For this CFO, energy is King: deeply involved in the oil and gas market, this year's recipient of FEI Canada's CFO of the Year Award, Marvin Romanow, discusses his business challenges and his perspectives on the CFO role.

With Canada's economic success intricately tied to the global resource industry, the growth in demand for energy around the globe is making the Canadian province of Alberta one of the strongest economies in the world. While market forces are favoring companies in this sector, becoming an international leader in oil and gas presents many strategic challenges.

As Executive Vice President and CFO of Nexen Inc.--a global producer in the oil and gas market--FEI Canada's CFO of the Year 2007, Marvin Romanow, is deeply involved in this market segment. Romanow was presented with his award at a gala in Toronto in April at the FEI Canada event co-sponsored by PricewaterhouseCoopers and Caldwell Partners. This is the fifth year the award has been presented.

In the following, Romanow talks about some of the critical management issues facing the industry, and how CFOs can best lead their organizations as an integral part of the strategic management team.

What are the major risks and opportunities facing the energy sector in Canada and around the world?

MR: One of the main challenges facing the industry falls into the category of cost. The biggest cost pressures we're seeing today are coming from the deep-water rigs--to drill wells at water depths of over 1,000 or 2,000 feet. Also, another input in commodity prices has gone up. From 2002 to 2006, the price of steel went up three-and-a-half times. Steel is used extensively in building the kind of infrastructure we need to produce oil and gas; even aluminum has more than doubled.

We're also seeing pressure across the whole labor spectrum. And, many governments around the world are reviewing taxes and royalties as a result of these higher prices, [and] access is becoming a lot more difficult.

On the opportunity side, for those companies that positioned themselves early and well--[read] good resources with good contractual terms--as long as you can manage the cost side, you'll make very good returns for your shareholders.

For a company like Nexen Inc., those resources would be in the oil sands. We've also got a couple of great discoveries--one in the Gulf of Mexico and one off the west coast of Africa--that will be developed. We have a brand new field coming onstream in the North Sea; that's a base without structural decline for quite a few years. Having a new discovery coming onstream with very strong oil prices will lead to strong returns from that area for quite a number of years.

There is some concern about foreign firms taking over Canadian natural resource interests. What are your views on Canadian foreign ownership policy in the natural resource and energy sectors?

MR: The best way to answer that question is to take a look at history. The original Alberta oil industry was largely developed by foreign companies coming in and developing; there were few Canadian oil companies to speak of. We found oil in Alberta in the late [19]40s. In time, an indigenous industry developed, and, as the base got mature, many of those foreign firms exited.

The next wave, which we're in today, is the era of oil sands investment where there is not only domestic interest in that business but more and more foreign interest. As long as we create an attractive playing field in Canada itself, and as long as we are subject to government policies consistent with other international companies, there's nothing that's going to prevent Canadian companies from competing very successfully domestically and internationally.

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Nexen has energy operations around the world--in Colombia, the Gulf of Mexico, North Sea and West Africa, for example. How do you evaluate and mitigate risk across these diverse regions?

MR: The first thing we do is carve off the risks to make sure we know what we're talking about. A lot of these risks--for example, oil price risk, interest rate risk, commodity price risk--are things we can manage and deal with centrally.

Once you get into diverse regions, there are a lot of things that you manage while you are on the ground. These include strong community development and relationships with the important constituents in the community. Often, that's the government. In many cases, it goes beyond governments and includes local groups of people; in some cases, even having relationships with tribes in local areas. Having those risks evaluated and managed on the ground is of critical importance.

Does risk assessment take on a different perspective by the nature of the global energy sector? What might be keeping you up at night that might not be worrying, say, a manufacturing or financial services CFO?

MR: Getting your cash out of a country would be different if you sell locally versus if you have a widely marketed international commodity, such as crude. On risk assessment, the most volatile commodity in the world is natural gas, and oil is fairly volatile as well.

We've seen oil prices double in the last few years, but there are periods when they have dropped by two-thirds. So, that has to be a unique element to commodity-based businesses. You don't see the price of automobiles double or drop by two-thirds year-over-year. You have to deal with that risk because it's a very important one to manage.

The rise of China as an economic superpower has increasingly focused attention on its growth potential. How closely linked is the Canadian energy sector to continued growth in China?

MR: The first link we have is that China has been a big, growing consumer of oil and has contributed to strong commodity prices. That demand from the Chinese economy has been a strong support to oil prices, so that's clearly helped Canadian producers.

For a company like ours--we produce oil in the Middle East, mainly Yemen--China is our biggest single customer; we have an important customer-supplier relationship with them. In the oil business, the big deal with China is that they are an important component of the world economy and as long as they continue to grow, we're all going to get wealthier. Not just in our business, but in virtually every other business.

Would you comment on your risk exposure in the Middle East now?

MR: We've been in business in Yemen for 15 years. We went through a civil war there in the mid-1990s without losing a day of production. It's an area that's seen its share of opportunities and challenges, security issues, etc. However, I would say physical security is an issue in every local jurisdiction in the world. Unfortunately, 9/11 proved that there are very few places that are exempt from having to be concerned about physical security.

[Also] virtually all economies want something more from the development of the oil business than just the money. For example, in Yemen, 80 percent of our employees are national and local employees, and many have been our employees for 15 years. They represent, in many ways, some of the best security that we have. Building strong relationships with the local community, creating jobs and having those folks there, is one of the best embedded elements of fitting in and fitting in well.

I think Canadian companies like Nexen have done an exceptional job in that area. For example, we started a scholarship fund where each year we bring in 10 students from Yemen and finance a full Canadian university degree. We're approaching 100 students who have been put through and gone back to their countries. When you do things like that, people know you're more committed to their country than just treating them like a resource to be exploited.

The evolving international regulatory environment poses significant issues for global companies. What might are the key costs and benefits for Canadian companies (and others) in adopting International Financial Reporting Standards?

MR: It serves nobody's benefit to have many standards, and many of the standards are not superior to one another. They just have become familiar to the people who regulate them and report against them, and [to] the investors who use them and understand what they mean.

The problem is that any time you've gotten used to using something for a long period of time, you believe that the system you have is the best. I don't see any structural problems that would disadvantage us in having to live under an international set of accounting standards.

In fact, I think it would be really beneficial because today 10 percent of our shareholders are in Europe, 40 percent are in the States and the rest in Canada. It would be great if they all didn't have to learn multiple rule systems to figure out what we're trying to tell them. One of the big challenges that I see in going to a single system is getting everyone on the same knowledge base. You need a transition period to do that.

You've been chosen Canada's CFO of the Year, not only for your strengths in strategic financial management, but for your unique style, business acumen and ability to lead. What major challenges are facing today's senior finance officers versus 10 years ago?

MR: Pressures on the CFO in the short term have come from new rules. There are so many new rules from so many places, and many of them don't harmonize well. We've seen our disclosure explode from 25 pages 10 years ago to almost 200 pages today. I would argue that some of that is directed towards explaining our business and having people understand it better. But a lot of it is directed towards meeting regulatory requirements.

So, I question the value of some of those things that we do. Also, you're asked to respond to a broader degree of opportunities and challenges; there is a broader range of financial products to think about.

What advice can you offer to finance professionals who are seeking to take the CFO career path?

MR: I would encourage people who want to become leaders in an organization--whether they are CFOs or other leadership roles--to get some diversity into their background so that they can be masters of more than one thing. When you get into to these roles, you have to think about external risks and opportunities. These don't always materialize if you come up through just one particular function in the company. I would argue that whether that's being a geophysicist or a drilling engineer, having breadth is what allows you to be a good leader.

Also, leaders are highly dependent on the success of their employees, so this award and the recognition it brings is all about the people that I work with, and not about me. One person doesn't do it all; it's the people around them.

RAMONA DZINKOWSKI ([e-mail]) is a Canadian economist and a frequent contributor to Financial Executive on Canadian financial issues.