Building Out Your Oil & Gas Accounting Function
Most finance and accounting endeavors are meticulous and precise, and the same approach applies when building out your oil and gas accounting function. Unfortunately, that build out isn’t always straightforward, particularly if you’re adjusting to a dynamic, unpredictable landscape or starting from scratch. That’s why these insights can give you a reliable foundation to begin.
Pick Your Strategy
First and foremost, you'll need a plan of attack. There is no absolute, clear-cut answer when choosing the best course of action but in general you’re choosing between three different solutions.
1. In-House
Most oil and natural gas companies eventually reach a point of critical mass where the business is so big and complex that bringing the accounting function completely in-house just makes the most sense. The nature of your underlying assets might also dictate the need for in-house accountants. If you’re working across multiple basins and operating teams with complex lease positions, then an in-house solution provides the time you need to address all the complexities without trying to explain everything to an “outsider.”
2. Outsourcing
In many instances, outsourcing your accounting function is the obvious choice, and not just for those quick exits and smaller accounting issues where it doesn’t make sense to staff a team. In fact, given the current state of the energy sector, outsourcing is most relevant and impactful for streamlining ongoing operations and maximizing efficiencies.
Keeping your headcount in-check and avoiding investments into potentially costly systems are obviously attractive for companies – particularly startups. Plus, there’s something to be said for the agility and convenience of outsourcing, where you can utilize talent that’s entirely on-par with in-house talent, just without the headaches involved with recruiting, interviewing, and hiring.
3. Combination/Co-Sourcing
There are plenty of circumstances where a combination of in-house accounting and an outsourced solution work best for you and your objectives.
For example, everything in E&P accounting is cyclical in nature, where your revenue process might be heavy for a couple of weeks each month but then settles back down. Co-sourcing can be beneficial in this type of situation, where you hire one full-time person and then bring in outside specialists for those times when things get more intense. This way, you still get the experience and expertise you need but don’t unnecessarily inflate your labor costs.
Costs, scalability, agility, and growth all play a major role in your decision. One of the worst-case scenarios is finally realizing the growth you’ve been aiming for all along, only to have inefficiencies in your accounting function cut that growth down at the knees.
Choose a System
Much of your decision-making around an accounting system depends on if you're an in-house, outsourced, or co-sourced accounting function. Obviously, an entirely in-house team will require dedicated oil and gas accounting software whereas an outsourced function does not. While something like the cost of a system will occasionally impact internal vs. external staffing decisions, those cases are quite rare.
Further, there are several accounting systems to choose from, whether you're in the downstream, midstream, or upstream oil and gas sector. That said, it’s usually best to start with your industry segment, then determine the nature of your operations.
Implement the System
If you choose to use an outside expert, pick someone that’s experienced with your new system as well as your team, goals, and vision.
If replacing systems, you also want to make sure you’re implementing the system to its full capabilities and not what you’re accustomed to from your old system. Remember, you’re replacing that old system for a reason.
Build Out the Accounting Processes
Remember to be intentional with both choosing a system and implementing it, keeping an eye on your overarching goals and what you want from them. Is your focus strictly on FASB accounting compliance? Or generating financial statements? How you roll-out the system and who has access to operational and managerial reporting can have a drastic effect on your decision-making going forward.
Once the system is implemented and fully configured, you need to build out your accounting/business processes so they correspond with your oil and gas segment, including:
Accounts Payable
Obviously, Accounts Payable is a basic process that every company requires. But accounts Payable should never be taken for granted and is of absolute importance to get right.
Joint Interest Billing
Ownership of operated, producing wells can range from one working interest owner up into the thousands. Expenses incurred by the operator during oil and gas production activities are shared with these working interest owners, so the accuracy, timeliness and validity of expenses is paramount. Having a team with extensive knowledge of the Council Of Petroleum Accountants Societies’ (COPAS) guidelines is a must.
Revenue and Regulatory
Given the nature of the oil & gas industry, the revenue process can be extremely complicated, so an experienced accounting perspective is usually very beneficial. The importance of understanding your contractual obligations and setting up the accounting system to appropriately calculate revenue and owner payments is essential.
Severance Tax and Other Regulatory Reporting
Likewise, severance tax and additional regulatory reporting can also be extremely complex since every state has its own requirements. 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.
Capital Expenditures and Budgeting
Obviously, capital expenditures are now perpetually at the forefront of everyone’s mind in the industry, not to mention the federal government on a frequent occasion. Things have changed dramatically in the last few years, so CapEx isn’t what it used to be just a few years ago.
It's always important to be as forward-looking as possible if major projects are on the horizon, including drilling wells, building a pipeline, or upgrading an existing refinery. Naturally, in an environment like today’s where maximum efficiency is a must, all of these notions suddenly become even more essential.
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’ve managed to solidify and streamline 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.
To read the full article from RealClear Energy , click here