Production Sharing Accounting System 

Purpose

Business Background

Because oil supplies in accessible areas have been fully exploited, oil companies have been compelled to seek petroleum reserves in remote regions of the world to satisfy the demand for energy.  This effort has led the companies to form alliances with the governments of developing countries by negotiating contracts, known as production sharing agreements, with them.

In many developing countries, the government manages the major natural resources.  To facilitate development of these resources, the government may grant a concession to a major oil company which possesses the capital and technical expertise necessary to tap the country’s petroleum reserves. 

The fiscal relationship between the government and the contracting company is specified in a production sharing agreement or contract.  The agreement specifies the rights and obligations of the parties, and it provides the formulas to be used to compute the various amounts involved.

In return for the right to pursue a petroleum production project in a country, a contracting company typically agrees to pay the government a royalty on production.  This royalty payment is computed on gross production volume or revenue before any costs are deducted.

In return, the contracting company is entitled to recover the costs it incurs on the venture.  The amounts the company can recover during any accounting period for various types of costs are stated as a percentage of either total production or production after deduction of the government’s royalty.

When the government’s royalty and the costs recovered by the contractor have been deducted from production volumes or revenue, the resulting net profit is then distributed to the parties on a percentage basis.

Overview

The SAP Production Sharing Accounting system (PSA) supports the reporting requirements for government royalty and contracting company cost recovery of petroleum exploration and production projects that oil companies undertake in developing countries.

PSA classifies and tracks costs for petroleum production projects in which government entities have a royalty stake, contracting companies recover costs, and net production volumes or profits are distributed to either or both parties.

PSA apportions user-entered production volume and revenue to cover various types of cost for production sharing agreements. Production volumes can be entered directly in PSA, and PSA calculates revenue by multiplying user-entered price per unit by these volumes for the various petroleum products of a production sharing agreement.

PSA is fully integrated with SAP’s suite of Oil and Gas systems.  Costs captured in the IS Oil Upstream Joint Venture Accounting (JVA) system are rolled up to the PSA ledger, where they are classified and tracked with reference to recovery. 

PSA also incorporates a comprehensive and configurable set of calculation rules used in computing the various amounts related to the agreement between the government and the contracting company.  During PSA calculation processing, all costs, including government royalty, are re-stated as amounts of production volume and revenue. 

The result of PSA’s allotment of a production sharing agreement’s volumes and revenues to its various costs is a comprehensive summary report of the financial transactions that are relevant to the contract between the government and the company for the accounting period.

Implementation Considerations

Terminology

For the purposes of documenting SAP’s Production Sharing Accounting system, the term PSA is used to refer to the system itself.  The term PSC is used to refer to the master data object for the production sharing contract.

Integration

PSA is integrated with SAP’s IS Oil suite of products.  Cost data posted into the ledger in IS Oil Upstream Joint Venture Accounting (JVA) is rolled up for processing in PSA.

Features

Components of PSA

PSA includes the following components:

·         Master data maintenance and assignment

·         Calculation specification and assignment

·         Processing

·         Planning

·         Production Interface

·         Reporting

PSA Master Data

PSA master data maintenance and assignment consists of functionality that supports the following tasks:

·         Creating and linking PSA master data

·         Mapping PSA master data to source system master data

Creating and Linking PSA Master Data

The principal objects of PSA master data are the production sharing contract (PSC), and the product, which is an object that represents a hydrocarbon substance, such as oil or gas.  The PSC and product are linked through master data maintenance, and all cost, volume, and revenue data stored in PSA are assigned to a combination of a PSC and a product.

Mapping PSA Master Data to Source System Master Data

Costs are rolled up from the source ledger, IS Oil Upstream JVA, and stored in the PSA ledger. Costs are stored in the source system ledger according to its key master data (that is, joint venture and equity group), but rolled up cost data is stored in PSA by PSC and product, as well as venture and equity group, and so source system master data must be mapped to PSA master data to facilitate cost rollup.  PSA functionality supports this mapping.

Calculation Specification

The principal process of PSA is executing the calculations required to provide reporting on government royalty and company cost recovery for production sharing contracts.  Calculation formulas are delivered with PSA for all standard calculation categories required for production sharing contracts.

These delivered calculation categories can be customized to meet specific business, accounting, or regulatory requirements.  

The formula for the standard calculation categories are predefined in the system, while the ranges of percentages to be applied against production volume or revenue can be specified in stepped rates that are triggered by volumes or in specific cases by values or indexes.

The customized calculations are also assigned to combinations of PSCs and products.

PSA Processing

There are three principal processes involved in PSA:

·         Rolling up of cost data to the PSA ledger from the source ledger

·         Entering production volumes and prices per unit for PSA products

·         Executing calculation processing

The final result of PSA processing is a report for each production sharing agreement that states the results of calculations.  This report can be used to satisfy the reporting requirements specified in the contract between the government and the contracting company.

Enhanced Functionality

In addition to the basic functionality required to support the minimum reporting requirements of production sharing agreements, PSA offers some enhanced features that streamline and further automate the reporting process.

·         Planning functions that support the creation and maintenance of multiple versions of a cost plan.  A plan can also be copied.

·         Multiple products are possible for each PSC.

·         Multiple source ledger master data objects can be mapped to a single PSC and product combination with cost rollup following this mapping.

·         Aggregate calculation results can be produced for all products in a production sharing contract.

·         Multiple calculation and reporting frequencies are supported, including reporting monthly, quarterly, semi-annually, annually, daily/monthly, daily quarterly, as well as by cumulative volume, cumulative value, and revenue cost index.

·         Expenses that exceed the amount of recovery allowed for a period can be automatically  carried forward to the next period in the same PSC or carried over to another PSC in the same period.

·         Production that exceeds actual costs for the period but falls short of the maximum amount of recovery allowed for the period can be apportioned various ways depending on user customizing.

·         Additional line items other than rolled up costs can be accommodated in PSA.

·         Manual transfers of credits between production sharing agreements can be posted directly in PSA.

·         Manual transfers of entitlement either (1) between partners or (2) between either a partner or a contractor, and a government are supported.

·         A variety of reports, including reports that provide data about entitlement, adjustments, lifting data, partners, and prices are available.

Constraints

PSA executes calculations for reporting purposes.  The PSA tables are updated with the results of processing, but no data is passed to other SAP systems from PSA.