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Building Out Your Oil & Gas Accounting Function

by Sarah Jolly - May 2018 7 min read

Your friends here at Embark thought we would begin this latest salvo by stating the obvious – finance and accounting are meticulous endeavors where organization and attention to detail are rewarded. Also, the sky is blue and ocean is vast.

While we’re not exactly reinventing the wheel by stating something so obvious, the importance of a thorough and detailed approach cannot be overstated. For that reason, and because we're pretty awesome, we've decided to call together a short checklist for our brethren in Oil and Gas to help their accounting departments get up and running and always make sure all their bases are covered.

Granted, depending on the size and experience of your team, effectively covering all of the points discussed in our Oil and Gas accounting checklist might not always be possible. However, being the eternal bearers of good tidings that we are, Embark has some encouraging news for you – you don't have to go it alone.

When resources are in short supply, nerves get frayed, and deadlines hearken, the extensive knowledge base and expertise possessed by your snarky but eminently insightful comrades at Embark are always ready and able to help you meet your responsibilities and goals. And on that note, let the Oil and Gas fun begin.


Pick Your Strategy

First and foremost, you'll need a plan of attack. However, like most aspects of modern business, there is no absolute, clear-cut answer when choosing between in-house, outsourced, or a combination solution to your accounting responsibilities. In fact, the best course of action is to simply let your overall strategy be your guide.

For companies looking for a quick sell and exit, outsourcing probably makes the most sense. Alternatively, if the road ahead is long and heading towards public entity dreams, an in-house accounting staff would be most appropriate. Simply put, the shorter the endgame, the less beneficial an in-house team becomes.

For those who are more longer-term in mind, scalability should always be at the forefront of your growth plans. For instance, companies that intend on making multiple acquisitions in both the near and distant future – a common occurrence in Oil and Gas – need to make sure their processes are fully scalable so there's no downtime or inefficiencies that inevitably allow things to slip through the cracks.


Choose a System

With myriad accounting systems to choose from, many with specific bells and whistles that might suit your needs very well, a certain strategic mindset is needed to wade through as many choices and find a system that fits your long-term goals.

Furthermore, the specific commands of oil and gas – from upstream, midstream, downstream, to oilfield services – require specific solutions. Whatever your industry segment might be, make certain your accounting system of choice can accommodate the particular requirements of that segment. This is not an instance where you should relegate yourself to the lowest cost provider or the most popular vendor on the block. Instead, find a system that is appropriate for your industry segment, size of your organization – both now and in the future, and is accessible from wherever your users might be, whether that's in the office or out in the field.

READ NEXT: Choosing an O&G-specific Accounting Software


Implement the System

Once you have chosen a system that suits your needs and circumstances well, don't throw caution to the wind and trust that Larry from the corner cubicle – who grew up rebuilding Commodore 64s and is the former office champion of Tetris – would do a decent job implementing your new system simply because you work for cheap.

After all the time and effort you invested in finding the most appropriate system, either hire an outside expert or use a sufficiently trained in-house team member that knows their way around an effective implementation. If you choose to hire from the outside, be meticulous with the hiring process and make certain whoever you choose not only fully understands what you're looking for but, most importantly, is capable of accomplishing it.

Read Next: Best Practices for System Implementations

If your in-house team is incapable of effectively implementing your new system, the outside expert you hire for the process should also be able to train your people to properly maintain the system or even successfully implement new ones in the future. Once the system is up and running, you will want to determine if you will need additional staffing and further configuration.


Build Out the Accounting Processes

Once the system is implemented fully configured, you need to build out the accounting processes needed to correspond with your oil and gas segment. Once again, whether it's midstream, upstream, or downstream, you now need the necessary processes to accompany the systems and team you already have in place, including:


Accounts Payable

Obviously, Accounts Payable is a basic process that every company requires. However, just because it's commonplace doesn't necessarily mean it straightforward. Therefore, Accounts Payable should never be taken for granted and is of absolute importance to get right, even when it's extremely time-consuming and requires a fair amount of heavy lifting.


Revenue Process

Given the nature of the industry, particularly for midstream segments, the revenue process can be extremely complicated so an experienced accounting perspective can be very beneficial. The importance of understanding your contractual obligations and setting up the account system to appropriately calculate revenue and owner payments cannot be overstated.

READ NEXT: New Revenue Recognition Standard Impacts Oil & Gas Industry


Capital Expenditures and Budgeting

No matter the industry, businesses that don't have one eye on the future will likely hit some major potholes. For oil and gas, in particular, it's important to be as forward-looking as possible if major projects are on the horizon, including drilling a well, building a pipeline, or upgrading an existing refinery. All of these instances require major expenditures and careful budgeting. When a 30-day project requires $5 million but you only have $1 million on hand, you will rue the day you didn't carefully balance your capital expenditures with your budget.


Severance Tax Reporting

Essentially a sales and property tax on the oil and gas you extract, severance tax reporting can be extremely complicated as every state has its own requirements. This is another instance where you'll need a thorough understanding of your accounting system for reporting purposes. Processing months or years of corrections on every well you operate will undoubtedly require far more time and money than setting things up correctly from the get-go.


Financial Reporting

As is always the case, you'll need to meet financial reporting requirements for both internal and external purposes, including those for private equity or your good friends at the bank. Of course, external reporting would also include the stock market if you're a public entity.


With so many moving parts, all of these reporting requirements could prove to be difficult, perhaps even impossible, for an accountant without significant oil and gas experience. However, once you have solidified your reporting requirements and you're ready to go, remember to always keep a pulse on what's working well and what's not so you can pivot as needed.



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