demonstrate that they can get the basics right first, says Constant-Glemas. ‘We get paid a lot of money to make sure the numbers make sense, and a lot of that comes from executing processes right first time, showing it was fit for purpose, strong governance, as well as a strong risk-management and control framework.’
The ability to handle ambiguity and uncertainty is part of a new mindset that successful oil and gas industry finance professionals need in the future, ACCA’s report points out. Opportunities there may be, but it will take accountants with vision and determination to seize them.
Peter Bartram, journalist