Petroleum CFO: The pandemic is an impetus for change

Editor’s note: This article is part of A Year of Evolution: CFOs on 2021 series featuring insights from finance leaders across industries, and their COVID-19 lessons and 2021 plans. To receive weekly updates on this series, sign up for our CGMA Advantage newsletter.

Heavy economic damage rocked Middle East countries despite their stringent action against COVID-19 in the first and second quarters of 2020. Oil exporting countries in the region were doubly impacted as lockdowns disrupted their supply chains, and oversupply of crude and weak demand pushed oil prices to sub-zero levels and deepened fiscal gaps. Cash flow and business sustainability concerns continue to dominate in the region.

Petroleum Development Oman (PDO) — jointly owned by the government of Oman, Royal Dutch Shell, Total, and Partex — found its footing in these difficult conditions through cost optimisation, resource evaluation, and digitisation. PDO is Oman’s largest oil and gas exploration and production company, and it generates more than 1 million barrels of oil equivalent per day for its shareholders and produces over 70% of Oman’s crude oil. It is a core contributor to the country’s revenue.

FM magazine spoke to Haifa al-Khaifi, FCMA, CGMA, the CFO at PDO based in Muscat, to find out how she steered her department and the organisation over the past months and how she’s building a team fit for the future.

How did you manage to maintain business continuity when the first wave of the pandemic hit?

Khaifi: At the PDO level, although we went into an emergency response mode, our operations have thankfully not been compromised. There has been business continuity, and we actually continued to embark on our growth agenda.

In my finance directorate, which includes finance, contracting, procurement, legal, ethics, HR, and operations excellence, we went into an emergency response mode. Our key priorities were set around business continuity and a near-term sustainability programme. These two were suddenly very high on the agenda, and we had to reprioritise our business plan ruthlessly to enable these.

The first thing we needed to do was to make sure that there was no disruption of supply. We had products coming in from China and Italy, and these were the two main countries that went under complete lockdown. So we looked at diversification of sourcing of components, such as critical spares, to make sure that we have the right levels; we looked at locally manufactured products and products that could be sourced from other backup countries. It was very important during this time to collaborate with our entire supply community to make sure that we didn't have any disruption in our operations.

What are the biggest threats to your business now, and how are you managing or overcoming them?

Khaifi: The only constraints I can think of may come from external agents, like if there are any cuts mandated by OPEC again. Being in the oil and gas sector, that’s something we must be cognisant of. Oman is not a member of OPEC, but we are quite empathetic to the decisions they make, and we try to contribute and such factors may constrain us from a growth outlook.

We reprioritised our near-term sustainability programme, which has three levers. The first lever is around pricing. Our crisis wasn't just about the pandemic; it's the macroeconomic situation as well. This year, oil prices crashed in a manner that we have never seen before. From that perspective, we looked at structurally reducing unit expenditures to a sustainable level, progressively.

Second, finance was involved in driving and enabling demand management [to determine] the minimum possible demand of certain equipment and components that were required to be kept in stock.

The third lever was on specifications such as using the average industry standards without compromising on safety or asset integrity. We prioritised these three levers because these directly added value to the business and ensured no disruption.

What is your most important priority now?

Khaifi: We used this crisis as an impetus to adopt new strategies, such as our “fit for the future” strategy in the finance directorate. These strategies are about being lean and agile, about digitalisation, and about using the opportunity to architecture the finance directorate team of the future. It's also about remote working, connectivity, automated processes that let you do further predictive analytics. We learned a lot about reprioritising and went for projects that will significantly add value to the bottom line.

In the current global economic climate, most organisations are facing challenges with cash flows. This holds true for PDO’s shareholders, too. Our focus is on optimising cash flows for our shareholders and relieving their cash flow burdens.

We're doing this by looking at alternative strategies in terms of contracting. For example, we're looking at design, build, own, operate, and maintain (DBOOM) strategies [see the accompanying video for details on DBOOM]. Other examples are working capital optimisation where we write off slow-moving stock, reverse engineer, and utilise components or engineering parts that may have not been utilised.

We have also been looking at alternative fiscals through ring-fencing certain areas of our concession and adopting mechanisms like production-sharing and profit-sharing contracting. The Oman government owns all reserves of oil and gas in Oman. Through concessions and production-sharing agreements, the government grants operators the rights to produce and sell oil. The government has granted PDO the biggest concession in Oman. So, production-sharing and profit-sharing contracting is a win-win for all. The DBOOM strategy works because the capital outlay is from the contractor rather than the shareholders. We can also focus on other fields that need to be developed.

Another high priority is around the energy transition area. We have been heavily investing in renewable energy, including solar and wind.

What approach are you taking to budgeting and forecasting for 2021? How is that different from past years?

Khaifi: At PDO, we have always successfully adopted zero-based budgeting. We share the objectives, guidelines, and the screening criteria during the commencement of each planning year, and we review the bottom-up budget build with each function. If they have material increases, whether it's in quantity or rate, we need to understand the essence of those increases. We have encouraged our staff to defer nonessential expenditures. For example, if consultancy is not required in 2021, and the value lost is not significant, then defer it. We prioritised projects that will add value to the bottom line, either in terms of production or in terms of value. Functions need to have a clear articulation of value added and the positive economics around execution.

The other thing is looking at prices and ensuring that we have built in the best possible pricing mechanism.

Third, we did an extensive functional capability review at the department level and the resource base required. We put a temporary stop for functions asking for significant additional resources. We had put a temporary freeze on recruitment. We had to deal with whatever we have, and in the short term, some people may have had to double-hat, but for the long run, this has given us a rare opportunity to re-engineer roles, particularly in light of the recent optimisation and digitalisation of processes.

How did the pandemic impact your organisation’s digital transformation journey?

Khaifi: At the company-wide level, robotic process automation (RPA) and 3D printing of spare parts became critical success factors because, when supply chains were disrupted, the potential of utilising a 3D printer to obtain components was invaluable.

In the finance directorate, RPA transformed running month-end processes and vendor performance management. In the past, we would have six people doing this over eight to nine days. That process has been digitalised and optimised so efficiently that now we use our RPA to run those processes in less than 60 seconds, which means we're able to liberate our staff to do more value-added activities like analytics and business partnering.

The main reason I'm saying the pandemic was a key enabler is because in this time and age, you need rapid information and extremely pertinent analytics to enable business leaders to make key operational, tactical, and strategic decisions. I can honestly say that digitalisation and the ability to provide relevant dashboard information managed to get us there.

As a business leader, you have an overwhelming amount of information coming at you. If you have a dashboard that gives you all the critical data such as the level of production against plan, or number of wells that are being intervened (repair or maintenance work on drilled and explored wells), the actual figure versus budgeted expenditure, all in a snapshot and in real time, it’s really beneficial.

What are your plans for taking ahead this digital transformation journey?

Khaifi: Our current digital road map covers the next three years with a key goal to set up a centre of excellence. We have ten transformation projects in areas such as category management, integrated supply chain management, vendor management, materials managements, contingent workforce management, and restructuring shared services. We also have significant digitalisation in our oil field operations to create a collaborative work environment. These projects are a key foundation toward our “fit for the future” strategy.

Rapid-fire questions

What has been your biggest lesson from this pandemic?

Khaifi: Looking after the wellbeing of our people and ensuring their health and safety.

What one piece of technology is a must-have in your 2021 budget?

Khaifi: Connectivity tools, because they are the ones that kept us all connected, particularly when we were under lockdown and isolated in our homes.

Looking ahead, what is one skill you want to develop in your team?

Khaifi: Digitalisation and analytics, with the use of lean and agile methods as a key enabler.

— Swati Sanyal Tarafdar is a freelance writer based in India. To comment on this article or to suggest an idea for another article, contact Alexis See Tho, an FM magazine associate editor, at Alexis.SeeTho@aicpa-cima.com.