It is not a secret that the oil and gas industry is a challenging environment. Its complexity and volume of financial transactions require a robust and flexible platform to perform financial reporting, consolidation, planning, and budgeting processes. In addition, the complexity of working in different areas of the world requires multiple legal reporting considerations such as US Generally Accepted Accounting Practices (GAAP), International Financial Reporting Standards (IFRS), local GAAPs, joint ventures (JV), mergers and acquisitions (M&A), royalty management, and private equity investments, among others. For all these reasons, the implementation of a global or corporate platform that can accommodate all the financial needs required to manage commodities makes this effort extremely challenging. I will discuss how the general requirements of an oil and gas company are delivered with the functionality available in SAP BusinessObjects Planning and Consolidation. Initially, I’ll define a general framework of SAP BusinessObjects Planning and Consolidation and why it is important. Then I’ll identify some standard reporting needs of the oil and gas industry for upstream operations, and finally I’ll explore the processes that SAP BusinessObjects Planning and Consolidation can support based on its current reporting and consolidation capabilities. Finally, it is important to mention that the successful implementation of a planning and consolidation application using SAP BusinessObjects Planning and Consolidation depends not only on technology but also on the business and engineering knowledge of the implementation team. Thus, the implementation team must be able to design, for example, a consolidation environment common to all regions of the world, tax jurisdictions, GAAP, consolidation structure, currencies, and others, without losing the ability of easy reporting and comparison between regions, business units, and companies based on legal and regulatory requirements.

Standard Consolidation and Planning Requirements of the Oil and Gas Industry

The upstream operations of an oil and gas company are affected by multiple regulatory, political, and economical elements. The smallest mistake in the upstream operations can cause a severe impact on a company’s image and a direct effect on the regulatory reports that monitor a particular asset or project. Even though each company is different, managing upstream operations in the oil and gas industry involves generic components including gross lifting and processing costs, gross onshore processing and onsite storage, gross field operating costs, and gross above field operating costs. The sum of the previous costing groups provides the total operational costs that have to be planned, reviewed, updated, and constantly reported (in addition to key performance indicators [KPIs] depending on the financial and operational needs). The details of the type of accounts or cost collectors that are classified in this cost groups are shown in Figure 1.   In addition, to calculate the total operating costs for a particular asset or production facility, you need to identify the following generic components to define the overall framework of the planning components:

• Well, surface, and subsurface capacity (capacity planning)
• Production costs (production planning)
• Lifting and processing costs (production planning)
• Onshore processing and storage (production planning)
• Reservoir management (production planning)
• Capital expenditures and asset management (capital planning)
• Lease operating statements (regulatory compliance and capital planning)
• Operational costs and expenditures (production planning)

In summary, you can define a general standard framework of requirements for the upstream operations of an oil and gas company, including its inputs and outputs (Figure 2).   The final outputs shown in Figure 2 summarize the key operational reports that a planning and consolidation system must generate, in addition to the traditional balance sheet, cash flow, profit and loss, and shareholders' equity if the operation is viewed as a division or business unit. Some of these reports are asset specific and key to determine if new resources would be allocated depending on the life cycle of the asset. This information allows a company to be able to react to natural disasters, emergencies, or changes in demand, budget, and resource allocation and to evaluate their impact on the asset’s operational cost and profitability.

How SAP BusinessObjects Planning and Consolidation Supports the Oil and Gas Industry

Companies can evaluate their financial processes and focus on simpler ways of performing planning and consolidation with SAP BusinessObjects Planning and Consolidation. However, in large corporations, it is difficult to determine when planning begins and when consolidation ends. For this reason, having a single integrated platform such as SAP BusinessObjects Planning and Consolidation simplifies the overall development process. Specifically for oil and gas, the challenge resides not only on the data volumes and the complexity of their planning and consolidation processes, but also on the level of integration due to M&As, JV activities, hedging, surface and subsurface capacity, exploration, reservoir management, and more. SAP BusinessObjects Planning and Consolidation simplifies these processes by allowing a company to easily include new legal entities to the overall structure and accept this new data quickly without the risk of significantly affecting the overall architecture and the quality of the historical data. For oil and gas companies, the most important step before initiating the build of an SAP BusinessObjects Planning and Consolidation application is to have a conceptual approach identified in a general architecture, business process, or design. Figure 3 provides a general framework to understand how SAP BusinessObjects Planning and Consolidation can support and deliver the requirements identified from inputs, process, and outputs. The general key input components associated with the activities of an upstream operation are presented on the left side of Figure 3. Depending on its size and complexity, most of the reports (outputs) shown at the bottom of Figure 3 can be delivered and reused across legal entities.   The difference between the inputs and outputs shown in Figure 3 identifies the key components that SAP BusinessObjects Planning and Consolidation requires for the system to be able to deliver the different financial reports. Notice in Figure 3 that the reports are stored inside the application and these reports interact with the master data stored in the different dimension members created in SAP BusinessObjects Planning and Consolidation. For implementation purposes, it is possible to classify any implementation on the consolidation area as legal and managerial reporting. Legal reporting identifies the components or data associated with the financial statement reporting of a corporation or asset such as balance sheet, cash flows, income statements (profit and loss), and shareholders’ equity. The managerial reporting component is associated with the data and reports associated with performance of profit centers, cost centers, business areas, business segments, and other classifications not associated with legal reporting. From the planning perspective, it is possible to perform any kind of planning required in SAP BusinessObjects Planning and Consolidation. You can perform standard processes such as allocation, distributions, and manual assignments. You can use some of these functionalities in both legal and managerial reporting applications depending on the configuration. The components and functionalities can be reusable but the differences are their architecture and final reporting goals.   As shown in Figure 4, legal reporting can be classified in five different processes depending on the kind of data that is reported: balance sheet, profit and loss, cash flow, changes in shareholders’ equity, and adjustments. These processes display an example that describes the logic of the upload processes into the SAP BusinessObjects Planning and Consolidation environment using the data manager functionality, but it is generally recommended that you isolate the main legal reporting needs in these processes based on the report that they will satisfy, plus any adjustments that will occur in SAP BusinessObjects Planning and Consolidation. In the case of Figure 4, I am assuming that the system not only must be able to handle information extracted from the different data sources using period and calendar extractors, but that it is also organized in a DataStore object (DSO) and InfoCube architecture in which SAP BusinessObjects Planning and Consolidation reads the SAP NetWeaver BW object so it can perform each process. The same architecture is valid for managerial reporting because the difference resides in the required fields, processes, and the types of reports available to the users. For example, in the managerial reporting application, users would be more concerned about profit centers, cost centers, and other components not related to the balance sheet, income statement, cash flow, and shareholder’s equity. How you visualize your oil fields, mines, and gas exploration sites as profit centers, business units, and companies directly affects your SAP BusinessObjects Planning and Consolidation database design. The main reason is that your legal entity dimension requires reflecting this organization to the lowest levels of reporting and thus must be part of the hierarchy. For example, if you consider an oil field to be a profit center but you create a separate hierarchy as part of your entity dimension, then you can use the same dimension in both the legal and managerial applications. However, if you consider your profit centers to be completely independent from your entity dimension and you create a separate dimension to store this information, then it is possible to include this specific dimension as part of your management reporting application without considering the entity dimension.

SAP BusinessObjects Planning and Consolidation Reporting

The use of hierarchies and multiple reusable dimensions is one of the strongest examples of flexibility and master data management from SAP BusinessObjects Planning and Consolidation in general. The possibility to consolidate and group data extracted from different sources into a common upload format allows any company to comply with multiple legal requirements such as IFRS, US GAAP, and local GAAPs. Even though there are multiple pre-delivered reports and objects as part of standard SAP BusinessObjects Planning and Consolidation, it is difficult to say that it will comply with the requirements of a particular industry out of the box and be ready to send your financial statements the next day to your internal and external auditors. As shown in Figure 4, you can match your legal reporting requirements with the group of processes you will focus on in your implementation. For example, you can create lease operating statements as part of your SAP BusinessObjects Planning and Consolidation environment reusing the different dimensions, reporting based on geographical locations, different organizational structures, and other aggregation criteria. In addition, you can report data using fiscal year period or fiscal year calendar depending on the financial statements based on legal, internal, and shareholders’ interests. This might require a more detailed design of your SAP BusinessObjects Planning and Consolidation application, such as the one shown in Figure 4. Also important for the oil and gas industry are capital projects and expenditures, and monitoring different assets based on actual, budget, and forecast data. SAP BusinessObjects Planning and Consolidation can handle each asset by asset number, project number, and asset group. It is possible to perform year-to-year data comparisons, current year and prior year analysis, rankings, and many other kinds of on-the-fly reports depending on the classification of your asset classes and groups, including customized depreciation procedures and simulation scenarios to determine the best method to use for a particular project. In addition, SAP BusinessObjects Planning and Consolidation can handle multicurrency reporting and current translation exposure of operations by using the interaction with the rate application, which stores the exchange rates applicable to your legal application. In this way, the exchange rates can either be uploaded or manually maintained for each time period in your SAP BusinessObjects Planning and Consolidation application rate. Then you can execute the foreign currency conversion as part of the standard configuration of SAP BusinessObjects Planning and Consolidation and pre-delivered content, and have your legal entities available in local currency and reporting currency. However, with the oil and gas industry, currency exposure and translation risk is part of doing business in different geographical locations. To consider the effect of foreign currency, currency translation adjustment is an important component that must be part of your SAP BusinessObjects Planning and Consolidation implementation. Figure 5 provides a general overview of how SAP BusinessObjects Planning and Consolidation handles or manages foreign currency and the roles of the currency translation adjustment calculation as part of financial reporting. Figure 5 shows four categories that reflect standard auditing considerations of a planning and consolidation system to provide visibility legal reporting and internal and external auditing: consolidation processes, intercompany elimination, US GAAP adjustments, and currency conversion processes.   As shown in Figure 5, the currency conversion engine, which is the dotted square, is the equivalent of the rate application where the currency exchange rates are maintained and uploaded. Based on this information, the data is translated into the required currencies and is available in local currency and reporting currency. However, the currency translation adjustments is a component that is particular to each region of the world in how it is handled, and might require additional business rules to be configured to comply with this legal requirement. Ultimately, the goal for legal reporting is to be able to generate the same report for a particular legal entity in any currency that companies do business. However, the rate application is an optional component if the data is already handled by SAP ERP Central Component (SAP ECC) and other non-SAP systems, and translated following the required legal guidelines from the region of the world where the currency is translated and the report generated.