Technology Insights

The critical role of fit-for-purpose financial modelling and analytics in the Oil & Gas industry

These are challenging times for the Oil & Gas industry, with the dramatic falls in oil prices triggering cutbacks in production levels, headcount reductions, renegotiations with oil services companies, lower planned capex and postponed projects.

There is a very real risk of an economic triple-whammy: as the falling oil price reduces income, incremental investment may no longer be economic, with the risk that field life diminishes and decommissioning is accelerated. Although there are a series of levers Oil & Gas business leaders can seek to pull, a sub-optimal in-house financial model and associated analytics will not allow the benefits and associated costs of such actions – nor different future scenarios around oil prices, capex, opex and financing arrangements – to be fully explored and assessed.

At the same time, lenders to highly leveraged Oil & Gas businesses are increasingly reassessing the debt servicing capacity of key assets, as well as that of the whole group. In many cases, existing in-house financial and forecasting models and the current suite of analytics are coming up short in their ability to provide a suitably robust and flexible platform for such assessments, with recurring themes including the following:

• many existing models base future oil price assumptions on forward curves sourced from, at least until more recently, more buoyant times for the industry. Oil price assumption modules consequently may not have the functionality to independently generate potential future oil price shocks, or generate scenarios that reflect the risks of changing macroeconomic conditions and regional/global supply and demand;
  • many models do not break opex and capex into each component part. Instead, the total costings from the original well plans (based on $100 or similar oil) have been input to the financial models and analytics dashboards. This severely constrains the ability to consider the impacts of alternative capex and opex scenarios at a more granular level (for example, the early termination or renegotiation of the lease for specialist equipment or a rig), thereby limiting the value of existing analytics suites;
  • 1P and 2P reserves may not have been revalued, or the functionality around production profiles is not sufficiently sophisticated or dynamic to be able to respond, without manual overrides, to revaluations of the Oil in Place which can be economically recovered;
• some other key business drivers are not modelled explicitly or dynamically, and so approximations or proxies need to be used in attempting to assess the business impacts of specific options and scenarios. In some other models, the hard-coding of values for certain key business drivers, rather than being sourced from a central repository of assumptions and inputs, makes it a much more time-consuming task to rerun the model under different scenarios;
• the models are often purely deterministic in nature, such that uncertainty around future outcomes can only be assessed by considering stresses around individual business performance drivers one at a time, or as a combination of these stresses in the form of a specific scenario. Stochastic functionality, which instead runs thousands of simulations for the business as a whole, facilitates an understanding of the “corridor of reasonable likelihood” of future outcomes by, along with quantifying the risk of more extreme outcomes (as illustrated in the graphic). Such analytics enable refinancing decisions to be taken with greater confidence. It also allows the risks and financial impacts of sharp movements in oil prices to be modelled more explicitly, and appropriate hedging strategies to be deployed;
• in a similar vein, the potential for geopolitical events, adverse foreign exchange exposures, resource nationalisation and sudden tax hikes have not necessarily been anticipated within existing financial models;
• the model structure was poorly conceived at the outset, and its subsequent expansion to include new projects or functionality has been haphazard and inconsistent;
• model documentation is limited or non-existent, creating key person risk;
• the model has never been validated independently, raising concerns about its integrity and the reasonableness of the methodologies and assumptions employed.

In light of all of the above issues, many financial models and analytics suites may no longer be fit for purpose. But the decision to start afresh, and design and build a completely new model and analytics dashboards, needs to be weighed up carefully. In some cases, the required enhancements to functionality can be retro-fitted to the existing model relatively easily. In some others, the constraints of the existing model framework or the amount of work required to address the core weaknesses strongly indicate the need to start with a blank piece of paper. Either way, it is critical that the design phase involves close consultation with key stakeholders, to ensure that all of the required functionality and capabilities will be captured and delivered.

A well thought through financial model and analytics suite – whether or not it offers stochastic functionality – should, in our view:

• model explicitly the business’s internal and external performance and cost drivers at an appropriately granular level for each asset, including production at each well, opex (for example, rig lease costs, contractor costs, transportation costs) and capex (such as exploration costs, appraisal well drilling costs, field development expenditure). This then enables management to better understand, quantify and mitigate the key threats to that performance, as part of strategic decision making;
• facilitate the production of a comprehensive suite of analytics, including production forecasts, P&L accounts, operating cash flows, net cash flows, balance sheets, and all the required Key Performance Indicators and Key Risk Indicators for individual projects, business units or the entire business, in a consistent manner, from a bottom up perspective. This will require the explicit modelling of each asset’s Production Sharing Agreements, Cost Recovery Pools, royalties and various tax liabilities, for example;
• dynamically link valuations of 1P and 2P reserves to future oil price scenarios, potentially parameterised through in-depth discussions with sub-surface engineers (see the diagram below);
• model dependencies between key business drivers and risks in an explicit manner, to allow risk analytics to be brought more to the fore;
• readily facilitate changes to assumptions, parameters and other inputs for a wide variety of key business performance drivers, which are captured in a central module, and which are all well documented in terms of their provenance and rationale. This will enable alternative business plans and scenarios to be explored in a robust manner, and the effectiveness of potential risk mitigating hedges to be tested;
• be sufficiently flexible that new assets and projects can be incorporated consistently and seamlessly, to allow rapid scalability of the analytics suite, while recognising that such assets and projects will have unique features;
• be subject to a rigorous governance framework that addresses controls around model change, data quality and management sign-off of key assumptions, as well as ensuring that management understands the model’s operation and limitations. 

A fit-for-purpose financial and forecasting model is still only a tool, and should not be relied upon blindly. However, a high level of model functionality and a well-run model parameterization process (along with regular recalibrations) will mean that much of the corporate expertise and knowledge has been captured effectively within the model and analytics dashboards, engendering greater buy-in across the business. This in turn will translate into greater use and acceptance of the model and associated analytics suite as a critical input to business strategy and decision making.

If you would like to discuss these issues, or the impact of emerging technology or data and analytics on your industry, then contact our Data & Analytics team.

The deal and data

by Matthew Linehan Manager

I recently attended an internal event at which I had the opportunity to meet colleagues from across PwC. Meeting people from other parts of the firm gave me a fresh perspective and a chance to reflect on my own role. Working in Transaction Services and being an active member of the Data and Analytics community, I find myself at a confluence of two environments: the deal and the data.

A deal environment is one of rapid change, requiring a balance of immediate tactical agility and longer-term strategic understanding. Data and analytics is a disruptive section of the market. Business users successfully leverage advancements in technology to create value in fresh, innovative ways. So how can data and analytics add value in a deal environment?

Time pressure is a persistent challenge in a transaction. Traditional analysis and presentation software packages can be constrained by limitations on volume and speed. In contrast, modern data and analytics technologies make short work of large, organised datasets. Interactive visualisation tools can fluidly generate different views of the data in seconds. A static perspective is transformed into a dynamic interaction; presentation becomes conversation. Discovering the answers in your data helps you to tell and define the narrative of your organisation.

While this additional speed and power can facilitate the transaction process, there is a longer-term benefit too. Immediately following a deal there is a window of opportunity to consolidate positive change. By leveraging the learnings from the transaction, the insight flows through into this post-deal period. Richer understanding breeds faster, more constructive change.

This is not just a question of looking retrospectively at the deal. Certain technologies come into their own in the post-deal environment. Agile, cloud-based planning software, for example, can be employed effectively in developing a robust strategic roadmap. Technologies in this field consolidate common elements, affording users time to focus on detail and handle complexity. The upside is increased efficiency and accuracy, and the ability to make real-time decisions.

In his Ted Talk, ‘The beauty of data visualization’, David McCandless describes data as, ‘the new soil, a fertile, creative medium’. This metaphor resonates—especially with a deal. By bringing bleeding-edge data and analytics technology into a dynamic, fast-paced situation, we allow fresh ideas to flourish. Deal volume was up 50% in Q1 2015 on the same period last year; the market is prime for innovation. For those still wondering why the ‘data’ and ‘analytics’ buzzwords are on everyone’s lips, there has never been a better time to join the conversation.

David McCandless’ Ted Talk can be viewed by clicking the following link: https://www.youtube.com/watch?v=5Zg-C8AAIGg

If you would like to discuss these issues, or the impact of emerging technology or data and analytics on your industry, then contact our Data & Analytics team.

by Matthew Linehan Manager

Are you geek body ready?

There is a growing trend in the health and fitness community that has been in the making for the past few years. According to ABI Research, approximately 10 percent of Americans own a personal activity tracker. Fitbit, Jawbone, and Nike are a few of the largest manufacturers of these devices; all of whom hope to tap into the estimated 80 million units expected to be sold in the US by 2016.

This surge in popularity can be partially attributed to Americans' growing interest in fitness as a whole. Between the years 2008 and 2013, the number of Americans enrolled in a gym or health club increased by more than 10 percent. More gyms and fitness clubs have been opening across the United States, as the industry passed $22billion in revenue in 2014.

At the same time, the fitness world is becoming more of a social endeavor. Group gym classes such as SoulCycle and CrossFit have had exponential growth in the past few years, as they have tapped into gym-goers demand for camaraderie and structure.The growth in activity tracker wear can be attributed to many of the same factors. Most activity trackers allow the wearer to connect with friends via their tracker’s phone app, which lets them compare their progress with that of their friends.

The social aspect of fitness trackers is not just an arbitrary attempt to cash in on social media; it also encourages a healthier lifestyle. According to FitBit, users who are connected with at least one friend on their app are 27% more active than those without. Friendly competition and a sense of an overarching fitness community helps to keep users engaged, and makes them more likely to go out of their way to improve their stats.

This competitive and engaging aspect of activity trackers is enhanced by the ability of users to quantify progress through the viewing of personal activity metrics. Trackers have become more accurate at measuring user activity than they ever have been in the past. Pedometers used to be able to count the wearer’s steps, and even sometimes total distance travelled. Today’s devices use advanced calculations to tell the wearer how many calories they have burned based on height, bodyweight, and heart rate. Users can view trending metrics in a dashboard online, including average calories burned per day, and even quality of sleep and resting heart rate over time, to see the improvements that are occurring over time. Additionally, users can input their daily diets into their tracker online, which tracks weight-loss goals they may have, and monitors progress on the way. This quantifies how diet and exercise are directly impacting the wearer’s health in ways that were previously much more abstract. To further encourage competition and motivation, online leaderboards post personal bests among users and award badges for achieving certain milestones, such as 20,000 steps in a day, or 50 flights of stairs climbed.

The benefit of activity trackers is their ability to use technology to encourage personal wellness. With the ability to visualise and analyse one's progress, it makes fitness goals more understandable and less abstract to the average person. The goal of these devices is to make people more likely to take the stairs instead of an escalator, or to take the scenic route home in order to get their step badge for the day. Making fitness quantifiable and fun is the key to helping people to lead healthier lives, and activity trackers help to make this possible for many users.

Do you use a fitness tracker?  What do you think you could do or show through the data from it?

If you would like to discuss these issues, or the impact of emerging technology or data and analytics on your industry, then contact our Data & Analytics team.

A supply chain is only as strong as its weakest link

By Katy Buller

This is a phrase I’m sure you’ve all heard on a fairly regular basis - ‘a chain is only as strong as its weakest link’, but never is this phrase more applicable when concerning the protection of data in a company’s supply chain. This is currently and for the foreseeable future a rather ‘hot topic’ in the world of data.

Supply Chain Information Assurance and Third Party Management is an evolving area that is affecting organisations across the globe. Industries are facing numerous threats, and with the recent rise in outsourcing, the cloud and Bring Your Own Device (BYOD) policies, it is becoming increasingly difficult for organisations to protect one of their most valuable assets – data. Regardless of how advanced internal security controls might be, if a Third Party used by a company has insufficient or weak security controls and processes, then they are at risk of having their information compromised. So the big question on the tip of everyone’s tongue is how can organisations tackle these threats and what can we do to protect our client’s data in the supply chain?

Data in any industry, whether it be healthcare or retail, can be extremely dangerous in the wrong hands. For example, Goldman (2014) highlights that a vendor error is one of the leading causes of a data breach. An example which I’m sure you have all heard of is the Target data breach in 2013. Since then, there have been an increasing number of similar attacks on organisations. It doesn’t matter how strong and effective an organisation’s controls are on their data if they have a vendor whose controls don’t either meet or exceed their own controls. A company needs to have complete visibility and awareness around their most sensitive data and where that is stored.

You might be thinking, why do organisations use Third Parties in the first place if there are so many risks involved? To which there are numerous answers. Using Third Parties and outsourcing different processes has many benefits, ranging from subject matter expertise in a particular field to purely a financial benefit.

We need to ensure that data is secure, remains confidential, available and integral. In order to start this process it ultimately boils down to initialising conversations and increasing awareness across the organisation to determine where the data is, and what controls are in place to protect it. There are many tools available on the market that can assist with supply chain management. If more companies are able to leverage such tools and build successful vendor relationships, then we will be taking the next step towards effectively tackling the many threats that exist in today’s world.

What do you see as the biggest threat to supply chain data?

If you would like to discuss these issues, or the impact of emerging technology or data and analytics on your industry, then contact our Data & Analytics team.

Email Doomsday?

By Katy Buller

In any organisation, I’m sure you will agree that a large amount of employee time and jobs are heavily reliant on email. Now, if I were to tell you that this could soon change and that email would become obsolete, how would you feel? Do you think that it would have a positive or a negative impact on either your own life or of those around you? Can you even begin to imagine life without email? For a lot of people, checking email is a routine, a habit that has become ingrained into their lives and honestly, I'm not sure if I myself could imagine not being so reliant on it. For many companies, this ‘no more email’ concept has already been set in motion. In fact, some companies have even gone to the extent of ‘banning’ emails. This new way of working has come to fruition with the likes of new collaborative tools and applications such as ‘Slack’ - which appears to be embarking on a revolutionary change to the way people work.

Slack claims to ‘bring all of your communication together in one place’, by integrating various tools that we use on a day to day basis, whether it be drop-box, google drive or even twitter into one application. The company who invented Slack have seen a large amount of growth in only a year of its release, with companies worldwide adopting this new approach. The application has a variety of features and functionality, such as the creation of groups and document sharing in one place, the ability to search across the network of individuals in your company for specific content, and the ability to sync with all of your devices amongst many other things.

Taking a step back however, what are the realistic implications of this? This tool could be seen as invasive and perhaps may even be seen to cross the thin line that is the world of personal privacy. In a world full of confidential information, do we really want to be group sharing certain information? What are the security implications? Who can access our conversations and to what level? As you can see there are many questions that will need to be investigated and thoroughly thought out in the long run. As this is such a new approach, only time will tell how effective this method will be. Just the other day Slack announced a breach to its application that occurred in February – demonstrating that there is still a lot of work to be done and investment to be made into the application.

On the other hand, tools such as Slack have the potential to be revolutionary as they are highly innovative and offer a completely fresh approach that aims to address significant problems that industry is facing; one of the main areas of which is employee productivity and the constant strive for a healthy work-life balance.

There is always going to be some degree of controversy and debate as with any new tool on the market, with many pros and cons which could be debated endlessly. However one thing is clear; as a society we are heading towards different styles of working. Could such an approach be on the cards for your organisation? Is this the end of email as we know it?

If you would like to discuss these issues, or the impact of emerging technology or data and analytics on your industry, then contact our Data & Analytics team.

The robots are coming - are CEOs ready for the era of automation?

Is the future now?

I recently saw an advert on TV which certainly caught my attention.  It opened by introducing Sally, a Synthetic Human billed as 'a teacher, a helper, a friend'.  Watching Sally clean the house, put the children to bed and prevent accidents I felt as though I was watching TV in the future.  Even though it was quite freaky, I must admit I did want one.  It got me wondering whether this is the future and if so, how long will it be until Synthetic Humans are as much a part of the family as our furry friends?

There are companies that make robots who are already selling them commercially.  One such company offers home robots that can mop, scrub, vacuum and perform outdoor maintenance, and boast they have already been sold into 10 million homes worldwide.  Having just got rather tragically excited about my new cordless vacuum cleaner which I thought was all the rage, I'm beginning to wonder whether I need to move with the times more.  At present each task is performed by a different robot so you would need to purchase many to be able to deep clean your house, and with starting costs of £400 per robot, that's going to add up.

There are other applications of robots which the company specialises in such as military and defence.  One robot can perform dangerous search, reconnaissance and bomb disposal missions, which is far more worthwhile endeavour than mopping a floor.  There have also been suggestions in the media of robots being used to provide care, support and companionship for the elderly.  Japan have allocated £14m in their budget to develop this technology and ease the challenges that our aging population presents.

We explored CEOs’ current perceptions of how robotics in the workplace is shaping their businesses today and in the near future.  The majority of CEOs we talked to cite manufacturing and production as the key functional area where they’ve already adopted robotics in their organisations or plan to do so in the next five years.  CEOs agree that robotics is going to make their companies more efficient, with 94% of those who’ve already adopted robotics saying that it has increased productivity in their business.  Over the next five years, CEOs expect that almost a fifth of their workforce tasks will have an element of robotics to them.  Whether this will be pure substitution (58% of them also tell us they intend to reduce headcount because of robotics over the same time frame) or finding new ways of working collaboratively, it’s hard to say.  This is certainly a huge growth area for Data and Analytics.

Do companies need to prepare for a time when they need just a handful of people blended with hundreds or thousands of machines? And do employees need to panic? Probably not.  So back to Sally.  Well it turns out that this was just an advert for a TV programme set in the future about Synthetic Humans, but it did get me thinking.

If you would like to discuss these issues, or the impact of emerging technology on your industry, then please get in touch with Euan Cameron.