How is the industry’s ongoing digital transformation impacting modeling capabilities?
The oil and gas industry is embracing data and analytics and transitioning to a model-based economy. This heavy reliance on models is being driven by a combination of new technologies, market complexities, and new demands on the business. We’re seeing oil and gas organizations address this disruption by investing in a wide array of new models, analytics, and data tools. By applying sophisticated modeling techniques and new tools to emerging data sets, the industry is transitioning to a model-based economy which provides deeper insights, quantifies risks, and generates increased revenue and operational agility.
Is there anything the industry should be doing to help that transition scale without adding unmanaged risks?
Where there is a model, there is model risk. This presents a unique risk for many companies as they may not have existing model risk functions, or they may have invested more in modeling capabilities than in model literacy and model risk management capabilities. Any company which is deploying “nextlevel” capabilities should ask itself, “do we also have ‘next-level’ management techniques to support our new capabilities?” For context, model risk arises from actions taken and decisions made based on incorrect (“the model doesn’t work”), misspecified (“garbage-in, garbageout”), or misapplied models (“wrong model for the job”). As an example, legacy models may date back years or decades, relying on tribal knowledge and declining skills to maintain a critical business tool, thus exposing companies to risk and scale problems. Other external events such as changes in reporting requirements or adoption of regulatory changes may also cause model drift or make models inadequate to support new business needs. Not all oil and gas companies have a robust model risk framework, and not all sources of model risk are mitigated by existing IT controls, audit programs, or processes embedded within business units. In the absence of adequate model governance frameworks, model management processes, and effective control structures, the residual risk may expose companies to significant losses and strategic missteps. In addition, it will be difficult to capture the benefits of significant data and analytics spend when the models don’t work.
What should companies be doing right now to ensure they are matching digital capabilities with model management capabilities?
Companies should first look to establish a robust model management framework for its combined digital and modeling efforts. This starts with a meaningful conversation to understand the current balance between modeling ambition, model risk, and model literacy. Then, companies should develop model management frameworks, operating models, and an infrastructure to help modeling ambitions scale without creating runaway model risk.
This effort should consider the six aspects of a healthy model management framework:
What benefits can companies expect to gain from taking a robust approach to model management?
New advances in technology and available data modeling techniques promise to provide companies with significant improvements in enterprise value, customer experience, and employee experience. Effective model management can help unleash this value while mitigating risks from model error and misuse. Models do not create value by themselves— it is the organization’s model literacy and data fluency which creates value from the models it uses to make decisions and enhance operations.
We see a combination of “hard” and “soft” benefits to such an approach.
In short, model literacy helps an organization understand, trust, and use its improved modeling capabilities, while model management helps an organization develop a coordinated, scalable, and trusted modeling environment.
About the KPMG Global Energy Institute
The KPMG Global Energy Institute (GEI) is a worldwide knowledge-sharing form on current and emerging industry issues. Launched in 2007, the GEI interacts with over 30,000 members though multiple media channels, including audio and video webcasts, publications and white papers, podcasts, events, and quarterly newsletters. Subscribe today to begin receiving valuable insights covering critical business topics and industry issues by visiting KPMG Global Energy Institute.