Upstream Oil And Gas CFOs: Increase Oilfield Margins And Reduce Operating Costs

Craig Kindleman and David Shimbo

As an upstream oil and gas CFO, you are well aware that your business has a lot of boom-and-bust cycles.

For example, four years ago, the price of oil dropped to approximately US$30 a barrel – and wells became hugely unprofitable. Three years later, it went up to $70 per barrel, and there was a lot of irrational exuberance. Geopolitical risk and supply/demand factors added to the instability.

But you need to moderate those boom-and-bust, bust-and-boom cycles – and it’s not easy when everyone around you is having a hair-on-fire moment.

After all, your wells are your bread and butter. If they’re not producing, you’re not surviving.

Profound change

Upstream oil and gas CFOs are seeing profound changes in the financial landscape. They’re seeing oil price swings, new technology, more restrictive regulations, and oilfield production challenges. They’re seeing drilling, operating, and maintenance costs increasing while upstream production margins are dropping. In addition, they’re seeing declining well production, increasing water disposal costs, procurement/supply chain inefficiency, and Health and Safety Executive (HSE) reporting and compliance issues.

Digitizing operations improves well profitability

Did you know that you could get a 10% to 20% reduction in financial operating costs by using intelligent finance solutions?

Here are some operational benefits:

  • A/R finance: 5%-10% reduction in A/R write-offs
  • Financial close: 5%-10% reduction in business and operations analysis and reporting analysis
  • Finance operations: 10%-40% improvement in invoice-processing productivity

Your financial planning and analysis processes could produce increased visibility into overall spend and expenses by 25%-50% – as well as a reduction in financial planning cycle time and budgeting and forecasting costs. And you could eliminate silos across business units by 25%-50%. These could go a long way to improving value to your shareholders.

Source: SAP Performance Benchmarking

Finance focused on well profitability

Now finance can be the intelligence center of both corporate and business units. You can take advantage of a fully integrated oil and gas financial management system, including finance, joint venture accounting (JVA), production revenue accounting (PRA), and upstream operations management. The aim is to optimize well profitability and reduce operating costs.

  • Well profitability: Gain a real-time view of well profitability and operating costs by completion interval and detailed drill-down on all payables and receivables with financial and operational KPIs that drive the business.
  • Operating cost reduction: Instantly access accurate production and oilfield services information to assess vendor performance, actual versus budgeted costs, and business-unit margins. Drill down into detailed operating costs and production margins.
  • Simplified reporting and analysis from the oil and gas business unit to the boardroom: You can see a single version of the truth for all financial and operational data. You’ll also see real-time business and operational performance metrics.

Customer success story

SAP recently worked with a global company in the emerging oil and gas development market. It provides a full range of upstream products and services including oil/gas field development, oilfield supply chain, equipment maintenance, and technical services.

The key challenges were material and equipment cost inefficiencies and no timely information about operations status and financial flow. In addition, the finance team was using manual procurement processes and Excel spreadsheets.

The company implemented a hybrid environment with end-to-end finance and procurement business processes and fully integrated capabilities for marketing, operations, R&D, and knowledge management. Newly created finance and procurement templates are adaptable to future business requirements.

The result was a $4.6 million savings on material and equipment costs per year, $630,000 reduction in reporting costs per year, and $2.3 million savings on external procurement costs per year.

A finance capability roadmap

Your roadmap to the future depends on five fundamentals:

  1. Centralize financial reporting with a focus on well profitability: Centralize financial reporting from all oilfield systems, including integration of production, procurement, supply chain, and oilfield services costs. Enable real-time operational visibility to well performance and field profitability.
  1. Digitize core finance processes: Drive updates to a single journal, general ledger, cost accounting, and JVA/PRA. Enable increased hydrocarbon margin transparency, intercompany transactions and reconciliations, and granular visibility into all accounting transactions.
  1. AP and AR automation: Reduce accounts payable (AP) invoice-processing costs related to integrated invoice routing, exception handling, and invoice management. Use credit management, disputes and collections management, and self-billing. Integrate commodity transactions to reduce the need for daily bulk-data transfers to third-party solutions, provide tighter management and enforcement of credit limits, and automate cash application.
  1. Compliance and governance controls: Use compliance and governance controls (GRC), segregation of duties (SOD), and access controls. Provide continuous compliance of SOD conflicts to eliminate manual audit work. Offer cybersecurity to prevent threats to the core transactional system by bad actors.
  1. Treasury and risk management: Manage every activity associated with cash, payments, liquidity, risk, and compliance. Help finance gain more control over payment batches, foreign exchange, and commodity exposures.

Your morning coffee

In your next daily or weekly meeting, ask your CEO, COO, and VP of field operations these questions:

  • What are our actual fully burdened production costs?
  • What are our detailed operating costs?
  • What wells should we produce today that might not be profitable at $30 a barrel or $40 a barrel?
  • What are the best projects we can work on today?

It’s sure to spark a lively conversation.

Join our webinar series on the SAP S/4HANA Movement program and learn from the program’s manager Bjoern Braemer how it enables your organization to manage a seamless transition to SAP S/4HANA.

Follow SAP Finance online: @SAPFinance (Twitter)LinkedIn | FacebookYouTube

Craig Kindleman

About Craig Kindleman

Craig Kindleman is a senior director in the Oil and Gas Industry business unit at SAP. He advises customer executive teams and leads priority shareholder value initiatives for the oil and gas industry at SAP. Craig has acquired vast knowledge in operations, asset management, marketing, and technology – all based on his experience designing global initiatives for multinational businesses and specializing in high-impact projects.

David Shimbo

About David Shimbo

David Shimbo is responsible for business development and value creation for energy and natural resources accounts at SAP. With a focus on upstream, midstream, and downstream oil companies and oilfield service businesses, he has deep expertise with upstream financials, asset management, maintenance, operational analytics, business case modeling, and benefits quantification. David has oil and gas industry experience with Exxon, BP, and Halliburton and technology experience with IBM, Oracle, and two startups. David is determined to make all SAP projects related to increasing productivity and reducing operating costs.