Oil and Gas Industry – SAP Profitability and Performance Management
Having worked on multiple PaPM assignments across the industries, would like to share my PaPM experience with all the PaPM Community members by writing series of blogs.
I will share high level Industry overview, requirement, challenges, SAP PaPM functionalities that we have used to meet the requirements in the specific industry/customer.
I am starting with Oil and Gas Industry and experience with the customer PaPM implementations.
First, Let us understand the Oil & Gas industry with quick overview
As we are aware Oil and Gas Industry has highly complex processes involved in identifying the Oil and Gas reserves, producing, refining and distributing. Oil and gas industry is broken down into three segments: upstream, midstream, and downstream. Upstream segment is characterized by high risks, high investment capital, long duration to locate and drill the Oil and gas and technologically intensive. This segment focus on Exploring and Production (identifying the Oil and Gas reserves, drill the crude and gas). The Midstream focus on Transportation from wells to refineries. The Downstream segment focus on refining and sales and distribution. Companies in the Oil and Gas industry may focus any of the above segments, or even specific areas in the segments like Drilling, Well maintenance etc., very few Oil and Gas companies are covering their operations in Upstream, Mid-Stream and Downstream.
The Oil and Gas companies may use variety of intensive technologies and methods in every process in the value chain to reduce the cost and their impact on environment. For example, Drilling can use several advanced technologies and methods like Vertical Drilling, Horizontal Drilling, Multilateral Drilling and Complex path drilling etc., and there are number of activities performed in every process, for example geological surveys and obtaining land rights, building and maintaining wells, onshore and offshore drilling in exploration and Production. In Refinery, the key activities include crude oil loading and unloading, mixing of crude oil, production unit operations of conversion and separation, operations of blending, and distribution of products etc.
By this time, you must have understood that Oil and Gas companies need an intensive capital and high operational cost to run the business. Management top priority is to reduce costs, optimize the performance of its industrial base assets and improve its environmental footprint. Most importantly they require visibility to cost incurred at every level to monitor and optimize the costs, to understand the cost drivers, resource consumption, cost incurred in performing each and every activity that are required to support operations of various processes like exploration, Production, Distribution, Refining, Sales and Marketing.
For cost reduction and optimization, understanding the cost at various levels and views is very important, for example
- What is the total cost incurred in Production of Crude & Gas?
- What is the per unit cost to produce various grades of crude and gas products?
- Who are the drivers or contributors to the cost?
- Maintenance and Repair Cost incurred at the Oil & Gas Fields, Wells?
- What is my distribution cost of various products?
- Comparison of the cost to produce same products between Fields & Wells?
- Comparison of Plan vs actual?
- What will be the financial impact due to internal decisions, organization restructuring, policy changes and market changes etc.?
- What is the impact on the environment pollution for producing one unit?
However, customers are facing many challenges to get the visibility to True Cost
- Required data is sitting in multiple systems and files
- Lot of manual work, managing the versions, accuracy
- Performing complex Allocations, calculations
- Understanding the cost at more granular level
SAP PaPM is perfect solution for answering the above all questions and provide greater visibility to the cost at any granular level.
How SAP PaPM helped us to implement the solution very rapidly and meet the customer requirements????
Integration Capabilities: SAP PaPM can easily integrate with various Databases, SAP and Non-SAP applications using standard adapters, Webservices, also File uploads. Best part is PaPM can consume the data from data sources in its calculations and allocations with or without replicating the data. This helped us to integrate to their finance and planning systems effortlessly using standard PaPM functions with zero customization to read costs, volumes, driver data and master data. Also provided flexibility to upload certain non-disclosure data directly by users and restricted the access only for authorized users. In addition to this, configured the input templates to allow authorized users to modify/adjust the driver data if necessary.
Rich Data enrichment and Validation functions: PaPM comes with rich functionalities that are often used to prepare the data in the required format and granularity to perform the calculations. Also support the Pre-validations before consume the data in costing process and generate exception reports and trigger notifications if any discrepancies in the source data. Again, this helped us to configure pre-checks to validate cost and driver data and prepare the source data in required format and granularity to perform allocations and calculations.
Powerful Calculation Engine: SAP PaPM is capable of performing high complex calculations and supports all kinds of allocations like direct allocation method, step-ladder allocation, activity-based costing and repeat distribution methods. We have configured the models to automate resource and activity assignment and activity reassignments to allocate the line-item expenditure to activities, fields, wells, crude and gas products and processes to calculate the cost incurred for each product. With the successful implementation, Business has complete visibility to resource cost, activity cost, Process Cost and department cost and contribution of each of them in producing one unit of the product along with value flow. For example, you can see how Research and Development incurred the cost to automate systems to perform various activities to support upstream and downstream products
Also, they can analyze the summarized cost at any level with roll-up capabilities while using Line item, Product, Cost center hierarchies. Business is able to trace the original costs, how it got allocated in various level, what allocation bases used for each allocation.
Adjustments & Write-backs to Finance & Planning Systems: Configured workflow to allow Authorized users to perform certain manual adjustments before writing the calculated data to Finance and Planning systems. This process is completely done using SAP PaPM standard functions, no customization is involved.
Conclusion: SAP PaPM helped seamless integrations with customer data sources. Automated all data reads, allocations, calculations, reports, write-back to Finance & Planning Systems. Better control with workflows, user roles. Customer has high visibility to cost at more granular level, also at aggregated level 😊.
Thank you for reading this blog, Please share your feedback and thoughts, questions in comments.
To know more about SAP PaPM topics, I encourage you to check SAP PaPM Community Page https://community.sap.com/topics/profitability-and-performance-management
Happy reading, See you soon with my experience with another industry 😊
Hello Chaitanya Sagar,
Thank you for the valuable information, it is very useful to understand about O&G industry and how PaPM can use in it.
Really appreciate and thank you for your knowledge sharing on oil& gas industry.