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IntroductionIn today’s dynamic and globalized energy marketplace, formal contracts define nearly every business relationship and activity – from the disposition of material and equipment to the use of time and labor, the transport and sale of product, and often the turnkey activities of vital field operations.

Yet all too frequently, oil and gas firms struggle with manual and obsolete contract management systems. High costs of those outdated methods include: wasted administrative time and money, lost operating efficiencies, missed opportunities including loss of potential revenue, and greater risk to the organization and to executives.

In this white paper analysis, SciQuest describes the emerging generation of more capable, cloud-based contract lifecycle management solutions. This study examines powerful trends driving oil and gas firms towards greater supply chain efficiencies, the elements in a modern contract management environment, and how best to implement such a solution.

Procurement-related oil and gas trendsThe current oil and gas sector outlook is marked by ongoing economic and geopolitical uncertainty; making decades-long capital investment decisions based on commodity prices that fluctuate on a daily basis remains an ever-present challenge. Rising costs continue to squeeze profit margins. Approvals for new capital projects have slowed. Meanwhile, early retirements are sapping the sector’s available talent pool.

Unconventional oil and gas discoveries, particularly shale gas reserves, are bringing new countries into the club of net energy exporters, and forging a new sense of energy independence.

In the United States, energy production has reversed decades of falling or stagnant output. According to figures from the federal Energy Information Administration, oil production through the end of 2013 has gained 49 percent and natural gas

Energize Your Most Vital Business RelationshipsAdvanced Contract Lifecycle Management

In the Oil and Gas Sector

Copyright 2014 by PennWell Corporation

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output is up 28.5 percent when compared to mid-2000 activity levels. Reserves that are economically viable to recover are up sharply, giving energy companies added incentive to explore and invest.1

Those and other developments present unique technical and management challenges. They are also driving major shifts in oil and gas business models and procurement methods.

Three key market trends – a dynamic merger and acquisition environment, the drive for cost and productivity efficiencies, and the emergence of strategic sourcing methods – are spurring change in the sector. By examining these trends, a positive correlation between the use of trends as practices and successful market growth emerges.

•Mergers and acquisitions. M&A activity was strong in the energy sector in the first half of 2014, and it is poised for expansion. According to the Deloitte Center for Energy Solutions, a total of 299 transactions were completed in the first six months of 2014 – one deal less than in the same period in 2013 – but the total $141 billion global value of those deals was $40 billion higher when compared to 2013.

• Increased M&A activity suggests that acquiring barrels appears to be cheaper than exploring for them. As reported by Deloitte, the U.S. and Canada accounted for 61 percent of all deal activity, while Asia and South America saw notable increases in M&A transactions.

•This trend was especially pronounced in the unconventional space, where supermajor players sought to acquire secure reserves. Due to dramatic increases in energy production in the U.S., industry analysts say pipeline and storage companies are using acquisitions to expand capacity.

•Cost and productivity. Following the collapse of crude oil and natural gas prices in late 2008, the energy sector undertook a major and largely successful campaign to reduce both operational costs and business risk. Analysts estimated that effort yielded more than $40 billion in hard-dollar savings by 2011, yet shareholder demand for higher dividends continues to spur the drive for greater cost efficiencies.

•While the unit price of individual budget items has been reduced, unconventional, deep water, and other complex exploration and drilling environments contribute to higher overall project costs. Not surprisingly, oil and gas firms continue to seek innovative ways to cut costs and to meet profit expectations.

Why O&G firms need CLMIf your oil and gas enterprise struggles with any of these challenges, you may be a candidate for a next-generation contract lifecycle management approach.

• You lack visibility into equipment and material procurement, oil field operational services, or other global supply chain commitments.

• Staff cannot quickly locate specific contracts or terms.

• Personnel do not know where to go for necessary approvals, or where a contract is in the approvals process.

• A less-than-optimum contract review/approval cycle is wasting time and money, and reducing your ability to compete in a competitive upstream or downstream environment.

• You cannot effectively measure performance-against-contract.

• There is no simple way to confirm a contract conforms to company standards.

• Contracts expire with no early warning.

• Poorly automated and integrated contract processes reduce efficiency and increase procurement-related errors.

• A lack of contract-related information weakens your negotiating position.

• Inadequate contract management creates increased risk for the enterprise, and for you.

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•Strategic sourcing. Recognizing the significant impact of supply chains on bottom-line performance, many oil and gas firms have pursued strategic sourcing programs to reduce the cost of project equipment, supplies, inventory, and logistics.

•Across the oil and gas sector, and particularly in the upstream segment, Halliburton and other key service providers are increasingly contracting with majors and supermajors to deliver turnkey field services. This critical shift dramatically alters the contracting mechanism for that sector; procurement economics change, there are shifts in roles and responsibilities, and risks and liabilities are restructured.

•As vendors increasingly take on near operator-like responsibilities, and as oil and gas firms strive to coordinate more dynamic global supply chains, the number and complexity of contractual business relationships has grown dramatically.

•Those powerful requirements – integration, efficiencies, and more strategic supply chains – are all creating a pressing need for more meticulous and responsive contract management throughout the energy sector.

Strategic CLM for oil and gasIn the oil and gas industry, as elsewhere, contracts form the foundation of virtually every business, relationship, and activity. Contracts define each aspect of supply chain procurement, sales and marketing, finance, legal, and human resources.

As we have seen, contractual arrangements are increasingly vital in today’s complex energy sector. Contracts now specify a growing array of upstream and downstream activities, from pricing and service levels to supply and availability, assigned risk and responsibilities, compliance and other variables.

In a volatile energy market – where in a number of regions, the massive surge in drilling activity has put serious strains on the supply base for oilfield services – contracts are a key tool companies can use to manage the scarcity of skilled labor and other resources. As the cost of building upstream oil and gas facilities continues to rise, the review and coordination of contracts can often determine the economic viability of a given project.

Contract management is a vital tool companies can and must use to understand and control a broad range of variables including, but not limited to: rig rates and the price of equipment upgrades, regional cost of premium steel, spot purchase costs for simulation work, the coordination of cross-continental rig transportation, or any of a thousand other field service, operational, or business activities.

Not surprisingly, an oil and gas company of any size typically maintains tens of thousands of active contractual relationships, and the number, complexity, and importance of those contracts are increasing. A modern and aggressive approach to contract management is crucial, yet contract management remains primarily a manual operation in many oil and gas organizations.

SciQuest recommends a comprehensive, lifecycle based model for contract management. Leveraging automation and industry best practices, this contract lifecycle management (CLM) approach provides the oversight needed to improve performance across even the most complex energy value chain. Companies can deploy a robust CLM tool to help negotiate better contracts, to reduce both cost and risk, and to ensure full compliance with all contractual obligations.

A new CLM modelWhat should an energy-oriented enterprise consider when evaluating application-based CLM environments?

First and foremost, any workable solution must address the full spectrum of contract-related activities: from contract requests and the use of standardized-and-customizable templates, to support for contract negotiations, review and approvals, signatures, documentation, and compliance.

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A modern CLM environment should be designed to optimize the value of business agreements across the value chain by addressing events, performance and delivery, compliance, assessments, and coordination. It should support all contract types including buy-side, sell-side, and non-monetary contractual arrangements.

Today’s advanced software-based CLM systems allow the rapid and efficient creation and customization of new contracts. Many use “smart templates”, document hierarchies, and other technologies to simplify the creation of contracts and to shorten contract maintenance cycles. Role and hierarchy-based security ensures only appropriate users – within the energy firm or across the approved supply chain – have access to needed documents and functionality.

Workflow automation allows organizations to streamline key activities related to spending, suppliers, service contracts, inventories, and accounts payable and receivable. A configurable workflow engine dynamically routes agreements to the correct reviewer, and can be adjusted to reflect monetary value, contract type, service or commodity, risk level, and other variables.

Next-generation analytics can provide actionable insights into a range of contract-related values such as which clauses or templates are negotiated most often, the type of difficulty of various changes, and upcoming contract events. A strong reporting system should provide convenient access to the entire contract portfolio.

Any workable approach should also provide native integration with DeltaView, the leading document comparison technology. Ideally, a robust CLM solution will also integrate smoothly with leading email, word processing, and other office productivity systems. Good CLM integration encourages collaboration between business partners, while minimizing cost and litigation risks for oil and gas firms.

Getting thereOnce an oil and gas organization has elected to deploy a modern, software-based contract lifecycle management solution, the next question is how best to implement that environment.

On-premise or Cloud?As with many other enterprise applications, there are two basic deployment alternatives for a CLM solution: an on-premise model and a cloud-based, Software-as-a-Service model .

On-premise. The on-premise approach is a behind-the-firewall deployment that locates a separate copy of the application at the oil and gas organization. In the on-premise model, tracking and ensuring CLM application performance is typically left to individual oil and gas firms.

Figure 1 – A comprehensive, lifecycle approach addresses all critical contract-related variables in the oil and gas value chain.

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Because the on-premise model requires a distinct location-specific database, any customization can create inconsistencies that make the application more difficult to upgrade and support. Unique variations also make it harder to diagnose and fix potential problems. Support is often more difficult and costly, due to customizations or hardware issues with local servers.

Software-as-a-Service. In the SaaS model, each user organization has a separate database; because the schema is the same across multiple customers, this increasingly reliable model lends itself to more efficient upgrades and support. With the cloud model diagnostics and resolution are easier, and upgrades are more frequent and typically free.

Because SaaS providers control and maintain all code, support issues can usually be replicated and solved quickly and easily. Cloud-based economies of scale can assure 99.99 percent performance availability. Given these differences, the total cost of ownership is almost always lower for a Software-as-a-Service model.

ImplementationA number of deployment issues can affect the success of a CLM project.

Organizations can improve implementation by gaining early stakeholder buy-in, by gathering detailed requirements, and by communicating effectively with all participants. A collaborative and transparent project environment is best, and should focus on business values and not on technical features.

A solution with a strong user interface is critical. In most energy sector supplier relationships, every buying organization connects to every supplier – a necessary arrangement that increases complexity, cost, and risk due to inefficiencies in communication and data management.

A well-configured user interface can help ensure business data is current and accurate, thus reducing the legal and financial risk caused by bad data. A robust portal also encourages clear and effective communications – for negotiations, pricing and payments, service levels, and other variables – between oil and gas firms and their suppliers.

Figure 2 – Contract lifecycle management in an integrated supply chain environment.

As depicted in Figure 2, a fully integrated platform provides comprehensive, enterprise contract lifecycle management in the energy context. A single sign-on should give qualified employees, customers, and suppliers secure access to a range of capabilities including sourcing and spend, supply management, requisition and order management, and accounts payable.

A robust solution should also integrate seamlessly with third party systems, including major Enterprise Resource Planning solutions, and document management systems.

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Partnership considerationsContracts are the bedrock of virtually every energy sector business relationship. Contracts are more numerous, increasingly complex, and vitally important to any company hoping to improve productivity while controlling cost and risk.

Managing those contracts – across global supply chains and throughout the full lifecycle of those key relationships – is critically important to energy firms. Today more and more oil and gas organizations recognize the business value of robust contract management delivered as an efficient, cloud-based solution.

SciQuest is the largest publicly held pure-play provider of cloud-based business automation solutions for spend management. The company’s Contract Director sets the standard for enterprise-class contract management.

SciQuest combines that powerful CLM solution with a deep knowledge of the energy sector, serving clients that include more than 10 industry-leading oil and gas companies.

Return on CLM Investment• Weakness in contract management cost the average company 9.2 percent of annual revenue – International

Association for Contract and Commercial Management

• Accelerate negotiation cycles by 50 percent (time from contract request to contract signing) – Goldman Sachs

• Reduce maverick spend by 22 percent – Aberdeen Group

• Cut operating and processing costs by 10-30 percent – Aberdeen Group

Benefits of strategic CLM• Increase the visibility and accessibility of contracts across an entire oil and gas enterprise.

• Ensure contract consistency, thus preventing “maverick” contracts and reducing legal and regulatory risk in today’s challenging energy industry.

• Generate better contracts faster, with approved terms, standard-and-customizable templates, and online collaboration.

• Streamline operations – from exploration to the field and into production – with robust contract lifecycle management.

• Accelerate the approvals process and reduce cycle time, thereby driving efficiency across complex global value chains.

• Ensure full documentation, a clear audit trail, and enterprise-class security.

• Use alerts and reminders to meet your commitments, and ensure vendors meet theirs.

• Gain the insights needed to strengthen your bargaining position on every contract.

• Achieve measurable ROI by expediting sales with improved sales-side contracts and increasing procurement savings by managing buy-side contracts.

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About SciQuestSciQuest (NASDAQ:SQI) is the largest publicly held pure-play provider of cloud-based business automation solutions for spend management—offering deep domain knowledge and a leading, customer-driven portfolio. SciQuest solutions enable greater visibility and compliance organization-wide to help you gain control, optimize efficiencies and reduce spend. These cloud-based solutions are easy to implement and proven to deliver measurable, sustainable value with SciQuest’s high-touch support, analysis and automation.

ABOUT PENNENERGY PennEnergy serves global energy professionals with the broadest, most complete coverage of industry-related information, with resources to help effectively perform critical job functions. Including content from all PennWell Petroleum brands and other industry sources, PennEnergy.com delivers original industry news, financial market data, in-depth research, maps, surveys, statistical data, and equipment/service information.

ConclusionContract management is a vital yet often poorly coordinated aspect of the oil and gas business.

When contracts are well managed, energy firms can drive productivity and economies across even the most complex global value chains. When those key documents are neglected, it can mean higher costs, lost opportunities, and increased risk for companies and managers.

As we have seen, forward-looking organizations are embracing a new generation of more robust contract lifecycle management solutions. Cloud-based CLM allows companies to access today’s most advanced capabilities quickly, economically, and without heavy up-front investments.

Change is a given in the energy sector, and change is accelerating. By better managing their most crucial business relationships, oil and gas firms can adapt and succeed in a dynamic marketplace.

References1 New York Times, “Resurgence in Oil and Gas Sector Spurs Merger Boom”, August 29, 2014

2 Deloitte Center for Energy Solutions, “Oil & Gas Mergers and Acquisitions Report”, Midyear 2014: “The deal market may be poised for a rebound”.