Making the Case for Outsourcing Midstream Accounting
Outsourcing midstream oil and gas accounting functions significantly reduces cost and increases operational efficiency in a time of low energy commodity pricing.
Is it more efficient and cost-effective for them to hire a third-party firm that specializes in the non-customer facing functions of a business or to perform them in-house? These functions include tasks such as IT support to accounting. Data entry to record maintenance. Settlements and allocations to regulatory filings. These are basically any business functions that don’t directly interface with the company’s client base. For the purposes of this article, we're focusing on the back-office accounting functions of a midstream company.
While this isn’t a new debate, it’s one that many midstream companies are re-evaluating as commodity prices have moved lower and the forecast is for little relief in the near-term. This puts pressure on company management to find ways to operate their business in the most efficient and cost-effective manner possible. It’s a pressure felt by companies both large and small. Private and public. Start-ups and well-established.
At the core of the debate is whether these third-party firms have more knowledge expertise and process efficiencies built into their operations than the companies looking to hire them. When this is the case, the benefit to the company is two-fold. First, it provides an overall reduction in operating costs as seen through an improved operating model and a reduction in required workforce. Second, and more importantly, it allows company management to focus its resources on efforts that will grow the company footprint and, ultimately, its revenues.
To help make the best decision of outsourcing versus in-house, companies first need to understand the complex world of midstream accounting and how outsourcing firms like Opportune LP can assist company management in implementing a more cost-effective operating model.
Midstream accounting is often considered a “black box” to organizations where volumes are entered, sales statements are received, and some complex system of calculations occur in the middle that no one tends to worry about as long as the key reports align. The reality of midstream accounting is, however, that this system of calculations includes a myriad of complex measurements, contracts, allocations, and valuations that have a significant impact on a company’s financial statements.
By adhering to industry best practices and relying on in-depth process knowledge, an expert midstream accountant can mitigate risks inherent in performing these calculations through their understanding of the hurdles involved (including asset-specific nuances) and the streamlining of the processes required. Third-party outsourcing firms like Opportune LP build their staffing models to include these types of industry experts and, as such, are able to offer this knowledge base and operational excellence to their clients.
"Midstream accounting doesn’t need to be a black box that no one within the company understands when a seasoned, knowledgeable outsourcing firm like Opportune LP can shed some light into that box."
At the heart of the debate for outsourcing midstream accounting are the following three focus areas: process and asset knowledge, communication and software familiarity. Each of these is discussed in more detail below.
- Process & Asset Knowledge – After initial analysis and setup in the company’s given software application, the midstream allocation process itself can usually be run at the press of a button. When looking at these assets, however, unless a company has in-depth knowledge of the assets and understands the nuances of them and their allocations, the setup process can be complicated and, if done incorrectly, can cause errors and inaccuracies. When an asset is acquired, if everything continues to process successfully, then a company can easily continue to operate at steady state. As soon as there is a contract change, a pipeline issue, a plant shutdown or additional volumes are brought into the system, changes will be required. If current processes aren’t understood, then the changes will not be implemented correctly. By utilizing an outsourcing provider that’s intimately familiar with not only the processes but the nuances of how to maintain the accuracy of the calculations, companies immediately have access to expert personnel that will ensure the system is accounted for properly and maintained accurately. The midstream experts are also able to build systems from the ground up should the need arise.
- Communication - Another issue that plagues midstream organizations is communication. Basic terms like “net”, “gross” or “sales” mean different things to different people, depending on the organization and the accountant. As in many areas, people use terms from the perspective of their experience and expect everyone to use industry terms in a standard way. Being in midstream, appropriately enough, puts you in the middle of the situation. A midstream accountant needs to understand all the information coming from producers, marketers, and purchasers to identify the correct volumes and values to be used in order to end up with the correct variables of settlement. The use of an outsourced midstream accounting group provides structure around these processes and such terminology. Because an outsourcing company has defined procedures in place, a communication protocol (including terminology) with the various parties will already exist helping ensure that the needed information is being communicated correctly.
- Software Familiarity – Significantly complex midstream assets usually require specific software to complete the necessary processes accurately and efficiently. As with any software, the system works only as well as it’s configured. This setup usually requires assistance from the software provider to maintain the formulas and configuration to accurately process the asset. Even mature, established assets need this sort of expertise to troubleshoot any issues that arise during normal monthly processes or changes to the system. Seasoned midstream accountants already understand the available software and have formed working relationships with these providers through their careers. In many cases, the use of an expert midstream accountant will save organizations consulting fees incurred by software providers.
"Midstream experts are able to build systems from the ground up should the need arise.
Understanding these challenges and how a third-party outsourcing company helps mitigate them allows a midstream company’s management to best answer the question of outsourcing versus in-house. It provides the backdrop for creating the most efficient and effective solution to accurately account for their midstream assets. After all, midstream accounting doesn’t need to be a black box that no one within the company understands when a seasoned, knowledgeable outsourcing firm like Opportune LP can shed some light into that box. This creates an asset and process structure that a midstream oil and gas company can embrace and utilize to their benefit.
About the Authors:
Kent McMahan is a Midstream Revenue Supervisor at Opportune LP - Outsourcing with eight years of experience in plant accounting and financial reporting. Kent leads the back-office outsourcing for midstream gathering and processing operations. Prior to joining Opportune, Kent worked for Linn Energy from 2012 to 2018 where he performed revenue allocation and settlement procedures for Linn’s midstream operations. Kent holds a BBA in Accounting from Baylor University. Kent can be reached via email at email@example.com.
Kevin Labban is a Manager in Opportune LLP's Process & Technology practice. Kevin has over 12 years of upstream and midstream experience related to project management, process consulting, asset integration and acquisition and divestiture transactions. He provides subject matter expertise with system implementations, including data conversion, change management and industry best practices. His client base ranges from start-up companies to small independents to Fortune 500 companies. Kevin holds a Bachelor’s degree in Accounting and a Master’s in Business Administration with a specialization in both Information Technology and Internal Audit from Louisiana State University. Kevin can be reached via email at firstname.lastname@example.org.