CTRR Planning Budgeting and Forecasting

Choosing the right route Planning, budgeting and forecastingfor oil and gas companies

Choosing the right route Planning, budgeting and forecasting for oil and gas companiesYou’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

2 Choosing the right route Planning, budgeting and forecasting

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 targets into a corporate budget and making periodic updates to the current view of future business performance. Investments in PBF allow organizations to more effectively set goals, develop plans, monitor performance and forecast anticipated changes. When your PBF processes have an effective and ef� cient infrastructure, you are more likely to remain competitive in the current market.

Survey results

Source: The Economist Intelligence Unit, published July 2008

� Strategic partner to the board� Annual budgeting and outlook forecasting

� Acquisitions and disposals

� Treasury management

� General accounting� Fixed assets management� Administering accounts payable/receivable

� Travel and expenses management

� Marketing investment appraisal

� Risk management

� Business management reporting

� Regulatory and external reporting

7%

13%

17%

19%

20%

34%

36%

45%

51%

57%

61%

65%

0% 20% 40% 60% 80%

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:

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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.

4

Oil and gas companies: roadblocks and detours

Oil and gas companies, in particular, are putting their PBF processes on the radar. Today, more than ever, having a “what if” analysis and capabilities is a must. Companies need to be able to respond quickly and accurately to external factors, such as a volatile market and a shift in supply and demand. In a time of capital spending reductions, reduced cash � ows, supply chain challenges and investor uncertainty, oil and gas companies must adapt and adjust their PBF capabilities accordingly. Those that can predict an upswing will be better prepared to capitalize on opportunities. From exploration and production to re� ning and marketing, decisions about product margins and investments are falling under greater scrutiny: which projects should we undertake, or shut down? How many rigs can we afford? How much equipment and how many resources are needed? Are there enough trucks to transport to retailers?

There are PBF challenges speci� c to the oil and gas industry. How companies address and overcome these current challenges may dictate their competitive position in the industry:

• Strained resources: an estimated 80% of the world’s oil-producing 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.

• Environmental restrictions: the increased focus on environmentally friendly infrastructure will likely continue to increase and challenge the ability of oil and gas companies to remain competitive and relevant in the future.

• Managing inventory: because of the economic crisis, many oil and gas companies are experiencing a shift in inventory strategy. Companies may need to decrease inventory in order to have more cash in hand to pay suppliers. As the market shifts, it is critical to plan for inventory.

• Aging workforce: the aging workforce within the oil and gas industry is a major concern. How do you prevent loss of industry knowledge and manage an increase in labor costs to attract and retain top talent? In addition, companies are having to make decisions about retaining top talent, in spite of the challenging economic environment.

Agility in adapting plans and budgets to meet challenges in the economy, regulatory environment, capital markets and competitive landscape is essential to oil and gas companies.

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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

There are areas within these PBF services where Ernst & Young can create ef� ciencies, and where companies can see improvements, in quality, time, cost and accuracy.

Improving quality through key driversReexamining 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 speci� c needs. Drivers improve the planning process effectiveness and ef� ciency, 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.

Don’t ignore the signs

7

Third-leveldrivers

Second-level drivers

First-leveldrivers

High-level business objective

Businessstrategy

Third-leveldrivers

Second-level drivers

First-leveldrivers

High-level business objective

Businessstrategy

Improve operating margin

Reduce operating costs

Transport, storage and distribution

Marketing

Crude/feedstock acquisition cost

Energy

Maintenance effectiveness/

Labor contracts

Procurement

Optimize business portfolio

Performance of preventative

programs

Asset effectiveness

Root cause analysis

Maintenance activities

Turnaround/ shutdown planning

maintenance resources

Spare parts inventory

control

Budget cycle time reductionIf 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 work� ows can free up your company’s employees for more practical, day-to-day tasks.

Less reliance on manual spreadsheetsSpreadsheets 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 work� ows, 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.

Oil and gas downstream driver tree (example)

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Source: Ernst & Young, 2009

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Obstacles to consider

Don’t ignore the signs

Strategic direction ProcessesPeople and organization

Technology

As you review your current PBF processes, you may need Ernst & Young’s help if you experience the following:

• Lack of “what if” analysis

• Time-consuming processes to re� ect strategic changes in your planning process

• Lack of integration between strategic, � nancial, capital, operational and resource planning

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

• Decentralized technology; data and information structure is ad hoc and sporadic

• Budgeting and forecasting data availability due to dependence on legacy ERP core systems

• Operational plans that do not re� ect organization’s goals

• Strategy and organizational bene� ts that are displaced by individual agendas


� 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 theychange, 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.

� 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.

� 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.

� 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.

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.

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Designing and building the approach

Delivering and improving the PBF value chain

Phases

Collect data

Understand the current-state people, process and technology to serve as a foundation for analysis

Analyze/develop options

Develop a framework for the future operating model and identify opportunities for improvement

Develop business case

Build a robust business case for executive/board approval

Outline design principles for the proposed operating model

detailed design meets business needs

Build

Initiate conversion of design into tangible work product(s)

Validate implementation

Validate and modify operating model to meet business needs and prepare for transition

Implementation

Introduce the new operating model to the business

Stabilize

Complete transition to new operating model

opportunity

understand scope

Develop detailed design

Develop the detailed operating model and initiate business buy-in

Develop hypotheses and formulate the overall strategy and vision for the operating model

Operate

Provide post-transition support and transfer ownership of the operating model to the business

Optimize

Identify and prioritize

accelerators

Extend

Inject new innovation and opportunities

Stages and

objectives

Identify Diagnose Design Deliver Sustain

Overview


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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.

12

The Ernst & Young roadmap

Key differentiators to our PBF approach:Staged method• We work with our clients to build a plan suited for their

individual environment• Modular implementations and changes deliver

immediate results • Our approach builds on the knowledge and successes

of previous stages

Integrated planning • Each phase of the planning process is integrally linked

to the previous and future process• The � nance organization is linked to the operations

through a thorough understanding of their connected activities

• The inputs from one planning cycle are used to validate and rede� ne the same process during its next iteration

Organization transformation• We help the client sustain a more ef� cient/

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

Finance-focused• Previous experience and � rmwide knowledge help

support the complex obstacles in � nance and supporting organizations

• We appropriately understand the impact of changes

Vendor independence• We evaluate the necessary vendor strategy to � t the

current obstacle; we are vendor independent and do not endorse vendor relationships that could in� uence our recommendations

Insightful experience• We bring years of insight through multiple system

implementers, designers and users in the practice

Strategic and tactical• It is important to form a link between operational

choices and their tactical implications• We work to translate goals and strategies into

actionable and relevant business decisions

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Business plans

Per

form

ance

mea

sure

men

t

Strategic plan

Demand Supply

Functional plans and short-term plans

Ope

rati

ons

Objectives and targets

Performance indicators

Targets and performance

indicators


Historic performance

Target Performance

Volumes

Policiesinitiatives and actionsupdated short-term volumes

Expected outcome

Committed outcome (targets)and initiatives and actions

Committed outcome

Aspired outcome

Requirements

Constraints

Financial plans

Budget-OpEx -CapEx

Product costs

Coststandards

Bus

ines

s pe

rfor

man

ce r

epor

ting

Performance reports

Performance reports

Performance reports

Forecast-OpEx -CapEx

Business plans

Per

form

ance

mea

sure

men

t

Strategic plan

Demand Supply

Functional plans and short-term plans

Ope

rati

ons

Objectives and targets


Targets and performance

indicators


Historic performance

Target Performance

Volumes

Policiesinitiatives and actionsupdated short-term volumes

Expected outcome

Committed outcome (targets)and initiatives and actions

Committed outcome

Aspired outcome

Requirements

Constraints

Financial plans

Budget-OpEx -CapEx

Product costs

Coststandards

Bus

ines

s pe

rfor

man

ce r

epor

ting

Performance reports

Performance reports

Performance reports

Forecast-OpEx -CapEx


Integrated PBF framework

14

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.

Speci� cally, 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 experienceWe 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 speci� c to the company, including a complex entity structure with geographically disparate companies, inaccurate and untimely reporting and forecasting capabilities, and manual processes with insuf� cient control and security.

Services Client bene� ts• Created business requirements for the future state

budget and forecast process• We created a leading practice

budgeting and forecasting operating model that:

� Successfully pushed down the ownership of the budget process

� Reduced overall cycle time by 50% and allowed multiple reviews and iterations

� Automated the complex consolidation process

� Improved ability to perform scenario analysis (particularly with regard to exchange rates and fuel curves)

� Developed reporting that allowed for more timely and sophisticated variance analysis

� Identi� ed and deployed advanced planning capabilities

• Designed a leading practice budget and forecast process that involved business owner input and sign-offs

• Implemented a planning application to facilitate the budget and forecast process

• Con� gured the planning application to include:

� Simpli� ed data model focused on material business units and business drivers

� Data interfaces to source actuals for variance analysis

� Enabled work� ow to facilitate a bottoms-up submission process

� Designed and developed reports for both the business and corporate management

� Developed sophisticated calculations to perform FX translations, intercompany eliminations, cash � ow calculations and sensitivity analysis

• Led system and user acceptance testing to validate all business requirements and the strategy design were satis� ed

• Developed training materials and facilitated training of end users

• Provided postproduction support to make sure budget cycle was completed with little interruption

The following table details the services we provided and how we brought value to the energy company during this PBF project.

Document title Additional text 15

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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

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Ernst & Young and PBF: the road well traveled

Whether it’s achieving leading practices in management reporting, improving the data structure or de� ning 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 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-bene� ts delivery, supported by a clear change realization methodology.

• 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, pro� t margins, investor returns and asset utilization — key ways you drive your business.

• We consider the risks. We approach PBF from a risk and cost-reduction perspective as well as a tax perspective. We consider the tax rami� cations 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 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.

Choosing the right route Planning, budgeting and forecasting18

Document title Additional text 19

The journey ahead

As we look toward the future of the oil and gas industry, PBF will be critical to a company’s success. The market will demand that companies make quicker and more 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.

When it comes to improving PBF capabilities, choosing the right advisor with the right experience — and the right roadmap — can give you the competitive advantage.

20 Choosing the right route Planning, budgeting and forecasting

Ernst & Young’s Advisory Services

Whether your focus is on business transformation or sustainingachievement, having the right advisors on your side can makeall the difference. Our 18,000 advisory professionals form oneof the broadest global advisory networks of any professionalorganization, delivering seasoned multi-disciplinary teams thatwork with our clients to deliver a powerful and superior clientexperience. We use proven, integrated methodologies to help youachieve your strategic priorities and make improvements that aresustainable for the longer term. We understand that to achieveyour potential as an organization you require services that respondto your speci� c issues, so we bring our broad sector experienceand deep subject matter knowledge to bear in a proactive andobjective 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 hesitateto contact:

Bill Hale+1 713 750 [email protected]

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 [email protected]

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.

Assurance | Tax | Transactions | Advisory

Ernst & Young

About Ernst & YoungErnst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 144,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential.

For more information, please visit www.ey.com.

Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each 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 CenterThe 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

© 2009 Ernst & Young LLP. All Rights Reserved.

SCORE No. I00158

Information in this publication is intended to provide only a general outline of the subjects covered. It should neither be regarded as comprehensive nor sufficient for making decisions, nor should it be used in place of professional advice. Ernst & Young LLP accepts no responsibility for any loss arising from any action taken or not taken by anyone using this material.

In line with Ernst & Young’s commitment to reduce its impact on the environment, this document has been printed using recycled paper and vegetable-based ink.

CTRR Planning Budgeting and Forecasting

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