Downstream Industry Process Overview & SAP Solutions
By this time you must have already understood that The Oil and Gas industry is usually divided into three major sectors:
- Midstream &
In this blog I would concentrate on Downstream industry.
In case you want to know about Upstream, you can check my previous blog: http://scn.sap.com/community/oil-and-gas/blog/2015/04/27/upstream-industry-process-overview-sap-solutions
Let’s focus on what Downstream Industry does
- Crude Procurement
- Trading & Risk Management
- Marketing & Retail
Crude Procurement – Procuring by refining of crude oil, and the selling and distribution of natural gas and products derived from crude oil. Such products
include liquefied petroleum gas (LPG), gasoline or petrol, jet fuel, diesel oil, other fuel oils, asphalt and petroleum coke.
Includes oil refineries, petrochemical plants, petroleum product distribution, retail outlets andnatural gas distribution companies.
Trading & Risk Management – Trading enables this oil to flow worldwide from areas of supply to demand. While trading happens at a geographic level from one country to
another, international oil companies also trade to improve their performance across the whole value chain.
Different Markets for Petroleum Trading like Contract Market, Spot Market, OTC Paper Market, and Exchange Paper Market.
Refining – 3 step process followed in refinery are SeparationàConversionàTreatment. In a process of reining, crude is essentially broken down into components like
LPG’s, Light Distillates, Residual Fuel oil etc.
Distribution – A few step process followed in Distribution are Oil field – >Refinery – >Terminal – >End User.
Pipeline, Shipping & Rail Method are used up to the distribution to terminal and this is called primary distribution and remaining are called as secondary distribution.
Marketing & Retail – Marketing refers to distribution and sale of refined product beyond the refinery gate. Can be in form of bulk shipments from a refiner to wholesaler
and sale of branded lubricants in supermarkets.
Wholesale marketing refers to trade with large-scale customers and trade in global markets or on the various exchanges (NYMEX, IPE) (Business to Business – B2B).
Retail marketing represents the final part of the oil and gas chain. It encompasses thesale of petroleum products to the end-use markets (Business to Consumer – B2C).
Downstream Facts & Figures
Downstream Industry highlights are as follows:
- Western Africa, Russia and the Middle East are major exporters of crude to the refining regions in Europe and the USA.
- 3 Major product markets Singapore, US east coast and Rotterdam.
- World crude oil distillation capacity is currently around 84 million b/d
- Over the period 2001 – 2011, reported downstream M&A transaction value averaged about US$22 Billion per year, with almost half of that in the refining segment.
- The success of Downstream industry lies in Quality assurance, Access to funding, large number of well-located retail outlets, effective cost control measures,
timely access to adequate supplies.
Downstream Operations Value Chain
- The primary objective is to provide Downstream oil and gas companies with operating performance insights to maximize value from their portfolio of assets.
- This can be achieved through better integration of processes and data across the upstream value chain.
- With high performance technology as the foundation, companies can materially improve operational and strategic decision-making.
The important sap modules applicable for downstream except standard functional modules (FICO,SD,MM,Logistics, PS, PM etc.) are as follows:
- HPM – Liquid & Hydrocarbon Product Management
- TDP(Tariffs, Duties and Permits)
- EXG (Exchanges)
- TD (Transportation & Distribution)
- MAP-Marketing Accounting & Pricing
- MCOE – Marketing, Contracts & Orders Entry
- MRN – Marketing Retail Network
- BDRP – Bulk Distribution Requirements Planning
- TSW – Traders & Schedulers Workbench
Now let’s talk about Costs that are incurred in the Downstream Industry
Major Costs will occur in Downstream Industry:
- Cost of Crude
- Freight Cost
- Cost of refining
- Principle Costs may include Cost of Petroleum products sold and distribution expenses.
- Operating costs of the industry that may include selling & marketing, repairs & maintenance, staff cost & other administrative expenses.
- Severance costs & Legal Costs occasioned by mergers & acquisitions.
It’s also important for us to know about associated cost objects in the Downstream Industry
In a typical Downstream implementation projects, the Cost Objects are treated as follows:
- Cost Center = Refinery, Supply and Maintenance Department/Corporate Department.
- Joint Venture Master Data = Can be represented by a Joint venture refinery, Joint venture distribution terminal. Technically not a cost object but only can be associated to a real cost object.
- Network: Classification of Project Costs i.e. Particular area in the Oil field.
- Activity under Network : Further classification under Network
- Projects/WBS = Refinery, Terminal, Retail station. Used for maintenance activities.
- Work Order – Required for Maintenance/ Workover in a terminal or refinery.
- Profit Center – Commercial department/Retail department/ Refineries can also be a profit center (Can buy and sell) etc. Basically which makes a sale and generate revenue.
Downstream Implementation Prerequisite
- Is a single integrated platform for the end-to-end value chain.
- Supports standardization of processes.
- Is a single instance globally to allow for cross asset roll-up and reporting
- Is a support for all asset types from non-operated to complex regulatory environment.
- Replaces several Legacy Applications.
Each implementation project irrespective of industry has its own share of challenges & risks and Downstream Implementation also is not an exception.
Downstream Implementation Challenges
- Understanding the Oil and Gas Domain and mapping it to SAP.
- Change management.
- Complex integrated scenarios.
- High transaction load.
- Lack of skilled resources
Downstream Implementation Risks
Downstream Implementation risks are divided into two parts.
- Unavailability of skilled/experienced resources
- Time overrun due to complexity/data volume
- Data Correctness
SAP Solutions Perspective:
- System stability
- Big bang implementation
- Complex integrated scenarios
Thanks Subhasish. Good snapshot on downstream. Contrary to 10 years back, there are many IS-Oil consultants available now in downstream implementations. Change management is still a big challenge, especially those who are not accustomed for using ERP system.