How to Efficiently Manage Your Revenue Accounting in Times of Low Oil Prices

08/19/2020
How to Efficiently Manage Your Revenue Accounting in Times of Low Oil Prices

Formerly: Best Practices in Revenue Management

Over the past eight months, the oil and gas industry has been impacted by low oil prices and low demand. This directly impacts the profitability of oil and gas producers and changes how they manage their operations. Many companies have had reductions in force and shut in wells that are not profitable at the current price point. For the back-office accounting team, this can cause an increase in work with less staff to manage the load, but one key to maintaining sustainability during this time is to look for ways to streamline and automate processes.

From a revenue perspective, processes are often very manual in nature, e.g. pulling production data into spreadsheets to compare to purchaser statements and calculating sales value from production sales volumes to ensure you are getting what you are owed. Add to that, manually managing ownership changes, both for current and prior periods, to ensure accurate distribution of revenue received and submitting and paying regulatory reports and fees. The good news? There is a better way and companies in the top quartile of efficiency have less revenue accountants per agreement and spend more time analyzing results.

Savings to be Had

If you’re part of an upstream oil and gas accounting department that records revenue transactions from cash receipts, the adoption of a marketing contract-based procedure that calculates revenue transactions from production volumes and contract terms can help your organization gain the following efficiencies:

  • Savings of 25-75% of time spent entering data into your accounting system
  • Saving up to 25% of time spent creating prior period adjustments
  • Savings of 15-25% of time spent reporting on production and severance taxes
  • Improve cash flow by knowing your purchasers are paying on time and in accordance with their product sales contract
  • Improve cash flow by knowing division orders are processed timely and suspended revenue is received, not held by the purchaser

The Challenges

Operators often record revenue transaction from cash receipts (Check Stub Data Entry). Here are a few reasons why:

  • A check stub is the easiest available source of information
  • The operator is only willing to pay other interest owners the amount they receive from the purchaser
  • They cannot get the production information from the production operations team in a timely manner
  • They don’t trust the information they receive from production operations
  • They don’t understand the marketing terms and pricing arrangements
  • They don’t have the ability to calculate all the components (taxes, marketing, transportation, etc.)
  • The adage “this is the only way we have ever done it”
  • The system only allows entry from check stubs

The challenges created by this method are:

  • The operator is fully dependent on receipt of payment from the purchaser to record revenue
  • The values calculated by the purchaser are recorded, whether correct or not, and the process does not validate the accuracy of the purchaser payment
  • Reconciliations are completed in spreadsheets and are very time consuming to manage
  • Data is entered for documents other than the actual source documents
  • Revenue suspended by the purchaser goes undetected
  • Timing for lease distribution, reporting of production, and severance taxes cannot be met and is dependent on purchaser receipts
  • Receivables are not recorded, delaying the collection of outstanding revenue
  • Calculation errors are recorded whether correct or not and are only corrected once the purchaser makes the correction
  • When time constraints require recording revenue and/or calculating and reporting taxes from data other than purchaser receipts, the work must be done in spreadsheets

Out With The Old

You can see that recording information solely from a check stub entry is not an effective process. It makes it difficult for the revenue accountant to comply with both lease and marketing contracts. In addition, government royalty and tax reporting requirements effectively render the process obsolete.

Auditors have established that oil and gas operators must prove the accuracy of the recorded data and validate that their business process accurately records and validates transactions through the audit. Manual check stub data entry no longer meets the mark. The ability to systematically calculate and record revenue transactions based on the source data and provide auditable assurance of the accuracy of the data is essential.

It’s also difficult to properly distribute and value revenue for different purposes for several reasons:

  • Individuals have special ownership-level pricing
  • Disproportionate sharing of different revenue related costs
  • Tax-exempt interest
  • Tracking multiple tax classifications
  • Payment of owner based on multiple dispositions (lease use, fuel, flare, shrinkage, etc.)

In With The New

By systematically recording revenue transactions starting with production dispositions from production data, revenue accountants quickly see the benefits:

  • Calculating values based on the marketing contract
  • Calculating production and severance taxes
  • Calculating special owner pricing
  • Calculating special component sharing
  • Allocating to owners
  • Distributing to owners
  • Variance and exception analysis
  • General ledger account reconciliation
  • Processing prior period adjustments

The revenue accountant can quickly evaluate the information and focus on accuracy, variances, exceptions, and reconciling differences versus calculating revenue values and data entry as is prevalent in many revenue accounting departments. With proper systems in place, the focus should be on:

  • Monitoring volume difference between dispositions reported by the field and amounts received from purchaser(s)
  • Monitoring compliance with lease and marketing contracts
  • Ensuring proper distribution is made to the different owners – special owner pricing, special volume disposition requirements (payment in lease use, flare, fuel, etc.), special component sharing, and NPI (Net Profit Interest) calculation
  • Reconciling receivable account; monitoring purchaser compliance with marketing agreement versus accepting payments at face value
  • Improving processing to reduce prior period adjustments, i.e. saving your organization from redoing and reprocessing information

Six Ways to Take Advantage of an Accounting System

Errors are costly but avoidable, especially when using spreadsheets. Below are some points to better manage and gain full advantage of your accounting system:

  1. Look for a system that is integrated with production operations so there is a single system of record for production data
  2. Establish strict review and approval standards for data entry
  3. Eliminate manual keying of data
  4. Depend on system calculations, not spreadsheet calculations, where a single error can impact multiple transactions
  5. Get your data into the system – having your data housed in multiple spreadsheets and point solutions limits your ability to analyze performance, report results, and gain efficiencies
  6. Understand and use the software as designed. Some estimate that users only exercise 20% of overall functionality of commercial software. Ask your provider how to best use the software so that you are getting maximum value.

Five Ways to Save Time and Money

Operators can reduce 25-50% of their prior period adjustments by focusing on and controlling the accuracy and timing when data is received. By focusing on a single point of data entry and establishing business processes to ensure the accuracy and timeliness of the data, an operator can realize many benefits:

  1. Spend less time calculating revenue transactions in spreadsheets and entering data into your accounting system
  2. Automate reprocessing and spend less time performing prior period adjustments
  3. Eliminate reporting on production and severance taxes
  4. Improve cash flow by knowing your purchasers are paying on time and in accordance with their product sales contract
  5. Improve cash flow by knowing division orders are processed timely and suspended revenues are received and not held by the purchaser

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