As an upstream oil and gas operator, you likely have various pricing agreements in place with your suppliers. These agreements can range from simple and rigid pricing structures to complex and flexible pricing structures. One specific type of flexible pricing agreement that is commonly used between buyers and suppliers in the oil and gas exploration and production space is called condition-based pricing.
In this blog post, we’ll review the basics of condition-based pricing for upstream oil and gas operators and share self-serve resources that dive deeper into the concept, including how to implement condition-based pricing at your organization with digital price books and automated compliance workflows.
What is condition-based pricing?
Condition-based pricing is a flexible pricing agreement structure in which the price of a product or service is influenced by factors (aka pricing conditions) that are mutually agreed upon by the buyer and seller.
Since upstream oil and gas operators often have complex and flexible pricing agreements with their suppliers, it’s important for your digital price book software to have condition-based pricing capabilities as they allow operators to use flexible pricing structures that are more aligned with the structures of their paper-based agreements.
Digital price books and condition-based pricing
Digital price books play a critical role in the digitalization and automation of back-office processes for oil and gas operators, making it easy to detect and prevent overbilling with automatic compliance checks, gain visibility into price compliance with advanced cross-functional reporting and identify common spend leaks like payment terms and block no-match invoices.
However, until recently, there was no easy way for operators to recreate complex paper-based pricing agreements in their digital price books. This limited buyers to using rigid pricing structures in their digital workflows, meaning supply chain teams wishing to use condition-based pricing would need to spend many hours manually updating their agreements every time there is a condition change or use a hybrid of paper-based agreements and digital agreements in their compliance workflows, neither of which are optimal solutions.
With the addition of condition-based pricing capabilities to OpenContract PriceBook, a digital price management solution purpose-built for oil and gas, buyers can now replicate complex pricing agreements and structures into their digital invoicing and compliance workflows without needing to hire a small army of support staff.
What is a pricing condition?
A pricing condition is a defined parameter that changes over time and affects the price of a product or service. The condition values are mutually agreed upon by you and your vendor, as is the pricing associated with each condition value. The timing of a pricing condition change is also mutually agreed upon by you and your vendor.
At present, you can leverage three main types of pricing conditions:
1. External authority
As mentioned earlier, a pricing condition can be based on an external authority like the West Texas Intermediate (WTI), a global benchmark for oil prices that changes periodically. In this case, you and your vendor would mutually agree on how to calculate the WTI average, how to define the WTI values, which prices are charge for each WTI value and how often the WTI condition will be updated (monthly, fortnightly, etc.).
2. Internal parameters
Alternatively, a pricing condition can be based on an internal parameter such as active rig count. For example, you could set the pricing conditions so that you get charged a certain price if the active rig count is two and under, but if the active rig count is between three and five, you will get charged a slightly better, lower price (similar to a volume-based discount). When using active rig count as a pricing condition, it often makes sense to update the condition changes in real time so that it updates as soon as a rig comes online or goes offline.
3. Performance tiers
A pricing condition can also be tied to performance tiers, in which case pricing of goods or services would be determined based on your organization’s performance against pre-defined business targets. As always, it would be up to you and your vendor to mutually agree on how to define the business targets, how to calculate performance against the targets, how pricing will be impacted by performance and how often the pricing condition will be updated.
What are the benefits of condition-based pricing software capabilities?
Upstream oil and gas operators often have complex pricing agreements with vendors, including condition-based pricing agreements. To successfully digitalize your condition-based pricing agreements and reap the full benefits of back-office workflow automation, it’s important to choose a system that is designed to enable the use of such flexible pricing agreements.
Leverage complex and flexible pricing models in the digital world so you can boos compliance rates, gain visibility into coverage, automate workflows and more.
Incorporate complex pricing agreements into compliance workflows without additional platform training on the supplier side.
Getting started with condition-based pricing
Watch the on-demand webinar “Mitigating Risk With Condition-Based Pricing” today to learn more about condition-based pricing for oil and gas operators. This session is packed with valuable content, including:
- An overview of condition-based pricing, which dives deeper into the topics explored in this blog post.
- A demonstration of how to get started with condition-based pricing in OpenContract PriceBook and its impact on digital invoicing and ticketing workflows from both the buyer and supplier perspectives.
- A preview of our product roadmap, including future possibilities for additional complex pricing models for oil and gas operators.
- Audience Q&A and discussion regarding the application and implications of condition-based pricing.