How tax and finance can play a critical role in changing oil and gas

In a sector facing transformation, the tax and finance function has a significant role to play in delivering enterprise-wide change.

In brief

• The sector is under pressure to reduce carbon emissions and address cost reduction, digitalization and talent gaps.
• Further, it’s global footprint presents unique hurdles and requires reliable in-country advisors aware of evolving local requirements.
• All of these challenges are being felt acutely but there is an opportunity for companies to reimagine these functions to chart a new course.

For oil and gas companies, tax and finance functions have a significant role to play in delivering enterprise-wide change. Though natural gas, crude oil and liquefied natural gas prices are above pre-energy crisis levels, there are still challenges in the pipeline that necessitate transformation for oil and gas companies. The first driver of change is the overall energy transition, which is powered by broader societal changes around sustainability. The second driver of change is digitalization. Amid these dual disruptive forces, tax and finance functions can distinguish themselves as a creator of long-term value and a protector of compliance and risk across a truly globally business.

Energy transition

Governments, corporations and other stakeholders are charting a clear path to a lower carbon future and greater reliability on renewable sources of energy. As a result of this evolution, oil and gas companies face pressure to decarbonize their operations as well as track and report their carbon emissions and impact. 

Some oil and gas companies will transform into energy companies, producing, processing and selling greener fuels. Many will decarbonize their own operations, becoming more efficient, more sustainable and cleaner; reducing the carbon intensity of their processes; and introducing systems of carbon capture and storage. These new asset classes will require alignment of carbon-efficient supply chains, pricing structures, and tax and finance functions.

Global fiscal systems are adapting to address the expansion of the pool of energy sources and, in many cases, are encouraging the energy production to be cleaner and more efficient. Efforts such as the US Inflation Reduction Act of 2022 have resulted in significantly increased investment and M&A activity in decarbonization and clean energy-related assets and projects.

For tax and finance functions, supporting and aligning both pricing and structure to this evolution of both sustainable products and carbon efficient supply chains will be critical.  Further, this area of the business will see a shift in quality, scope and requirements of their corporate reporting due to ESG pressures as well. Many oil and gas companies rely on centralized management of tax and finance, while there is a growing need for reliable in-country advice on emissions reporting standards across jurisdictions.

A 2022 EY Global Corporate Reporting Survey that polled more than 1,000 CFOs, senior finance executives, controllers and financial leaders revealed an increasingly urgent requirement for CFOs and finance leaders to align ESG reporting with financial reporting, and close the disconnect with investors and other stakeholders on ESG disclosures. Scrutiny of ESG performance has accelerated across many industries but is even more significant within the oil and gas sector. CFOs and finance leaders should define what role they and their teams are playing or will play in ESG reporting.

In addition, our survey uncovered that oil and gas companies have an average of 13 ERP system data sources for the tax and finance function, yet only 16% of respondents say that they capture most of the tax data needed, and 62% rely on service providers to consolidate their tax data.

Given increased attention on public transparency and tax reporting, companies are also navigating which disclosures will be government-mandated, and trust and transparency will be critical. According to our survey, oil and gas companies expect two or more emerging reporting requirements to have a significant impact on their organization’s tax and finance function.

This focus on compliance may also draw their talent away from doing the work that matters — on average, oil and gas companies spend 72% of their time on routine compliance work and would prefer to spend much less. Driving effective talent management is a significant benefit of co-sourcing. It allows teams to focus on high-value activities, effectively access and leverage data, future-proof technology platforms for future legislative and technological changes and reduce risks and cost.

How would you best describe your ideal tax co-sourcing arrangement?

Due to these impacts as well as the need for enhanced reporting due to ESG requirements, CFOs, controllers, and tax and finance leaders will likely need to make significant changes to people and leadership approaches, as well as technology to enable advanced analytics and forecasting capabilities.

Forward-thinking tax and finance leaders should collaborate and build effective C-suite and external stakeholder relationships to help drive a more cohesive approach. Further, they should also build the advanced analytics capability to extract insights from data and reboot the approach to financial planning and analysis (FP&A) to create more agile scenario planning capabilities. This will require reimagining the career path for finance people to meet these evolving corporate needs with next-generation skills and capabilities.

The availability and application of the workforce needed to execute through the transformation poses its own challenge. Sixty-two percent of oil and gas respondents said that they are experiencing moderate to extensive struggle in attracting talent and more than half said that they have difficulties retaining talent.

This inability to recruit isn’t helped by strong perceptions that oil and gas companies stand in the way of a greener future. It is further complicated by companies who resist shifting to more forward-looking technologies and flexible ways of working to attract the best and brightest talent.

“Oil and gas companies routinely retool their assets to become more effective and efficient,” said Tim Haskell, Oil & Gas Leader, People Advisory Services, EY US. “Similarly, they need to retool their employee value proposition – giving their employees a leading class experience, using the latest technology, and a chance at solving the world’s most pressing energy problems from the inside out.”

Faced with the drive to cut costs and to deliver greater value from their cost base, companies across the sector are turning to digital to automate whole areas of the tax and finance function formerly handled by their workforce. Others are going even further – handing appropriate tasks to technology-enabled managed services providers, to drive additional savings and value.

An invaluable partner

“For oil and gas companies, the fixed cost of their tax and finance function becomes a variable cost, as it can now scale up and down in capacity as the times demand. So they no longer have to carry excess capacity, and they can instead focus on employing specialists to deliver what really matters to the business.” says Craig Mitchell, EMEIA Tax and Finance Operate.

The result is a tax and finance function that walks in genuine step with the organization through the constantly changing business and global tax landscape, efficiently and effectively handling all the tax implications of its transformation.

Digital transformation becomes about far more than mere cost-cutting and risk mitigation. Instead, technology creates an opportunity for the business to free its own highly trained, well paid, technically proficient team from mundane tasks, and push them towards high-value work, so they become better partners to the wider business.

“In today’s world, organizations need to work closely with providers who know the operating environment like their own back yard,” says Mitchell. “For an oil and gas company, tax isn’t their business. Their business is extracting, refining, distributing or selling natural resources. A tax person wouldn’t even begin to suggest they should get involved in the front-end strategy there. 

“So the question is: why would an oil and gas company attempt to build substantial capability in a back-office function like tax, when they have a far more compelling alternative?”