AFE Processes in the Oil & Gas Industry Leave Room For Improvement

AFE Processes in the Oil & Gas Industry Leave Room For Improvement

Capex approval workflow processes go by many different names, and getting a handle on the alphabet soup of acronyms can be dizzying. Capital Expenditure Authorizations (CEAs), Capital Expenditure Requests (CERs), and Capital Appropriation Requests (CARs) all refer to the same general process. In the oil & gas industry, the more common term is Authorization for Expenditure (AFE) – though its applications and implications can be very different. 

The main point of difference is the size and scope of projects for which AFEs are applied. Because huge capital outlays are commonplace in this sector, a well-managed AFE process can have a substantial impact on outcomes by improving allocations, minimizing cost overruns, and eliminating the time and resources associated with unproductive tasks.

In other industries, AFE approval workflows may require just a few sign-offs, from the likes of the CFO, project manager, and one or more engineers. With oil & gas projects, more people are typically brought to the table — which means geologists, surveyors, and lawyers may also need to give their go-ahead. That means more capital request follow ups to deal with, and longer timelines – or stage gates – for getting projects across the finish line.

With many more required approvals, and sizable Capex budgets, manual and antiquated capital planning systems just won’t cut it. In order to optimize AFE workflows, businesses need a modern capital request solution to harness real-time data, make adjustments on the fly, and adapt to unexpected changes.

More than just streamlining the process, a system like this also supports data-driven decision making – which is much more difficult to glean from error-prone legacy tools.

An “arduous and inaccurate” AFE process

For a billion dollar project, 20% prediction errors can mean hundreds of millions in unexpected costs.

Yet that’s the margin of error that the oil & gas industry accepts for AFE accuracy. According to a report from consultancy Sia Partners, the “industry as a whole is allowing far too wide an acceptable range for AFE estimates, and worse, isn’t able to progressively learn from previous missed estimates. Missed earnings based on poor cost estimates have been an industry problem for years.”

Inconsistent approaches, combined with data that is held captive in various systems and departments within the company, and lengthy approval cycles are surely to blame. Moreover, with so many parties involved in the approval process, slight inconsistencies between ROI models can snowball into forecasts that end up way off.

Additionally, it’s easy for bias to unknowingly creep into AFEs. For instance, Malone Petroleum Consulting has found that “in the past an AFE can be manipulated, e.g., actual costs (based on actuals of near-by wells), low costs (to sell the project to management of investors), high costs (high estimates as a built in safety for over expenditures.”

Standardizing metrics and methodologies is a good starting point for reducing these errors. If engineers across the organization are using different models to estimate costs, the final total is bound to be riddled with bias.

Modern tools reduce the fragility of complex AFE tracking

Imagine that a project has reached the business unit manager, and he wants to talk to an engineer about his or her cost assumptions. Whoops! That engineer left the company six months ago, and the original spreadsheet is nowhere to be found. Now what is he supposed to do?

AFE approval workflows that break down with staff changes add fragility to a complex process. Not only will the manager be unable to explain the cost overruns — he won’t be able to correct the error going forward, because he has no idea what the error was!

A central repository for all project data, that also interfaces with a company’s ERP, would eliminate these troubles. If project costs are tracking over budget more than the acceptable amount, the finance team can analyze the data trail to see what’s driving the overruns. Moreover, as projects reach set thresholds, it can be automatically remanded for additional approvals to the overrun. That’s the power of a system such as Finario GO.

Plus, in the case of an audit, there’s a clear reporting trail that can be followed.

For the best results, you need a customized AFE solution with financial intelligence

With modern tools, AFE processes should be set up based on a company’s specific priorities and processes. This ensures that projects competing for budget are evaluated in a consistent, bias-free manner and that critical criteria such as ROI models, risks, strategic initiatives such as ESG, and other factors are appropriately considered.

When companies have more project proposals in the queue than they can fund within their Capex budgets, cutting-edge AFE software is invaluable in ensuring that approvals are going toward the highest risk-adjusted ROI projects.

Finario’s stack ranking feature, for example, lets you compare projects based on the criteria you choose, and get a clear line of sight as to how approving individual projects will impact your overall budget, and which will have the most material impact on your business going forward.

Ultimately, every company has their own approval flows, business rules, and other idiosyncrasies that generic AFE software overlooks. In order to move into the elite category of oil & gas companies that reduce variances to 5% or less, you need a SaaS solution like Finario, which gives you real-time status reporting, dynamic updating, and full project detail.