Oil finance managers are put to great tests amid oil price volatilities in 2020
Oil, Gas, & Chemicals Insights
A Chinese saying once tells crisis creates chances. Brent Crude price of $35 and below makes clean energy investment's IRR of less than 15% a comparable or better to that of oil's. While such opportunities attract sophisticated studies, most of the finance functions in oil business have also been tasked to first respond to the crisis through significant cost reviews for costs to be cut, i.e. stop the bleeding to stay alive before getting a cosmetic surgery on the wound and scar. Cost review is just one of the many to be accomplished by finance professionals. It is saying the obvious they have a more critical role to play than ever and a heavier burden to shoulder in the end. Hence, if we may, we would like to forewarn fellow finance managers to check the following off their to-do lists for the next half of the year before late:
1. Budgeting and forecasting -
- Do you already have deep understanding of the nature of the cost base, and clarity about which costs can be reduced?
- Do you possess the needed depth and breadth of skill and business knowledge to propose objectively and efficiently to the final decision makers the trade-offs between discretionary spending, short-term priorities, liquidity fundamentals as well as longer-term spending and its efficacy?
- Do you forecast and collaborate with reliable tools when to reinstate the deferred budgets?
2. Corporate reporting – Do you have adequate knowledge to consider, liaise and alert in advance the business units as well as final decision makers the internal information needs and external corporate reporting results, to name the least:
- treatment of coming exploration costs when China's 7-year oil and gas action calls for intensive exploration, while the historical exploration costs in the current balance sheet may not be recoverable by current value of oil that can be extracted;
- new revenue and lease recognition requirement which may not give much sought better pictures of the oil business;
- vanishing reserves in low oil price pushing up depreciation charges and eating further into declining profit as well as giving deteriorating oil KPIs like replacement ratio;
- joint ventures and associates are providing less or negative investment returns and have not been providing sufficient financial records for timely valuation and becoming last minute surprises;
- financial instruments', including hedge accounting's, fair value movements are most probably adversely changed into a loss given the poorly performed underlying;
- financial guarantees' fair value increase when the guaranteed not able to honor own obligations;
- inventories are to be stated at the lower of costs and net realizable values, and the net realizable values are most likely to be lower;
- expected credit losses are likely to increase when more business counterparties are struggling;
- oil and gas properties impairment loss is expected to increase and large change in price is making it much more difficult to estimate the convincing longer-term price expectation for the stakeholders, auditors, and more importantly the top management. It is more so for shorter-term assets and/or unconventional assets;
- the right amount of transparency in your disclosures so the company is less likely to be seen as taking a big bath in the eyes of the public;
- the list goes on.
3. Controls and systems – Are the controls and systems in your organization offering data integrity for decision making supports and accountabilities, first for you to do your part as a capable finance professionals and to the top management? Have you been able to assess efficiently and effectively the pressure to manipulate performance related data in your organization?
4. Do you know the list still goes on, including funding needs, life-cycle management, tax assets/exposure management…?
If you take a less-than-loud "yes" for answer to any of the questions above, we have an encouraging message for you. Deloitte China Oil, gas & chemicals practice is here to offer our practiced solutions against each of the abovementioned to you and we are just a call or a barcode away from you.
We benefit from a worldwide range of best practices and experience while at the same time maintaining and reinforcing a local presence in tune with the unique challenges and cultural sensitivities of China. Our successful stories with our oil and gas clients include greenfield/brownfield feasibility studies, reserves evaluation, resources-return forecast/modelling, risk management/controls, smart oilfields/assets, digitalization, benchmarking and financial reporting, covering comprehensively the strategic and tactical needs across business value-chains.
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