Importance of AFE in Oil & Gas Industry
If you have a chance to navigate vocabulary for Oil & Gas then you will definitely notice the term AFE. There is no doubt people working in Oil & Gas Industry are very much aware about the term AFE however for others it could be new.
The term AFE stands for Authorisation for Expenditure.This particular term is used in order to drilling and completion costs.
As you might have already noticed in my earlier Upstream component overview (In case you still want to refer, check: http://scn.sap.com/community/oil-and-gas/blog/2015/04/27/upstream-industry-process-overview-sap-solutions), it was quite evident that expenditures in Upstream Oil & Gas Indusry are huge and quite capital inventive and every time, whenever such expenditure is proposed and need to be incurred by the operator, it is required to be documented in detail and that proposal definately requires approval by the associated partners in the joint venture before the starting of the project. Business can incur this expenditure only when the proposal is approved and mandate is provided.
So in short, AFE is used for approval of large Capital expedenture related to exploration, development and production. Sometime even for approval of Operating Expenditure related to exploration, development and production as well AFE is used.
Off course we are talking about SAP design so the question comes How the AFE is represented in SAP
An AFE is genrally represented through a Project captured at WBS Level.
When an expense can be booked against the AFE
Once the AFE proposal is approved by all respective partners in the JV, the WBS representing AFE can be released in the system and required expenses can be booked against it.
Now probably its time to speak for which are the AFE Processes followed in SAP
Two types of AFE are generally followed in the Industry:
- Operated AFE
- Non – Operated AFE
Lets know about the AFE Processes followed by various upstream majors:
- Standard SAP Workflow
- Custom Workflow
Standard SAP Workflow : We have noticed some companies using the Standard SAP Workflow with Appropriation Requests and approval from partners is obtained via email or hard copy.
Custom Workflow: Whereas it is seen that some companies is using the custom worlow with PRF (Program/Project Request Form) and in this case the approvals from partners are taken through the AFE Link or even via e-mails.
It could be an important question that which Workflow design to refer to address What Requirement:
Though there is no definite rulebook documented the appropriateness of the design to be followed however based on our experience we have noticed that if the business requirement is quite simple in reference to the information to be captured on AFE and also related internal approvals, the standard workflow solution can be followed.
However if the business requirement is to capture a large number of oil fields or information through AFE or if there is an additional requirement to extract the data from SAP to other 3rd party tool, then PRF with customised workflow would suit better.
I thought that Operated and Not-Operated is rather a characteristic of the Joint Venture itself. If I have an Operated JV where my company is an Operator, naturally all AFEs run by that JV are Operated AFE. Same goes for Non-Operated AFE, because the JV is Not-Operated.
My point is that this Operated vs. Non-Operated is rather derived from the JV and not something AFE specific.
Yes that is right. However venture need to be tied to a cost object and in this case we are talking about AFE i.e. WBS from Operated and Non Operated POV which ultimately decides based on venture.
Once Joint Venture Accounting is activated for the Company code it is a system requirement to link all cost objects to JV master data such as JV, RI, Equity group, etc. There is no other way around it... 🙂 But thank you for the good post anyway, I think it could have been more interesting to get down into more detail around IM/PS integration from the AFE process perspective.
Very Nice Basic Explanation of AFE's in JVA.
Keep posting useful documents like that. Much appreciated
Regards,
Amar Lal
Hi Subhashish. Nice article. Dear Paulo, I have had some exposure to SAP IM/PS from my work as an engineer-SAP user in a running petrochemical process plant, some 10+ years ago. Exploration ventures, although much riskier, and more complex but similarly expensive as mega projects investments on grassroot petrochemical plants and refineries. Joint Operated Ventures (JOV) are formed for not only sharing the technological depth of knowledge but also to spread risks and to balance portfolios among the investing participants. The dominant E&P Company within the JOV is referred to as Operator, while the junior partners are referred to as non-operators (NO). NOs have little contractual influence on managing the risks arising in the venture, even though they are directly impacted by the risks/ outcomes of the venture. In SAP IM/PS, a total budget of “X” in higher level AFE WBS could have its breakdown into OJV-AFE and NOJV AFEs for these business scenarios. AFE is a stage gate that occurs not only in Up- and Down-stream O&G sectors, but also in other areas as well. For non-exploratory projects, the investments are approved by the stakeholders, generally in phases, as Soft/Partial FID and Full FID, and thus money is brought down from IM to PS, where commitment is made for future expenditures. Why approvals are in stages or phases? Engineering, financial & legal due diligence for each gate/ phase have to be carried out, based on increasing level of maturity of design, risks and opportunities, so as to provide more confidence and transparency to the venture capitalists or the stakeholders before they can happily approve another few billion dollars more for us mortal bean counters to have another few months of pay-checks.
Excellent article. Where might I find more collateral on AFE (i.e., one-pagers, Internal use-cases, etc)?
Thank you in advance!