Over the past 20 years’ David Watton has experienced many
significant changes to internal audit within the oil and gas industry. Here, he
shares some of these experiences.
A brief introduction
The oil and natural gas industry comprises the processes of exploration and extraction (known as the upstream
activities), refining and transporting (midstream) and
marketing (downstream) of petroleum products.
The largest volume products of the industry are fuel for
electricity generation and transportation, but oil and gas are also the raw
materials for many other industries including pharmaceuticals, fertilizers and
plastics. The world consumes some 84m barrels of oil and 3 trillion m3
of natural gas per day1, and the oil and gas industry is one of the
world's largest in terms of dollar value.
The ‘super-major’ companies, such as ExxonMobil and BP, are the
public face of the industry, but the vast majority of the world’s reserves of
oil and gas are held by state-controlled entities, such as Saudi Aramco and
Kuwait Petroleum Corporation.
In addition to the large operating companies, there are a myriad
of other organisations – small independent producers and drillers, design and
construction contractors, equipment suppliers, service providers and specialist
technical advisers – which comprise the industry as a whole.
The role of internal audit and type of work
The primary role of internal audit in the oil and gas industry
is, unsurprisingly, no different from that of internal audit in any other
sector – to review and assess independently the adequacy of the system of
controls in place which identify and manage key business risks.
Many areas of work will be familiar to most internal auditors –
financial controls, IT systems and projects, HSSE, and human resources, etc.
There are also a number of other areas of focus for internal audit which merit
- Joint venture audits – because
of the risk profile and capital cost of oil and gas projects, it is common
for these to be developed by a consortium of companies including, in many
countries, a representative organisation of the host government. One
entity (usually the largest stakeholder) will take the role of lead
operator responsible for the development and day-to-day running of the
enterprise, using funding provided by all the parties.
Joint venture audits of the operator’s financial records are performed
(typically on an annual basis) by the non-operators, working as a combined
audit team, to ensure compliance with the requirements of the joint
venture agreement and to verify the accuracy and validity of the cost and
revenue statements produced by the operator.
- Parent company audits – a
variation on the above. In some instances, a standalone company is formed
to run the operation, with key managerial positions staffed by secondees
from the parent organisations. Again, an annual joint audit may be
performed by auditors from the parent organisations. The main difference
here is that the scope of the audit will not be restricted to purely
financial matters, but can range across the whole organisation. As a
result, it is not unusual to have an audit team or 10 or more persons,
representing five different parent organisations, working together for two
or three weeks.
- Project management audits –
developing large oil and gas resources requires major construction
projects demanding huge capital expenditures. The largest projects may
have a 30 or 40 year lifecycle and it can be a decade between initial
expenditure (such as a licence acquisition) and first revenues. Exemplary
project management controls throughout the lifecycle are a fundamental
requirement for successful organisations, whether in the position of
operating company or as a construction contractor or equipment supplier to
the project. This is, therefore, a
key area of focus for internal audit.
- Commodity trading – oil and
gas companies obviously need to sell their production and this may be
transacted on a long-term, short-term or spot basis (and often a mixture
of all three). Many oil and gas companies also undertake energy trading
activities and the internal audit team will need to review the front,
middle and back-office controls of these operations.
The oil and gas industry is a global business, with the larger
organisations having operation bases throughout the world. Internal auditors
must, therefore, be prepared for lots of travel, not always to desirable
locations with 5-star accommodation. The global nature of the industry also
places a premium on the auditor’s communication skills (not everyone will speak
your language as their native tongue) and the need for awareness of cultural
sensitivities, differences in the workplace and the attitude towards audit.
Time management skills are also important if you want to catch your flight
The importance of good systems of control
The recent Deepwater Horizon disaster in the Gulf
of Mexico, which killed 11 workers and caused America’s largest oil spill,
demonstrates horrifically what can result when systems of control break
There have been some other notably industry examples of failure
in controls in the last decade, including the demise of Enron in 2001, which
also caused the dissolution of the Arthur Andersen accounting firm and led to
the Sarbanes-Oxley legislation, and the Shell hydrocarbon reserves
overstatement in 2004, which resulted in a large fine and multi-million dollar
It has been argued that each of these instances could have been
avoided if the systems of control and the three lines of defence model had been
operating effectively. Internal auditors have a key role to play in helping to
ensure that such events do not recur.
Future prospects for work
Whatever your views on the climate change debate and the
development of the renewable energy sector, our reliance on oil and natural gas
will continue for decades to come. The industry faces many challenges ahead,
including the technical, financial and political challenges of accessing an
increasingly scarce resource base, but if you are interested in working in a
dynamic business environment and have a desire to travel the world, the
industry provides great career opportunities for the internal auditor.
1 BP Statistical Review of World Energy June
David Watton FCCA
David has over 20 years’ experience as an internal
auditor in the oil and gas industry and has experienced at first hand the major
developments and convergence that have taken place in internal auditing,
corporate governance and risk management in this time. His current position as
consultant auditor with a global oil and gas company has given him an
international insight to the internal audit profession.
The author is writing in a
personal capacity and the views expressed above do not necessarily reflect
those held by ACCA or his employer.