Meeting compliance challenges

According to BDO's annual Oil & Gas Riskfactor Report, regulatory compliance consistently ranks as number one among the risk factors cited by the 100 top E&P producers. Federal, state, and international regulations are the most frequently cited risks in public oil and gas companies' 10-K filings. And new compliance concerns are emerging on an ongoing basis. Fracking, for example, is still a relatively new practice with a unique set of environmental and safety concerns that are still being established by government agencies. While federal and, especially, state regulators continue to scrutinize E&P environmental and business practices, the uncertainty associated with how to comply with new regulations is high. For example, one in four companies in the BDO Report cited horizontal drilling as a regulatory concern.

Oil and gas producers not only have to ensure compliance with multiple agencies in multiple jurisdictions, they also have to worry about compliance across multiple disciplines. These companies have to comply with regulations for facilities, financials, operations, environmental practices, and more. In the area of health, safety, and environment (HSE), spending among global E&P companies is estimated to climb from $35 billion in 2011 to $56 billion in 2030 - a 60% increase driven mostly by increased regulatory scrutiny.

The risk factors and associated costs vary depending on the company and its industry segment, but wherever you are in the production value chain, the cost of non-compliance is increasing. For example, recent changes to HR 2845: Pipeline Safety, Regulatory Certainty and Job Creation Act of 2011, have extended pipeline records to be included as part of the regulation, including geospatial and oil flow lines, as well as other types of non-petroleum materials such as hazardous liquids, chlorine, and biofuels. This means there are more records to maintain and failure to comply with safety regulations can result in a fine of $1.75 million.

As part of HR 2845, the National Safety Transportation Board recommends using a central database to ensure timely access to oil and gas records in the event of an emergency. Automating business processes and centralizing them using an Enterprise Resource Planning (ERP) system is your best strategy to consolidate record-keeping, monitor operations for compliance, and prepare for an audit to avoid additional fees and penalties.

THE VALUE OF ERP

No matter what type of operation you have in the E&P process, ERP technology can consolidate operations monitoring and management into a single system that gives you end-to-end control of business systems. ERP systems are used in manufacturing, production, maintenance and transportation for both upstream and downstream companies, providing control over processes, reducing costs, and delivering an end-to-end view of operations.

ERP systems for oil and gas have a number of applications including:

• Cost control and tracking
• Equipment tracking and management
• Document management
• Financial tracking and projections
• Production planning and reporting
• Financial management, cash management, and accounts receivable management.

An ERP system also allows companies to create an integrated data repository containing everything from customer contacts to inventory to invoicing. E&P companies that have implemented ERP systems have shown an increase in profitability of at least 10% due to improved operational efficiency.

ERP systems offer a number of advantages for compliance as well, such as localization of accounting. Regulations are enforced by state, national, and international agencies, and the ERP system helps distinguish financial records by geography. Using ERP, you can configure accounting for financial compliance in different regulatory environments, including auditing.

For asset management, ERP systems can provide real-time information about geographic location and machine use for equipment anywhere in the system. If the company is performing regular maintenance as part of compliance, the ERP dashboard can see the exact status of all the equipment, complete with an audit trail of maintenance and repair.

ERP systems come in various deployment models, including on-premise software and software-as-a-service. Whatever approach you choose, you want to be sure that your ERP technology can be integrated across the value chain and that it provides real-time visibility into operations. Using cloud-based ERP systems, for example, enables easier access to data from anywhere, including mobile devices. This helps to resolve issues quickly and efficiently while still creating a centralized audit trail.

START WITH PAPERLESS PROCESSES

In order to use ERP systems to power compliance, you need to eliminate all paper processes. Any data that is not automatically captured by the ERP system has to be entered manually or maintained separately for auditing and compliance, which creates added risk. Paper processes are prone to errors and harder to manage and track, so your best strategy is to eliminate paper altogether and consolidate business processes using a fully automated system.

Undoubtedly, there are legacy systems and processes in your value chain that still rely on paper. Invoices, bills of materials, shipping manifests, delivery receipts, and other paperwork are still being processed by hand. Manual data entry, for example, requires time and resources and is fraught with errors and risk of lost paperwork. Even processes where paper-based forms are scanned and distributed electronically to make them part of the ERP systems still have to be managed manually, as if they were paper.

Automating all business processes and eliminating paper saves the cost of manual data entry and creates more efficient systems. For example, paying an analyst to process paper invoices manually incurs overhead costs in labor and processing time. You not only have to pay for the data entry time, but also for additional management time to review the paperwork for accuracy and make corrections. Then there can be the hidden cost in the delays incurred in processing paper invoices, as well waiting for checks and processing paper payments. In addition, this kind of paper process is more difficult to audit. Since invoices have to be filed and payments logged into the financial system, there is a lot of room for error with this kind of manual process.

Automating the end-to-end system, even by using PDF invoices for electronic transmission, is easier to track with less room for error. Centralizing financial records, for example, makes it easier to keep track of customized contracts, discounts, payments, purchase orders, and other transactions. The ERP system logs every step in the workflow for auditing. There is even customized ERP software specific to the oil and gas industry to manage transactions, such as three-way purchase order matching, royalty check stubs, run tickets, joint interest billing (JIBs), and shared billing costs. Once you go paperless, you are ready to automate and track all your business interactions.

AUTOMATION SIMPLIFIES AUDITING

By eliminating paper processes, you are migrating to a completely automated workflow. All transactions between partners and customers become digital and are managed and tracked by the same ERP infrastructure. Every step in the end-to-end workflow is managed and logged by the ERP system, which means every transaction and relationship can be monitored for compliance and accessed in the event of an audit.

One of the advantages of automating workflows is that it often simplifies business processes by eliminating steps. With manual data entry and business processes, there are more checks and balances built into the workflow to eliminate errors. These additional steps not only slow business processes but also make them inefficient. With automated business processes, workflows are streamlined for greater operating efficiency and easier auditing.

For example, one of our customers went to paperless operations and they were able to simplify their invoicing workflow from 60 steps to 12 steps. In addition to reducing invoice processing time from 30 days to three days, they also were able to simplify auditing since they only have to track 12 steps rather than 60.

The benefit of using ERP for managing operations is that the ERP system tracks business relationships as well as transactions. For example, the ERP system can maintain data about state safety regulations, sales tax payments, drilling rights, contracts, licenses, supply chain records, and more. The ERP system becomes the central repository for authorization for expenditures (AFE), division of Interest (DOI), allocation of costs per well or per owner, and reporting of gross and net revenues.

By funneling all business processes and transactions through the ERP database, you not only create the means to generate any type of audit trail, but you gain a holistic view of operations. You can use historical data to manage projections and budgeting or make strategic decisions to improve operations. ERP also gives you an overview of the end-to-end supply chain at a glance. You can access inventory and assets, such as equipment, at any time. You also have a data repository you can mine for analytics, including big data, to help you plot the growth of the company.

Centralizing business data also helps you contain your compliance costs by providing total transparency into operations. Using the ERP system to map transactions, assets, and operations to local regulatory requirements makes it easy to spot anomalies or issues that could lead to non-compliance.

ERP AND RISK AVOIDANCE

A well-designed ERP system simplifies regulatory compliance across the board. The ERP system becomes the company's insurance policy and the centralized resource to promote risk avoidance.

Using digital transactions and tracking to manage the entire operation means that your staff and legal representatives have immediate access to information they might need for an audit or litigation. Your ERP controls and manages documents in a way that should be compliant with ISO, Sarbanes Oxley, and other regulations that could require auditing. In fact, your ERP system promotes regulatory compliance in a number of ways:

• Data and asset security - The system maintains control as well as a log of data access showing who has access to what records and assets. The ERP system can restrict information access to only authorized employees and maintain a record of all personnel who access specific records.
• Compliance - Most regulatory compliance initiatives are typically related to privacy, control, and requests for information. The ERP system makes it possible to redact personal information in documents and transactions to protect privacy, and ensures the ability to produce any required information quickly and efficiently.
• Document control - Processes such as reviews and approval of documents can be automated and standardized to maintain total control in accordance with ISO and government regulations.
• Records management - The automated system includes retention plans and guidelines so as new documents and transactions are added to the system, they are coded accordingly. That way records are retained and not prematurely purged or erased. The system also maintains an audit trail of records access if there are any questions.
• Legal hold - Using a centralized document and transaction repository also simplifies implementing a legal hold in the event of litigation. Secure files can be securely stored to prevent them from being altered during litigation while digital copies of those documents are still available for review.

There was a time when a new government rule or regulation would create chaos in systems management, requiring changes in record keeping and workflows to ensure compliance. Automated business systems have changed all that. By eliminating paper and automating all transactions and workflows, oil and gas companies gain total control over record keeping and can adapt easily to any new regulatory requirements. Any type of data can be accessed quickly and easily for auditing or analysis. And companies save a fortune in the process because of the efficiencies inherent in paperless processes.

Every business runs on information, and effectively managing business processes and automation is the best way to harness that information to power your company toward a successful future.

ABOUT THE AUTHOR

Richard Slack is president and CEO of Oildex. He has more than 30 years of experience developing, marketing, and selling software products and services to the oil and gas industry. He holds a bachelor's degree in geology from the University of California and a master's degree in geophysics from the University of Houston.