Oil and gas firms guilty of overspending, KPMG says

Market news
Market news

A KPMG audit of UK oil and gas industry contracts has revealed widespread overbilling at the same time as firms are trying to slash costs.

The professional services firm said 70% of 10,000 deals across all industries it looked at were not properly complied with, leading to regular overcharging.

KPMG put the cost of unnecessary spending at between 1% and 5% of “high-risk” investments, meaning a significant level of unnecessary spending on a supply chain worth up to £35billion a year.

The findings come as the industry battles to save cash wherever it can in the wake of a sharp slump in crude oil prices.

At the Offshore Europe 2015 show in Aberdeen last week, Oil and Gas UK chief executive Deirdre Michie said firms were on track to slash £2billion from their costs.

It is estimated the cuts have already caused about 65,000 job losses since the price of a barrel of oil peaked at $110 in 2014.

KPMG said better contract management can hold the key to reducing operating costs further.

Ken Milliken, forensic associate partner for Scotland at the firm, said: “There is no silver bullet for the oil and gas industry’s cost issues.

“But avoiding loss by ensuring contracts are performing can restore cash to businesses and aid future contract negotiations.

“Conducting a contract audit can provide transparency on actual costs and identify inaccuracies such as non-inclusion of rebates and discounts, incorrect overhead apportionment and intercompany mark ups.

“For an individual business on an individual contract, a saving of one or two percent may only be seen as marginal.

“However, given the value of the overall supply chain in the UK oil and gas industry and the potential scale of overbilling that our own experience of contract audit has highlighted, there are very significant cumulative savings to be made by addressing this issue.

“Good contract discipline should, therefore, form part of the wider strategic focus within the industry on bringing down the per barrel production cost through transformation, innovation and collaboration.”

According to KPMG, the best intentions of companies to achieve best value in contracts can suffer as priorities and responsibilities change over time.

Terms, incentives and break clauses are often neglected, leading to invoicing mistakes, the firm said, adding: “A large number of contracts contain pricing mechanisms with an inherent blind spot when it comes to ensuring the buying organisation is receiving the correct price.

“Proactive contract management is essential to ensure that contracts are fit for purpose, the relationship is well-managed and all parties benefit from the agreement framework.

“With the current market conditions in oil and gas, now is an ideal time to ensure that the deal which has been struck with a supplier is not eroded – giving away precious margin.”

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