Industry SectorsEnergy/MiningThe Oil and Gas Sector: Oil in the Tank or Cash in the Bank?

The Oil and Gas Sector: Oil in the Tank or Cash in the Bank?

Although the oil and gas industry has demonstrated improvement in overall performance, especially on indicators such as days sales outstanding (DSO) and days working capital (DWC), a recent Ernst & Young (E&Y) report, entitled ‘Cash in the Barrel: Working Capital Management in the Oil and Gas Industry’ concluded that working capital in all forms has been ignored.

Economic value and return on assets (ROA) are important indicators of performance, and are closely watched in the oil and gas industry. The huge amounts of capital invested in setting up upstream and downstream projects require close monitoring for effective use. With daily volatility in product prices, continuous monitoring of deployed working capital and an understanding how resources are performing on a real-time basis, all of prime importance and effective monitoring is crucial.

Treasury Operations in the Energy Industry

The role of treasury in the energy industry is very complex. Not only does treasury deal with various interfaces that give form to the business entity, but it also engages in the larger aspect of risk management. Managing financing of the business value chain is no easy task. E&Y’s insights on the industry’s optimising return on equity (ROE) through treasury operations provides perspective to the magnitude of touch points the treasury must deal with. These range from forecasting cash flows and managing liquidity for bidding exploration rights, capital for exploration equipment and from managing borrowing costs, to mitigating currency risk and business surpluses. The complexity of the challenges and business interfaces is staggering.

The E&Y article also cites various strategies that treasury must consider to fully utilise deployed capital. Among the strategies mentioned, to gain control over resources, treasuries need to centralise liquidity management for cross-border fund movements, use netting across the group, and manage the liquidity horizon for deployment of surpluses.

Cash Flow Planning

In a recent survey conducted by KPMG of leading mining and upstream oil and gas organisations, nearly two out of three respondents cited working capital, business planning, cash flow forecasting, and cost control as key areas requiring greater focus.

According to the survey, nearly 80% of respondents lack a global view of key financial processes and allow local systems, manual processes and spreadsheets to pervade management reporting, business planning and project accounting. Poor systems and inefficient processes have created a vicious circle that hinders treasury’s performance, with unnecessary effort spent on data collection, duplication and re-work in order to gain confidence in the integrity of the data. Remember, stagnant processes and inefficient data can impede success.

Operational Excellence in Treasury Management: Key Factors

When devising a strategy to counter both upstream and downstream challenges in the oil and gas industry, treasury needs to holistically consider all challenges to the value chain, whether that is downstream or upstream, or concerns the appropriate use of technology.

Downstream value chain challenges
An oil and gas company’s distribution networks face operational challenges to streamline retail payment processes, reduce operational overheads, and increase visibility and control over dealer credit terms. The dealer network on the other hand needs to maintain optimal inventory stock, utilise better collection methods, and optimise its use of scarce working capital.

Operational success depends on close collaboration between the oil company and dealers to tackle various challenges to make it a win-win business relationship:

  • Poor visibility into credit requirements by dealers leads to insufficient finance and lack of on-demand availability of finance to expand operations.
  • Inventory re-ordering and payment processes between the oil company and the dealers requires the elimination of manual processes involving consolidation of paperwork, fax, and phone call confirmations, including the elimination of daily trips to bank branches.
  • Speeding up the process of manually remitting collections from dealers to the company’s account, and then faxing the pay-in slip confirmation.
  • Evaluating credit positions of the dealers, managing collateral, and reconciling receivables into the accounting systems.

Upstream value chain challenges
The challenges for corporate treasurers of energy companies are classified by Lance Kawaguchi of Citi into four distinct areas:

  1. Capital expenditure.
  2. Joint venture arrangements
  3. Merger and acquisition (M&A).
  4. Competition to purchase hydrocarbon assets.

These are challenges that need to be assisted by improving treasury management efficiency, and by optimising working capital.

M&As will present a significant challenge in the coming years. Signals from the industry indicate a heightened activity by energy companies to acquire smaller players and the trend is likely to continue. The driving force behind this is the need for cost rationalisation and the need for oil companies to expand beyond their own countries.

In such a dynamic environment, corporate treasurers need full visibility across the enterprise to understand where internal cash is located and how to unlock it. Apart from unlocking cash needed to finance the integration, disparate cash management systems from the merged entities need to be seamlessly integrated for smoother operations. This will be at the top of any energy business’s agenda.

Changes in technology adoption
A speech delivered last November by the Organisation of the Petroleum Exporting Countries’ (OPEC) secretary general, Abdalla Salem El-Badri, captures the emerging changes in the energy industry. He noted that technology has been the game-changer in improving the recovery of oil from depleted fields and has also significantly contributed to maximising the utilisation of existing assets. Going forward, technology and innovation would be key to the continued success of the oil and gas industries.

Treasury operations will also need to be supported by advanced technologies. Cash management systems will have to be equally versatile to match advanced production systems already in place. Cash management systems that offer game changing technologies such as process standardisation, perfect controls, smooth integration and better insight will be the differentiators for treasury to drive the business agenda in the coming decades.

Technology: Core Elements of Achieving Efficiency

Energy companies frequently have cash distributed across many countries, and many banks and accounts, with consequent loss of visibility and cash flow leakage, which can make for an inefficiency treasury. The best ways to improve visibility and drive efficiency include:

Process standardisation
Cash management systems that provide a flexible web-based approach will create substantial value and productivity gains. For instance, electronic invoicing (e-invoicing) is widely acknowledged within the vendor, sales and supplier communities. A solution that accepts invoices in any type of structured format, including electronic data interchange (EDI), eXtensible Markup Language (XML) and portable document format (PDF) will allow buyers and suppliers to quickly and easily connect to the treasury network and begin processing invoices immediately, regardless of the accounts payable (A/P) and accounts receivable (A/R) processes, enterprise resource planning (ERP), and other back office systems being used.

Although each of a corporation’s businesses, and the vast partnership network typically used in the oil and gas field may have their own internal process standardisation programmes, a global cash management platform will ensure that best practices are followed. Energy companies should also expect, and demand, from their banking relationships a consistent quality of transaction banking service across the various global locations.

Automation through systems integration
Oil companies that operate across multiple jurisdictions face a further challenge to the treasury: how to minimise cash funding requirements in each location and how to extract profit?

Often, oil companies operate in national jurisdictions with strict currency controls and tax agreements, which may impede the transfer of funds in and out of the country. In these circumstances, cash management systems must accommodate business activities such as distributing cash generated from operations to pay debt holders, or for re-investing in assets.

Transaction banking systems that can integrate diverse processes, activities, and countries in which the company operates, require local analysis by business segment. These can all be supported by a single web-based global platform that can connect to disparate third-party systems, for example, receivables collection at the downstream level, to Excel-based forecasting tools for the accounts department.

Better management of foreign exchange (FX) exposures
For energy companies, the dominance of the dollar presents its own set of problems. UK oil companies, for instance, are likely to have personnel-related costs in pounds sterling, giving rise to foreign exchange (FX) exposures. A stronger pound or weaker dollar will reduce reported profits and influence cash generation. In addition, as UK oil companies expand their operations abroad to countries in Africa, Asia, and South America, USD/GBP disparities will not be the only FX issue they confront. They will face new exposures to currencies that are often regulated by local governments, and which sometimes may not be freely exchanged.

By gaining visibility into cash positions overnight or intraday, cash managers can factor in currency fluctuations, and are consequently in a better position to negotiate contracts.

Better investment of cash
Taking strategic decisions on hedging currencies, the utilisation of liquidity across entities, or tapping the overnight markets for finance will require real-time data and seamless integration of disparate systems among all operating units.

Good decisions by treasury require a strong foundation of online and accurate data presenting the right picture across the internal organization as well as external financial networks.

Work With Your Bank

Some or all of the following can be considered to improve treasury operations in the energy industry, suggests Citi’s Lance Kawaguchi:

  • Set up a web-based system to allow global visibility of cash balances and real-time balance sheet management by managing bank accounts across the globe.
  • Initiate end-to-end processes for collections, payables and investments, to increase the velocity of cash flow, and obtain ability to net surpluses and deficits across regions.
  • Set up systems to prepare and execute daily automated clearing house (ACH) and wire transfers, ensuring accuracy, control with authorisation of either the corporate treasury head or the local signatory based on country specific requirements.
  • Deploy tools to bring all countries within a global cash structure, including target balancing
  • Set up a system for a global pooling structure, which sweeps funds based on local time zones and cut offs to maximise investment opportunities.
  • Set up notional pooling appropriate for each country.
  • Use cash sweeps by identifying overnight or intra-day opportunities to reduce the need for local cash build-up.
  • Consider investment options that mitigate counterparty risk and facilitate optimisation of investment return against risk.
  • Exchange electronic documents and messages for actions on bank accounts, signed with digital certificates.


Internal processes and controls, via better transaction management systems, are certainly not the only deciding factor in keeping an energy company afloat in a tough environment. But they are key in helping it to generate new sources of revenue, increase efficiencies, reduce costs, gain competitive advantage, and ensure regulatory compliance.

Better cash management can turn every subsidiary unit into a self-sustaining profit centre, thereby increasing the viability of turning every drop of oil in the tank into cash in the bank.

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