The typical procurement lifecycle is highly complex, ever-changing, and often policy and process heavy. Within the transactional avalanche of purchase requisitions, invoices and payments lurk unseen risk and probable revenue loss.
Regardless of industry or company size, inefficiencies, waste and improper payments collectively cost organizations billions of dollars every year.
The nature of businesses in the oil and gas industry—the locations and equipment involved, the diverse suppliers and contractors they depend on, and the volumes of goods and services required for operations—puts them at greater risk of loss than those in other industries. Further, many of these companies abroad are state-owned, which leads to tighter oversight to avoid doing business with the wrong people and refrain from corrupt practices.
Managing the system
Many oil and gas companies have deployed enterprise resource planning (ERP) systems to help manage contracts, suppliers, payments, forecasting and inventory. Despite the investment, organizational efficiencies and cost controls are rarely fully realized. In fact, industry experts estimate losses are 4% to 5% of annual revenues.
Coupling continuous surveillance and monitoring of all procurement and contracts data with ERP systems can go a long way in securing supply chain risk and reducing losses in the procure-to-pay cycle. Applying analytics to this problem area can identify abnormalities, improper payments and risky suppliers that could siphon profits and put a company’s reputation at risk.
The industry’s next generation also can’t ignore the increasing shift to digital, and in oil and gas that means the digital oilfield. It’s a concept that combines business process management with digital technologies to automate workflows that maximize productivity, reduce costs and minimize the overall risks associated with oil and gas operations.
So, what can an oil and gas company do to mitigate inherent risks and save millions annually? Exploring the following five best-practice areas to improve fraud, risk and compliance issues is a good starting point.
What and where is your data?
The key business drivers of procurement optimization are cost and risk reduction—via standardization of processes and controls, profit growth through cost savings, and better management of existing inventories.
While these drivers may seem applicable to all industries, oil and gas procurement processes are decidedly different. The differences are reflected in the industry’s unique tangible assets (pipelines, separators, rigs, wells, etc.) and operational spend. Consider, too, the industry’s intangible assets (business practices, processes, organizational structure).
For an oil and gas company, procurement risks can occur at any stage—upstream, midstream or downstream.
The first step to properly managing the procurement lifecycle is the most critical and the most time-consuming: Determining what data you have, where the data comes from, what data is important and how you can start collecting the key data digitally if you aren’t already.
As we consider the importance of new data sources, we also need to think about the innovation and modernization that comes with the data influx from the digital oilfield and its Internet of Things (IoT) connected devices. Data from IoT devices coupled with the process automation advances from AI and machine learning point to the invaluable nature of data and the improved competitiveness and sustainability it can lead to. However, the legacy systems and remote fields complicate data capture from these valuable production assets.
Data is at the core of any successful decision-making outcome. You’ll need to aggregate data from different parts of the organization and its many systems in addition to incorporating third-party data to augment knowledge about suppliers, people, products and contracts.
Don’t skip data cleansing, the standardization of data including name variations; use of common addresses, phone numbers or bank accounts; and business ownership monitoring. Although this step appears to be a no-brainer, it’s common for data quality to be low in areas like master vendor lists.
Ensuring the data is high-quality, consistent and flows seamlessly among departments and processes without bottlenecks or gaps is foundational to your success and well worth the upfront investment.
Continuous monitoring of procurement data
Studies show that most procurement fraud occurs due to weak controls and detection measures. When controls aren’t strong—especially within large organizations—signs of fraudulent activity or circumvention of controls can get lost in many thousands of transactions.
Generally, the bigger your organization, the easier it is for employees to commit fraud, waste or abuse without detection.
Continuous monitoring of all procurement-related data is the foundation for an integrity-based approach that detects potential risk early, before payments go out the door. An integrity-based approach combines typical controls and processes with a “continuous monitoring” review cycle, so organizations can identify and act on issues as they occur. This approach maintains the integrity of the procurement process by avoiding mistakes or wrongdoing and helps to ensure the organization remains stable and solvent.
AI and analytics efficiencies
Early detection uses analytical techniques such as clustering, segmentation, pattern recognition, associations and business rules to determine or predict the overall risk posed by each payment, invoice, supplier or purchase order.
Successful procurement integrity requires analytic solutions that deliver artificial intelligence (AI) through automation, natural language processing and machine learning, along with other advanced analytic capabilities. These solutions continuously analyze diverse data sets to deliver deep insights into contracting, billing and payment processes, effectively identifying overpayments and potential fraud while meeting internal procurement and compliance mandates.
With digital oilfields gaining momentum from the pervasive use of IoT devices and the data captured from them, oil and gas companies are achieving production gains from the improved reservoir understanding, remote monitoring of drilling, and supply chain optimization that come from the use of advanced technologies like AI.
Other key analytics capabilities to consider include:
- Associative linking, or link analysis, identifies relationships among entities based on static attributes in the data (such as phone numbers, addresses or bank accounts) or transactional attributes (such as business relationships and referrals).
- Vendor/supplier scoring, done by running various scenarios against the data, identifies any networks in the data and provides a scored approach for looking at your vendors based on transaction volume and total purchases, entity level and relationships to employees and suppliers.
- Network scoring helps identify collusion in the procurement space—both with employees and with other vendors.
- Fraud rules, applied to make use of weighting, also deliver a scored approach with ranked alerts, suppliers and employees that help investigators know where to focus their efforts.
- Drill-down functionality enables you to identify and investigate the root causes of problems such as the need for more advanced controls, process changes or reporting standards that can improve the purchasing process while reducing risk.
- Geo-mapping makes it easy to understand exactly where you have risk based on locale or geopolitical issues.
Using a combination of these analytic methods results in a proactive approach to procurement integrity that shifts the focus from fraud detection to prevention—all while vastly reducing the potential for financial losses, reputational damage, operational disruption and legal action. This approach also improves the bottom line by eliminating traditional “pay-and-chase,” a strategy that culminates in the recovery of funds in less than half of cases.
Prioritize high-risk indicators, focus investigations
Oil and gas companies must focus on their product supply chains and the nonhydrocarbon supply chains that handle the parts, materials and services required to run the business. The nonhydrocarbon supply chain is critical to deliver the equipment and services required to find, extract, refine and finally market the oil and gas.
Procurement and supply chain strategies are at the forefront of critical issues plaguing oil and gas companies, especially with the current volatility in oil prices.
Analytics can point you to the highest indicators of risk. Aggregated, entity-level alerting reduces false positives and prioritizes the thousands of transactional-based alerts that analytics generate. This frees up business users to focus their time and resources on the most critical and high-value risk in the procurement cycle.
Integrating data from all financial and contractual systems into one environment with a unified workflow can help improve investigative capabilities and decision-making. Reporting provides information to key decision makers in the form of dashboards or portals, mobile reporting and risk insights across the procurement and financial groups.
These tools make the process of reviewing risk indicators more efficient for business users, auditors and investigators alike, as each function can quickly find weaknesses in their control systems and address them to prevent and detect risk more efficiently.
Feedback loop and tracking success
Analytics-enabled modes of detection are faster than manual control checks. By employing continuous monitoring, risk is further reduced from the typical spot-check or annual random audits that often surface issues. This ongoing approach of reviewing all data ensures issues are uncovered quickly, saving considerably more costs in a shorter period of time.
The median duration of internal fraud is 16 months, but the length can vary considerably depending on its type, according to the Association of Certified Fraud Examiners.
Creating an adaptive learning system that continually improves its ability to detect anomalies and react rapidly to the emergence of new risk patterns is another important capability to consider. By automating much of the data management, alert generation and workflow, operations can be streamlined for efficiency and enable analysts to make decisions quickly.
By taking advantage of more digital data and streaming data monitoring, we can bring the decisioning process closer to real-time, combining streaming data with advanced data streams and enabling a continuous scoring of streaming data. The results of the decisions should be fed back into the continuous monitoring system so the data can be refined, and the analytical models retrained for accuracy. Thus, the detection methodology gets more intelligent over time—as do the results.
The way forward
Most oil and gas organizations are aware of the danger posed by procurement fraud waste and abuse and are taking steps to tackle it. However, the true scale of the challenge is poorly understood. Some businesses are in a state of denial, neither believing they are targets nor taking steps to protect themselves from procurement fraud. This naivety is a potential windfall to the would-be fraudsters.
Digitizing and modernizing the supply chain process can reduce procurement costs for all purchases of goods and services by 20%, reduce supply chain process costs by 50%, and increase revenue by 10%.
Until organizations adopt an integrated, data-driven approach to the detection of fraud, waste and abuse, they will continue to lose untold millions to procurement fraud. Companies need solutions able to spot errors and fraud throughout the procurement cycle, from bid to contract execution.
What businesses don’t see can still hurt them.
Ellen Roberson is global marketing manager at SAS, and Jen Dunham is a solution specialist with SAS Security Intelligence-Global Practice.
2022-12-07 - Alliance Resource Partners made two purchases of royalty interests in the Midland and Delaware basins totaling more than 4,300 net acres.
2022-09-19 - Cheniere Energy and subsidiaries of Whistler Pipeline will move forward with the construction of a new 43-mile pipeline as part of plans to send more natural gas from the Permian Basin for export as LNG.
2022-10-10 - The asset sale on Oct. 10 included Martin Midstream’s Stockton Sulfur Terminal in California, which Gulf Terminals LLC agreed to acquire for approximately $5.25 million.
2022-09-23 - Continental Resources Inc. retained EnergyNet for the sale of a 200-well package of conventional and unconventional assets in Oklahoma’s STACK play within the prolific Anadarko Basin.
2022-09-21 - Also in this week’s A&D Minute: SilverBow Resources’ $50 million acquisition provides a new position in this South Texas gas play and U.S. Energy Development Corp. recently acquired core Permian Basin acreage for more than $60 million.