3 Looming Developments in the Midstream Oil and Gas Industry and What It Means for Their Financial Close
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In recent years the historical risk factors that have impacted the midstream oil and gas sector – e.g., commodity price volatility, geopolitics, increased competitive intensity, etc.— have grown exponentially more complex. While once tethered to physical supply and demand, the price of crude oil is now tied closer to macroeconomic influences that make turning a profit increasingly more difficult as time goes on.
Moreover, after factoring in foreseeable changes to the industry, such as a dwindling workforce, new regulatory reporting and fewer resources available to the non-revenue generating parts of companies, the future of midstream oil and gas is one of uncertainty.
To help you navigate these upcoming challenges, below you’ll find explanations of three major changes coming to the midstream oil and gas industry, details on what those changes will mean for your office of finance’s financial close process, and ideas on how to overcome the issues they may create.
The Next Great Crew Change Challenge
Just a few years ago, the pool of qualified personnel within the oil and gas industry declined to critical levels. Known more commonly as the “Great Crew Change”, midstream companies struggled to maintain the necessary workforce to keep their operations moving forward. And unfortunately, as activity within these organizations continues to ramp up due to a rebound from the crude oil crashes of 2016, this event is likely to return with a vengeance, but this time it will be within the office of finance.
According to Data USA, almost 40% of accountants and auditors are at most ten years away from retirement age[1]. And despite the shift in this industry towards “doing more with less,” it’s hard to imagine that any organization’s office of finance could function properly with a loss of workforce and internal knowledge on that scale if changes are not made soon.
While admittedly, this issue is likely a decade away, to avert a similar catastrophe that was the original “Great Crew Change,” adjustments to the current status quo must take place – or a sacrifice in the quality of your financials will be inevitable.
Changes to Regulatory Compliance
In the past decade, there’s been a substantial increase in regulation and a greater focus on compliance within the oil and gas industry. In response, companies have increased their efforts to ensure compliance with existing and new regulations to minimize regulatory delays.
Moreover, in addition to the traditional International Financial Reporting Standards that all organizations must abide by, the oil and gas industry is subject to unique regulations in the form of environmental reporting, such as greenhouse gas emissions reporting. While most companies are likely able to handle the workload necessary for their current operations, as the price of crude oil recovers, midstream organizations are likely to expand and the workload required to complete the financial close process will grow in tandem.
Similarly, as the amount of work increases so will any “hiccups”, such as bottlenecks, missing documentation, and overall incomplete system of controls applied from beginning to end within the current financial close process. And those issues that might have once been solved with extra time spent manually verifying the financials, now lead to millions in fines and reduced consumer confidence due to misstatements – negative ramifications this industry simply can’t bear the burden of.
Do More with Less
In recent years, oil and gas companies across all sectors have been forced to make themselves as lean as possible in response to falling crude oil prices. Thankfully, due to “take or pay” or “minimum volume commitment” provisions that guaranteed payments regardless of volumes, the midstream sector has been somewhat protected from the early shocks of the oil and gas price drops.
However, there are several trends that are worrying for the midstream organizations. For example, the Alerian MLP Index, a historically good predictor of the health of the midstream industry, has underperformed the S&P 500 over one-, three- and five-year periods.[2] Additionally, newly emerging nerve-wracking trends, such as stranded assets within previously profitable drilling basins and the influx of private equity investing taking increasingly aggressive contract terms, suggest that the future of the midstream oil and gas is one of uncertainty.
In order to compensate for this uncertainty, it’s likely that costs within organizations will be cut. Similar to the massive cuts within the upstream oil and gas sector, midstream companies will have to make themselves lean in order to stay under already razor thin margins. And sadly, when organizations decide to trim their budget, the cutbacks are typically not evenly distributed. Cost-cutting methods within this industry have historically focused on non-revenue generating and support functions within the companies, such as the office of finance.[3] Sadly, instead of providing the resources necessary to complete the close process in a timely and accurate way, midstream offices of finance often adopt a “do more with less” mindset while expecting the same results.
At this point, cost-cutting measures are not only the safer route to take but likely a necessity. However, it’s important that the office of finance is still able to complete the job necessary to avoid the millions in fines and reduced consumer confidence that comes with misstatements.
Where Does the Industry Go from Here?
As time goes on and the midstream industry continues to evolve and react to a changing landscape, their office of finance will be disproportionally affected. And with a growing workload and dwindling resources, the solution lies in changing how the financial close process is managed.
Companies within this industry have always been willing to introduce new forms of technology in order to improve their work operations. However, historically speaking, the office of finance has been left untouched, and the current financial processes are handled through spreadsheets and other manual means.
To grow your office of finance and overcome the challenges to come, that same willingness to embrace technology needs to be applied, and a strong system of controls must be implemented to not only create a more efficient process but a more reliable one as well.
To learn about the many ways an automated solution can improve your financial close process, view our eBook on “How to Effectively Handle Close Management During Your Period End”.
Written by: Caleb Walter
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