Implementing Production Sharing Contracts

A widely used contract across the Oil  &  Gas world is the Production Sharing Contract (PSC).  Alongside the Joint Operating Agreement (JOA) which details contract information and equity sharing between the operator and its partners, the PSC dictates guidelines for Oil&Gas entitlement between the national government (commonly operating through a national oil company) and the contractors – the operator and its partners as a single unit.

Throughout the last decade, Oil & Gas exploration has boomed worldwide given reported Oil & Gas shortages which lead to a spike in their price.  This was mainly due to increasing demand from Asia as well as a significant reduction in growth of worldwide reserves.  Given the mature state of Oil & Gas assets in the developed world, Oil & Gas companies have had to look elsewhere for value on investment – namely the developing and third world.  In these regions, many have incentivised the big 6 to explore for Oil & Gas assets while maintaining a PSC to ensure national entitlement of the assets.

At high level, the contract allows foreign companies to explore at own cost.  In case where assets are discovered and are developed for production, the PSC dictates how the investment can be recovered (commonly by applying an entitlement cost cap on ‘recoverable costs’), but also how the profit oil is shared between the contractor and the government.

Given that all costs are held within the Joint Venture Accounting (JVA) module in SAP, it made sense to develop a PSC module which would be coupled with JVA for the extraction of recoverable costs.  In order to automatically produce entitlement statements (both contractor/government and operator/partners), production, pricing and sales data would also be required.  Given lack of worldwide use of SAP to manage revenue and hydrocarbon accounting for Upstream companies, this data would have to be entered directly into PSC (or interfaced from elsewhere).

SAP embarked on a mission to automate PSCs by first developing an initial solution with Agip (ENI) for Egypt in 1999.  The solution was mainly tailored to their requirements and it was soon discovered that a phase II development would be required if the module were to break through globally.  The opportunity for this came in 2001 with Shell where global requirements were gathered and a more complete solution developed by SAP to meet those requirements.  Critical Consulting was involved in the functional specification and testing of the PSC module for both the Agip release as well as the larger upgrade for Shell.

Though the module has become more mature since Phase II, it has struggled to breakthrough in a big way globally.  The main issue for this is the general lack of knowledge of how the module works, but more importantly, that its functionality remains limited with respect to the large variations that appear to exist in the PSC.  Where a JOA is rather consistent worldwide, PSC specifics vary tremendously between countries and companies within the same country.  Some companies have opted for custom solutions rather than implement standard SAP PSC or working with SAP on further enhancements.  This ofcourse is not optimal for those looking to automate their PSC nor is it beneficial for the expansion of the use of the module worldwide.

Given our expertise in PSC business requirements and the capability of the module, Critical Consulting would be able to quickly analyse your requirements and perform a gap analysis to the standard PSC module.  In some cases, full functionality may already exist; but where further enhancements are required, we have in-house expertise for developing functional specifications for any outstanding gaps identified.  Ultimately, integrating financials and JVA with PSC improves data integrity and ensures further automation allowing accelerated periodic close while enabling more time for verification of data.