In modern times, humans have developed the habit of coexisting with technology like AI, IoT, Big Data etc. It's being used at full fledge in almost everything.
Businesses have also adopted modern developments to increase their productivity and efficiency. The adoption rate is high because technology has facilitated businesses with a lot many things and one such gift is analysis.
As it may be known to all, analysis is a simple phenomenon that involves brainstorming and coming up with solutions based on it, and in the business world, analysis is crucial and it seeks a lot of attention.
From market insights to consumer behavior and supply chain management, everything falls under the analysis. Businesses are using big data analytics in many ways.
With the introduction of different analytics tools, businesses have used them to grow. Financial analytics is one such area that has sought significant investment but has failed to provide equally good returns.
As said above, every industry seeks the use of technology and so, the Petroleum industry is no exception. The petroleum industry has a great impact on the market (it may not be seen though). The hike in prices of gas or oil concerns every one of us.
In this blog, we will be discussing the petroleum industry. Alongside this, we will look at financial analytics as a concept, and then there will be a discussion on the petroleum industry and financial analytics as one.
So, let's start with a description of the petroleum industry and terms related to it.
What is the petroleum industry and why is it significant?
Being a resource-based industry, the petroleum industry has its advantages. The industry doesn't only mean to extract crude oil and obtain gasoline from it but rather it involves the global processes of exploration, extraction, refining, transportation, and marketing of petroleum products.
Petroleum (oil) is also the raw material for many chemical products, including pharmaceuticals, solvents, fertilizers, pesticides, synthetic fragrances, and plastics. You may have even heard people calling it ‘black gold’ and this is because it has a very high monetary value.
IBISWorld in its report had revealed that the petroleum industry was the third-highest revenue-generating industry. It was expected to generate a revenue of $3.3 trillion in 2020. The industry has retained its spot in terms of the biggest industries by revenue in 2021. These numbers are self-explanatory and show the market size of this industry.
So, having seen the influence of the petroleum industry let us look at the reason in brief.
- Several industries rely on oil as an input, such as transportation, producers of consumer goods, and the food industry.
- Apart from industries, common people are also affected by the hike in oil prices as it has a direct impact on their budgets.
- The exploration and extraction of crude oil require big machines and equipment that are provided by steelmakers and other such industries. However, the effect is opposite on these industries as common people. These industries benefit from higher oil prices as the petroleum industry increases production when there are higher profits.
Petroleum is a non-renewable resource and also the prime source of energy and hence there always remains a risk of extinction. So, the usage has to be sustainable and conservative.
There are countries whose economy highly depends on the petroleum industry and the prime example of this is Saudi Arabia. Saudi Arabia accounts for 12% of total oil production in the world and currently ranks second in the list of top oil-producing countries. According to The World Factbook, the petroleum sector accounts for roughly 42% of the country's gross domestic product (GDP), 87% of its budget revenues, and 90% of export earnings.
These numbers show the significance of the petroleum industry and hence require more attention. Financial analytics is one such way that can further boost the sector and can also be beneficial for sectors associated with the petroleum industry.
So, we will first have a quick description of financial analytics and then in the end will understand its use in the petroleum industry.
3 ways in which Financial Analytics is used in the petroleum industry
“A century ago, petroleum - what we call oil - was just an obscure commodity; today it is almost as vital to human existence as water.”
- James Buchan, Scottish Novelist
What is Financial Analytics?
Financial Analytics means to analyze the financial data of a business. It helps to gain in-depth knowledge and take action against it to improve the performance of a business.
Every business needs to maintain a record of its expenditures, returns, investments, and profit. This is what financial analysis is all about. Financial analytics focuses on measuring and managing the tangible assets of an organization such as cash, machinery, and others.
So, this small definition may have cleared the concept of financial analysis. (If not please go through our blog on financial analysis)
Moving to the role of financial analysis in the petroleum industry, we will look at some interesting points that would make things clear.
"Financial peace isn't the acquisition of stuff. It's learning to live on less than you make, so you can give money back and have money to invest. You can't win until you do this." - Dave Ramsey, American Radio Host
Financial Analytics in the petroleum industry and vice-versa
The oil and gas producing industries face great challenges. Diminishing reserves have come up at the top. This has forced companies to operate from a remote and hostile environment.
The petroleum industry has a complex supply chain and with the recent issue of cost overruns, the delivery of projects on time and within the budget has come up as a big challenge. With these complex challenges, every upstream oil and gas company should focus a substantial amount of their efforts on oil and gas reservoir financial analysis to aid in resource discovery and boost production.
It is necessary to understand the complexity of reservoirs because it is used by engineers, geologists, and executives to make strategic decisions and get higher returns. However, Conducting a financial analysis in the oil and gas sector is different because of the unique needs of natural resource companies.
Unlike others in the consumer industry, oil and gas businesses have no control over the price of their products. As a result, it can be a challenge to predict future revenues.
Financial analysis in the petroleum industry requires big capital and not all businesses are capable of bearing that cost. Some business owners may have the technical know-how to manage operations, but not all of them have the resources to address complex financial issues.
Now, talking about the vice-versa, it does not need so much brainstorming. As discussed above, the petroleum industry contributes significantly to the economy of a country. So, the data secured from this industry aids in the overall financial analysis.
Having understood the significance of the petroleum industry, we can also agree on the fact that financial analysis in the petroleum industry is a prominent development.
The analysis provides important data and trends that companies use to frame their business strategies. On the other hand, the data retrieved from such analysis of the petroleum industry is further used in financial analysis of all economic activities.
Petroleum is the primary source of energy even after many alternatives have been developed and as discussed earlier it must be sustainably used. Financial analysis is one such way to do it.
So, it was just a small approach to understand the role of financial analysis in the petroleum industry. We will be writing such blogs in the coming days. Let us know if you think there is any topic that needs to be looked upon.