This year, the U.S. oil industry is on track to see record-breaking production and is on track to break it again in 2024. The U.S. Energy Information Administration projects that the nation’s crude oil production will average 12.4 million barrels per day in 2023, and 12.8 million in 2024.
With so much revenue flowing through operations, there are many opportunities for revenue leakage to creep in—often in the form of missed contract entitlements: According to EY, an estimated one to five percent of EBITA is lost because organizations don’t have their contract management and payment follow-up processes in order. Think about that in terms of the more than $6 trillion oil and gas industry.
With that in mind, let’s look at where revenue leakage occurs in the energy sector—more specifically in the oil and gas industry—and how a better approach to contracts can help prevent it from occurring.
Where revenue leakage happens
To understand how revenue leakage happens we need to look at the three main areas where energy companies make money in the first place: upstream, midstream, and downstream.
Upstream: This is the exploratory stage of finding crude oil and gas. It’s a stage rife with massive, front-loaded capital investments. These are hard-to-reach geographical areas that cost billions to explore, drill, and produce.
It can take a decade to get the first drop of oil and start to recoup the investments made. Over that time hundreds, if not thousands, of contracts have been signed with national entities, investors, land leasing jurisdictions, and parties that help identify and drill the location.
This results in needing to look at contracts from multiple dimensions to understand what’s being promised, when, and at what frequency. Of course, regulatory requirements around extraction also require constant attention.
Midstream: At this stage, the organization is moving crude to market.
There are now significantly more contractual agreements, including with pipeline owners and transport carriers.
Maintaining obligations—say, how is the pipeline metered, commitments around quantity and quality of delivery, or time objectives—is essential.
Downstream: At this point crude is refined and, once again, shipped for use as gasoline or diesel fuel, etc.
The number of contracts is now almost uncountable—terminal companies, freights, sublet fleets, franchisees, facilities operators, regulators, security, marketing agencies, the list goes on.
When making sure production throughput is high and margins are met, timely and accurate information is critical. That includes keeping a timely and accurate account of contractual obligations.
Preventing revenue leakage
When making sure production throughput is high and margins are met, timely and accurate information is critical. That includes keeping a timely and accurate account of contractual obligations.
As business moves between upstream, midstream, and downstream operations, different divisions use different software systems to track different, important metrics. This creates data silos that can lead to errors that result in leakage. This is because throughout this funnel there is the potential for obligations such as delivery time or product quality to be overlooked. Payments may be missed or delayed, or even paid too early when revenue is needed for the business to recoup its own investments.
Each division, as well as the business’s many partners, may all have different systems for monitoring and tracking production and delivery, and it quickly becomes difficult to identify pricing and delivery issues resulting in revenue leakage.
Manually tracking contracts of the scope and complexity the industry experiences at any stage of production or delivery is difficult, to say the least. In addition, having timely and accurate information is all but impossible, since it may be out of date by the time its entered. The solution is to take a holistic approach to contract management that takes advantage of AI.
5 strategies to patch the leaks
We call that holistic approach contract intelligence. It goes beyond contract lifecycle management to connect the organization’s disparate systems, departments, and processes that lead to revenue leakage.
Here are five best practices energy sector companies can use to reduce revenue leakage:
- Integrate contract data into enterprise systems – Integrate contract data with enterprise systems to reduce leakage by improving accuracy and efficiency. Using AI, organizations can integrate contract data across the lifecycle of a deal or agreement.
- Review pricing – Regularly review data and pricing strategies to make sure they are appropriate. Modern contract management systems that incorporate pricing collaboration services can streamline pricing updates against contractual parameters.
- Track and monitor – Track commitments and obligations and report performance to investors, as well as those with customers and suppliers. Was the crude received not of the right volume or quality? What are the revenue recovery measures? Are you meeting your environmental regulatory requirements? An AI-empowered contract intelligence solution can uncover this information (and much, much more), so you can identify where leakage occurs and the steps to take to address it.
- Use AI – Take advantage of AI to automate contracting tasks, thereby saving time, reducing errors, and improving efficiency. AI can automate the identification of pricing errors and payment obligations. It’s a master at recognizing the anomalies and patterns in data, presenting organizations with opportunities to make necessary adjustments to reduce risk and increase profit.
- Train employees – Even with AI, employees need to be trained on the best practices related to contract management, artificial intelligence, and avoiding revenue leakage. With the rapid improvements in AI, especially around contract management, this is even more crucial.
With the right combination of technology and people, energy companies can speed up time to revenue, reduce human error, mitigate regulatory risks, and ensure nothing slips through the cracks.
