In order to explore and develop their oil and gas reserves, governments (or national oil company – NOC) enter into production-sharing contracts (PSC) with international oil and gas companies.
These production contracts allow to formalize the fiscal relationship between the contractor and the government and require the contractor to maintain relevant accounting information, provide regular OPEX & CAPEX reports to the government, pay royalties and distribute the production between costs and revenues.
The SAP PSA module support these requirements by facilitating the accounting and reporting requirements (under the terms and conditions of production contracts).
It is also good to know that SAP PSA is often used in conjunction with SAP Joint Venture Accounting (SAP JVA). The cost data maintained in SAP JVA accounting ledgers is then used as the source cost data in SAP PSA.
Now let's talk about how the Production is generally shared. It is generally split into Cost Oil, Profit Oil and Royalties asshown below :
Royalties
The Royalties are based on the volume extracted and do not take into account the profitability of the project. They can be paid in cash or in kind.
Cost Oil
The Cost Oil is the amount kept by the contractor to recover its investments (i.e. the costs occuring during exploration, development and production phases) but is contractually limited to a certain amount (a %age of the production), named as the Cost Stop. If the amount of costs is not recovered during the period, it is carried forward to the next period. On the contrary, if the costs are below the Cost Stop, the difference is added to the Profit Oil shared between the contractor and the government.
Profit Oil
The Profit Oil is the part of Production which remains after the royalty has been paid (to the government) and the cost oil has been kept by the contractor.
To sum-up the revenue steams:
| Total Production |
| - Gvt Royalties |
| = Total available for Production Sharing |
| - Cost recovery (CAPEX + OPEX) for contractor |
| = Total Profit (available for sharing) |
| - Contractor Take |
| = Government Take |
The next part of this paper will explain some required SAP and Oil business basic vocabulary.
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