With oil prices slowly recovering from the dramatic fall last summer which forced global organisations to put multi-million dollar projects on ice, ACCA (the Association of Chartered Certified Accountants) has detailed the key areas in which chief financial officers (CFOs) working in the sector can galvanise the finance function in the fight to future-proof their business in an ever more volatile market.
Speaking on the report, titled Oil and gas – priorities and challenges for the CFO enterprise, Jamie Lyon, the author and ACCA’s head of corporate sector says:
“We have all seen the impact of volatility in the market hitting the cost base and impacting capital expenditures over the last year or so. The big question now is how low and how long the oil price will remain at present levels.”
The report also highlights how volatility is bringing pressure on forecasting and decision support capabilities, and more scrutiny from investors on the performance of businesses in the sector.
“Corporate reporting challenges are also a key test for CFOs, particularly in relation to asset impairment and stranded assets” Lyon says.
One of the biggest issues facing CFOs in the sector is predicting the future business landscape. Lyon adds: “Effective forecasting and planning is vital right now. Preparation for the potential risks of the future and most importantly, how to overcome them, needs constant review so that plans do not become irrelevant which can happen all too quickly in a fast-moving and volatile sector like oil and gas.”
The report also highlights the challenges facing CFOs in terms of the cost base. “Resource allocation needs to be prioritised, and ruthlessly so. What really needs the funding? All spending will be analysed so CFOs need to tread a fine line between cutting cost but also protecting essential investment for the future. It’s a really tricky balance to get right”.
With ongoing pricing challenges impacting the sector, the investor community remains cautious, and is becoming more challenging. For enterprises that are heavily invested in carbon, the issue of “stranded assets” and potential impairments is also dominating the agenda, with Lyon commenting: “I think we can expect to see a reduction in the value of assets on the balance sheet, that’s just a reality of the market at the moment.”
Longer term outlook
From the CFO’s perspective, the report also points to the longer term demands. “Obviously investment in renewables is a key issue. Fossil fuels by their very nature are a finite resource, and one that global warming targets may leave out of reach, so investment in alternative energy sources must be increasingly on the priority list.”
Lyon adds “Another equally important issue for CFOs longer term is the talent pipeline. Securing the right balance of operational and strategic skills in the finance function is a huge challenge across the industry, and ensuring its endurance in the longer term must be a key consideration. The big question is where the next generation of finance talent across the industry will come from.”
In summary, Jamie Lyon says: “CFOs, and the approach they use to transform their businesses to make them fit for the future, are a vital part of ensuring the oil and gas industry runs ‘business as usual’ as it works through turbulent times and continues to transform in an ever-changing world. We believe the finance organisation is going to be at the forefront of driving the transformation needed in the sector”.