To comply with changing regulations, energy industry must maintain flexibility

Ralph Baxter,ClusterSeven, London and New York

Until recently, the public attention around the oil and gas industry was mostly limited to energy prices, but the pending cap-and-trade bill passed by the US House of Representatives and awaiting Senate approval is generating much deeper attention.

New regulatory requirements mean new information technology, but the requirements are < at this time, making it hard for the energy industry to prepare for any potential changes. The industry therefore needs an approach that can adapt as requirements are formulated. Therefore, the question facing business is what environment can respond efficiently to changing requirements while being robust enough to protect against the large operational risks that may be incurred if they get it wrong.

The flexibility part is easy. Spreadsheets have always been one of the most cost-effective and adaptive technologies that all companies turn to when dealing with business change. They are inherently ubiquitous in dynamic, complex areas of businesses like the energy industry that are characterized by high rates of change. In most areas they act as precursors to the replacement systems that will come from the large-scale technology vendors. But this will require clear and firm specifications, taking time and added resources, not to mention the additional time spent on training.

However, there is a problem with spreadsheets as a stand-alone solution. With the pressures facing energy companies around improved governance, spreadsheets by themselves cannot be relied upon for accuracy or audibility. The complexities behind managing the buying and selling of emissions permits as required by pending cap-and-trade legislation are all reflected in large spreadsheets. These spreadsheets containing crucial data are highly accident prone, especially when they have hundreds of thousands of lines of data. The process is exceedingly hard to manage, and it is critical for companies to utilize an automated compliance tool that detects any irregularities in the system and alerts senior management.

As energy companies have a strong grasp on risk management, it is not surprising to hear that they are waking up to these risks and implementing solutions that can preserve the needed flexibility but also provide a control framework to alert anomalous activity within their operational spreadsheets.

Recently a multinational oil company kicked off a major end-user computing (often abbreviated to EUC, but essentially spreadsheets) control project across their entire integrated supply and trading business to minimize the operational risk inherent in the use of these applications. The project goes beyond the traditional SOX/Financial Reporting remit and recognizes the opportunity to mitigate risks associated with Operational EUCs.

The project approach is based on the two critical elements:

• Spreadsheet remediation to ensure a quality, error-free and robust application in the first instance; and
• Ongoing control provided by an Enterprise Spreadsheet Management application to maintain the applications' quality over time.

The project vision is to "Reduce the gap in operational risk between EUC applications and IT systems to enable EUCs to be viewed as long-term strategic applications."

The sophistication of the energy business means that in certain areas companies will always find that spreadsheets are the only practical short- and medium-term answer. Energy companies that stay with manual control will be highly vulnerable to control problems. However, by investing in an automated control environment, they can obtain control as part of an overall risk management program. Automated systems are more efficient and reliable and closely monitor, record, and expose behavior for auditors.

Spreadsheet management is a cost-effective solution until your regulatory requirements are clear and you can migrate to a new system at your own speed, without being panicked into new, less flexible solutions that will take time to mature. OGFJ

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