Choosing the right route

Planning, budgeting and forecasting

for oil and gas companies
Choosing the right route
Planning, budgeting and forecasting for oil and
gas companies
You’re taking a road trip. But you don’t just put the key in the
ignition and start driving. First, you need a map. With the right
route and the right plan, you’ll stay on time, on budget and
on track to reach your destination.
Contents

2 Choosing the right route

4 Oil and gas companies: roadblocks and detours

6 Don’t ignore the signs

10 The Ernst & Young roadmap

14 Reaching the destination

18 Ernst & Young and PBF: the road well traveled

20 The journey ahead

Choosing the right route

For companies operating in today’s volatile
economic environment, having solid
Planning, Budgeting and Forecasting (PBF)
processes can mean the difference between
staying on course and veering off track.
The purpose of the PBF function is to
translate a company’s objectives and goals
into a roadmap for achieving them. This
entails translating operational and nancial
An increasing number of companies are putting PBF at the top of their
agendas. A survey by The Economist Intelligence Unit (published July
2008) asked 251 C-suite and board-level executives in the US and
around the globe “Which of the following activities do you think are the
most important areas of focus for your CFO?” As the following chart
shows, PBF is a top concern for CFOs:
Survey results
Ź Strategic partner to the board 65%

targets into a corporate budget and making Ź Annual budgeting and outlook forecasting 61%

periodic updates to the current view of future Ź Risk management 57%

business performance. Investments in PBF Ź Business management reporting 51%

allow organizations to more effectively set Ź Regulatory and external reporting 45%

goals, develop plans, monitor performance Ź Acquisitions and disposals 36%

and forecast anticipated changes. When your 34%
Ź Treasury management
PBF processes have an effective and efcient
Ź General accounting 20%
infrastructure, you are more likely to remain
Ź Fixed assets management 19%
competitive in the current market.
Ź Administering accounts payable/receivable 17%

Ź Marketing investment appraisal 13%

Ź Travel and expenses management 7%

0% 20% 40% 60% 80%

Source: The Economist Intelligence Unit, published July 2008

2 Choosing the right route Planning, budgeting and forecasting

Many CFOs are viewing PBF as a low-cost way to improve the
performance of their businesses. Companies often spend
US$100 million to overhaul and replace Enterprise Resource Planning
(ERP) systems and technology; however, cleaning up PBF processes
offers companies a less expensive, less invasive way to improve
visibility and reaction time, providing the “best bang for their buck.”

Optimizing PBF capabilities will improve

predictability, responsiveness and cost
efficiencies and will align the organization
to key business decisions.

3
Oil and gas companies:
roadblocks and detours
Oil and gas companies, in particular, are putting their PBF processes • Environmental restrictions: the increased focus on
on the radar. Today, more than ever, having a “what if” analysis and environmentally friendly infrastructure will likely continue to
capabilities is a must. Companies need to be able to respond quickly increase and challenge the ability of oil and gas companies to
and accurately to external factors, such as a volatile market and a remain competitive and relevant in the future.
shift in supply and demand. In a time of capital spending reductions,
• Managing inventory: because of the economic crisis, many oil
reduced cash ows, supply chain challenges and investor uncertainty,
and gas companies are experiencing a shift in inventory strategy.
oil and gas companies must adapt and adjust their PBF capabilities
Companies may need to decrease inventory in order to have
accordingly. Those that can predict an upswing will be better prepared
more cash in hand to pay suppliers. As the market shifts, it is
to capitalize on opportunities. From exploration and production
critical to plan for inventory.
to rening and marketing, decisions about product margins and
investments are falling under greater scrutiny: which projects should • Aging workforce: the aging workforce within the oil and gas
we undertake, or shut down? How many rigs can we afford? How much industry is a major concern. How do you prevent loss of industry
equipment and how many resources are needed? Are there enough knowledge and manage an increase in labor costs to attract and
trucks to transport to retailers? retain top talent? In addition, companies are having to make
decisions about retaining top talent, in spite of the challenging
There are PBF challenges specic to the oil and gas industry. How economic environment.
companies address and overcome these current challenges may
dictate their competitive position in the industry: Agility in adapting plans and budgets to meet challenges in the
economy, regulatory environment, capital markets and competitive
• Strained resources: an estimated 80% of the world’s oil-producing landscape is essential to oil and gas companies.
assets are past peak production and in rapid decline. This has
placed increased strains on oil companies to drill in challenging
environments to find and develop proven reserves. These pressures
will continue to place companies in challenging environments where
political instability, harsh environmental conditions and technically
challenging drilling will increase the overall business risk.
• Access to capital: oil and gas companies are more global and
dispersed, with increased acquisition activity and opportunities.
Global credit market problems have led to reduced access to capital
and customer purchasing power, as well as increased lending
challenges, which impairs the funding of future projects.

4
5
Don’t ignore the signs
Ernst & Young has experience helping oil and gas companies
recognize and overcome PBF challenges. We take an in-depth
look at a company’s approach to PBF, historical data, current
processes and key drivers. Whether it’s long-term planning
for a network of warehouses/plants, improving inventory
management or reengineering the budget process, we help
companies establish a stronger link between their nancial
plan and their operational plan.
The three main PBF services we offer include:
1. Driver-based PBF: shifting a company’s focus to driver
performance and incorporating it into the PBF process
2. Implementing rolling forecasts: reducing the budget cycle
time through a quarterly rolling forecast, which yields a
quicker refresh of what is happening with the business
3. Employing new PBF technologies: implementing PBF
tools for the purpose of integrating and streamlining
processes
6
There are areas within these PBF services where
Ernst & Young can create efciencies, and where companies
can see improvements, in quality, time, cost and accuracy.
Improving quality through key drivers
Reexamining a company’s key drivers can improve forecasting
quality and accuracy. Drivers serve as the link between
strategic planning, annual planning, performance reporting and
forecasting; they translate a company’s strategy into tangible
objectives and measures, drive the desired behaviors and
evolve to address specic needs. Drivers improve the planning
process effectiveness and efciency, and they enhance decision-
making capabilities. If you’re seeing a disconnect between your
company’s strategy and outcome, identifying and documenting
key drivers allow you to make strategic decisions based on more
rigorous, consistent facts.
The downstream oil and gas segment will continue to feel
margin pressures. As global market factors (e.g., price of crude
oil) uctuate, the importance of an integrated driver-based
model will increase. Companies with these capabilities will be the
industry leaders and drive industry trends and standards.
Oil and gas downstream driver tree (example)
Business High-level business First-level Second-level Third-level
strategy objective drivers drivers drivers

Improve operating Reduce Crude/feedstock Asset

margin operating costs acquisition cost effectiveness

Optimize Energy Root cause

business analysis
portfolio

Transport, storage
Maintenance
and distribution
Labor contracts activities

Turnaround/
Maintenance shutdown
effectiveness/ planning

Marketing maintenance
Procurement resources

Spare parts
inventory
control
Performance of
preventative
programs

Source: Ernst & Young, 2009

Budget cycle time reduction

If you typically complete your annual budget in 35 days, you are doing pretty well; if it takes you 80 days, you may
want to explore ways to speed up the process. Implementing quarterly rolling forecasts can reduce time and effort.
Additionally, the integration of processes (i.e., budget creation, submission and approvals) with workows can free up
your company’s employees for more practical, day-to-day tasks.

Less reliance on manual spreadsheets

Spreadsheets still play a key role in PBF. However, if you are an oil and gas company with employees scattered around
the globe, you are likely using different spreadsheets with varying formulas and fragmented processes. Automated
workows, in contrast, create a structured process that reduces manual intervention and error. Streamlining
technology by implementing an enterprise performance management system connects personnel in real time around
the globe, using one uniform system.

7
Don’t ignore the signs

Strategic direction People and Processes Technology

organization

 Planning must adequately
support strategy and decision-
making.
 Budgets and plans must be
flexible enough to be adapted
quickly to changes in strategy.
 Budget drivers should be
significant for the users. If they
change, users must understand
the impact on the future.
 Good planning discipline is
essential to the correctness of
the budget and its timely
completion.
 Budgets and plans should
support management to make
better decisions. Budget
structures and drivers should
illustrate the business well
enough to be informative
baselines.
 People and their understanding
of the business are essential to
an accurate budget (they provide
insight and a vision of the future).
 Budgets and plans help align the
people and organization to
executive strategy, and require
management’s buy-in and
acceptance.
 When new budget build processes
and user interfaces are
implemented, it is essential that
employees be trained to use the
new tools, and understand what
the change is for.
 Budget and plans are often
complex endeavors spanning
multiple departments and roles.
Implementing clear, standardized
and defined processes creates a
timely and accurate budget.
 If each division has a different
way of building its budget,
budgets will not be comparable or
understood across the
organization.
 Streamlined processes mean
budgets do not become rapidly
outdated as market conditions
change.
 Good budget governance should
allow executives to set budgets
they believe in, instead of
budgets they can beat.
 Technological and process change
can facilitate task automation and
reduce budget cycle time, thereby
empowering people to undertake
tasks and achieve outcomes not
previously possible.
 Technology can facilitate more
efficient data retrievals, perform
rule-based calculations and embed
process controls along the raw
data to Key Performance Indicator
(KPI) production process.
 Technology can generate
efficiency savings through the
automation of current processes
and through efficient data
collection interfaces.
 Unifying data structures and
sources and implementing
integrated data transformation
processes are key to reliable,
time-saving information
production.

Source: Ernst & Young, 2009

Obstacles to consider
As you review your current PBF processes, you may need • Decentralized technology; data and information structure is
Ernst & Young’s help if you experience the following: ad hoc and sporadic

• Lack of “what if” analysis • Budgeting and forecasting data availability due to dependence
on legacy ERP core systems
• Time-consuming processes to reect strategic changes in your
planning process • Operational plans that do not reect organization’s goals

• Lack of integration between strategic, nancial, capital, • Strategy and organizational benets that are displaced by
operational and resource planning individual agendas

• Extensive ad hoc “spread sheeting” and manual work effort

8
9
The Ernst & Young roadmap

Ernst & Young helps companies develop an integrated PBF infrastructure — one that links organizational goals
to operations and is an integrated cycle of prediction, observation, reaction and revision. Our end-to-end
methodology provides a structured framework; we zero-in on key workstreams within a company (i.e., people,
technology) and help streamline and transform PBF processes throughout each stage — from identifying the
vision and strategy, to designing and sustaining the new operating model.

Overview
Designing and building Delivering and improving
the approach the PBF value chain

Phases Identify Diagnose Design Deliver Sustain

Collect data Build Operate

opportunity Understand the current-state Outline design principles for Initiate conversion of design Provide post-transition
people, process and the proposed operating into tangible work product(s) support and transfer
understand scope technology to serve as a model ownership of the operating
Stages foundation for analysis model to the business

and
objectives Develop hypotheses and
formulate the overall
strategy and vision for the
operating model
Analyze/develop options
Develop a framework for the
future operating model and
identify opportunities for
improvement
Develop detailed design
Develop the detailed
operating model and initiate
business buy-in
Validate implementation Optimize
Validate and modify Identify and prioritize
operating model to meet
business needs and prepare accelerators
for transition

Develop business case Implementation Extend

Build a robust business case Introduce the new operating Inject new innovation and
for executive/board approval model to the business opportunities
detailed design meets
business needs

Stabilize
Complete transition to new
operating model

Source: Ernst & Young, 2009

10
 Integrating planning, budgeting and
forecasting is the key to developing the
necessary predictability and responsive
capabilities to improve business decisions —
now and in the future.

11
The Ernst & Young roadmap

Key differentiators to our Finance-focused

PBF approach: • Previous experience and rmwide knowledge help
support the complex obstacles in nance and
supporting organizations
Staged method
• We appropriately understand the impact of changes
• We work with our clients to build a plan suited for their
individual environment Vendor independence
• Modular implementations and changes deliver
immediate results • We evaluate the necessary vendor strategy to t the
• Our approach builds on the knowledge and successes current obstacle; we are vendor independent and do
of previous stages not endorse vendor relationships that could inuence
our recommendations
Integrated planning
Insightful experience
• Each phase of the planning process is integrally linked
• We bring years of insight through multiple system
to the previous and future process
implementers, designers and users in the practice
• The nance organization is linked to the operations
through a thorough understanding of their connected
activities Strategic and tactical
• The inputs from one planning cycle are used to validate • It is important to form a link between operational
and redene the same process during its next iteration choices and their tactical implications
• We work to translate goals and strategies into
Organization transformation actionable and relevant business decisions
• We help the client sustain a more efcient/
accurate process
• Planning pulls disparate and separated groups into a
single vision and a thought-focused organization

Driver-based approach
• The business metrics and drivers are used to predict
the coming time horizon
• Outcome-oriented drivers help pull the strategy
into reality

12
Integrated PBF framework
Strategic plan

Objectives Committed Aspired Performance

and targets outcome outcome Product reports
costs

Business plans

Business performance reporting

Performance measurement

Demand Supply
Targets and
performance Cost

Operations
indicators Committed outcome (targets) standards
Target
Expected outcome and initiatives and actions
Performance

Requirements Performance
Financial plans reports

Budget Forecast
Performance -OpEx -CapEx -OpEx -CapEx
indicators Constraints

Policies
Historic initiatives and actions
performance updated short-term
Volumes
volumes

Functional plans and short-term plans

Performance Performance
indicators reports

Source: Ernst & Young, 2009

13
Reaching the destination
For each company, PBF success may be
measured differently. One company might
want to reduce budget cycle time. Another
might need to budget more accurately, or
centralize technology. We help companies
forecast the outcome metrics to achieve
different scenarios, but with the same
underlying goal: better business decisions.
Specically, we can help oil and gas
companies improve strategic decision-
making through shorter, more frequent
forecasting and planning cycles to more
quickly respond to market and business
conditions. Through our guidance, companies
can improve prediction capabilities and
increase focus on managing the key levers
that impact business performance.
Our hands-on experience
We recently helped a US$10 billion energy
company improve its annual budget and
forecasting process. The company wanted
to reduce its overall cycle time, push down
the budgeting process to the business
owners, run multiple scenarios and develop
a more simplistic and accurate forecasting
process. We helped identify and resolve
PBF challenges specic to the company,
including a complex entity structure with
geographically disparate companies,
inaccurate and untimely reporting and
forecasting capabilities, and manual
processes with insufcient control
and security.
14
The following table details the services we provided and how we brought value
to the energy company during this PBF project.
Services Client benets
• Created business requirements for the future state • We created a leading practice
budget and forecast process budgeting and forecasting
• Designed a leading practice budget and forecast operating model that:
process that involved business owner input and  Successfully pushed down
sign-offs
the ownership of the budget
• Implemented a planning application to facilitate process
the budget and forecast process
 Reduced overall cycle time
• Congured the planning application to include:
by 50% and allowed multiple
 Simplied data model focused on material reviews and iterations
business units and business drivers
 Automated the complex
 Data interfaces to source actuals for variance consolidation process
analysis
 Improved ability to perform
 Enabled workow to facilitate a bottoms-up scenario analysis (particularly
submission process with regard to exchange rates
and fuel curves)
 Designed and developed reports for both the
business and corporate management  Developed reporting that
allowed for more timely
 Developed sophisticated calculations to perform
and sophisticated variance
FX translations, intercompany eliminations, cash
analysis
ow calculations and sensitivity analysis
 Identied and deployed
advanced planning
• Led system and user acceptance testing to
capabilities
validate all business requirements and the strategy
design were satised
• Developed training materials and facilitated
training of end users
• Provided postproduction support to make sure
budget cycle was completed with little interruption
Document title Additional text 15
Reaching the destination

We have helped companies streamline and improve their PBF processes.

We recently transformed the planning processes and technology infrastructure
of a large enterprise. We replaced a process that was heavily reliant on spreadsheets
and manual activities with an integrated, driver-based planning database that provided
enhanced exibility, accuracy, cycle time and transparency of the planning process.

Common outcome indicators of a successful

PBF process include:
1. 45% to 50% reduction in planning cycle time
2. 20% to 25% reduction in total cost of planning
3. Better asset utilization
4. Better use of capital
5. Lower distribution costs
6. Streamlined technology and processes
7. Increased ability to react to changes affecting key drivers of business
8. Improved quality of information and forecasting
9. Improved customer service

16
17
Ernst & Young and PBF:
the road well traveled
Whether it’s achieving leading practices in management reporting,
improving the data structure or dening KPIs, we have the industry
knowledge, experience and deep pool of resources to help companies
meet their PBF goals. We believe the following qualities set
Ernst & Young apart as a trusted PBF advisor:
• We consider the risks. We approach PBF from a risk and cost-
reduction perspective as well as a tax perspective. We consider
the tax ramications of shutting down a plant or relocating. We
consider the operational risk and can bring value through nancial
accounting leading practices, which is our area of specialty.

• We are the market leader in serving oil and gas companies.
Ernst & Young’s Global Oil & Gas Center provides a network of more
than 7,800 energy professionals that offers services to companies
operating in all sectors of the industry. Through this unrivaled
network, our professionals share leading practices and provide
clients with tailored services and thought leadership to improve
performance in an ever-changing global market.
• We have professionals with invaluable experience in PBF
infrastructure transformation. We address PBF from both a
business and technology perspective. Our strength and experience
helping companies build their PBF capabilities demonstrates that
we understand core business needs to improve decision-making.
Our professionals harness leading-edge program management
techniques as well as base-lined and tracked-benets delivery,
supported by a clear change realization methodology.
• We identify cost savings. Our advisory capabilities span the
full range of cost value levers, from operations and overhead to
capital costs. We have a successful track record of identifying cost
reduction opportunities — rigorous, nancially robust output that
stands up to critical analysis from stakeholders.
Most important, our job isn’t done when the project is done.
Sustainability — embedding successful PBF behaviors into the
organization — is essential. We leave behind the tools and leading
practices companies will need in the years ahead. Our goal is to
give companies better visibility, a clearer picture into how they plan,
budget and forecast.

• We become a collaborator. We understand that a PBF initiative

must be collaborative. We are knowledgeable in the customer,
supply chain and nance arenas and the business processes of oil
and gas companies. Our subject matter resources and business
resources supplement your team and can reduce business
disruptions and reduce the demand on your most valuable asset:
your people.

• We provide a “driver-based” method. We make your PBF process

more driver-based. Instead of focusing on such areas as revenue,
cost, expenses and net income, we focus on KPIs, prot margins,
investor returns and asset utilization — key ways you drive
your business.

18 Choosing the right route Planning, budgeting and forecasting

Document title Additional text 19
 The journey ahead

As we look toward the future of the oil When it comes to improving PBF capabilities,
and gas industry, PBF will be critical to a choosing the right advisor with the right
company’s success. The market will demand experience — and the right roadmap — can
that companies make quicker and more give you the competitive advantage.
precise decisions, and PBF will become more
sophisticated as a result of the credit crisis
and the volatility of raw materials. Optimizing
PBF processes will enhance decision-making
on which new markets to explore, which
projects to fund and how to adjust key drivers
to impact business costs.

20 Choosing the right route Planning, budgeting and forecasting

Ernst & Young’s Advisory Services
Whether your focus is on business transformation or sustaining
achievement, having the right advisors on your side can make
all the difference. Our 18,000 advisory professionals form one
of the broadest global advisory networks of any professional
organization, delivering seasoned multi-disciplinary teams that
work with our clients to deliver a powerful and superior client
experience. We use proven, integrated methodologies to help you
achieve your strategic priorities and make improvements that are
sustainable for the longer term. We understand that to achieve
your potential as an organization you require services that respond
to your specic issues, so we bring our broad sector experience
and deep subject matter knowledge to bear in a proactive and
objective way. Above all, we are committed to measuring the
gains and identifying where the strategy is delivering the
value your business needs. It’s how Ernst & Young makes
a difference.
About the authors
For inquiries about our Advisory Services, please do not hesitate
to contact:
Bill Hale
+1 713 750 8383
bill.hale@ey.com
Bill Hale serves as the Oil and Gas sector leader for the Advisory
Services practice with the Ernst & Young Global Oil and Gas Sector.
He has more than 20 years of experience in large-scale business
transformation projects with companies in the oil and gas industry.
He concentrates his work in the nance and operations process of
his clients.
Dan Williams
+1 713 750 1534
dan.williams@ey.com
Dan Williams serves as the Oil and Gas Supply Chain coordinator
for the Advisory Services practice with the Ernst & Young Global
Oil and Gas Sector. He has more than 17 years of professional
services experience delivering large-scale transformation projects.
He has worked with various clients on matters related to process
assessments, organization assessments, process reengineering/
design, system design/integration and merger integration.
Ernst & Young

Assurance | Tax | Transactions | Advisory

About Ernst & Young

Ernst & Young is a global leader in assurance, tax,
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144,000 people are united by our shared values and
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For more information, please visit www.ey.com.
Ernst & Young refers to the global organization of
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of which is a separate legal entity. Ernst & Young
Global Limited, a UK company limited by guarantee,
does not provide services to clients.
About Ernst & Young’s Americas Oil & Gas Center
The oil and gas industry is faced with complex issues
and constant change. Volatile prices, business
consolidation, difficult operating environments, ever-
increasing customer demand, continuously evolving
regulatory environments and the reliability of supply
all present significant challenges. The Ernst & Young
Americas Oil & Gas Center can draw upon a network
of energy professionals in the Americas and around
the world to work closely with clients to facilitate
the development of coordinated approaches to
managing risk, improving performance and increasing
operational effectiveness. The Center works to
anticipate market trends, identify the implications of
and develop points of view on relevant industry issues.
Our deep energy industry focus helps Ernst & Young
make a difference.

www.ey.com/oilandgas

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