The oil and gas industry has some unique attributes that make compliance management hugely challenging. For any business in the sector, meeting this challenge and maintaining compliance over the long term adds significant costs. Reduce focus even for a short while however and, depending on the scenario, the costs of non-compliance can be immense.
In a sector focused on value creation, with M&A plays and exploration activities leading the way, the question is whether it is possible to take compliance, typically recognized as a major cost center in the business, and turn it into an additional value driver.
So let’s take a look at where compliance costs typically stem from, and then explore the “five compliance value drivers”. These drivers encompass the ways in which RegTech can help move compliance from a cost center to a creator of value.
The compliance cost drivers
Compliance in the oil and gas sector is an outcome that only comes from having a depth and width of organizational involvement. Teams throughout a company, from those at the well head to those around the boardroom table, each play a part and have a real stake in how well compliance is handled. Why is it so challenging?
First, there is the nature of exploration and production operations which have environmental and health and safety aspects that are heavily regulated in almost all jurisdictions.
Secondly, there is the global nature of the sector bringing with it the risk and cost of navigating new market entries and needing to quickly get up to speed with local laws and regulations while not falling foul of corrupt practices or conflicts of interest.
Thirdly, there is the myriad of contractual obligations with host governments, landowners, joint venture partners and suppliers.
Add to that an ever-changing regulatory environment for the sector as governments grapple to address concerns over climate change and you have a significant legal and compliance overhead in order to do business.
How do you change the perception of the compliance function from cost center to value driver?
In most organizations, the value in ensuring compliance and avoiding the negative consequences of compliance breaches are well known. Not only do you avoid fines and penalties and the internal and external costs of dealing with compliance failures, but you also avoid the increased operating costs that can result from delays, such as having a drill rig and crew on standby while you deal with regulatory issues.
Perhaps less understood, are the real benefits to be realized from using technology to bring a pro-active compliance management culture to the organization. These are what we call the Compliance Value Drivers.
The 5 Compliance Value Drivers in the Oil and Gas Sector
Compliance Value Driver #1: Visibility – bringing clarity and awareness of compliance management to the business
Often, as oil and gas companies grow and expand, they develop an ad-hoc set of compliance systems and processes siloed in different business units, functional teams and offices. This can result in, at best, costly duplication of effort and wasted resources and, at worst, unidentified compliance risks as there is no clear picture of who is responsible or how effective their systems and processes are.
Implementing a technological solution to provide a single source of compliance information across the organization brings visibility of compliance requirements to all who need it, provides clear responsibility and accountability and ensures everyone in the business is accessing the most up to date information.
By improving compliance knowledge and understanding across the business, knowledge gaps can be identified for training and operational process gaps can be filled. Identifying these issues early and enabling compliance risks to be addressed proactively means there is less reliance on audit processes to bring issues out of the woodwork.
Compliance Value Driver #2: Efficiency – create more time for value-add activities
Having a single source of real-time information available across the organization translates into less time spent on communicating information and updating people and systems across your business or gathering and manipulating information from multiple sources to generate reports for management.
It goes without saying that software can also take the pain out of managing the many periodic obligations of oil and gas companies, such as annual reporting and payment of fees and royalties, which can be ‘set and forget’ with email reminders and notifications to keep you on track.
Where RegTech can really come into its own, though, is in enabling the legal and compliance specialists in the organization to operationalize compliance requirements in a meaningful way for the business. In doing so, the compliance function can, for example, empower the operational teams carrying out exploration and production activities to manage the many activity or event-driven obligations that often arise under license and contract conditions, health and safety and environmental regulations.
These operational compliance requirements are usually time-bound to the activity and can be hard to manage as logistical planning changes. Specialist compliance software solutions can be used to automate activity timelines, task generation, email reminders and report generation, removing the need to manually enter tasks for each new activity. This not only saves time but also standardizes the process and reduces the chance of input errors (e.g. due dates being miscalculated) or obligations being missed altogether. What’s more, the audit trail is created as you go and your operational teams are freed up to do more valuable things with their time.
Compliance Value Driver #3: Resilience – actively manage key person risk
The breadth and depth of compliance knowledge required from people working in the upstream oil and gas sector means that specialization is a requirement in the industry. But this leaves operators uniquely susceptible to key person risk. Losing an employee with seemingly irreplaceable knowledge and skills, crucial to a company’s success, can cripple the business, especially when the skill set relates to regulation and compliance.
The consequences of less experienced people attempting to fill empty shoes can result in errors and omissions and can damage the company’s reputation, lose trust with stakeholders and significantly impact on shareholder value.
Regulatory technology should be one of your underpinning strategies to mitigate key person risk by capturing compliance knowledge and operationalizing compliance processes such that incoming staff can quickly ascertain status and easily take over those responsibilities.
Compliance Value Driver #4: Forward focused – organizing for change
By achieving the efficiency gains made possible by regulatory technology, the compliance function’s time and resources can be re-focused on proactive compliance activities such as tracking and evaluating proposed legislation and policy settings to get ahead of the curve and advise the business on the risks and impacts of changes on the horizon.
Furthermore, having operationalized the organization’s compliance requirements, you will be well-positioned to quickly adapt to regulatory change as the impacts on business operations can be easily identified, managed and integrated into your business processes.
Compliance Value Driver #5: Reputation – positioning the organization as an ‘operator of choice’
In many jurisdictions, a negative compliance record can harm an oil and gas operator’s chances of obtaining blocks in competitive bid processes. It can also make it more difficult to attract joint venture partners.
Conversely, the ability to demonstrate a good compliance record and an embedded compliance culture in the organization increases stakeholder confidence. This drives value which will be reflected in the stock price and relationships with joint venture partners, landowners, communities and regulators, cementing the organization’s reputation as an ‘operator of choice’.
In summary, harnessing the power of RegTech will not only almost entirely eliminate the collective dread amongst employees that comes with endless compliance questionnaires and audits, but it will elevate visibility, awareness and understanding of compliance across the organization. It will embed pro-active compliance management processes into the day-to-day business operations.
The shift to utilizing powerful data analytics and real-time management information will start to show results as the company can refocus time and resources from manual tasks and duplicated effort towards mitigating key risk areas and supporting the activities that deliver on the strategic vision. That is where compliance can drive most value into an organization. The question for your team is the scale of value that can be created as you move from being a cost center to being a value driver.
Caroline Taylor, founder and CEO, Permitintel. Permitintel is a cloud-hosted compliance and risk solution developed specifically for the oil and gas industry.