TIOG10 en Col82 Bussines Process

TIOG10
Oil and Gas Business Processes

and Organisation
SAP for Industries - SAP for Oil and Gas
© SAP 2009
SAP for Industries - SAP for Oil and Gas

Material Number: 50097830
Version 82
Copyright
Copyright 2009 SAP AG. All rights reserved.

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consent of SAP AG. The information contained in this
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© SAP 2008
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Course Overview
This course will give you an introduction to the following:

Industry drivers and how SAP answers industry requirements and
trends
Business processes of a global Oil & Gas company - from
Exploration & Production to Midstream and Downstream,
including:
Oil & Gas Business Terms
Upstream – Exploration & Production
Refining & Midstream - Understand and analyze state-of-the-art domestic
and cross-border oil industry supply chains
Downstream, Marketing and Retailing (including Secondary Distribution)
High Performing Assets Enterprise Asset management
© SAP 2009
Course Goals
This course will prepare you to:

Become familiar with the organizational units and the setup of a global Oil
& Gas company and its business processes, and understand how SAP
addresses the business challenges
Analyze Oil Industry Business Processes from Exploration & Production
to Midstream and Downstream. This includes O&G Business Terms, E&P,
Refining & Midstream, Downstream, Marketing and Retailing (including
Secondary Distribution) as well as ‘High Performing Assets’
Understand and analyze state-of-the-art domestic and cross-border oil
industry supply chains, as well as typical requirements of the crude and
product logistics of multinational oil and gas companies
© SAP 2009
Target Group
This course is intended for the following audiences:

Solution Consultants
Project Managers
Account Managers supporting the oil industry during IT implementations,
by playing an advisory role, or during sales activities
Anyone interested in getting an overview of the Oil and Gas industry
© SAP 2009
Business Example
You will accompany several new and experienced people in

their daily business life to review what goes on in a "typical" oil
company and to depict business processes in dedicated
departments
© SAP 2009
Course Objectives
This course will prepare you to:

Understand what drives the oil & gas industry and how SAP covers
industry requirements and trends. You will accompany several new and
experienced people in their daily business life to review what goes on in a
"typical" oil company and to depict business processes in dedicated
departments.
© SAP 2009
Course Content
Preface
Unit 00 Overview
Unit 01 Oil & Gas Business Terms &
Company Organization
Unit 02 Upstream Exploration and Production
Unit 03 Refining & Midstream
Unit 04 Downstream Marketing & Retailing
Unit 05 Enterprise Asset Management
© SAP 2009
Oil and Gas Business Terms &
Company Organization
Contents:
Introduction
Commodities and Hydrocarbon Product management
Organizational Structures & Supporting processes
SAP for Oil and Gas Overview
© SAP 2009
How are hydrocarbons formed? Where are they found? How are they extracted and treated? How do
oil & gas companies deal with products along the value chain? What kind of organization is needed
to do this in an efficient way? How do SAP solutions support processes?
The answers to these and many other questions will be discussed in this course. You will also find
further information about the hydrocarbon business and about the actors in the global petroleum
business.
© SAP AG TIOG10 1-1

Company Organization: Unit Objectives
After completing this unit, you will be able to:

Understand the major drivers and challenges of the oil and gas industry
Explain why the handling of commodities is different from dealing with discrete
products
Describe how a “typical” oil and gas company is set-up.
Give a high-level explanation of the SAP portfolio for oil and gas companies
© SAP 2009

Oil and Gas Business Terms & Company
Organization: Course Overview Diagram
1 – Oil and Gas Business Terms and Company

Organization
Exploration Development Hydrocarbon Refining & Primary Terminal Secondary Commercial

& Appraisal & Production Supply & Gas Manufacturing Distribution Management Distribution Sales &
Transmission Retailing
2 – E&P, Upstream
3a – Refining &
Manufacturing
3b – Midstream
Supply, Transmission & Trading
4 – Downstream Marketing &

Retailing
5 – Enterprise Asset Management
Support
processes Enterprise management and support
© SAP 2009
Upstream
Exploration and Appraisal ; E&P Contract Management ; Liquid and Gas Production ; Allocation
and Settlement
Bulk Supply Chain Planning and Optimization ; Bulk Supply Chain Operations and Scheduling ;
Bulk Supply Chain Execution and Settlement ; Bulk Supply Chain Reporting and Analytics ;
Physical Oil and Gas Commodity Trading; Oil and Gas Paper Trading and Risk Management
Refining & Manufacturing
Refining Operations; Lubes Manufacturing Operations
Downstream Marketing & Retailing
Marketing Planning and Execution; Sales Planning and Account Management; Opportunity to Cash;
Customer Service; Terminal Management; Hydrocarbon Products Transportation; Service Station
Fuel Management; Convenience Retailing
Enterprise Asset Management
Portfolio & Project Management, Asset Information Management, Sourcing & Procurement,
Optimized Asset Operations and Maintenance, Operational Risk Management (Health, Safety,
Environmental Compliance, Process Safety)

Company Organization: Business Example
As a business analyst of a major oil and gas company, you are responsible for
predicting development and impacts on the company’s core business up to
2020. Impacts of energy demand on your exploration efforts will be analyzed.
You need to support your company with estimates on production growth and
reserves replacement targets.
You are monitoring the global economy with its geopolitical influences,
seasonal changes, and world trading relationships.
A new colleague of our company needs “on-boarding”: we will explain to
him/her what is so special about selling Hydrocarbon products. Also he/she will
get an overview on how an oil company and the Supply Chain Organization
within it is set up.
Afterwards, he/she wants to have look at how SAP solutions can support
him/her and the company.
© SAP 2009

Company Organization: Unit Overview Diagram
Oil and Gas Business Terms & Company Organization

Lesson 1: Introduction
Lesson 2: Commodities & HPM
Lesson 3: Organizational Structures
Lesson 4: SAP for Oil and Gas Overview
© SAP 2009

Introduction: Lesson Objectives
After completing this lesson, you will be able to:

Describe how oil and gas fits into the overall energy ecosystem
Provide an outlook for energy demand
Understand the "battle for new resources"
Compare the business challenges for oil and gas
(Markets, Demands, Supply, and so on)
© SAP 2009

Introduction: Business Example
As a senior business analyst of a major oil and gas company, you are
responsible for predicting development and impacts on the companies core
business up to 2020. Impacts of energy demand on your exploration efforts will
be analyzed. You need to support your company with estimates on production
growth and reserves replacement targets. Furthermore, your logistics division
needs estimates to be able to plan transport connections to export supply
chains.
You are monitoring the dynamics of the global economy, geopolitical
influences, and seasonal changes, because they have tremendous impact on
the design of the world trading relationships and therefore effect your company.
© SAP 2009

Oil and Gas is a Vital Contributor to the
Overall Energy Ecosystem
Renewables
Mining
Upstream
Onshore Hydro Power

production
Offshore Gas to
production liquids
plant Power Station
Gas storage
and LNG
terminal
Downstream
Domestic &
Oil refinery Industrial Energy
Petrochemicals
plant Fuels & Lubricants
Synthetics & Plastics

Transportation Commercial Industrial Residential
© SAP 2009
Discovering oil was a significant milestone in the history of mankind. Being a liquid and hence
easily transportable, it makes a perfect energy product. When burnt in small quantities, it produces
sufficient energy to turn the motors that drive all sorts of vehicles and make all sorts of machines
work. Moreover, it can be transformed into a huge number of products, which have themselves
become the raw materials of our day-to-day lives: plastics, synthetic textiles, and many other
products.
Natural gas, which belongs to the same family as oil, that of the hydrocarbons, is systematically
found with it in all the oil fields. Natural gas is a highly efficient energy product, especially for
burning. In addition, some of its compounds are used to manufacture polymers that are the basic
elements of everyday items.
Nowadays, oil and gas have also become one of the major challenges of the present time.
The ever increasing consumption of hydrocarbons threatens the ecological balance of our planet,
particularly that of the Earth’s climate. Solutions will have to be found in the coming years and that
will have an impact on each and every one of us.

Oil and Gas Value System
Customers
Suppliers
Hydrocarbon
Development Commercial
Exploration supply, Refining and Primary Terminal Secondary
and production sales and
and appraisal manufacturing distribution management distribution
Transmission retailing
and Trading
Upstream
Midstream
Downstream
© SAP 2009
There are different ways and views on how to describe the oil and gas value system. Generally
speaking, you can differentiate between Upstream, Midstream, and Downstream.
These segments face the following challenges and objectives:

Upstream:
- Strategic and economic decisions affecting the entire value chain (country / basin entry)
- Exploration pains: How large is the structure? How much and which HCs were generated?
- Production pains: How can we tap on the reserves? What are the reservoir characteristics?
Midstream:
- Simple pipeline concepts versus strategic decisions
- (LNG / GTL / gas-to-power; observe competitors and markets)
Downstream:
- Sell for highest possible revenue
The principal activities involved in moving crude oil from its source to the ultimate customer are:
Production, which involves finding, extracting, and transporting crude oil

Refining: the process by which crude oil is turned into products such as gasoline
Distribution & Marketing, which focuses on moving those products to final consumers
These activities occur within a global marketplace, an international network of thousands of
producers, refiners, marketers, brokers, traders, and consumers buying and selling physical volumes
throughout this chain.

Reserves and Production Facts
OPEC has over 70% of the proved oil reserves worldwide (and 51% of the gas
reserves)
More than half of the proven oil reserves is in Middle East,
Over 70% of the Worldwide proven gas reserves is in Middle East and Eastern
Europe (including FSU)
Top 10 Oil Reserve Countries are Saudi Arabia, Canada, Iran, Iraq, Kuwait,
Venezuela, Abu Dhabi, Russia, Libya and Nigeria – together, they have 84% of
worldwide proven oil reserves
Top 10 Gas Reserve Countries are Russia, Iran, Qatar, Saudi Arabia, United
States, Abu Dhabi, Nigeria, Venezuela, Algeria and Iraq – together, they have
78% of worldwide proven gas reserves
© SAP 2009
Oil and Gas reserves
New estimates of the world’s oil reserves total 1.34 trillion barrels (bbl), up 10.5 billion bbl from
those reported in Jan 2008 – due mainly to larger estimates for Venezuela and Libya (as reported
by OPEC)
Argentina, Brazil, Ecuador and US show larger oil reserves, while Canada, Mexico and Columbia
show a decline
Reported oil reserves declined by 4.6% and gas reserves declined by 2% in Western Europe
OPEC also reported lower oil reserves and higher gas reserves for Iran
Worldwide Oil Production
Preliminary estimates indicate worldwide crude and condensate production increased by 1.1% in
2008 – spurred by robust demand in late 2007 and early 2008, and record high oil prices that
peaked in July 2008
Worldwide crude and condensate production in 2008 averaged 73 million barrels per day (b/d)
(72.16 m b/d in 2007)
Russia recorded its first oil output decline in a decade (estimated to be 9.76 million b/d against
9.83 million b/d in 2007) – due to shrinking foreign investments and high crude export taxes
Total Middle East production has increased by over 5% in 2008 against 2007 – strong gains in
Iraq, Saudi Arabia and Kuwait
Combined 2008 average production in Western Europe has declined 7% from 2007
Mexico (-9%), USA (-3%) and Canada (-1.8%) have also shown some decline in production

Oil Production Data 2007 and 2008
Oil Production & Producing Oil Wells Data
25,000.0 23,101.0
700,000
630,718
(excludes shut in, injection or service wells)

Producing Oil Wells (31.12.2008)
21,910.1
600,000
Oil Production ('000 b/d)
20,000.0
16,434.1
16,883.8 500,000
Estimated Oil Production in 2008
15,000.0 12,678.7 400,000
12,369.4 Actual Oil Production in 2007
9,260.2
300,000
10,000.0 7,406.3 9,205.6 No. of Producing oil wells*
7,386.1 Dec. 31, 2008
200,000
4,085.9 120,049
5,000.0 88,691 4,405.1
100,000
6,208 12,203 9,984
- -
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© SAP 2009
OPEC’s share of world production was 44% (38,034 b/d - Increased production by 3.8% over 2007)
– due to an increase in worldwide demand growth in H1-2008 – especially in Asia, Latin America
and Middle East
At the rate of 2007 worldwide production, the world’s proven reserve of conventional and non-
conventional oil at current estimates would last about 51 years
At the estimated 2008 production rate, these reserves will last for 50 years

(Proven) Oil Reserves
© SAP 2009
Reserves are those quantities of petroleum claimed to be commercially recoverable by application of

development projects to known accumulations under defined conditions. Reserves must satisfy four
criteria: They must be: discovered through one or more exploratory wells, recoverable using existing
technology, commercially viable, remaining in the ground.
All reserve estimates involve uncertainty, depending on the amount of reliable geologic and
engineering data available and the interpretation of that data. The relative degree of uncertainty can
be expressed by dividing reserves into two principal classifications – proven and unproven.
Unproven reserves can further be divided into two subcategories – probable and possible - to indicate
the relative degree of uncertainty about their existence. The most commonly accepted definitions of
these are based on those approved by the Society of Petroleum Engineers (SPE) and the World
Petroleum Council (WPC).
Proven reserves are those reserves claimed to have a reasonable certainty (normally at least 90%
confidence) of being recoverable under existing economic and political conditions, with existing
technology. Industry specialists refer to this as P90 (that is, having a 90% certainty of being
produced). Proven reserves are also known in the industry as 1P. Proven reserves are further
subdivided into Proved Developed (PD) and Proved Undeveloped (PUD). PD reserves are reserves
that can be produced with existing wells and perforations, or from additional reservoirs where
minimal additional investment (operating expense) is required. PUD reserves require additional
capital investment (for example, drilling new wells) to bring the oil to the surface.
There are doubts about the reliability of official OPEC reserve estimates, which are not provided
with any form of audit or verification that meet external reporting standards

Development of Proven Oil Reserves -
A Decade of Reserve Changes
A Decade of Reserve Changes
1,600,000,000 16,000,000
1,400,000,000 14,000,000
Oil Reserves (in '000 bbl)
1,200,000,000 12,000,000
Gas Reserves (in bcf)

1,000,000,000 10,000,000
World Oil Reserves
800,000,000 8,000,000 OPEC Oil Reserves
World Gas Reserves
600,000,000 6,000,000
bcf: billion cubic feet
400,000,000 4,000,000
200,000,000 2,000,000
- -
2000 2002 2004 2006 2008
© SAP 2009
New discoveries and evaluations have kept the reserves at consistent levels (marginal increases) over
the last decade (despite increasing production)
Alternate energy sources, exploration into deep seas, and so on, provide hope for an elongated
lifecycle of current energy reserves
However, an increasing majority of experts agree that alternative energy, especially renewable
energy would need to be sustainable in the future.
Development: Global increase in proven reserves (1986: 877 thousand million bbl; 1996: 1049,
2006: 1208). Distribution remains largely the same, however, there is a decrease in OECD countries.
Resulting in: Bigger involvement in focus areas such as North Africa, Caspian sea region and Iran.
Decision for high CAPEX midstream concept.

Development of Oil Price
West Texas Intermediate 1996 - 2009
© SAP 2009
The demand for oil is highly dependent on global macroeconomic conditions. According to the IAE
(Int. Energy Agency), high oil prices generally have a large negative impact on the global economic
growth.
Others argue that the run-up in oil prices over the past few years actually led to an acceleration in
global growth. The huge surpluses built up by oil exporting countries were recycled through
sovereign wealth funds and the banking system and (through the money multiplier) greatly increased
investments in emerging markets. They also helped hold down interest rates in the U.S.
Oil price has undergone a significant decrease since the record peak it reached in July 2008. On
December 23, 2008, WTI crude oil spot price fell to US$30.28 a barrel, the lowest since the global
financial crisis began, and it has been trading at between USD 35 a barrel and USD 73 per barrel in
2009.

CERA Outlook on Market Future
Industry Preparing for Long Term Oil Price
Brent Oil Prices – Potential Price Paths
Over-
correction
Baseline
US Reference
Dollar
Per
Barrel
Short-term
[kde1] Price
Support
Scenarios: Short Term Price Support Baseline Overcorrection
© SAP 2009
IHS Cambridge Energy Research Associates® Inc. (IHS CERA®) is a leading advisor to
international energy companies, governments, financial institutions, and technology providers. IHS
CERA delivers critical knowledge and independent analysis on energy markets, geopolitics, industry
trends, and strategy.
There are several price paths and scenarios on how the oil price will develop over the next years.
Overcorrection: Oil prices will continue to drop. Because of this, there will be no investment in
new oil fields /exploration. Production is decreasing, nevertheless, demand is still there – Result:
oil prices will significantly increase.
Baseline (most probable scenario): Oil prices are recovering and reaching values where
“normal“ business is possible (Exploration & Production)
Short-term Price Support: Governments would support the oil industry on a short-term basis …

Outlook for Energy Demand - A View to 2030
and Beyond
Shell Oil’s “Sustainable” Growth Scenario
Surprise
By 2030 global energy demand
Geothermal
will increase by 50%* (*Source: EIA, World
Solar Energy Projections)
Biomass Oil and gas will remain

Wind predominant energy source for
Nuclear
Hydro
next few decades, but a tipping
Gas point has been reached
Oil & NGL
Coal
Trade. Bio
“The break point is already here. Oil is in the process of losing its almost total
domination in ground transport. It is not going to fade away soon—such is the scale of
its use and convenience that it will retain a dominant position for many years.”
Daniel Yergin, Chairman of Cambridge Energy Research Associates
“Oil Has Reached a Turning Point”, Reprinted from The Financial Times, May 27, 2008
The balance of future supply and demand remains challenging
© SAP 2009
The world has produced about 1 trillion barrels of oil to date. Over the next century or so,
approximately 2 trillion barrels more are expected to be produced from conventional proven reserves
and undiscovered conventional oil. Even more will be produced from unconventional oil resources,
such as extra-heavy oil in Venezuela, bitumen in Alberta and shale oil in the United States.
Oil and petroleum products have powered the world in the form of motor fuels for more than a
century, and demand is expected to grow over the long term. Between now and 2030, global energy
consumption is projected to increase up to 50 percent, with oil and gas, along with coal, continuing
to meet the largest part of that demand.
Oil and gas will remain the predominant energy source, with the increasing contribution of natural
gas (2003: 95 Tcf, 2030: 182 Tcf) (tcf: trillion cubic feet). Gas is experiencing rapid growth in
demand and production as an energy source.

The Future of Global Energy
6 000
Oil
Mtoe (million tons of oil equivalent)
5 000
4 000
Natural gas
3 000 Coal
2 000 Other renewables
1 000 Nuclear power

Hydro power
0
1970 1980 1990 2000 2010 2020 2030
Source: International Energy Agency - World Primary Energy Demand

© SAP 2009
Global investments for energy will increase exponentially due to Increasing demand coupled with
increasing expenditures per boe (barrel of oil equivalent) and slowly decreasing supply.
Robust energy demand growth will continue through the year 2030 (Energy demand will grow by
about 50%)
Oil and gas will continue to lead among the different forms of energy supply: About 65% of the
future energy needs will be covered by oil and gas. The transportation and industrial sectors will
remain mainly responsible for oil demand.
Power generation is expected to drive the demand for gas and coal.
Relatively cautious investment in alternatives / renewables and their pre-requisite infrastructure

constrains their growth potential
Growth Drivers: Economic growth, Population growth, Industrialization, Growth in income /

emergence of a new middle-class in Asia.
The Future Supply of Resources is a Massive Challenge for Energy Companies

The Key Challenges in the Oil and Gas Industry
A Constant Competitive Squeeze
Energy Security Shapes Policy
Increased risks of supply disruption
Policy impacts on regulations & taxes
Unconventional resource incentives
Sustainable and responsible development
Compliance &
Governance Leading to:
Sarbanes Oxley
Fierce competition Complex & Volatile Market
for energy reserves &
supply
Price Volatility
Sanction Party
compliance Fierce competition for Changing Supply/Demand
new markets & Pattern
Hedging laws – IAS customers Competition between ‘Global
39, FAS133 Secure Profitability & Majors’ and ‘National Giants’
Excise taxes Compliance
Environmental controls
Globalization
Global operating models
Concentration of portfolio into strategic
plays
Resource optimization (capital assets,
inventory/transport capacity, talents)
© SAP 2009
With robust growth and a changing geopolitical landscape, there will be an increasing focus on
Energy Policy aimed at providing energy security. It is recognized that there is an increased risk of a
supply-disrupting event due to either geopolitical events such as wars or terrorism, or natural
disasters such as hurricanes, earthquakes, or tsunamis. With a historically tight demand-supply
balance, each event now has a much more dramatic effect on energy security and supply.
As a result, governments will certainly continue to adjust their policies and taxation structures
designed to promote long term energy security.
These changes will strive to bring balance both short and long term supply security and do so in a
way that is both sustainable and responsible
The emerging economies like China are leading a surge in oil demand owing to their economic
growth.
As Oil prices rise, OPEC’s influence appears weak amid little spare capacity. OPEC may try to
regain control by increasing spending and entering into new ventures. With increase in oil prices
and increasing gasoline cost, Governments are levying heavy taxes on Oil& Gas companies.
This is to encourage alternative energy sources and energy conservation by providing tax breaks.
Oil prices have always been volatile because they are affected by unpredictable yet recurrent natural
disasters and political instability. Volatile markets also because of the high liquidity of the trading
market which makes opportunistic trading a realistic venture - which drives volatility as well.

The world's thirst for oil is ever increasing. Government-controlled national oil companies are
challenging international firms in the global competition for oil reserves.
Access and competition for reserves is growing ever more difficult with many new opportunities in
increasingly remote or difficult areas.
About 77 percent of the world's 1.1 trillion barrels in proven oil reserves is controlled by
governments that significantly restrict access to international companies, according to PFC Energy,
an industry consulting firm in Washington. Government-controlled oil companies in China -
including China National Petroleum Corp. and China National Offshore Oil Corporation (CNOOC),
have been expanding internationally. Malaysia's PETRONAS now has business interests in 35
countries. Brazil's Petrobras has been active outside its home country and has developed expertise in
deep-water production.
Access and competition for reserves is growing ever more difficult with many new opportunities in
increasingly remote or difficult areas, such as the deep water in the Gulf of Mexico, the Beaufort
Sea, or Ivory Coast, for example.
Globalization
Oil and gas companies are adopting global operating models to allow them to effectively supply and
deliver in the current environment of supply-demand imbalance.
They also have to concentrate their reserve portfolios into strategic plays where they can gain
economies of scale at an acceptable level of geopolitical risk
The merger and acquisition in downstream activity has been increasing. These M&A in Downstream
are shifting assets but not increasing overall refining capacity
Complexity and pressure of compliance management increases, driven by high variety of legislation,
country-specifics, various involved systems / departments
Global governments are instituting tighter reporting controls and emissions controls.
AMR categorizes compliance into these segments.
Operational compliance refers to regulations that affect manufacturing and privacy issues.
Financial compliance groups regulations on financial reporting (in the US referred to as Sarbanes
Oxley and in Europe the Basel II initiative).
Global Trade compliance requires providing the ‘customer documentation’ on all shipments.
Finally, employee health and safety compliance.
Companies of all sizes and from virtually all industries are beset with pressures to demonstrate
compliance with government regulations, industry regulations, industry standards and best practices,
and with their own internal policies.
SOX: The CEO/CFO must certify quarterly and annually that the SEC report being filed has been
reviewed and does not contain any untrue statements or omit any material facts

SAP’s Vision: From Wellhead to Decision -
One Platform for Oil and Gas Industry Processes
Own the operational process

management platform, data and key
solutions – SAP from the wellhead to
decision
Close the Oil and Gas Supply Chain Loop

across enterprise, sub segments and
commodities, to enable business
transition
SAP Oil and Gas Vision
Leader in operational performance management suite by delivering the platform, data, and
collaborative integrated processes for the oil and gas Industry
Provide leading oil and gas supply chain management applications by leveraging the strong SAP
industry commitment in marketing and retail
© SAP 2009
Given these new market realities, energy companies must see clearly, think clearly, as act clearly.
They must be lean enough to withstand the pressures of a mid term low price scenario and agile
enough to respond to price volatility and ever changing market dynamics as they meet the world’s
growing energy demands in a sustainable manner. This requires transparency and accountability in
meeting the company’s desired business outcomes while maintaining its asset development and
operational disciplines, in collaboration with all its key business and regulatory stakeholders. Best
Run energy companies with such a sustainable management system are positioned to not only
succeed in the current market realities, but also in whatever conditions they find in the future.
Operational Excellence and Capital Discipline are based on the visibility and transparence of
processes and data in a company; to support and enable the right decision to be made based on the
right facts by the right people.
SAP‘s vision for oil and gas is a vertical and horizontal integration of processes and data.
The slogan ‘From the well head to decision’ refers to the coverage of all industry-specific processes
from Exploration & Production, Midstream & Refining and Downstream & Retailing - either
through SAP-developed applications, partner solutions, or integration into point solutions, for
example, OSISoft for Upstream Historians. SAP is also utilizing the results from technology
projects, for example, IOHN (Integrated Operations High North) to deploy the latest technology
approach to integrated digital operating environment in remote, vulnerable, and hazardous areas.

Discuss Key Trends Driving Change in the Oil
and Gas industry
Reserve Continued
Shifting Increasing Increasing
Replacement & Advances in
Demand & Governmental Global Market
Operating Unconventional
Supply Patterns Regulation Dynamics
Efficiencies Resources
Source: BP Statistical
Review, June, 2009
High growth Sarbanes Global Digitization of Increasing use

rates in Oxley operating oil fields of bio fuels
developing Sanction Party models Operational Competition
countries compliance Concentration Excellence from
Increasingly Hedging laws of portfolio into alternative
Capital Project
remote and – IAS 39, strategic plays fuels
FAS133 management
smaller Resource
discoveries Excise taxes Technology
optimization key to
Environmental (capital assets,
controls extending
inventory / reserves from
transport existing fields
capacity,
talents)
© SAP 2009
Point 1: What might be the result of shifting Demand & Supply patterns?
Demand is expected to rise at a rate of 2% per year for Oil and 3% per year for gas in the coming
years.
Industry needs to add 80Mn oil-equivalent barrels per day to production to meet projected
demand.
The cost of doing so would reach nearly $1Trillion
Point 2: What types of compliance are known to you?

(Possible answers according to AMR:)
Operational compliance refers to regulations that affect manufacturing and privacy issues.
Financial compliance groups regulations on financial reporting (in the US referred to as Sarbanes
Oxley and in Europe the Basel II initiative).
Global Trade compliance requires the provision of ‘customer documentation’ on all shipments.
Finally, employee health and safety compliance.
Companies of all sizes and from virtually all industries are beset with pressures to demonstrate
compliance with government regulations, industry regulations, industry standards and best
practices, and with their own internal policies.
SOX: The CEO/CFO must certify quarterly and annually that the SEC report being filed has been
reviewed and does not contain any untrue statements or omit any material facts

Point 3: What impact might the market dynamics have on the changing behavior of oil companies?
Adoption of “global business processes” by NOCs and Independent producers

Mergers and Acquisitions in Downstream are shifting assets but not increasing overall refining
capacity
Organizations are focused on their core competencies. They are evaluating how to improve
margins and profitability by either acquiring or divesting assets
Move towards integrating their Supply and Trading business units into the overall supply chain
Increasing international supply chain harmonization.
Source: http://www.achilles.com/en/Achilles-colombia/Our-sectors/Oil-and-gas/
Point 4: This point can be mentioned as fact:
Lean Manufacturing offers opportunities to stabilize, optimize, and innovate core process
productivity as well as eliminate waste and low quality product that needs to be reworked.
Source: Oil and Gas industry Year end Overview and Trends for 2008, Booz Allen Hamilton
Point 5: This point can be mentioned as fact:
Bio fuels supported by government mandates and subsidies have expanded rapidly. For example:
number of ethanol plants has increased from 81 in Jan 2005 to 130 at the end of 2007.
Source: Oil and Gas industry Year end Overview and Trends for 2008, Booz Allen Hamilton


© SAP 2009

Commodities & Hydrocarbon Product
Management: Lesson Objectives

Explain the key differences between handling commodities and handling
discrete products.
Describe what oil products are, explain Hydrocarbon Product Management,
and outline why we need dynamic quantity conversion
© SAP 2009

Commodities & Hydrocarbon Product
Management: Business Example
A new colleague at our company needs “on-boarding”: we will explain

what is so special about selling Hydrocarbon products.
© SAP 2009

What are Bulk Products and Hydrocarbons?
Bulk Products:
This is a generalized expression for products whose quantities
can not be counted using only natural numbers (1, 2, 3, 4…).
Example: If you are a pump vendor, you sell either 1 or 2 or 10
pumps to your customers, but not 8/13 of a pump or 0.0003
pumps.
Discrete products :
can be counted using only natural numbers (1, 2, 3, 4…).
© SAP 2009
Oil and natural gas are naturally occurring chemicals that are made up of just two elements - carbon
and hydrogen. The class of chemicals based on carbon and hydrogen are called hydrocarbons. The
simplest hydrocarbon, methane, is made up of one carbon atom and four hydrogen atoms. Other
hydrocarbons like octane and octadecane have more complicated structures. Plastics are made of
molecules called polymers that are very long chains of hydrocarbons.
Oil and natural gas play important roles in our daily lives, and in some ways you might not expect:
Hydrocarbons are the building blocks of vital products such as plastics, pharmaceuticals and more.
Cleaner burning fuels are contributing to improved air quality. Fossil fuels may prove to be the ideal
source of hydrogen for clean power generation.

Examples of Hydrocarbon Products
Light Gases Butane / Propane
Gasoline Car fuel
Naphtha Used within refinery, middle distillate
Kerosene Jet fuel
Diesel Car fuel
Heavy Gasoil Heating oil / Lubricants / Petrochemicals / Feedstock
Residue Coke / Asphalt / Bitumen
© SAP 2009
Extracted hydrocarbons in a liquid form are referred to as petroleum (literally "rock oil") or mineral
oil, whereas hydrocarbons in a gaseous form are referred to as natural gas.
Petroleum and natural gas are found in the Earth's subsurface with the tools of petroleum geology
and are a significant source of fuel and raw materials for the production of organic chemicals.
The extraction of liquid hydrocarbon fuel from sedimentary basins is integral to modern energy
development. Hydrocarbons are mined from tar sands (extra heavy oil, are a type of bitumen deposit)
and oil shale, and potentially extracted from sedimentary methane hydrates. These reserves require
distillation and upgrading to produce synthetic crude and petroleum.
Oil reserves in sedimentary rocks are the source of hydrocarbons for the energy, transport and
petrochemical industry.
Hydrocarbons are economically important because major fossil fuels such as coal, petroleum and
natural gas, and its derivatives such as plastics, paraffin, waxes, solvents and oils are hydrocarbons.
Hydrocarbons — along with NOx and sunlight - contribute to the formation of tropospheric ozone
and greenhouse gases.

What a Barrel of Crude Oil Makes
© SAP 2009
Figures above are based on average yields for U.S. refineries in 2005. One barrel contains 42 gallons
of crude oil. The total volume of products made is 2.7 gallons greater than the original 42 gallons of
crude oil. This represents "processing gain“.

Introduction - Units of measurement
Typically, oilfield units (barrels and cubic feet) are used internationally whereas
SI (meters and tonnes) units are used in Western Europe.
Standard (international) currency is the US dollar. Volumes (barrels, cubic feet)

are reported on an international base, and masses (tonnes) in Western Europe.
Dollar Barrels of oil equivalent for gases and other
Million (106) energy materials
Billion (109) Abbreviation BOE
Trillion (1012) 1 BOE equiv. to 5,610 scf gas or 159 m3 gas
Barrels for liquids Tonnes for liquids (and also gases)

Abbreviation = t
Abbreviation BBL
Equiv. to 7.33 barrels
Equiv. to 158.98 liters
MMBBL = million barrels (106) Cubic meters for gases (and also liquids)
MBL = thousand barrels Abbreviation = m3
Equiv. to 35.3 standard cubic feet
Standard cubic feet for gases
Abbreviation SCF
Equiv. to 0.028317 cubic meters
BCF = billion cubic feet (109)
TCF = trillion cubic feet (1012)
© SAP 2009
Dimension or quantity is the technical word for measurable attributes of phenomena or matter. For
each dimension, you can define units of measure that have a well defined relation between each other
(within one dimension). Dimensions and units of measure are defined in R/3 customizing.
Volume dimension: SI (Système Internationale) unit: m3 (cubic meter)
US gallon (gal); barrel (bbl); liter (l); imperial gallon (igl); hectoliter (hl), mega cubic feet (MCF)
Mass dimension: SI unit: kg (kilogram)
Metric ton (to); short ton (sto); long ton (lto); pound (lb); gram (g)
Energy dimension: SI unit: J (joule)
Million British thermal units (MMBTUIT), Kilowatt hours (kWh)
Density dimension: SI unit: kg / m3
gram per cubic decimeter (g/dm3); gram per liter (g/l);
Dimensionless densities: API gravity; relative density (specific gravity); relative density (air,
standard conditions)
Heating value dimension - volumetric: SI unit: J / m3 ; other units: BTU
Temperature dimension: SI unit: K (Kelvin); other units: FAH, Celsius
Pressure dimension: SI unit: Pa (Pascal); other unit: PSI (pounds per square inch)

SAP’s Quantity Conversion Interface -
Product Types
Product types
1: Crude Oil (before processing)
2: Oil products (gasoline, diesel)
3: Chemicals
4: Lubes
5: Asphalt/bitumen
6: Natural gas (gaseous)
7: Liquefied natural gas (LNG)
8: Liquid petroleum gas (LPG/NGL)
A: Water
B: Generalized gases (pure, inert)
I: Industrial aromatic hydrocarbons
R: Raw materials
© SAP 2009
The Quantity Conversion Interface (QCI) converts volumes, masses and energy at ambient
conditions (temperature, pressure, vapor pressure, calorific value, density) into volumes, masses and
energy values at standard conditions. In addition, the QCI calculates density and heating value at
standard conditions.
The QCI can convert quantities based on international standards for
Crude Oil & Petroleum Products (ISO, API, ASTM)
NGL /LPG (ISO, GPA, DIN)
Natural gas (ISO, AGA)
The governmental authorities in most countries have pre-defined base conditions and units of
measure that have to be used for goods movements and regulatory reporting, and those may deviate
from the ones mentioned in these standards. The QCI is flexible enough to convert quantities, taking
into consideration those country specific requirements.

Dynamic Quantity Conversion - Liquid
Products
Product Density determination:

type Base density ρBase
TTest
ρBase = f (Product type,
test temperature,
ρTest test density,
base temperature,)
ρBase ρBase Volume correction:

Volume V2 at temperature T2
= g (T1,T2, V1, ρBase)
Volume V1 Volume V2 >V1
at Temperature T1 at Temperature T2 > T1
© SAP 2009
An observed quantity, at observed parameters (temperature, density) and unit of measure has to be
converted to quantities at various units of measure at standard/base conditions using well defined
algorithms. For petroleum liquids (such as crude, gasoline, asphalt, and lubricants), the main effect is
the thermal expansion, which is non-linear.
The mass of a product is independent of the ambient temperature and pressure (1 kg at 15°C = 1 kg
at 25°C), therefore no temperature-dependent or pressure-dependent conversion factor for the
quantity conversion would be required if quantities were always measured in mass (mass to mass
conversion).
Because it is not common to determine the mass for large quantities (such as ships or pipelines)
directly, the oil and gas industry normally measures volume.
Because the volume of an oil product depends on the temperature of the product, a volume correction
is needed to calculate a standardized volume (example: 980 l of material at -15°C equals 1030 l at
60°C or 1000 Gal of material at 0F equals 1025 Gal at 70F).
The test density and test temperature are used to calculate the base density of the material (density ρ
= mass m / volume V).
The material temperature is the temperature of the material at the time of goods movement. Together
with the measured volume of the material, you can calculate the volume in a different unit of
measure at a different temperature (volume to volume conversion).
For volume to mass conversion, the base volume of the material is multiplied by the base density.

Dynamic Quantity Conversion - Gases
Business Communication
Density determination
Ambient 1
Standard conditions
Heating Value determination Temperature
Pressure
Base heating value Ambient 2
Volume correction Heating value class
Base density
Pressure correction Ambient 3
Inventory Management
© SAP 2009
For gases, the pressure under which the gas is kept plays a decisive role in the gas quantity
conversion. As a result, the volume of a gas depends on the temperature and the pressure under
which a specific quantity of gas is held.
The ideal gas law is not valid for pressures that are more than ~3 times the atmospheric pressure.
Therefore a compression factor has to be taken into account.
Natural gas is mainly used to produce energy through combustion. Thus, the amount of energy
released per standard volume at standard combustion conditions is the main factor for pricing
purposes. That value is called the heating value of natural gas. A synonym of this is the calorific
value.
The test heating value, test heating value temperature, and test heating value pressure are used to
calculate the base heating value of the material. Additionally, the heating value is used to calculate
and store energy quantities in the ERP System.
Units of measure can be temperature-dependent and pressure-dependent: volumes, heating values,

and densities.
Units of measure can also depend on the combustion temperature and pressure (natural gas-specific):
Heating value and energy units of measure.
The QCI can utilize American Gas Association (AGA) c-codes for natural gas conversions.

Dynamic Quantity Conversion - Example
15 CEL at pick-up
1000 Liters
Outbound Delivery Edit Goto Extras Environment
Quantities in
Delivery Create: Item Details UoMs of Unit
Post goods issue of Measure
Item 10 Item category TAN Standard Item Group
Material REGULAR-00 Regular 95
Processing Material Qty in alternate UoM Batch split Picking Load and transp
Parameter C Value UoM Addl. qty UoM

Material temperature 15,00 CEL 676,900 KG
Test temperature 20,00 CEL 1000,000 L15
Test density 672,200 1492 LB
Air buoyancy indicator 264,376 UG6
Air buoyancy factor 1,000000
§
Hydrometer corr. indicator
Inventory Mgt Taxes Reporting

© SAP 2009
The quantity conversion calculation function performs conversions automatically between different
units of measure, based on national and international measurement standards such as the API,
International Standards Organization (ISO), and the American Society for Testing and Materials
(ASTM). The calculation takes place at least for all units of measure defined in the unit of measure
group.
The calculated quantities are used to update the stock levels. The stock levels are retrieved from the
relevant appendix tables and are displayed, if the unit of measure belongs to the unit of measure
group assigned to that material.
To support the quantity conversion effectively, the system uses default values for the relevant
quantity conversion parameters (for example, density, temperature, and air buoyancy). You can
define these default values at plant, storage location, or batch level for each material and each point
in time. The system always reads the default values from bottom to top. This means that the system
first uses special values at batch or storage location level before using general values at plant level.
In the reading group assigned to the conversion group it defines which parameters are taken into
consideration for the quantity conversion and whether they are visible to and changeable by the user.
The quantity calculation is carried out automatically at the time of goods movement. You can
calculate quantities at any time using the desktop calculator.

Commercial Aspects of Oil Products -
Prices & Taxes
Pricing
Time Pricing Day/Date & Day of Week
Contract Pricing
Company
Cumulative Call-Off Pricing margin
Customer Price List
Head Office/Branch Pricing Retail
Differential Reference Code Pricing margin
Gross & Net Unit of Measurement Pricing
Formula & Average Pricing Production
Five Decimal Pricing costs
EXCISE TAX is:
Material dependent…
…Quantity– based Value added
….due when a movement takes
tax
place
© SAP 2009
The commercial handling of Oil products also includes some specific aspects that SAP had to
consider when developing the first industry solution with its ERP system.
The Marketing Accounting and Pricing (MAP) component is enhanced with additional functions
required for the downstream oil business.
The most important one is Formula and Average (F&A) Pricing which uses external quotations
such as Platts, Reuters, and others to determine the price of a material. It can be used both on the
purchasing side (MM) as well as on the sales side (SD). The purpose of formula and average
pricing is to enable the calculation of product prices based on external quotations over a set time
period. The calculation is performed with company-defined calculation rules. Currency
fluctuations within the time period are taken into account either by daily conversion or by
averaging.
An excise or excise tax (sometimes called an excise duty or special tax) is a type of tax charged on
goods produced within the country (as opposed to customs duties, charged on goods from outside the
country). It is a tax on the production or sale of goods. Typical examples of excise duties are taxes on
gasoline, tobacco, and alcohol. It is a separate tax from VAT.
The TDP component provides functionality for calculating and posting excise duty for dutiable
goods. Excise duty is determined when a goods movement occurs, and is based on the quantity of
material moved.

This component covers:
- Excise duty processing within the sales and purchase cycle
- Excise duty processing for inner-company goods movements (excise duty calculation for
material that is moved between two plants with various tax rates).
- Excise duty for production orders
- Calculation and posting of excise duty liabilities and claims for goods movements of dutiable
material.
- The use of several excise duty rates for a material
- The revaluation of inventories after excise duty rate changes
- Licenses for excise duty (ED) reductions and exemptions
- Split inventory management of the ED portion and the net price of a material
- A data pool for creating reports

Questions
Answer the following questions:

1. Oil & Natural gas consist mainly of which two elements?
2. What did oil deposits begin as?
3. How long will oil & natural gas reserves probably last?
4. Why is a dynamic quantity conversion important when handling oil products?
© SAP 2008
Carbon & Hydrogen
Microscopic plants and animals
> 50 years, some say 60 – 90 years
Because of the physical constraints: temperature and density can significantly change volume

Commodities and Hydrocarbon Product
Management: Lesson Summary
You should now be able to:

Explain the key differences between handling commodities and handling
discrete products.
Describe what oil products are, explain Hydrocarbon Product Management,
and outline why we need dynamic quantity conversion
© SAP 2009


© SAP 2009
There are numerous actors in the world of oil and gas. The best-known are the major oil companies
and OPEC. Furthermore, there are many more companies, organizations, and consultants which all
play a part in the “hydrocarbon universe”:
NOC – National oil companies manage oil production and defend national interests in the
hydrocarbon sector
Companies specializing in gas distribution, such as Gaz de France
National agencies and government departments with responsibility for energy matters (for
example, in the US, the Department of Energy (DOE));
International organizations such as OPEC (the Organization of Petroleum Exporting Countries),
OAPEC (the Organization of Arab Petroleum Exporting Countries), or the IEA (the International
Energy Agency)
Small independent oil companies (for example, taking over oil fields near the end of their useful
lives, or developing fields that have been abandoned by the major companies.
Companies operating in the oil sector as suppliers of services to oil companies, mainly for
exploration and production (Schlumberger, Halliburton and others). These companies are
involved in specific technical areas (geophysical surveying and analysis, drilling, depth imaging,
production equipment), supplying oil companies with personnel and equipment (third-party
services).
Source: www.planete-energies.com/content/oil-gas/companies.html

Organizational Structures: Lesson Objectives

Explain the difference between a National Oil Company (NOC) and an
Integrated Oil Company (IOC)
Describe the organizational structures of a "typical" IOC
Explain how Planning & Optimization is typically handled, as an example
business area
© SAP 2009

Organizational Structures: Business Example
John Doe is a new employee in an oil company, he needs to get an overview

on how the Supply Chain Organization is set up. Within a company structure,
the Supply Chain Management (SCM) is usually within a department called
Supply, or Refining & Supply, or Supply & Distribution, or Refining &
Marketing…
In this case, he will use the term Supply & Distribution (S&D) for the
department with the major Supply Chain Management process covering crude,
feed stocks, semi-finished products (blend stocks, re-run products), and, in
terms of production and distribution, finished products. S&D usually needs the
full scope of SCM.
He wants to look over the rim of his SCM tea cup. Who else can help him with
daily tasks? To be able to run an oil major he must not only focus on "Key"
business areas, but also on so-called support processes, like Financials and
HR.
© SAP 2009

Players in the “Battle for New Resources”
© SAP 2009
Energy Demand and Industry Trends are driving the Market in Upstream towards a “Battle For New
Resources”:
3 key players are battling for access to the oil reserves represented by the earth on the left so they can
Explore, Appraise, Develop, and Produce into crude oil supply represented by the tank of oil on the
right. To accurately describe the full value chain, we need to add one more step in the life cycle of all
oil & gas assets and that is the Dispose phase where assets reach the economic end of their life and
are either traded to another party or eventually abandoned.
Let us now introduce the three major sets of “combatants” in this increasingly fierce battle for
resources
Let’s start with the National Oil Companies, or NOCs for short, that sit on top of the majority of the
worlds new oil & gas reserves and are getting much more demanding in the control of their access.
They have an obligation to provide for the energy and fiscal security of their nations’ people,
returning the highest value from its finite national and natural resources where their focus is more on
sustainability rather than profit
Then, there are the Integrated majors, who have well established and mature markets,
infrastructure, and capabilities, with the obligation to serve the ever growing demands of their
customers and shareholders, so access to the necessary new resources to meet these demands is key
to their success so that they compete. They tend to have a more balanced perspective of the
profitability versus sustainability balance.

Last but certainly not least are the Independents that fill vital and important niches within this value
chain by exploring and developing energy resources that are uneconomical for a variety or reasons
(small reserve base, declined production within mature assets, and so on). Their obligation is to
exploit one of their unique capabilities and/or low cost base to either bring to market new niche
resources or harvest mature resources that are no longer attractive plays to others. While their focus
is more slanted towards profitability, in either case, they are adding to the overall energy supply
picture in very important ways.
While we’ve starkly painted these three groups as “combatants”, we need to also acknowledge that
all members in the value chain do also “play nicely together” to convert these reserves into crude oil
& gas. Yet, while they do so, you can also imagine, there are constant and growing battles along this
value chain based on these conflicting objectives and obligations to their key stakeholders.

NOC versus IOC - Major Players Supplying the
World Oil Market
A national oil company (NOC) is an oil company that is fully or majority owned by a
national government. According to the US Energy Information Administration, NOCs
accounted for 52% of global oil production and controlled 88% of proven oil reserves
in 2007.
Due to their increasing dominance over global reserves, the importance of NOCs
relative to International Oil Companies (IOCs), such as ExxonMobil, BP, or Royal
Dutch/Shell, has risen dramatically in recent years. NOCs are also increasingly
investing outside their national borders.
An International Oil Company (IOC) is an oil company that is mainly private owned.
© SAP 2009
Although investor-owned oil companies are often thought of as those most responsible for world oil
production, government-controlled companies actually control the majority of both current
production (more than 52% in 2007) and proven reserves (88% in 2007), one indicator of future
production potential.
Investor-owned oil companies, including ExxonMobil, Royal Dutch Shell, and BP (formerly known
as British Petroleum), are primarily concerned with maximizing shareholder return. These
companies, often referred to as international oil companies (IOCs), typically move quickly to
develop and produce the oil resources to which they have obtained access and to sell their output in
competitive markets.
National oil companies with strategic and operational autonomy that function as corporate entities,
including Petrobras (Brazil) and Statoil (Norway), often balance profit-oriented concerns and the
objectives of their country into the development of their corporate strategy. While these companies
may support their country’s goals, they are primarily commercially-driven entities.
National oil companies that operate as an extension of the government or a government agency,
including Saudi Aramco (Saudi Arabia), Pemex (Mexico), and PDVSA (Venezuela), support their
government’s programs either financially or strategically. They also provide fuels to domestic
consumers at prices lower than world customers pay. These companies do not always have the
incentive, means, or intention to develop their proven reserves at the same pace as commercial
companies. Due to the diverse situations and objectives of the governments of their countries, these
national oil companies pursue a wide variety of objectives that are not necessarily market-oriented,
such as employing their citizens, furthering a government’s domestic or foreign policy objectives,
generating long-term revenue, and supplying inexpensive domestic energy.
Major NOCs include (Source “Wikipedia“): Saudi Aramco, ONGC, Pemex, KPC, Petrobras, Qatar
Petroleum, Petronas, Rosneft, Gazprom, Sinopec, PDVSA, Statoil Hydro, Sonagol, CNOOC (China
National Offshore Oil Co.), Sonangol and many more.

Further Players
OPEC countries work together to influence world oil supplies.

Oil reserves are increasingly concentrated in OPEC countries and national oil
companies.
A Regional Player (often an NOC’s or IM’s subsidiary) is a private company acting in

a certain region. It may be involved in many sectors of oil and gas business.
A Niche Player is a local company acting only in a definite sector of oil and gas
business, for example, Service companies, Engineering companies, Drilling
companies.
© SAP 2009
In addition to influencing the operation of national oil companies, governments of oil-rich countries
can directly impact world oil supplies by changing financial regulations, for example, tax structures.
Such a change would force commercially-oriented companies to change production plans or form
strategic alliances with other major producing nations, such as OPEC members. As the majority of
reserves becomes increasingly concentrated in fewer countries, changes in leadership or strategic
alliances of individual countries have more substantial effects on world oil supply and energy
markets than in past years.
OPEC is a group of some of the world’s most oil-rich countries that coordinate their oil production
policies. As of January 2009, there are twelve member countries in OPEC: Algeria, Angola,
Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and
Venezuela. Together, they controlled approximately three-quarters of the world’s total oil proven
reserves in 2007.
OPEC attempts to influence the amount of oil available to the world by assigning a production quota
to each member. The track record of compliance with OPEC quotas is mixed, as production
decisions are ultimately in the hands of the individual member countries. All OPEC member
countries have a national oil company and most also allow international oil companies to operate
within their borders. An OPEC member country wishing to reduce output in response to a cut in its
quota implements its decision by restricting the production of the oil companies operating within its
borders. Taken together, the decisions made by OPEC members influence the overall oil market by
determining how much of the gap between world demand and non-OPEC supply is filled by their
production.
OPEC countries and national oil companies already hold the majority of proven oil reserves, and the
percentage of reserves they hold is increasing. This concentration further establishes their future
importance as major players in the world oil market and could potentially increase market tension
and upward pressure on prices as world oil demand rises.
Organizational Structure & Business
Processes
Go to Market CHEMICALS
Upstream Supply, Transmission & Trading
UTILITIES/ENERGY
Source
Liquefaction to Pay Re-gasification EP & S&D
XTL
Upstream XTL Downstream Marketing Retailing
Exploration Development
& & Gas Processing
Supply to Market
Hydrocarbon SupplyPrimary Distribution
Gas Secondary Meter Sales &
Appraisal Production
Supply, Transmission &
& Gas Transmission Process
Mgt
Terminal
Distribution Operation Retailing
Value
R&D Planning Sourcing Manufacturing Delivering
Energy Provisioning Selling &
Trading Sec. Servicing
Value
Exploration Supply & Gas Refining& Primary Terminal Distr. Sales
Service&
Go to
Sales
Value
& Appraisal Transm. Manuf. Distr. Mgt Retailing
Customer
Commercial
Dev.& Downstream Metering

Production Refining &
Quality Management and Compliance Service
Marketing & Delivery
Manufacturing Retailing Service
Finance and Analytics Collaboration
Corporate Services
Finance and Analytics
Human Resources
Corporate Services
Operations Support
Finance and
Human Analytics
Resources
Corporate Services
Operations Support
Human Resources
Operations Support
© SAP 2009
This picture describes possible value chains within an oil & gas company: From exploration down to
retailing. Let us discuss the most important tasks of the corresponding units…
The Upstream group of scenarios covers all business processes related to the exploration,
development, and production of crude petroleum, from the decision to increase petroleum reserves to
the tank or pipeline from which extracted petroleum is lifted and further shipped along the supply
chain. Upstream oil and gas companies are consistently challenged to find new petroleum reserves
and produce as much petroleum as possible as fast as possible, whilst minimizing costs. As the
search for new petroleum reserves spreads to further frontiers, oil and gas companies must be able to
think globally and act locally, which requires strong global collaboration, and often reorganization.
The upstream industry segment is also highly regulated, especially in terms of health, safety and the
environment. This means that oil and gas companies must carry out and monitor their activities well
to comply with many regulations, as well as render auditable information that accurately shows
compliance (or non-compliance) with company, industry, or governmental regulations at all levels.
The Supply & Trading scenario group covers all business processes for the management and
execution of the complete set of bulk supply chain activities from initial planning right through to
final settlement. This applies for both the Midstream supply chain sector (for example, crude oil
from its release out of Upstream processes to the handover to the refinery) as well as the Primary
supply chain sector (refined products from the refinery to the final bulk terminal or customer). The
complete spectrum of bulk supply chain hydrocarbons can be managed within this scenario group,
from crude oil to refined products, to natural gas and liquid gases. Key processes include planning
and optimization, operations and scheduling, execution, and settlement, plus trading and risk
management. Key to this scenario group is managing all processes in a streamlined, consistent, and
transparent manner. Plans must flow into operational activities, invoicing and settlement must be
natural progressions of scheduling, and trading must maintain a real-time overview of open positions

and be able to mitigate risk accordingly. In short, the supply chain needs to be managed as a single
entity to achieve optimum results, in terms both of process, data and interaction. Each incidence
where this is not the case reduces the effectiveness not just of the immediately subsequent steps but
potentially throughout a whole network of indirectly dependent activities.
Downstream Marketing & Retailing covers all business processes, from managing terminals to
marketing and selling hydrocarbon products to commercial and retail customers. Marketing and sales
processes include marketing, sales planning, and the complete opportunity to cash process
throughout various channels (for example, interaction center and Internet). Processes related to the
secondary distribution business are management of stock at the terminals and transportation of bulk
products. Finally, service station fuels management and convenience retailing covers all processes
related to management of fuels as well as dry goods at the service stations.
Enterprise Asset and Service Management offers complete asset life-cycle support, from investment
planning to decommissioning, with real-time, detailed information about quality, performance, and
costs of all equipment. It helps companies to manage capital expenditure better, reduce operating
costs, improve asset utilization, and collaborate with engineering and maintenance contractors. It
also enables both long-term and short-term planning, optimization and deployment of resources
(people, tools, parts, and so on). The Enterprise Asset and Service Management portfolio covers
three key business areas: Investment Planning, Design & Construction, Sourcing and Procurement,
and Maintenance Operations & Logistics. These are described in further detail on the next level of
the solution map. Included with Enterprise Asset and Service Management are the solutions for
business processes, the technological tools and the supporting infrastructure a company needs to
manage its assets along the asset life value chain. Asset-related business processes, such as work
clearance management or remote logistics management round out the solution offering, covering
additional oil and gas industry specific business requirements. Tools such as mobile solutions and
collaboration platforms, allowing for advanced communications between all parties involved in the
delivery of asset related services, are also included. Industry Best Practice business process
templates are also part of the overall solution package.

IOC Example - Organizational Structures
Overview - Trading & Supply View
International Oil Company
International Trading
(global/ regional)
Local Oil Company Local Oil Company Local Oil Company

Netherlands Germany .....
Local Tax Fuels Marketing/

Retail
Local Finance Refinery Production
Lubes Gas S&D Supply & Marine Aviation

Distribution
Supply Chain Supply Chain

Lubes Gas Supply Chain Fuels
© SAP 2009
As an example of a Supply Chain Organization let us have a closer look:
The organization varies by company and is named differently within the individual oil company.
Within a company structure, the Supply Chain Management (SCM) is usually within a department
called Supply, or Refining & Supply, or Supply & Distribution, or Refining & Marketing. The
commonly used is the term Supply & Distribution (S&D) for the department with the major
Supply Chain Management process covering crude, feed stocks, semi-finished products (blend
stocks, re-run products), and -in terms of production and distribution- finished products. S&D
usually needs the full scope of SCM.
In most oil companies, SCM is also applicable within individual departments for specific product
lines: Liquefied Petroleum Gas (LPG); Lubes (in- or excluding Base Oil; sometimes base oil is
handled by S&D SCM); Jet Fuels (aviation-gasoline, -kerosene, -lubes), Asphalt (regular,
oxidized…) and Coke. There may be also SCM for specific customers handled by individual
departments: I&W – Industrial and Wholesale customers (usually heating oil, diesel, heavy fuel
oil and others, depending upon the branch of the customer); Marine (diesel, bunker fuel, lubes…).
The scope of SCM within these departments varies according to the specific business
requirements. There may be interactions, for example, Aviation or Marine just sell and S&D and
Lubes provide the products, that is, there is a shared SCM process.
Aviation and Marine in many companies are organized globally with their own global sales
systems. Companies may decide to interface these systems to capture local movements and
inventory in SAP. Billing may be captured as well, that is, whole accounting in SAP, order taking
and scheduling outside.
Retail is considered specific and not covered here. There is no typical SCM for hydrocarbons,
only for dry goods (convenience store).
- For Lubes and Gas SCM there are many similarities.
Example: Departments and Responsibilities of
S&D
SCM planning cycles (for example, daily, yearly), optimization
S&D Supply & Distribution inventory management, product contract economics
crude, feed stock,
semi-finished products, finished products
Purchases and Sales (term contracts, spot deals) for balancing, third-
Planning & Optimization party trading, w/o hedging, own production trading
Role: Planner
Trading
Update of planning cycles, vehicle and pipeline programming (primary
Role: Trader distribution)
Scheduling
Role: Scheduler Negotiation of transportation term contracts, programming of
available transportation, chartering capacity, safety/ environmental
Transportation issues, vessel screening
Role: Dispatcher
Terminal Operations Coordination of loads and discharges, terminal maintenance, physical

Role: Operator inventory measurements, postings of receipts and issues, gain/loss
management
Administration
Role: Administrator
Term and spot contract administration, claim handling, inventory
management (reconciliation, physical inventory adjustments)
© SAP 2009
This figure describes the subdivisions of a typical S&D Department. Here is a list of business units
using the full scope of SCM, and their main responsibilities:
Planning, Optimization; Role: Planner
Responsible for the different planning cycles (for example, yearly, monthly, weekly for day to day
business; longer term for strategic decisions). May include optimization. Usually only partly, for
example, refinery production or lubes blending. This business unit could also be responsible for
product exchange and term contract (purchase & sale) economics. Guidance is given on inventory
handling, min/max and targets.
Trading, Role: Trader
Purchases and sales as per planning signals using term contracts plus necessary spot deals to balance.
Depending on the company philosophy, third-party trading is used to optimize, with or without
hedging to secure wet deals. Usually, there is also a close link to upstream for own production
trading; that is, sales of surplus production or sale and purchase to optimize supplies (for example, to
minimize transportation costs).
Scheduling, Role: Scheduler
Daily operations as per planning cycles (usually the weekly/monthly cycles). Tanker-, Barge-, Rail-,
Truck- and Pipeline-programming for crude, feed stocks, semi-finished products, base oil transfers,
purchases and sales (primary distribution). Resulting slates (basically shopping lists) are bridging
Trading and Transportation, that is, they are the basis for all nominations to suppliers (or vendors),
customers, terminals, inspection companies and so on.
Transportation; Role: Dispatcher
Negotiation of transportation term contracts to cover basic transportation requirements.

Programming of available transportation units based upon slates from scheduling. In- (or out-)
chartering of capacity to balance coverage. Safety / Environmental issues, vessel screening (ship,
crew safety status, technical condition, ship safety record).
Terminal Operations (including refinery distribution terminals); Role: Operator
Coordination of loading and discharging of different transportation units (berth/loading rack

scheduling…). Terminal maintenance: Tanks, racks, berths, pipes, gauging systems and so on.
Posting of Issues and Receipts and physical inventory measurements. Gain/loss management.
Administration; Role: Administrator
Term and spot contract administration (purchase, sale, exchange). Claim handling (contract pricing,
product gain/loss, demurrage …). Inventory management* (reconciliation, physical inventory
adjustments…).
*This task may be with controllers rather then S&D. Common Change Management issue for SAP
implementations.
The same structure is applicable (fully or partially) to other departments like Lubes or I&W.

Supporting Processes Overview
Go to Market CHEMICALS
Upstream Supply, Transmission & Trading
UTILITIES/ENERGY
Source
Liquefaction to Pay Re-gasification EP & S&D
XTL
Upstream XTL Downstream Marketing Retailing
Exploration Development
& & Gas Processing
Supply to Market
Hydrocarbon SupplyPrimary Distribution
Gas Secondary Meter Sales &
Appraisal Production
Supply, Transmission &
& Gas Transmission Process
Mgt
Terminal
Distribution Operation Retailing
Value
R&D Planning Sourcing Manufacturing Delivering
Energy Provisioning Selling &
Trading Sec. Servicing
Value
Exploration Supply & Gas Refining& Primary Terminal Distr. Sales
Service&
Go to
Sales
Value
& Appraisal Transm. Manuf. Distr. Mgt Retailing
Customer
Commercial
Dev.& Downstream Metering

Production Refining &
Quality Management and Compliance Service
Marketing & Delivery
Manufacturing Retailing Service
Finance and Analytics Collaboration
Corporate Services
Finance and Analytics
Human Resources
Corporate Services
Operations Support
Finance and
Human Analytics
Resources
Corporate Services
Operations Support
Human Resources
Operations Support
© SAP 2009
In an oil & gas company, there are also business processes that exist across the value chain
including:
System management, Corporate communication, IT, Information Management, HSE, JV Mgt, HR,
Service management.
Financials / Analytics
Financial Supply Chain Management, Financial Accounting, Management Accounting, Corporate

Governance, Strategic Enterprise Management, Financial Analytics, Operations Analytics,
Workforce Analytics
Corporate Services:
Global Trade Management
Export control, Trade management, Restitution handling
Compliance Management
Product Safety, Hazardous Substance mgt, Dangerous Goods management, Waste management,
Industrial Hygiene & Safety, Emissions management, Occupational Health

Travel mgt
Travel & Expense management and analytics
Real Estate management
Portfolio management, Real Estate management
Human Resources
Talent Management
Recruiting, Performance management, Compensation management, Enterprise learning
Workforce Process management
Employee administration, Time and attendance, Payroll and legal reporting, Healthcare cost
management
Workforce Deployment
Project resource planning, Retail scheduling, Resource and Program management
Operations Support
Technology & Data management
Application & System management, Document management, Change & Configuration

management, Recipe management
Project & Portfolio management
Project planning & execution, Resource & Time management
Quality management
Document management, Change & Configuration management, Recipe management

Questions
Answer the following questions:
1. Who are the players in the “oil & gas” world?

2. What are the main aspects / challenges that drive these players to adapt their business
model?
3. List the main segments of the oil and gas value chain.
4. What are the main responsibilities of a dispatcher in the Transportation Department
© SAP 2008


© SAP 2009

SAP - Excelling in 24 Industries
Aerospace
SAP for Oil andAutomotive
Gas: 1 out of 24 Industries, butChemicals Consumer Defense &
Banking
& Defense Products Security
25 years of SAP industry expertise
Higher
790 IS-Oil installations - solution is industry
Engineering,
standard Industrial
Education
Construction Healthcare High Tech Machinery & Insurance
& Components
& Operations
1,678 Active installations withResearch
all solutions
1,100,000 users (~10% of SAP)
Life
Running the core business of ourMill
O&G Oil and Professional
Media Mining
Sciences
customers Products Gas Services
97% of the Oil and Gas companies listed in

Fortune 500 are running SAP
Travel &
Public Telecom- Wholesale
SAP Retail
is the Trusted Advisor for the Oil and Logistics Utilities
Distribution
Sector munications
Gas Industry Services
© SAP 2009

SAP Oil and Gas Solution Map
Suppliers & Exploration & Development & Hydrocarbon Refining & Primary Terminal Secondary Commercial Sales Customers
Partners Appraisal Production Supply & Gas Manufacturing Distribution Management Distribution & Retailing & Channels
Transmission
Upstream
Exploration and Appraisal
E&P Contract Management
Liquid and Gas Production
Allocation and Settlement

Bulk Supply Chain Planning and Optimization
Bulk Supply Chain Operations and Scheduling
Bulk Supply Chain Execution and Settlement
Bulk Supply Chain Reporting and Analytics
Physical Oil and Gas Commodity Trading
Oil and Gas Paper Trading and Risk Management

Refining Operations
Lubes Manufacturing Operations

Marketing Planning and Execution
Sales Planning and Account Management
Opportunity to Cash
Customer Service
Terminal Management
Hydrocarbon Products Transportation
Service Station Fuel Management
Convenience Retailing

Capital Portfolio Management, Design & Construction
Sourcing & Procurement
Maintenance Management
Remote Site Logistics
Enterprise Management & Support

© SAP 2009

Exploration & Production Solution Portfolio
Exploration& Refining & Primary

Midstream Marketing Retailing
Production Gas Plants Distribution
Production Production & Remote Logistics

Joint Venture
Sharing Revenue Management
Accounting
Accounting Accounting
Cash calls Revenue calculations & Managing production data Goods Receipt
Partner billing
allocations Field data capture Shipping
Government royalty
Allocations of costs Upstream graphics Material Tracking
reporting
Equity change Returns
Cost recovery tracking
handling
© SAP 2008

Refining / Manufacturing Portfolio

Enterprise Asset MII - Manufacturing Lubes

Environmental
Management Integration & Manufacturing
Intelligence Compliance
Plant Maintenance Real-time Analytics, Compliance Mgmt. Production Planning

Mobile Asset Management KPIs Permit Management Detailed Scheduling
Supplier Relationship Dashboards Emissions Mgmt. Manufacturing
Management Real-time connectivity, Greenhouse Gas Mgmt. Operations
Linear Asset Management alerts
Operation Level Costing
© SAP 2008

Downstream Solution Portfolio

Trader’s & Commodity Oil and Gas

IS-Oil
Scheduler’s Trading & Risk Secondary
Downstream
Workbench Management Distribution
Supply chain Market analysis Hydrocarbon Product Mgmt. Telesales

planning & opt. Trade strategies Exchange Business Tour Planning
Scheduling Position reporting Contract & Sales Orders Data Collation
Execution & Deal capture, Pricing Commodity Pricing Interfaces to External
Settlement Risk management Excise Tax Handling Systems
Hedging Bulk Transportation
Settlement TAS/TPI Interfaces
© SAP 2008

Service Station and Convenience Retailing
Portfolio

Site and Business

Convenience Fuels Headquarter Analysis &
Retailing Management Accounting Reporting
Assortment Planning Fuel inventory Rebate Management Sales Analysis

Merchandising Fuel Pricing Payment Card Vendor Performance
Retail Pricing Payment Card Processing Loyalty Card
Promotions Handling Site Settlement Processing
Dealer Settlement Site Expense Invoice Franchisee Support
© SAP 2008

Overview Key Partners
Oil and Gas Industry
Partner Solution
TechniData SAP EH&S (Environmental Health & Safety)
Adobe SAP Interactive Forms by Adobe
Implico SAP Oil and Gas Secondary Distribution

OpenTAS
NRX SAP Visual Information for Plants by NRX (US only)
Asset Center, VIP (Global)
OpenText SAP Archiving and SAP Document Access
Livelink ECM – Records Management
RWD SAP Productivity Pak by RWD
Vendavo SAP Price and Margin Management

KSS RackPrice, PriceNet
Triple Point Commodity SL
Meridium Reliability Centered Maintenance and Optimization (RCMO)
Quorum Land Lease Management & GIS
TIPS Gas Plant
Syclo Mobile Asset Management
© SAP 2009

Driving Innovation within SAP’s Oil and Gas
Communities of Innovation
Industry
advisory
council
Industry
value network
Enterprise
services and
standards
Business
Process Expert
community Several hundred
SAP Developer individuals from the
Network oil and gas industry
User groups
© SAP 2009

Company Organization: Unit Summary

Understand the major drivers and challenges of the oil and gas industry
Explain why the handling of commodities is different from dealing with discrete
products
Describe how a “typical” oil and gas company is set-up.
Give a high-level explanation of the SAP portfolio for oil and gas companies
© SAP 2009

Upstream - Exploration & Production
Contents:
Geological Basics
Exploration
Production
Petroleum Engineering
© SAP 2009

Upstream - Exploration & Production

Explain the basics of exploration and production of hydrocarbons and the key
differentiators to other industries
© SAP 2009

Course Overview Diagram
1 – Oil & Gas Business Processes
Hydrocarbon
Exploration Development Primary Commercial
Supply & Gas Refining & Terminal Secondary
& Appraisal & Production Distribution Sales &
Transmission Manufacturing Management Distribution
Retailing
2 – E&P, Upstream
3a – Refining &
Manufacturing
3b – Midstream

Retailing
Support
© SAP 2009
Upstream
Exploration and Appraisal; E&P Contract Management; Liquid and Gas Production; Allocation and
Settlement
Bulk Supply Chain Planning and Optimization; Bulk Supply Chain Operations and Scheduling; Bulk
Supply Chain Execution and Settlement; Bulk Supply Chain Reporting and Analytics; Physical Oil
and Gas Commodity Trading; Oil and Gas Paper Trading and Risk Management
Portfolio & Project Management, Asset Information Management, Sourcing & Procurement;

Upstream - Exploration & Production:
Unit Overview
Upstream: Exploration & Production

Lesson 1: Exploration & Production basics
Lesson 2: Exploration
Lesson 3: Production
Lesson 4: Petroleum Engineering
© SAP 2009

Lesson 1

Lesson 1: Geological Basics
© SAP 2009

Basics of Exploration & Production: Lesson 1
Objectives

Understand basics of geology
Explain the basics of the formation of oil and gas
Describe the essentials of a reservoir
© SAP 2009

Basics of Exploration & Production:
Business Example
Oil and gas are natural resources that can be exploited from under
ground. To lower risk in exploration and production, oil and gas
companies need to understand the formation and distribution of
hydrocarbon accumulations on a global and local scale. Once an oil
or gas well is successfully drilled, further risks during production
need to be lowered. A sophisticated petroleum engineering
approach that relies on state of the art technology in multi-billion
ventures is necessary.
© SAP 2009
Proven world oil reserves 2008: 1,258.0 billion bbl
y 1,408.7 billion bbl with Canadian Oil Sand
y Based on the 2008 world oil reserves, oil production would last for 47 years
Total world gas supply in 2008: 3,065.6 billion m³
Proven World Gas Reserves 2008 185,000.0 billion m³
y Based on the 2008 World Gas Reserves, gas production would last for 60 years

Planet Earth - The Giant Onion
Like an onion, the Earth consists of different layers.
64
00
km
For petroleum geology, only the a thin layer of the lithosphere, the uppermost crust is of
interest (about 10 km). In a sphere of 2 m diameter, this would be a thin layer of less than 2
mm thickness.
© SAP 2009
Oil and gas are resources, which are naturally present on earth. Humans did not always consider
these resources to be useful. Areas where petroleum was seeping out on the surface were considered
as spoiled areas: petroleum was something that polluted soils and water. This changed dramatically
when people discovered how useful it was – first as fuel for lamps to bring light to homes and cities,
and later for energy generation. It became even more important after the industry developed more
and more products that are based on oil. Soon, oil and gas turned into resources that are intensely
sought after. Only in very rare cases do oil and gas appear naturally at the surface; most of the time it
hides deep below thick layers of rock. To find it, a profound knowledge of the earth and a huge effort
of investigation is required.
Compared to the size of the earth with a diameter of more than 12,000 km, the interval where oil and
gas are usually found is very small. Only in the upper 10 km of the earths crust are the conditions
right for oil to remain stable over a long period of time (in greater depth it is usually too hot and the
oil slowly decays). For a better understanding of the techniques used to find the oil, we first provide
an introduction to geology, to see the processes that work together for the generation of the oil and
gas and the prerequisites for a reservoir where oil and gas can accumulate to an amount that is
economical to exploit.

Play Concept: Source Rock, Reservoir Rock,
Trap, Migration
Drilling Platform
Cap Rock
Oil & Gas
Reservoir
Reservoir
Trap
Rock Trap
Oil & Gas
Migration
Source Rock
Fault
© SAP 2009
Oil and gas are very mobile and because they are lighter than any other components that make up
rock formations, they move up. If this movement is not stopped, it continues until the surface is
reached and the oil and gas seep out, either escaping into the atmosphere (the gaseous components)
or staying at the ground waiting for biological deterioration. In some cases however, there is an
impermeable layer between the source rock were the oil and gas are formed and the surface. If this
is the case, the migration comes to an end and oil and gas accumulate below that seal, which is
called cap rock. An accumulation, however, only occurs if there is enough porosity in the rocks
below the cap rock. If this is not the case, the oil and gas migrate laterally until a new escape is
found to continue the journey further up, or until a porous rock is reached. For these reasons,
comparably small amounts of oil and gas are found in the source rock and the reservoirs are
somewhere else above or laterally from the source rock.
There must be a source rock where the formation of the hydrocarbon takes place
y A source rock is a type of rock that can generate oil and/or gas. In most cases, organic black
shales form source rocks. To produce and release/expel hydrocarbons, the rocks have to
experience higher temperatures and pressures. Hydrocarbons are generated and expelled from the
source rock. After expulsion, they migrate (flow) into a reservoir rock
Reservoir rock – porosity: There must be a porous rock in which the hydrocarbons can accumulate
Reservoir rock – permeability: The pores must be interconnected so that the fluids can move within
the rock.
Cap rock: Some kind of barrier or seal must be above and to the sides, which will prevent the
hydrocarbons from escaping upwards or laterally.
Trap: A trap is a favorable structure or stratigraphic feature that controls the shape of the reservoir
If any one of these conditions is not present, no oil or gas can be accumulated. The term ‘play’ is
used twofold in the oil and gas industry:
it describes the extent of a petroleum-bearing formation
it means all the activities associated with petroleum development in an area.

Lithosphere: Minerals and Rocks
Granite
(Rock)
Quartz Feldspar
(Mineral) (Mineral)
Mica (Mineral)
Rocks are all naturally occurring solid aggregates of minerals.
A mineral is a naturally occurring inorganic solid that possesses a definite chemical structure,
which gives it a unique set of physical properties.
1) It must be naturally occurring
2) It must be inorganic (was never alive)
3) It must be a solid
4) It must possess a definite chemical structure
© SAP 2009
The first piece of the puzzle is to understand what makes up the earth’s crust. Most people consider
the layer of the earth they interact with as rock, when it is hard, or as ‘dirt’ when it is soft and
consider this as something ‘dirty’. However, some parts of that dirt called ‘minerals’ are considered
to be of value (for example, gems such as diamonds) as well as being of some importance in the
human diet. This understanding is not sufficient when it comes to geology. A geologist defines a
‘rock’ simply as an aggregate of minerals. The minerals are the building blocks of a rock. A rock is
usually formed by a mixture of several different minerals. Only in rare cases, does a rock consist of a
single mineral. Certain properties of the rock, such as color, come directly from the mineral. Other
properties, such as the hardness of a rock, are only partially influenced by the minerals that make up
the rock. For example, a sandstone which consists of the hard minerals of quartz grains can be very
soft, if the cement that holds the grains together is only partially formed. In our example on the
figure, we see a Granite that mainly consists of three different minerals – Feldspar, Quartz, and Mica
– and these minerals are responsible for the different colors found in the rock.
Minerals on the other hand have a very precise definition (see slide). Following this definition, oil
and natural gas which are not solids, and which once were ‘living’ (they are the remains of
organisms), are not classified as minerals.

What are Rocks and What Types of Rocks
Exist?
Igneous rocks originate from processes within the earth.

Plutonic rocks, such as granite, form deep in the earth‘s crust and intrude into other rocks.
Magmatic rocks, such as basalt, also form deep in the earth‘s crust and extrude onto the
surface.
Sedimentary rocks originate from processes on the surface of the earth.
Organic deposits, such as limestones, are formed by and out of fossil organisms.
Clastic deposits, such as sandstones, are formed out of broken and eroded rocks.
Volcanoclastic deposits are formed by aerial deposition of volcanic material.
Chemical deposits, such as salt are formed during desiccation.

Metamorphic rocks originate from processes deep in the earth.
Metamorphism is a process that alters the chemical composition and structure of rocks
(re-crystallization). It occurs with increasing pressure and temperature.
Metamorphism can occur in both sedimentary and igneous rocks.
© SAP 2009

Lithosphere: Rocks 1
Magmatic - Intrusive (Plutonic)
© SAP 2009 Granite - Half Dome Yosemite
Plutonic rocks (named after the Greek god ‘Pluto’, the god of the underworld) are igneous
(magmatic) rocks that never made it to the surface while the magma was liquid. Magma often forms
at great depth (around 200 km) and slowly rises to the surface. Some magmas are more liquid and
others are more viscous. Those viscous magmas are rich in silicon and they tend to get stuck at some
point on their way up through the lithosphere, several kilometers below the surface. As temperature
is still high at that level, minerals have time to grow as the magma slowly cools down. The size of
the minerals you find in the different plutonic rocks are an indicator on how long it took the magma
to cool down. Those minerals that form first have the possibility to grow with their typical crystalline
form (such as feldspar which is often found in plutonites). Those minerals that form last, just fill up
the space that is left without having the chance to grow in their characteristic form.
The Half dome of Yosemite National Park is such a plutonic rock that was formed several km below
the surface. What we see it nowadays is a result of uplifting processes (tectonics) and erosion.

Magmatic - Effusive (Volcanic)
Fujiyama (JAP) Mount Etna (ITA)
Svartifoss in Iceland
Lava – liquid rock (magma) Hawaii (U.S.A.).
© SAP 2009
Volcanic (named after ‘Vulcan’, the roman god of fire) rocks form when the magma reaches the
surface. Some magmas have a very low viscosity (such as basaltic lava) and they flow out easily (for
example in Hawaii). Other magmas have a high viscosity and a high pressure has to build up first
before the magma extrudes. These eruptions are usually accompanied with big explosions. As part of
the eruption, a volcano is formed that usually consists of divers layers of ashes and lava which
accumulate over a period of several eruptions. Volcanic ash is magma that was pushed high into the
air as small particles (for example Mount Etna) and cooled as it fell back on the ground, close to the
center of eruption. As the magma cools down quickly at surface conditions, the minerals do not have
time to crystallize. Therefore, volcanic rocks usually only consist of some minerals that had formed
while the magma was on its way to the surface (which sometimes takes a long time) and the rest is a
very fine grained matrix that seems massive without crystals for the naked eye. Sometimes the
cooling process is so fast that a ‘glass’ is formed, where only microscopic sized minerals are present.
During the cooling process, contraction of the cooled rock occurs which leads to cracks in the rock –
the formation of the symmetric patterns of basalt columns (for example: Svartifoss in Iceland on the
slide).

Sediments - Siliciclastica
Fluviatile Sandstone – Buntsandstein in Pfalz (GER)
Aeolian Sandstone Cross-

Checkerboard Mesa Zion NP (USA) bedding
Horizontal bedding
Erosion into
underlying stratum
© SAP 2009
Any type of rock that is exposed at the surface will suffer from weathering. Weathering is basically
the wearing down of a rock by the permanent activity of the atmosphere - through wind, water, and
temperature. Quick temperature changes between hot and cold (such as changes in the desert)
eventually cause a rock to crack. Water that penetrates through pores and cracks also acts when
freezing as a very effective medium of erosion. Also chemical weathering through water and
atmosphere will cause the minerals in the rock to decay. The most resistant minerals will endure
longest the process. Quartz is one of those durable minerals and therefore found as main component
of ‘silicicalstic’ sediments, which is the most abundant type of sediment. Eventually wind and water
will pick up the components and transport them to a different place. As the components are laid
down, they form sediments. Eolian sediments are formed by wind (sand dunes) and fluvial sediments
are formed by rivers. A stratification which is usually caused by different grain sizes, can often be
observed in the sediments (see lower right on the slide). This stratification on the other hand allows
conclusions about the processes at time of deposition, which is important to reconstruct the
depositional environment. Loose and unconsolidated sediments will turn into hard sedimentary rock
by the processes of cementation and compaction as they get buried below other layers of sediment
over time.

Sediments - Carbonates
Coral reefs are the source for carbonate rocks

Bora Bora atoll, Polynesia
Carbonates – Drei Zinnen, Dolomites (ITA)

© SAP 2009
Carbonates are much less abundant than siliciclastic sediments. The majority of sediments that form
carbonate rocks have not experienced a long transportation. The main mineral of carbonate rock is
calcite that is easily solved by acids (such as atmospheric CO2 dissolved in rainwater). It is
‘chemically’ weathered and the rock is dissolved rather than transported over large distances.
Therefore, a different mechanism is responsible for the formation of carbonate rock. It forms either
through chemical or biological processes. Corals, which grow in huge colonies that eventually form
reefs are the builder of the biogenic carbonates. As corals best grow in the tropics, this is where you
can observe the formation of reefs today. Those reefs are constantly worn down by the wave activity
at the surface and constantly rebuilt by the corals, which leads to a huge amount of detritus that
eventually turns to a carbonate rock. Hence, the rock is mainly formed by the detritus that is
accumulated in the lagoon behind the reef, rather than by the reef itself. Lots of other marine life that
build calcareous shells can contribute to the formation of carbonates. However, oceanic water
beyond a certain depth will dissolve all carbonate that sinks to the seafloor (CCD = Carbonate
Compensation Depth). Therefore, the formation of carbonate rocks is usually restricted to shallow
marine environments. About 10% of Carbonates is formed chemically, by precipitating directly from
water. This is described in the next figure.

Sediments - Chemical
© SAP 2009
There is another group of sediments, which contributes only a relatively small amount to the total
volume of sediments. However, this group acts as a very effective seal between layers and therefore
oil and gas reservoirs are often found where these sediments are present in a considerable thickness.
Chemical sediments are neither formed by physical erosion (such as siliciclastics) nor by biotic
activity (such as carbonates), but by chemical processes such as precipitation from an evaporating
water body. Today, this can be observed in any ‘intra mountain’ basin (basins surrounded by
mountains, where no outlet for the water exists) where periodic rains form lakes that eventually
evaporate. ‘Death Valley’ in the Mojave Dessert in western US is a good example for that (picture
upper left on the slide). On the other hand, whole seas can dry out when climate and geographically
conditions are right. This happened, for example, to the Mediterranean sea about 6 million years ago.
A low sea level caused the connection to the Atlantic being disrupted (the straight of Gibraltar
forming a natural barrier) and evaporation in the Mediterranean being much higher than water being
supplied by rivers caused the sea to slowly dry out, leaving behind a thick layer of salt. Evaporates
typically show a distinct sequence of minerals, as some minerals precipitate first and others only in
the very last stage of desiccation.
Salt, being lighter than other rocks, starts to migrate when covered by a thick layer of sediments. The
salt eventually moves upward at certain locations, forming domes. These domes are fed by the
underlying salt layer, as the salt migrates laterally in that layer towards the dome. Even though this
type of sediment has a very low abundance compared to other sediments, they have a particular
importance for the formation of oil & gas reservoirs as they form a perfect seal above a potential
reservoir and due to their mobility, any potential cracks and fissures ‘heal’ quickly. Furthermore, in
areas with halokinesis (= the mobilization and flow of subsurface salt, and the subsequent
emplacement and resulting structure of salt bodies) the sediment layers get pushed and tilted, which
also increases the potential of creating a trap for the oil and gas.

Why are Sedimentary Rocks so Important?
Hydrocarbon Reservoirs of the World
Carbonate reservoirs 60%
Although carbonates represent only 20% of the world‘s sedimentary record, they host the vast
majority of all hydrocarbon reservoirs
Example: Middle East and North African reservoirs…
Sandstone reservoirs 35%

A common problem is diagenesis which strongly overprints primary (sedimentary) texture
Example: German Rotliegend reservoirs, most North Sea reservoirs…
Producing analogues from tight reservoirs (that is, fractured sandstones): Hamra Quartzite,
Algeria
Fractured basement / volcanic / metamorphic <5%

All other reservoirs are usually also fractured, for example, matrix porosity in deeply buried
sandstones is usually low, production would most often be impossible...
Producing analogues from magmatic / volcanic dikes: Neuquen basin, Argentina
© SAP 2009

Metamorphic Rocks
Rock fold, Canadian Rocky Mountains,

Migmatite – Switzerland Jasper National Park, Alberta
Slate – Eifel (GER)

© SAP 2009
To complete the introduction to the different rock types, metamorphic rocks also have to be
mentioned. Metamorphism literally means to ‘change form’. Thus, metamorphism changes existing
rocks in size, shape, texture, and even the minerals they contain. Any rock, sedimentary, igneous, or
even metamorphic rocks themselves can be transformed by metamorphism. Metamorphism occurs
when rocks are exposed to pressure, heat and/or chemically reactive fluids where some or all
components (minerals) of the rocks are no longer stable. Time is also an important parameter in this
process. Metamorphism shows a wide variety from low-grade metamorphism where most of the
original structures of the rock are still preserved (for example, shale is transferred to slate) to high-
grade metamorphism, where the original rock can no longer be identified (for example, migmatite =
A coarse-grained, rock consisting of high-grade metamorphic components) could be formed from
any parent rock, but it can no longer be identified as all of the original structures are gone and
extensive recrystallization has occurred).
When directional pressure is applied to a rock at depth, it bends into folds. The formation of folds
does not occur at the surface as rock reacts brittle when not completely surrounded by high pressure
and breaks. Since metamorphism does not occur at surface conditions, but always below the surface,
the formation of metamorphic rocks is completely hidden from view.

Lithosphere: Rock Cycle
Cooling &
Melting
Solidification
(Crystallization)
Magma
Heat and Pressure
Wea
therin
gT
& de ransporta
posit tion Igneous
ion Rock Weathering
Metamorphic
Rock Weathering Transportation Transportation
& deposition & deposition
Heat &
pressure
(Metamorphism) Compaction and
Cementation
(Diagenesis)
© SAP 2009 Sedimentary Rock Sediment
The rock cycle shows the relations between the different rock types. The three types of rock which
we defined before (Igneous, Sediment, Metamorphic) are transferred into each other through various
processes. Heat and pressure will transfer any rock type into a metamorphite and eventually, as heat
is further increased, to a magma. When this magma then rises and cools, it turns into a plutonite
when staying in the crust, or into a volcanic rock when extruding at the surface. On the other hand,
any rock will be a subject of weathering and transportation as soon as it is exposed to the surface,
being transformed to a sediment, which eventually will turn into a sedimentary rock as further layers
deposit on top of the sediment and temperature and pressure increase to trigger diagenesis (the
mechanism of cementation of a sediment to sedimentary rock). When sedimentary rock becomes
buried deep within the earth or is involved in the dynamics of mountain building, it is subjected to
great pressures and heat. The sedimentary rock will react to this changing environment and turn into
a metamorphic rock.

Lithosphere: Plate Tectonics
© SAP 2009
By drawing the locations on a map where most earthquakes and volcanic activities take place, it
becomes obvious, that they are not randomly distributed throughout the surface of the earth but
rather aligned along certain structures. When mapping the ocean floor, it was observed that
geographical features, called mid ocean ridges extend throughout the oceans and these structures
also coincide with areas of earthquakes and (mostly submarine) volcanic activity. There is only one
location, where the volcanic activity that takes place at mid ocean ridges can be observed at the
surface: Iceland. When the cracks open at mid ocean ridges for the magma to pour out, the oceanic
plate is pushed a little sideways. Related to this type of volcanism is basaltic lava which is of little
viscosity and whose eruption is not very explosive. As the eruption ceases, the cracks are closed by
the cooling lava and for new lava to come out, new cracks have to open. As this process of creating
new oceanic crust is continuously ongoing, the earth’s surface would have to grow accordingly, if
there wasn’t a mechanism that consumes the crust again. This process is called subduction and it
occurs at those plate boundaries which are not part of mid ocean ridges. At these boundaries, one of
the colliding plates is pushed below the crust of the neighboring plate. Observing the collision
processes, we can notice several rules:
y when two oceanic crusts meet, it is usually the older plate that is pushed below;
y when a plate with continental crust meets with a plate boundary of oceanic crust, it is always the
oceanic crust that is subducted and
y when two continental crusts meet, eventually one of the crusts is pushed below the other.
The process of subduction is also accompanied with volcanism and earthquakes, but of a different
type than at the mid oceanic ridges. The magma that is related to subduction zones is usually more
of granitic type, with a high viscosity. Therefore, the eruptions are often very explosive. As one
plate is thrust below the other, the one on top is somewhat lifted and bent, which leads to the
formation of mountain ranges. The most impressive mountain ranges occur when continental crust
is colliding, as it is the case in the Alps and the Himalayas.
There are so many volcanoes along the edge of the Pacific Plate that it is called the 'Ring of fire'.
The ring of fire stretches from New Zealand, along the eastern coastline of Asia, and along the
western coast of North America. All that volcanism is related to subduction.

Lithosphere: Layers of the Earth
The driver behind tectonics is the heat inside the Earth. Large convection cells of
rising and hot material move the outer crust of the Earth. Tectonic plates “float” on
soft, ductile rock and, at the same time, are the outermost cold and solid part of these
convection cells.
Ridge
L” Lithosphere
Trench B P UL Trench
“SLA
Crust
As
Upper Mantle th eno
mantle sph
e re
700 km
Outer Core
Lower
mantle
Inner
Core
© SAP 2009
On this slide, you can see the mechanism which is considered to be the driving mechanism for plate
tectonics. It is called ‘convection’. Since no one can see into the inside of the earth it is a theory that
– by now – explains the observed phenomena. The deepest hole that was ever drilled has a depth of
20 km, which is merely a scratch considering the size of the earth. On a globe with a diameter of 2
meters, this would be a hole of about 3 mm depth. Therefore, only hypothesis is possible, derived
from indirect measurements. The main sources of information about the inside of our planet are
seismic waves which are generated during earthquakes. These waves indicate several zones with
different physical properties. As a result, a model of an earth consisting of several layers was
developed. The inside of the earth is considered to be hot, with the decay of radioactive atoms as the
assumed source of this heat. As radioactive decay is continuously ongoing, the heat must be
transferred somehow from the more interior areas. A very efficient process to transfer heat is
convection. This phenomenon can be observed when heating a pot of water on a stove. The water at
the bottom of the pot heats up faster than at the top and some of the already heated water starts to
move upward from the bottom to the top. This process does not happen evenly throughout the
bottom, but at some distinct areas only. Water moves up in certain areas and down in others; together
they form so-called convection cells. A similar process is postulated for the heat transfer inside the
earth’s mantle. In those areas where the heat rises, the mid ocean ridges form; at those areas where
colder material sinks down, the subduction takes place.

Geological Timescale as a 12 Hour Clock
4550 Ma: Formation of the Earth

2 Ma: first humans
4527 Ma:
The Earth is 4.6 billion
230 – 65 Ma: Dinosaurs Formation of the
Moon
years old. Geologists
CA. 380 Ma; First vertebrae
land animals
measure time in millions
of years before now. (Ma
65 M
a 4.6 Ga Ca. 4000 Ma: end of the Late Heavy
= mega annum, or
Ma
Bombardment; first life million years).
Cenozoic
750 - 635 Ma; two
Meso
Snowball Earths 251
If the age of the Earth
Pa
zoic Ha
de
a
leo
an were put on a 12 hour

M
2
zo
54
4 Ga
scale, then it would look
ic
1 Ga
3.8
like the graph to the left.
a G
Ca. 3500 Ma: Early life starts with
photosynthesis
starts Prokaryotes (certain
bacteria) at 4000 Ma or
02:00.
an
pr
The first land plants

he
o te
Arc
enter the world at 10:00.

ro
zo
ic
Legend 3 Ga
Dinosaurs lived from
Mammals 2 Ga 10:30 to 11:45.
Land plants
Animals Humans enter the world
Multi-cellular life
Eukaryotes G a at 30 seconds before
2.5
Prokaryotes noon.
Ca. 2300 Ma; atmosphere becomes
oxygen-rich; first Snowball Earth
© SAP 2009
Time plays an important role in human lives. As time passes, we turn from a newborn baby into
adults and, eventually, we die. Throughout our lives, the way time is experienced changes. For
children a year or even a few days seems a very long time and the time between vacations seems to
take forever. For an adult, a year passes quite fast, but it might seem long to wait for several years for
a promotion. Politicians plan in time cycles between elections and economy plans have 5 to 10 year
timelines. Time going beyond several decades is considered very long and hard to imagine and
already some hundred years are usually unimaginably long. For processes taking place in the earth’s
history however, hundreds or thousands of years are insignificantly short, as many processes take
hundreds of thousands or even millions of years and the whole history of earth goes back about 4.6
billion years. These time spans are completely beyond comprehension for humans. Therefore, it
makes sense to put the history of the earth into relation with a 12 hour clock. On such a clock, the
appearance of humans would be only 30 seconds before noon and our recent history of the last 2,000
years would be squeezed into 2/100 of the last second only – this is less than a blink of the eye. This
puts all our activities into perspective. Whereas we might be able to change the conditions on earth
in a way that makes it unfavorable to us and finally impossible for our species to survive, this will
not have a big impact on the overall development of the planet. Future scientists of another
intelligent species that might have developed in another few hundred million of years might wonder
about this ‘incision’ where many of the now existing species have died out. Just as we can observe
several incisions throughout the earths history and wonder what might have caused these
phenomena.

Sea Level Curve as Timescale
(Transgression / Regression Cycles)
North, 1985
© SAP 2009
The processes of sedimentation and erosion are closely connected to climate conditions. Hence, the
different layers of sediments can also tell us a story about the climate in which they where formed.
One possibility for climate change for a specific region lays in the mechanisms of plate tectonics that
push the plates across the different climate zones of the planet and expose continents to the
experience of different climate conditions throughout their history. However, the alteration in solar
radiation that reaches the surface of the earth also has an impact on climate change. Many different
factors have been distinguished so far that will cause the climate to change one way or another. As
some of the most important factors have to do with the position and inclination of the earth relative
to the sun that follows continuous, but cyclical changes, climate changes in the sediment record of
the earth can be observed to be cyclical. This is different to the previously described climate change
caused by plate movements, which are not cyclical, but random. Cycles of different orders – of short
and long duration – can superimpose on each other and it is a huge challenge to distinguish among
them.
As biotic activity is highest in phases of warm climate, this has an impact on where to expect the best
conditions for the formation of source rock for oil and gas. To measure biotic activity, sea level
curves can be used. High global sea levels often refer to warm periods, where the polar ice is
completely molten and sea levels can be more than 60 meters above the today's sea level. On the
other hand, during ice ages, the sea level can drop significantly – in the last ice age, the sea level was
more than 60 meters below the current sea level.
A high biotic activity is a precondition for forming our fossil sources of energy like coal, gas, and
oil. The process of the generation of coal is essentially different from the process of forming of oil
and gas. The following slides will show the differences.

Generation of Coal
Peat
Lignite
Coal
Time Pressure Heat
© SAP 2009
Coal is formed when peat is altered physically and chemically. This process is called "coalification“.
During coalification, peat undergoes several changes as a result of bacterial decay, compaction, heat,
and time. Peat deposits are quite varied and contain everything from pristine plant parts (roots, bark,
spores, and so on) to decayed plants, decay products and even charcoal if the peat caught fire during
accumulation. Peat deposits typically form in a waterlogged environment where plant debris
accumulated; peat bogs and peat swamps are examples. In such an environment, the accumulation of
plant debris exceeds the rate of bacterial decay of the debris. The bacterial decay rate is reduced
because the available oxygen in organic-rich water is completely used up by the decaying process.
Anaerobic (without oxygen) decay is much slower than aerobic decay.
For the peat to become coal, it must be buried by sediment. Burial compacts the peat and,
consequently, much water is squeezed out during the first stages of burial. Continued burial and the
addition of heat and time cause the complex hydrocarbon compounds in the peat to break down and
alter in a variety of ways. The gaseous alteration products (methane is one, for instance) are typically
expelled from the deposit, and the deposit becomes more and more carbon-rich as the other elements
disperse. The stages of this trend proceed from plant debris through peat, lignite, sub-bituminous
coal, bituminous coal, anthracite coal to graphite (a pure carbon mineral).
Because of the amount of squeezing and water loss that accompanies the compaction of peat after
burial, it took a quite high amount of peat material to produce a certain amount of coal. The peat-to-
coal ratio is variable and dependent on the original type of peat the coal came from and the rank of
the coal. In eastern and western Kentucky, for instance, it is estimated that it took a 10m thick layer
of original peat material to produce a 1m layer of bituminous coal.

Generation of Oil and Gas
Planktonic microbionts
provide the source
material for oil & gas
© SAP 2009
Crude oil is a naturally occurring liquid found in rock formations in the Earth, consisting of a
complex mixture of hydrocarbons of various molecular weights, plus other organic compounds.
According to generally accepted theory, petroleum is derived from ancient biomass. More
specifically, crude oil and natural gas are products of heating of organic materials (kerogen) over
geological time (kerogen is a mixture of organic material, rather than a specific chemical; it cannot
be given a chemical formula). Formation of petroleum occurs from hydrocarbon pyrolysis, in a
variety of mostly endothermic reactions at high temperature and/or pressure.
Today's oil formed from the preserved remains of prehistoric zooplankton and algae, which had
settled to a sea or lake bottom in large quantities under anoxic conditions (the remains of terrestrial
plants, on the other hand, tended to form coal as described in the previous slide).
Over geological time, the organic matter was buried under thick layers of sediment resulting in high
levels of heat and pressure (diagenesis). This process caused the organic matter to change, first into a
waxy material known as kerogen, which is found in various oil shales around the world, and then
with more heat into liquid and gaseous hydrocarbons via a process known as catagenesis.
Geologists often refer to the temperature range in which oil forms as an "oil window“ - below the
minimum temperature, oil remains trapped in the form of kerogen, and above the maximum
temperature the oil is converted to natural gas through the process of thermal cracking.
Although this temperature range is found at different depths below the surface throughout the world,
a typical depth for the oil window is 4–6 km.
In its strictest sense, petroleum includes only crude oil, but in common usage it includes both crude
oil and natural gas.
Both crude oil and natural gas are predominantly a mixture of hydrocarbons. Under surface pressure
and temperature conditions, the lighter hydrocarbons methane, ethane, propane and butane occur as
gases, while the heavier ones from pentane and up are in the form of liquids or solids. However, in
the underground oil reservoir, the proportion which is gas or liquid varies depending on the
subsurface conditions, and on the phase diagram of the petroleum mixture.

Source Rock
Different Types of Source Rocks (Kerogen)
Type I kerogen
This type originates from algal and
bacterial material and has a very high
potential of generating oil. It is very
often attributed to lake deposits. It also
requires not much activation energy
(that is, temperature) to generate
hydrocarbons.
Type II kerogen
Is the most typical kerogen type and of
marine origin. It contains fossil plankton
and can generate oil and gas.
Type III kerogen
This type originates from fossil land
plants and has a very high potential for
generating gas. In most cases it cannot
generate oil.
Type IV kerogen
This type is completely inert and cannot
Tissot & Welte (1989)
generate any hydrocarbons.
© SAP 2009
From top left to bottom right, the activation energy to transform the kerogen increases, as indicated
by increasing TAI (thermal alteration index).

What are Hydrocarbons?
Simple Forms
Methane CH4 Ethane C2H6 Propane C3H8
Hexane C6H14
© SAP 2009
As their name implies, hydrocarbons are mainly built, of the atoms carbon and hydrogen. The
smallest combination is CH4 – methane – which consists of one carbon and 4 Hydrogen atoms. A
hydrogen however can be substituted by another carbon atom and if two hydrogen atoms are
substituted, chains are formed. Hydrocarbons can form very long chains. Only a certain range,
however, is relevant for the petroleum industry. The short chains are gaseous at ambient pressure and
temperature (1 to 4 C atoms). Crude oil is a mixture of more than 100 hydrocarbon molecules that
range in size from 5 to more than 60 carbons in length. The hydrocarbon molecules in oil form
straight chains, chains with side branches, and circles.

What Types of Hydrocarbons Exist?
Measured in API Gravity
Solid hydrocarbons, extra heavy oil, or bitumen

API (American Petroleum Institute) gravity of less than 10°
Liquid hydrocarbons
API gravity between 10° and 70° High API
Gravity
Heavy oil: 10° to 22.3°
Crude
Medium oil: 22.3° to 31.1° > 25°API
Light crude oil: 31.1° to max. 45° Low API

Gravity
Condensate: 45° to 70° Crude
< 25°API
Gaseous hydrocarbons
API gravity of greater than 70°,
NB: The lower the API gravity, the higher the density!
SG (standard gravity @ 60°F) is:

141.5 ρOil
API gravity = − 131.5 SG =
SG 60°F
ρWater
© SAP 2009
Crude oil is a mixture of Hydrocarbons with various chain lengths. The longer the chains, the higher
the density and the viscosity of the liquid.
The petroleum industry has developed its own measure of density which is called API. API is the
acronym of the institute that established this unit of measure ‘American Petroleum Institute’. API
gravity is expressed in degrees API (°API). Water has API 10. The larger the number, the lighter the
material is. API > 10 will float on water API < 10 will sink. The API was introduced for practical
reasons as it leads to better readable scales on hygrometers. The API gravity is calculated from a
formula that involves the specific gravity (SG) and two constants. The constants were derived
empirically. API gravity = 141.5/SG minus 131.5
Based on API gravity, Crude oils can be classified as follows:
y Exatra-light crudes (condensates): greater than 45 °API
y Light crudes: between 33 and 45 °API
y Medium crudes: between 22 and 33°API
y Heavy crudes: between 10 and 22 °API
y Extra-heavy crudes: less than 10 °API
NB: Low API Gravity Crude has a higher density than crude with high API gravity

Reservoirs - Lake or Sponge?
© SAP 2009
People often think of an oil or gas reservoir as a large pool of liquid beneath the Earth’s surface, like
a subterranean pond. In reality however, the petroleum is entrapped in tiny openings in the rock, the
pore spaces. These pore spaces can either be caused by space between the individual grains of
sediments, or by leaching of certain grains or components of the rocks which leave behind small
vugs (cavities). Besides the pore space, which is the ‘porosity’, the permeability of the rock is
equally important. Permeability is about the interconnectedness of the pores and how easily fluids
can circulate through the sediment body.

Play Element - Reservoir
Reservoir Rock and Porosity Loss with Burial
Relationship between porosity and burial depth in different lithologies (Allen & Allen, 2006)
Sandstone Shale Carbonate
Porosity % Porosity % Porosity %
General relationship between dry bulk density of a

rock, porosity and burial depth (North, 1985).
© SAP 2009
When sediment is deposited in its original state, it contains many pores (space between sediment particles such
as sand grains) and inter pore connectivity (permeability). When the soft sediment becomes a sedimentary
rock, the pore space, as well as the permeability, decrease during burial. The process of becoming a rock is
called digenesis.
Long story short: source rocks require heat and pressure to generate oil, whereas the reservoir
characteristics usually deteriorate with increased burial.

Stratigraphic Traps and Structural Traps
Structural Traps
Anticline Traps Salt Dome Trap Fault Trap
Reef Unconformity Pinch-Out
Stratigraphic Traps
© SAP 2009
The rocks where oil and gas accumulate are called traps. It is important to have a clear understanding
of what a trap is and how it can be identified to successfully search for oil and gas. The two main
groups which are differentiated are structural traps and stratigraphic traps.
Structural Traps
Structural Traps are caused by deformation of the rock formations. Due to tilting or movements
along faults, the potential reservoir rock is moved in a way that allows the trapping of oil and gas.
Anticline Traps
An anticline is an upward folding of the strata, much like an arch. The petroleum migrates to the
highest point of the arch where its further escape is blocked by an overlying barrier of impermeable
rock.
Salt Dome trap
Here, we see salt that has moved up through the Earth, punching through and bending rock along the
way. Oil can come to rest right up against the salt, which makes salt an effective trap rock. However,
many times, the salt chemically changes the rocks next to it in such a way that oil will no longer seep
into them. In a sense, it destroys the porosity of a reservoir rock.

Fault trap
Fault traps result when a potential reservoir rock is shifted along a fracture (fault) in a way that it is
now neighbored by an impermeable rock that prevents the oil and gas from lateral escapement. The
fault itself also could serve as a seal, since along faults, fluids often migrate and precipitation of
minerals can occur. When in a later stage the oil migrates into the rock, it encounters the
impermeable barrier formed by the former fault and can not migrate any further.
Stratigraphic traps
A sequence of rocks is also referred to as a stratigraphic sequence. A stratigraphic trap is therefore

simply a trap where a porous rock is surrounded by impermeable rock. This differentiation already
took place at the time of the deposition of the rock rather than later due to structural changes as with
structural traps. For example, a beach sand is deposited at the same time as the adjacent fine grained
sediments in the lake and the also fine grained sediment of the floodplain in the back country. Later,
this beach sand can make a very well suited reservoir rock which is surrounded by impermeable fine
grained sediments that seal the reservoir, as the reservoir sands get thinner laterally and eventually
pinch out. The situation is similar with a coral reef that is surrounded by the mud of the lagoon.
Another stratigraphic Trap can occur at unconformities when rocks are tilted after deformation and
than eroded. If after that, a fine grained sediment is deposited on top, it serves as a cap rock for the
underlying sediments.

How Does Migration and Trap Filling Occur?
Oil leg
Crest
Spill point
Trap I is filled to the spill point and has a gas cap; Trap I is completely filled with gas; all its oil has
only oil is spilling upwards into Trap II; Traps III and been flushed upwards into Trap II; oil is now by-
IV are full of salt water and contain no oil or gas passing Trap I; Trap II is filled with oil is spilling oil
upwards into III which still has no gas cap; Trap III
has a little oil, while IV is still filled with salt water.
GWC = gas water contact
GOC = gas oil contact OWC = oil water contact
Trap I is unchanged, with gas spilling upwards into Trap

II; oil is by-passing Trap I; Trap II now has a gas cap and
is spilling oil upwards into Trap III; Trap III is now filled
North, 1985
with oil but still has no gas cap; Trap IV is dry.
© SAP 2009
Migration describes the process of hydrocarbons moving from the source rock to a reservoir. There
are two types of migration, primary migration (expulsion of hydrocarbons from the source rock
through micro fractures) and secondary migration (migration from one reservoir to another driven by
buoyancy as shown below).
Maturation of source rocks and transformation of kerogen into hydrocarbons is accompanied by a

significant volume increase. Hence, overpressure in the pores of a source rock creates the necessary
micro fractures and pathways for hydrocarbons to move out of the source rock.
Buoyancy means that less dense materials (such as oil) will try to rise up in a column of rock or
water.
The kitchen area of source rocks is to the left in the three sketches.

Which Natural Circumstances are Favorable
for Finding Hydrocarbons?
Petroleum plays are situated in

sedimentary basins. A basin is an area
where sediments can accumulate over
time, that is, a sink for sediments.
All play elements are related to
sedimentation and subsidence
(deepening) in the basin.
Sedimentation provides source and
reservoir rocks. Subsidence in a basin
increases temperature and maturity in
a source rock.
In principle, five general types of basins
can be distinguished:
Divergent settings (for example,
active rifts)
Intraplate settings (for example,
continental platforms or intracratonic
basins)
Convergent settings (for example,
trenches, foreland basins)
Transform settings (for example,
basins related to strike-slip tectonics)
Hybrid settings (any combination of
the above, such as intracontinental
wrench basins)
Klemme, 1980
© SAP 2009
On previous slides, we have discussed the play concept that comprises source, reservoir, seal, and
trap. Common to all play elements is that they require the presence of a basin for any sediments to
accumulate.

Basics of Exploration & Production: Questions
1) What are the three groups of rocks and the geologic processes in the formation
of each?
2) Why are plutonic rocks bad reservoir rocks?
3) What is the difference between the formation of coal and oil?
© SAP 2009

Basics of Exploration & Production: Questions
How is coal formed?

Rearrange the ten frames in the correct sequence to tell the story of how coal is formed
over millions of years
1 2 3 4
5 6 7 8
9 10
© SAP 2009

Basics of Exploration & Production:
Lesson Summary

Understand basics of geology
Explain the basics of the formation of oil and gas
Describe the essentials of a reservoir
© SAP 2009

Lesson 2

Lesson 1: Geological basics
© SAP 2009

Exploration: Lesson 2
Objectives

Explain the basic exploration techniques
Describe the different steps in the exploration process
Describe basic risking and portfolio management of upstream assets
© SAP 2009

Exploration: Business Example
Exploration for oil and gas basically deals with assessing and increasing
the chance of success of actually finding hydrocarbon accumulations.
Apart from direct and indirect methods, a rigid risk and portfolio
management is required. In this section, a virtual oil and gas company
carries out risking, budgeting, and planning of exploration activities in
Libya with RPM.
© SAP 2009

Exploration: Finding the Right Spot to Drill
$
$
© SAP 2009
The primary purpose of all investigations is to determine whether the geological formations contain
profitable commercial reserves. Before actual drilling starts, thousands of dollars have been spent in
securing seismic information and in buying leases. After drilling has started, costs are usually on a
per-meter basis, with the prices increasing along with the depth of the well. Investors want to know
as soon as possible when to cease drilling and abandon the project or whether to go on and complete
the well. Once a decision has been reached to continue with the venture, further costs lie ahead such
as running casing, cementing, perforating, testing and buying and installing tubing and production
equipment. To reduce the risk of a ‘dry well’, a lot of investigation is done prior to drilling to
identify areas with high potential for successful drilling. Once such a “likely” area is found, more
specific tests and investigations are made, and the information is used to construct subsurface maps,
and three-dimensional models of what lies under the Earth’s surface.

Exploration:
Drawing a Picture of the Subsurface
e
rik Geological Map
St
Dip
Axial Plane Hinge
3D model of the subsurface based

on data available on the surface Limb
Syncline structure constructed from

the data on the geological map
© SAP 2009
The search for oil begins with geologists and geophysicists using their knowledge of the earth to
locate geographic areas that are likely to contain reservoir rocks.
The geologist studies the surface of the earth and draws the structures he finds on geological maps.
From the structures on the surface, geological structures in the subsurface can be derived.
Constructing a three-dimensional model of the subsurface is the first step when trying to find
structures that could be likely to form a reservoir. However, the information available on the surface
very restricted and usually not sufficient to generate a comprehensive picture of the subsurface.
Many potential reservoirs are not related to structures which outcrop at the surface. Therefore,
additional tools have been developed for accessing the ‘inaccessible’ subsurface. One of the most
widely used exploration techniques today is seismology.

Geophysics
Principle of Seismic Surveys - Sonic Velocities
The image shows the distribution of

sonic velocities within certain rock
types.
Seismic reflection in the subsurface

occurs because the different rocks
(lithologies) possess different densities
and sonic waves may travel slower or
faster.
North, 1985
© SAP 2009
The word seismic comes from the Greek word seismos meaning an earthquake. In seismic surveying,
geophysicists use the same basic physical properties as the earthquake seismologists. In theory,
seismology is very simple. The earth is composed of layers which vary in density and thickness –
sound waves that are produced by a source (for example, an explosion) travel in all directions and as
they pass each of the layers; some of them are reflected back to the surface, where they are recorded
by a seismograph. Based on this theory, seismic reflection exploration - a powerful technique for
underground exploration - was developed and has been used for over 60 years now. Seismic waves
are essentially sound waves that travel underground at velocities of 3 to 6 km per second (2 to 4
miles per second), depending upon the type of rock through which they pass. Seismic reflection
techniques depend on the existence of distinct and abrupt seismic-velocity and/or mass-density
changes in the subsurface. These changes in either density or velocity are known as acoustical
contrasts (acoustic impedance).

Geophysics
Processing of Seismic Survey - Normal Move-out
Figure A
North, 1985
Figure B Figure C
© SAP 2009
The simplest case of seismic reflection is shown in figure A. Seismic waves are emitted by a source
into the ground, commonly by explosion, truck-mounted vibrators, mass drop, or projectile impact.
Energy is radiated spherically away from the source. One ray path originating at the source will pass
energy to the subsurface layer and return an echo to the receiver at the surface. In the case of a single
flat-lying layer and a flat topographic surface, the path of least time will be from a reflecting point
midway between the source and the receiver.
The sound receivers at the surface are called geophones and are essentially low-frequency
microphones. Signals from the geophones are transmitted by cables to a recording truck, which
contains a seismograph. The seismograph contains amplifiers that are very much like those on a
stereo music system. The sounds returning from the Earth are amplified and then recorded for later
processing and analysis. The purpose of computer processing is to separate echoes from other
sounds, to enhance the echoes, and to display them graphically. In the real world, several layers
beneath the Earth's surface are usually within reach of the seismic-reflection techniques. Figure B
illustrates that concept. Note that echoes from the various layers arrive at the geophone at different
times. The deeper the layer, the longer it takes for the echo to arrive at the geophone. Because
several layers often contribute echoes to seismograms, the seismic data become more complex.
The figure C shows a seismic survey record with 24 traces and one shot point at location B. These
traces are equivalent to geophones located on the ground. For better reading of the traces, positive
amplitudes are colored black and negative amplitudes are white. Geophones at increasing distances
to the seismic source record the same seismic event (reflection at a boundary between two materials)
at a later point in time because the travel time for the sound waves is longer to the distant geophones.
This effect is called “normal move out”. A horizontal reflector appears to be curved and cannot be
interpreted correctly. During data processing, this effect is removed.

Geophysics
Interpretations of Seismic Surveys
© SAP 2009
The seismic-reflection method is used to determine the spatial configuration of geological formations
in the underground. The figure shows conceptually what they try to accomplish with such a survey.
Each trace represents the data recorded by a geophone. The peaks of the seismic reflections have
been blackened to assist in the interpretation. This example is a very simple version of typical near-
surface geology that depicts a buried sand lens in a river valley. The deeper the sand lens below the
surface, the more difficult it is to detect, but the physical principles remain the same.

Geophysics
Seismic Resolution
Emery & Myers, 1996

© SAP 2009
This figure illustrates the resolution of seismic surveys. Big Ben is pictured for comparison in the
middle, and to the right, a gamma ray log run in a specific well. Surface seismic can only
differentiate rock layers over 10m thick which means that many of the reservoir features are not
captured. Smaller features, such as thin reservoirs and fractures, are "invisible“. An additional
problem is the limited capability of geophysical techniques to distinguish between water and oil.
Even though modern computer programs increased the interpretation capabilities significantly, there
is always the chance of misinterpretation of the subsurface features. The more data from wells that is
available for a surveyed area which can be used to calibrate the seismic reflectors with geological
elements, the more reliable the interpretation.

Geophysics
Land Seismic Surveys: Geophones and Vibrator Trucks
<- geophones aligned for a 2D seismic line
StatoilHydro, 2008
A group of several Vibroseis ™ trucks is

synchronized to generate seismic vibration.
StatoilHydro, 2008
© SAP 2009
The complexity of the seismic survey operation can vary enormously. There are, however, two main
types of seismic surveying. These are Two-Dimensional or 2D Exploration and Three-Dimensional
or 3D Exploration. 2D can be described as a fairly basic and inexpensive survey method, has been
and still is used very effectively to find oil and gas. 3D surveying on the other hand is a much more
complex and accurate method of seismic surveying, which involves greater investment and much
more sophisticated equipment than 2D surveying. Until the beginning of the 1980s, 2D work
predominated in oil and gas exploration, but now 3D is the dominant exploration tool and accounts
for over 95% of the surveys.
For seismic surveys on land, the energy required to image the subsurface is mostly induced through
vibrators and no longer through explosions as in earlier years. These vibration generating devices are
mounted on trucks and produce a defined spectrum of waves. Vibrations start at low frequencies
(deeper penetration) and accelerate to higher frequencies (better resolution but lower penetration).
Although it cannot be used on every type of soil or terrain, vibration seismic has many advantages,
as it can be used in populated areas without damaging or altering the surroundings. The geophone
(the receiver unit) is stuck into the ground with a spike. The geophone is sensitive to vertical ground
motion and moves with the ground as the seismic waves pass.

Geophysics
Marine Seismic Survey
Back network
Front network Paravane
Streamer
100 to 200 m
separation
Sail line
GPS
Source (airgun)
Compass Ship
Hydrophone
© SAP 2009 6 to 8 km length
Marine seismic operations use bubbles or bursts of compressed air from devices (airguns) towed
behind boats. High pressure air, at typically 130 to 170 atmospheres (2000 to 2500 psi), is supplied
to the airgun from the survey vessel via a hose. At the same time, streamers with hydrophones are
dragged behind the boats. The vessel sails in a straight line over a target, then turns back to shoot
another line parallel to the first. In a 2D survey, typically one streamer is towed behind the vessel. In
a conventional 3D survey, a boat drags around 10 to 20 streamers and each streamer consists up to
2000 hydrophones. The streamers are usually between 4 to 8 km [3 - 5 mi] long and 100 to 200 m
[300 to 600 ft] apart. Streamers tow depths are a compromise between the requirement to operate
these sensitive devices away from the surface weather and wave noise, which limits the usability of
the recorded data, and other technical requirements. The deeper the tow depth, the quieter the
streamer and the greater the immunity to weather noise, but also unfortunately, the narrower the
bandwidth of the data. Typically, the range of operating depths varies from 4 to 5 meters for
shallow, high resolution surveys in relatively good weather areas; and 8 to 10 meters for deeper
penetration, lower frequency targets in more open waters.

Geophysics
2D Seismics
Example of a cross
section in a 3D survey
with interpretation of a
single horizon
containing a
meandering channel.
Brown, 1999
© SAP 2009
In a 2d seismic survey, individual cross sections are measured within the study area. In the graphic,
each of the vertical lines represents a curve measured by a geophone. The horizontal axis gives the
position of the geophones and the vertical axis the ‘two way travel time’ (TWT). The time is
expressed as TWT, because the signal is received at the geophone after the time that was required to
travel from the source of the signal down to a reflector and up to the geophone. There is not a linear
relation between depth and time as each lithology that is passed by the waves has its own physical
properties. As described earlier, the positive amplitude (high acoustic impedance) is usually colored
black, whereas negative amplitudes (low acoustic impedance) stay white. The changes in amplitude
can either represent lithologic changes, or also changes in cementation or fluid content within the
same lithology. This adds complexity to the interpretation of the data. Within a known reservoir
rock, high negative anomalies (white spots) are commonly seen as a good 'sign' for petroleum
exploration as they suggest a sudden decrease in acoustic impedance, which may potentially be
related to the presence of porosity and low density fluids (hydrocarbons) or gas. Negative polarity
reflections could also indicate a change from shales to underlying porous sandstones (cap rock above
reservoir rock). The same negative polarity however, could indicate a contact between compact, fully
cemented sandstones and underlying shales (with relatively lower acoustic impedance).
Lithologies with similar acoustic impedances that have horizontal extension generate ‘reflectors’
which can be traced across the seismic line. In the upper line on the graphic, several of those
horizons are indicated by a colored line. The seismic line in the lower part of the figure shows a
horizon that is highlighted in yellow. This horizon extends mostly undisturbed as a horizontal line,
but shows a downward dent in the middle. As the reflectors above are undisturbed, you could
conclude, that this feature represents a structure in the lithology rather than an artifact caused by
disturbed data.

Geophysics
3D Seismics
Schematic
Faults
Segment of grid
mapped on the
Surface for 3D survey
surface
Well A
Well B
Well C
Vertical cross section
Horizontal cross section of a

randomly selected vertical position
© SAP 2009
For a 3D seismic survey, the geophones are arranged in narrow spaced grids. 3D seismic surveys are
very data extensive. It is estimated that 2/3 of the world wide available capacity of computer storage
is used to store data for 3D seismics.
Well data is used to correlate the reflectors with rock formations. The dense grid spacing allows
cross sections not only vertically in any direction through the surveyed sector, but also horizontally.
This helps to reveal linear structures which can not be easily identified in vertical cross sections. In
the example you can see a shoestring like linear structure, which can be interpreted as a river
channel.

Bore Holes - A Peek into the Depth
Core Cuttings Core
© SAP 2009
If exploration takes place in a known oil production area, geological information is easier to collect,
as data from previous wells is available. When drilling through the formations down to the expected
reservoir, valuable information about the rocks that are penetrated can be gathered. The most
complete data is gained when cores are taken, by drilling with a special bit that leaves a central part
undestroyed. With these cores, the rocks and the structures are well preserved and further analysis of
the samples is possible. However, this process is very expensive and slow, as cores can be recovered
only for a few meters and it has to be brought up before the drilling can be continued. Therefore,
cores are taken only on rare occasions and usually only samples of the drilling mud are taken on a
regular basis. These samples allow to analyze the rocks themselves, but do not give information on
the sediment structures. Furthermore the resolution of the cuttings is not as high as for cores, where
even layers of mm thickness can be identified.

Bore Holes - Well Logging
Well bore with casing Logging tools measure the petrophysical

Wire line characteristics of the penetrated formations.
They are usually lowered to bottom hole and
Receiver 2: then pulled gradually upwards while
For example,
ILD: induction
measuring (wire line logs).
log deep
Logging tools can be differentiated by :
Receiver 1
The way tools are being run:
For example
ILM: induction Lowered with a wire (wire line tools)
log medium Mounted to the drill string (measurement while
drilling, logging while drilling)
Deep penetration Where tools are being run:
Cased hole
Centralizer Open hole
The way how they measure:
Shallow to medium
penetration Active: source emitting some kind of energy
(either sound or radiation)
Passive: measuring only the energy emitted
Source from the rock (either radiation or electrical
behavior)
© SAP 2009
Additional methods have been developed to increase the resolution and the quality of the information
on the lithology that is penetrated by the borehole. These measurements are called ‘well logging’ and
are run either continuously while drilling, or at certain intervals. Another common term for logs is
‘wire line log’, which has its origin in the fact that the instrument that takes the measurements is
lowered by means of a cable into the well. A log may be a graphic display of the lithology and
stratigraphy of the formations penetrated by the well. It might also display physical properties such
as resistivity, self-potential, and gamma ray intensity or velocity at given depth, depending on the
measurements represented by the log. The interpretation of a well log is an art by itself, as many
parameters such as temperature, borehole size, salinity, drilling mud and formation composition
impact the measurements. If one of the parameters is of interest (for example, formation
composition) the impact of all the other parameters has to be removed as good as possible.

Bore Holes - Well Logs
Logging - Application
fdc = nuclear fluid density tool C Gluyas & Swarbrick, 2004
© SAP 2009 cnl = compensated neutron log
Logging of a well significantly increases the understanding of the subsurface. Usually several logs
are combined in one run to analyze different characteristics of the formation. There are more than
100 different types of logs available. The devices that are used are very sophisticated instruments
which have to withstand very high temperatures (> 200 °C) and pressures (> 1000 bar)
The most common logs are:
y Gamma ray – measuring the natural radiation of minerals. As clay minerals usually contain
radioactive atoms, this measurement usually gives a good representation of the clay content of a
formation.
y Sonic velocity – a sonic tool measuring the sonic velocity of the formation
y Density – a gamma ray source irradiating the formation
y Neutron porosity – a neutron source irradiating the formation (neutrons interact strongly with
hydrogen atoms, hence fluid-filled pore space can be assessed)
y Resistivity – measures electrical resistivity of the rock plus fluid content; two pairs of receivers
which read shallow or deep into the formation
The presence of oil and gas in rocks in a bore hole is indicated by unusually high electrical
resistance.

Geology
Well Correlation
Earl, 2006
© SAP 2009
The well information is used by geologists in several ways. Where possible, core data and outcrop
information is used to calibrate the wire line logs from the wells. Furthermore, the logs from
different wells are correlated and cross sections are constructed. After the logs are calibrated,
lithologies can be linked to wells where only wire line logs are available. By interpolating lithologies
between the wells, it is possible to derive the spatial distribution of formations.

Geophysics
Non-seismic Survey Methods
Non-seismic methods for petroleum exploration Passive methods:
Gravity surveys = density of rock.
Magnetic surveys = susceptibility of rock.
Magnetotelluric surveys = resistivity of rock.
Active methods:
Controlled source electromagnetic surveys (see below) = resistivity of rock.
Signal of water / air interface
Transmitter
Direct signal
Receivers
Conductor
Resistor A
Geological signals
Conductor
Resistor B
© SAP 2009
Gravity survey
The gravimeter measures the gravitational field and this reading correlates with the density of the
region. Basically, the gravity survey is used to determine gravity differences in a surveying block.
Gravity survey is mostly done to determine salt domes in oil exploration. Salt domes have a very low
gravity in comparison with rocks surrounding them and an obvious gravity difference will show
itself as an anomaly. Finding salt domes, is a way to find possible oil traps. Then, with other
comprehensive methods, potential reservoirs are distinguished.
Magnetic survey
Magnetometers are devices that can detect fluctuations in the Earth’s magnetic field. Different rocks
have different magnetic properties and cause fluctuations or ‘magnetic anomalies’. Mapping these
anomalies with a device carried in an airplane, allows to map a huge area and gather subsurface
information of areas which are remote and difficult to access on land. Satellites allow to collect these
data on a global scale.
Magnetotelluric survey
This type of survey measures the electrical conductivity, or its inverse, the resistivity of the
underlying earth. In the upper crust, the resistivity of geologic units is largely dependent on their
fluid content, pore-volume porosity, interconnected fracture porosity, and conductive mineral
content. Although there is not a one-to-one relationship between lithology and resistivity, there are
general correlations that can be made. The Magnetotelluric (MT) method is a passive-surface
electromagnetic geophysical technique that measures variations in the earth's natural electromagnetic
fields to investigate the electrical resistivity structure of the subsurface from depths of tens of meters
to tens of kilometers. Worldwide lightning activity and geomagnetic micro-pulsations provide the
majority of natural signal used by the MT method. Magnetotelluric surveys can be used to detect
structural elements such as faults and salt diapirs (salt dome).
Controlled Source Electromagnetic Survey
The Controlled Source Electromagnetic (CSEM) method is an offshore geophysical technique,

employing electromagnetic remote-sensing technology to detect the presence and extent of
hydrocarbon accumulations below the seabed. The CSEM survey uses a dipole source that is towed
just above the seafloor to transmit a time-varying electromagnetic field into the earth. This field is
modified by the presence of subsurface resistive layers and these changes are detected and logged by
an array of receivers placed on the seabed. Because hydrocarbon-bearing formations are highly
resistive compared with surrounding formations, a CSEM survey can indicate the presence of oil and
gas in offshore situations.
Summary of different exploration methods:
Geology
y Field mapping and studies

y When entering a new area, a geological map of the present day situation is usually created. Here,
the surface expression of strata is mapped providing insight into subsurface successions. This
approach is also called analogue studies as the outcrops serve as an analogue for the subsurface
succession.
y Outcrop or well correlation
y A common approach during field studies is to try to understand the areas between point
information, such as wells (if they exist) or sections at outcrops which are measured in the field.
This method also involves geological log interpretation and the microscopic analysis of rock
samples.
y Sequence stratigraphic or basin analyses
y Geology always means understanding space in time, it is a true four dimensional approach to solve
the riddles of a succession. Once a map and meaningful correlations between wells or outcrops
exist, the evolution of the entire area can be derived.
Paleontology
y Depositional environment analysis

y Certain fossils are indicative for specific depositional environments. By analyzing the occurrence
of these fossils, the original depositional environment (“facies“) can be derived. For example,
radiolarians only occur on the deep sea.
y Biostratigraphic analyses
y As mentioned previously, short-living, rapidly evolving and differentiating organisms serve as
marker fossils. The age of the rock can be inferred qualitatively, and if there is a tie to a
chronostratigraphic age, the age can be quantified rather precisely.
Geophysics
y Remote sensing (georadar, satellite surveys)

y This method helps the geologists in creating maps for large areas without having been to all the
places that need to be mapped. Care must be taken to obtain vital ground control for inferred
structures / successions from imagery alone.
y Seismic methods
y Seismic surveys are the most common geophysical exploration method and, in offshore areas, the
base for all subsequent exploration. Seismic imagery allows the geophysicist to picture the
underground structures similar to ultrasound images in medicine.
y Non-seismic methods: gravimetric, electro-magnetic, or magneto-telluric surveys
y These methods sometimes accompany seismic surveys but can also be run on their own. These
methods picture the underground structures at a very coarse resolution but are an economic way of
exploring.
Geochemistry
y Analyses of oil seeps

y Direct analyses of oil seeps are a very common way of exploring. Here, the composition of the oil
as well as special isotopic measurements are being carried out in order to obtain information on
the source rock itself. However, in most cases, the oil seeps are heavily biodegraded oils and the
original composition of the oil is difficult to infer.
y Source rock analyses
y Analyses of outcropping source rocks or successions penetrated during drilling usually comprise
measurement of total organic content (TOC), type (kerogen type) and maturity (measured in
vitrinite reflectance) of the organic matter.
Mineralogy
y Radiometry
y Radiometric methods involve measuring the isotopic composition or the ratio of certain isotopes
in rock.
y Thermometry
y Certain minerals and as well as their composition and internal structure provide insight into the
temperature history of a succession. These minerals record heating and cooling histories. In
addition to minerals, fluid inclusions also record the temperature of the cement when it formed
between particles during diagenesis.
Numerical modeling
y Integrates all afore mentioned disciplines

y Petroleum system analysis is a multidiscipline and multidimensional approach to solving the
history of an area. Sensitivity analyses with certain confidence intervals help to quantify
assumptions on trap fill and hydrocarbon quality.
Drilling & Logging
y Exploration drilling
y An exploration well is the only direct proof for the assumed presence of hydrocarbons. Sometimes
exploration wells are also used to perform a stratigraphic test when detailed information on the
basin succession is absent.
y Well logging
y To obtain information on formations in the underground penetrated by wells, it is necessary to
measure certain petrophysical parameters of the rock. For this purpose, wire line logging tools are
lowered in the borehole and either measure passively or actively.

Phases and Processes in Upstream
Frontier Exploration
Portfolio
Management
Licensing
Exploration
Appraisal /
Delineation
Development
Gluyas & Swarbrick, 2004
Production
© SAP 2009
After the introduction to the exploration methods, we will now turn to the economic side of the
process. Exploration activities are significant investments by themselves, which have a huge
unknown component and a considerable risk of loosing the invested capital. Furthermore, many
different activities are required in exploration projects and it is crucial to capture all the cost
elements. Very often, risk assessment and portfolio management are carried out quite
heterogeneously in oil & gas companies, therefore clear and rigid corporate standards are required.
Oil and gas companies tend to share the risk by setting up joint venture projects with other
companies. Another trend within the industry is to outsource certain exploration activities to
specialized service providers.
Exploration starts with an assessment of an entire basin, region or country. This phase is triggered by
management or market decisions and dealing with so-called new ventures. Ideas on hydrocarbon
accumulations are very crude and need to be refined for further phases. Nevertheless, they must be
sound enough to drive strategic investment decisions.

Exploration
Portfolio
Management
Licensing
Exploration
Appraisal /
Delineation
Development

Production
© SAP 2009
The main goal of exploration is to identify possible hydrocarbon accumulations, known as leads.
These leads are subject to scrutiny in peer reviews and risking exercises. Only if the chance of
success is deemed high enough, these leads are going to be transferred to prospect stage, which
means that they are eventually going to be drilled.

Appraisal Phase
Portfolio
Management
Licensing
Exploration
Appraisal /
Delineation
Development
Production
© SAP 2009
During the appraisal phase, a significant amount of G&G data has been acquired and exploration
wells have been drilled. If these wells have discovered hydrocarbon accumulations, the size of the
reserve needs to be proven by subsequent appraisal wells.

Development and Production
Portfolio
Management
Licensing
Exploration
Appraisal /
Delineation
Development
Production
© SAP 2009
In the development and production phase, an economic field has been proven. The main goal now is
to improve and accelerate production as well as to extend the life-of-field. The data that has been
acquired previously allows for a refined model of the subsurface. Additional dynamic data (including
the time dimension) gathered is used for monitoring of the reserve sizes.

Costs and Earnings of Upstream
Value Chain - Description
Decision for country / basin / Country / basin / concession study

Portfolio concession entry based upon
G&G reasons
Management Market opportunities
Vintage data (for example, well
correlation, seismic interpretation)
Existing studies
Acquisition of new acreage In-house experience
Bidding round Risking
Licensing License swap
$$
Acquisition of new data
Drilling the leads 2D/3D seismic survey and
Identification of prospects interpretation
Exploration Proving the plays Well data analysis (cuttings,
cores, logging and testing)
G&G Basin simulation
Reducing uncertainty and (Geology &
Appraisal / defining the prospect Geophysics)
3D survey on reservoir
Delineation Relinquishment of acreage Reservoir model
Designing and building facilities Full data integration
Development Reservoir studies

Mid-/downstream concepts
4D seismic survey
Exploiting the reservoir
Planning of production and injection
Production Go on-stream wells
Production history matches and
forecasts
© SAP 2009
Upstream business process from exploration to production. Many activities and expenditures are
required prior to producing oil and gas.

Costs and Earnings of Upstream
Value Chain - Detailed Duration and Expenses
Portfolio 0-1 M$ 0-5 M$

Management 0-2 yrs 0-4 yrs
50-1,500 M$
Licensing 0-2 yrs
1-300 M$
Seismic survey: 5-50 M$ * 2-6 yrs
Exploration Exploration well: 10-300 M$ *
2-3 yrs
G&G
Seismic survey: 5-20 M$
Appraisal / Exploration well: 10-150 M$
Delineation 2-3 yrs
100-100,000 M$ 1-50 M$
Development 1-10 yrs 1-10 yrs
Revenue 1-100 M$
Production 5-50 yrs 5-50 yrs
* Common minimum work commitment:

1-3 seismic surveys, 1-10 wells PLUS signature bonus
© SAP 2009
The previous figure describes the different steps involved from the first prospect to a producing well.
This figure gives some insight into the time and money that is required for the different steps.
Portfolio management is analysis in a multidimensional space:
y Budget / investment
y Risk types
- Geology, drilling, completion
- Economy, contracts
- …
y Expected revenue
When portfolio management also considers prioritization (that is, when entering the time domain), it
merges with project management, additional risks emerge and need to be watched
y Availability of equipment
y Availability of resources
y Managing timelines and milestones

Different types of success
y Geological success (find HC accumulations)

y Completion success (produce from the wellhead)
y Economic success (make money out of it)
Exploration risk
y 20% success rate is deemed as threshold, that is, one in five wells drilled will encounter
hydrocarbon accumulations
Production risk
y „ … when one transfers x barrels of oil from an inventory perceived to hold X barrels of
undiscovered oil, there is no requirement that the remaining undiscovered oil inventory is (X-x)
barrels.“ John Lohrenz, Louisiana Tech
Economic risk
y Oil price scenarios (>60 $ per barrel is now considered as the base case)
y Contractual issues (PSA, work commitments, buyback and so on)
y Arbitrary decisions of national oil companies / authorities
y Political climate

Flow Chart
“E&P Project Portfolio Management for O&G in RPM”
Port. Man.
Assign budget
Review for Assure transfer of
identification and prospects to field
ranking of level (reserves for
prospects production)
Exploration Manager
Start G&G
activities
Identify and
evaluate leads
manager
Drilling
Drill, test and

complete wells
© SAP 2009
In the following, we will see how the complete process from the first identification of a prospect to
the final exploitation of the reservoir are mapped by the RPM (Resource and Portfolio Management)
module of SAP. SAP RPM is a tool that supports companies in their strategic and operative portfolio
management.

Mapping in RPM
Reserves’ Life-cycle
Idea: Lead Prospect Field

New Phase Gate Phase Gate Phase
Acreage
Initiative
Geophysics
Geology
Drilling
(Exploration,
Appraisal,
Development,
Production)
Reservoir and
Petroleum
engineering
© SAP 2009
This figure shows how the process is divided into different segments and which activities are related
to each phase. The central component in RPM is an Initiative, which is equivalent to the life-cycle of
a possible hydrocarbon accumulation in a specific area of interest or already licensed acreage (lease
or concession). This life-cycle consists of all necessary phases from early exploration (identification
of leads) until development and eventual production.
Lead: the early phase of exploration on a prospect that might contain hydrocarbons. A lead may or
may not be elevated to prospect status depending on the results of additional technical work.
Prospect: exploration in an advanced stage, the lead has been fully evaluated and is ready to drill.
Exploration wells and first production wells are being drilled to explore the behavior of the reservoir
Field: the phase after the prospect has been evaluated successfully and the existence of a reservoir is
proven. In this phase exploitation is ongoing and all the necessary production wells are put in place.
Reservoir & Petroleum engineering activities are required to get the maximum out of the reservoir.

RPM - Initiative Overview
© SAP 2009
In the context of oil and gas exploration, SAP RPM initiatives serve as a tool for structuring and
coordination of the execution of all the activities from the first investigations to the final exploitation
of a field. An initiative consists of phases and decision points that represent the progress of the
initiative and steer the progress of subordinate projects. Initiatives also allow you to monitor and
aggregate the expenses related to the individual projects.

Start
Libyan Bid Round 2007
Area of interest (AOI)
Yellow areas: available blocks for bid round 4 in 2007.

The name and location of wells, seismic, and possible
prospects is purely fictitious.
© SAP 2009
Several blocks are offered by the national authorities of Libya. Our company – North African
Petroleum (NAP) – has successfully qualified for this round and now wants to choose the right
blocks and the right partners for these possible ventures. NAP has already opted for the Ghadames
blocks and now has to assess the following:
y Presence, size (that is, quantity) and quality of hydrocarbon accumulations.
y Corresponding geological, drilling and completion risk.
y Available resources (internal / partners / contractors).

Block Evaluation
NAP’s Decision for Area 95-96
Tunisia
Libya
© SAP 2009
The blocks on offer were assessed and the potential of each area identified. All blocks were ranked
according to risked volumes in each block. The portfolio management team decided to bid for area
95-96.
Area 113-114 has a similar or higher chance of success compared to Area 095-096 but contains less
reserves. Additionally, the upside potential in Area 095-096 is ranked higher. Accumulations in Area
064 are significantly smaller than in the two other Ghadames blocks.
The possibility of producing oil first, going quickly on-stream, and developing gas afterwards also
fits the company strategy.

Block Evaluation - Details
NAP’s Decision for Area 95-96
Discovered leads in area 95-96

Gas lead
Libya
A1-1 Oil lead
Algeria
B1-2 K1-1 Lead A
N B1-1 B1-3
Lead B
C1-1
J1-1 L1-1
M1-1
Lead E
C1-2 O1-1
Lead G Lead D
Lead C
Lead F
P1-1
N1-1
© SAP 2009
Risked and unrisked volumes of the blocks within the AOI (area of interest) and their respective
leads

Step 1 - Assign Budget
Port. Man.
Assign budget
Exploration Manager
Start G&G
activities
Identify and
evaluate leads
manager
Drilling
Drill, test and

complete wells
© SAP 2009
The first step is to assign a budget for the exploration of a potential reservoir.

Expenses for Work Program
© SAP 2009
After an international tender, NAP contracted Worldwide Geophysics (WG Inc.) to carry out the
several seismic surveys.
After processing and interpretation of the seismic data as well as integration of the other G&G work,
the location of the exploration wells can be determined.

Assigning Budget in RPM
© SAP 2009
It is possible to aggregate different costs to cost groups and categories to give a high-level overview
of the total cost in SAP RPM. Actual costs can be compared to planned costs and budget. The actual
costs come from the integrated ERP system in the backend.

Step 2 - Start G&G Activities
Port. Man.
Assign budget
Exploration Manager
Start G&G
activities
Identify and
evaluate leads
manager
Drilling
Drill, test and

complete wells
© SAP 2009
Step 2 is the initiation of the necessary projects for Geological and Geophysical exploration.

Step 2 - Start G & G Activities
Seismic Campaign
New 2D seismic
Libya
Algeria
K1-1 Lead A
New 3D seismic
N
Lead B
J1-1 L1-1
M1-1
Lead E
O1-1
Lead G Lead D
Lead C
Lead F
P1-1
N1-1
© SAP 2009
NAP committed to a work program of 5 exploration wells, 1200 km 2D seismic, and 400 km2 3D
seismic. The location of the seismic campaign is easily determined by the leads already identified
during the bid round.
NAP wants to carry out four seismic surveys:
y 1200 km high-res 2D covering all leads
- Thereof 400 km 2D with long offset to identify deeper targets
y 400 km2 high-res 3D covering Lead D&E
- Thereof 120 km2 with 3D long offset to identify deeper targets

RPM - Define Projects for Initiative
© SAP 2009
This figure shows an example of the Item Dashboard. It is a highly flexible tool that allows you to
monitor the status, KPIs, and progress of the individual projects. The example shows several
exploration well projects assigned to the initiative.

Step 3 - Identify and Evaluate Leads
“E&P Project Portfolio Management for O & G in RPM”
Port. Man.
Assign budget
Exploration Manager
Start G&G
activities
Identify and
evaluate leads
manager
Drilling
Drill, test and

complete wells
© SAP 2009
Step 3 is the identification and subsequent evaluation of possible leads based on the data gained by
the G & G activities in the previous steps.

Step 3 - Identify and Evaluate Leads
Risking Questionnaire in RPM
© SAP 2009
The evaluation of leads can also be done by indirect measures. In this case, the risk is calculated
based on figures gathered through a questionnaire.

Step 4 - Review for Prospect Generation
“E&P Project Portfolio Management for O & G in RPM”
Port. Man.
Assign budget
Exploration Manager
Start G&G
activities
Identify and
evaluate leads
manager
Drilling
Drill, test and

complete wells
© SAP 2009
Step 4 is the review process of the leads, during which the portfolio manager and the exploration
manager decide which of the leads should be moved forward into a prospect status.

Prospect Generation
© SAP 2009
NAP has discovered seven leads within the block and now has to select the best five to be transferred
to prospect status and eventually drilled.
Leads F, G, D, E, B will be transferred to prospect status when G&G work (carried out on data
gathered within the initial exploration phase) confirms size, quality, and risk of the hydrocarbon
accumulations.
MMboe: million barrels of oil equivalent.
Risked volumes are volumes of oil-in-place or gas-in-place corrected for uncertainty.
* COS: Chance of success

Drilling and Completion Risk
© SAP 2009
The Reporting Cockpit provides graphical decision support. In this example, the risk is plotted
against the net present value (NPV). The NPV is derived from the reservoir size, rate of recovery,
and the current oil price scenario.

Step 5 - Drill Wells
Port. Man.
Assign budget
Exploration Manager
Start G&G
activities
Identify and
evaluate leads
manager
Drilling
Drill, test and

complete wells
© SAP 2009
Step 5 is the execution of the drilling plan for exploration, appraisal and, finally, development wells.
During this phase, all the information that is necessary to move from the exploration phase to the
production phase. The workflow follows a sequence of steps and is similar for all appraisal and
development wells:
y Determine location
y Determine expected size of reserves added
y Determine risked size of reserves
y Determine drilling and completion risk
y Drill well and connect to flow stream

Drilling Campaign
Lead A
Libya
N
Lead B
Lead E
Lead G Lead D
Algeria
Lead C
Lead F
© SAP 2009
NAP committed to a work program of 5 exploration wells.
NAP does a review to find out if the prospects identified so far match the foreseen drilling risk
acquired from previous regional drilling campaigns.
y Devonian: 0.9 Pt
y Ordovician oil only: 0.72 Pt
y Ordovician gas and oil: 0.65 Pt
y Cambrian: 0.55 Pt
y Infra-Cambrian: 0.4 Pt

Drilling Campaign in cProjects
© SAP 2009
The template project plan streamlines the process of drilling wells by implementing corporate
standards. It also automatically installs predefined milestones that facilitate monitoring the project
progress.

Port. Man. Step 6 - Production
Assign budget
Exploration Manager
Start G&G
activities
Identify and
evaluate leads
manager
Drilling
Drill, test and

complete wells
© SAP 2009
The final step in our example that shows the transition from the prospect to the field. Developing the
field includes additional investments such as construction of surface facilities and collector pipelines.

Exploration: Questions
1) Seismology is the study of earthquakes.

What is the theory behind it?
How is it used in exploration?
2) What is the benefit of an exploration well?
3) What are the stages in an exploration project?
4) What is SAP RPM?
© SAP 2009

Exploration: Lesson 2
Summary

Explain the basic exploration techniques
Describe the different steps in the exploration process
Describe basic risking and portfolio management of Upstream assets
© SAP 2009

Upstream - Exploration & Production: Lesson 3

© SAP 2009

Production: Lesson 3
Objectives

Explain the basics of production
Describe how to assess well/reservoir performance
Explain allocation
Elaborate on planning for upstream production
© SAP 2009

Production: Business Example
Once oil and gas accumulation has been found, they are
produced at the lowest risk, lowest cost, and highest
recovery possible. Production of oil and gas is a peculiar
task where all different fields of petroleum science are
involved. The ultimate goal of production is to produce as
long as possible from a given reservoir while still creating
revenue.
Classic well performance analysis involves production
decline curves of allocated production volumes. Planning
downtime and handling unplanned downtime during
production in an intelligent way ensures minimizing
production loss resulting in immediate loss of millions of
dollars.
© SAP 2009

Agenda
1. Business context
1. The economic model in a production network
2. Industry pain points
3. Basin entry to decommissioning decisions points
4. Investment decisions
5. Plateau and decline
2. Drilling, wells and surface facilities
1. Onshore / offshore drilling
2. Vertical and directional drilling
3. Wells and well completions
4. Production network and pipelines
3. Production measurement and allocation
1. Meters and well tests
2. Mass balancing process
3. High level process description
4. Operations plan
1. Balancing downtime and production
2. Planning and analyzing production
© SAP 2009

Elements of the Upstream Oil & Gas Lifecycle
Upstream Oil & Gas Value Chain
Exploration Production
Gas Storage
& Pipelines
Seismic Crude Gathering
© SAP 2009
Exploration
y Seismic Exploration
y Geological Mapping
Lease Acquisition
y Working Interest
y Royalty Interest
Exploration Drilling
Development and Completion
Production
y Natural Lift
y Sucker-Rod Pumping
y Gas Lift
y Electric Submersible Pumping (ESP)
Recultivation
y Dismantling of the well site
y Sealing of Well Completions
y Backfilling of the Borehole

Elements of the Upstream Oil & Gas Lifecycle
Surface Ownership vs Mineral Ownership
Operator / Surface
Producer Owners
Mineral
Owners Prospect
Land
Prospect land involves both Surface and Mineral ownership
© SAP 2009
Who are Owners?
Owners are business associates who have some form of Interest in the Upstream Value Chain. In
most countries, the right to own the minerals is separated from the right to own the land. In Germany
for example you need a special permission to buy the mineral rights.

Elements of the Upstream Oil and Gas
Lifecycle
Prospect
Operator /
Working Interest
Producer
Owners (WI)
Example: Example: Chevron
Exxon
Mineral Owners = Royalty Interest
owners* (Farmer Jones)
Landman
Sign Leases
Lease A for A, B & C
Lease B Lease C
© SAP 2009
Surface Ownership
Owning only the surface of the land Right to sell, walk, build ...
Mineral Ownership
Ownership of the minerals contained in the earth, for example, Coal, Oil, Gas or Fuel hydrocarbons.
Operator (Producer)
Person or Company engaged in drilling wells for minerals Bears all the costs associated with
exploration/development and production.

Elements of the Upstream Oil and Gas
Lifecycle
Upstream Value Chain: Important Aspects

Debit Credit
Land
Financials
Production Revenue
© SAP 2009
Once a Oil & Gas Field is….
The process of creating, and updating records that are used in the process of distributing sales
revenue to working interest and mineral interest owners has to be established.
In simple words, Ownership is ‘Everything to do with the Land, People, and who Owns what in the
upstream value chain involving oil, gas & other mineral products’
The above definition implies
y Master records for use by revenue distribution processes
y Involvement of Business associates/Partners
y Management/administration of Land & related data
y Creation of MD for the RPM process

Business Context
Oil and Gas Production Network and an Economic Model
Economic
model Process
facility Interoperability
RT visibility
KPIs
COO
Pipeline
Port & network
storage
facility
KPIs
Connectivity Wellsite
Tanker
Data volume
© Kongsberg Subsea,
2009
Platform
FPSO Reservoir
Subsea
installations
Gas Oil Water

Well completion
© SAP 2009
This is a typical scenario of an Integrated Oil & Gas Company.
FPSO: Floating production storage and offloading

Business Context
Key Industry Pain Points
Optimize Minimize
Reliability Wear
Uptime Smart fields framework Failure
Throughput Downtime
Reservoir and well surveillance

Efficiency Power
Contracting, procurement and

Asset management, planning
Transport, market and trade

Drilling and well operations
Production operations and
Maintenance and integrity
EH&S management
and scheduling
hydrocarbons
management
optimization
logistics
Best practice work processes & team structures
Real time data and control

Source: Shell 2008, „Intelligent fields and integrated operations“
Key Challenges
Costs Infrastructure Regulations Data
Resources Competition Collaboration Experience

© SAP 2009
Overall decision environment of an Integrated oil and gas company

Plateau, Decline, and Reserve Additions
Extending the Economic Limit
Plateau
Reserves additions
Production rate
OPEX reduction
dup
Buil
De
cli
e n
1 2
Time Initial economic limit Revised economic limit

© SAP 2009
The ideal oilfield produces quickly to a stable plateau and drops in a steep decline. By maximizing
the plateau production, facilities can be used very efficiently. Satellite fields may be added to the
production and thus extend the life-of-field. OPEX reductions in ageing fields can extend the
economic limit of a field until it is being decommissioned.

Agenda
1. Business context
4. Operations plan
© SAP 2009

Onshore / Offshore Drilling
Fundamentals of Pressure and Overpressure
Pressure
transition zone = overpressure fluids in
rapidly buried sediments
1st transition zone

with rapidly building
up (over) pressure
Typical
Depth
pressure
profile in a
well
Hydrostatic Lithostatic
pressure pressure
© SAP 2009
The crux in drilling is maintaining the right balance between under balanced drilling (that is, with
less pressure in the well bore than in the reservoir) and risking blow-out or overbalanced drilling
(that is, with more pressure in the well bore than in the reservoir) and risking damaging the
formation through mud infiltration.
The graph to the left indicates a typical pressure path for a well. Two types of pressure must be
distinguished:
y Hydrostatic pressure, that is, the pressure exerted by a water column of a given height
y Lithostatic pressure, that is, the pressure exerted by a rock column of a given height
The first pressure is basically experienced inside the well bore, whereas the second pressure is
present in the pores of the penetrated formation. If no countermeasures inside the wellbore (such as
increased mud weight or closed blow-out preventer) are being taken, the well will blow-out
(=explode).

Onshore Well Site
StatoilHydro, 2009
© SAP 2009
In contrast to offshore installations, onshore well sites are removed immediately after drilling has
completed.
The drilling rig moves to another location, in offshore locations, the drilling rig usually remains on
the platform.

Offshore Installations for Drilling and Production
Barge
Semi-
submersible
platform Riser
Production
flowlines
StatoilHydro, 2009
© SAP 2009
subsea templates facilitate drilling / re-entry and so on
subsea processing: separation of fluids at sea bed
Template: allows to connect additional pipelines

Onshore / Offshore drilling
Kelly Drive Drilling Rig - Detailed Explanation
Additional
drill pipe 1. Mud tank
(“Drill pipe
stand“) 2. Shale shakers
3. Suction line of mud pump
Derrick or 4. Mud pump
A-frame
5. Motor or power source
6. Vibrating hose
Swivel and 7. Draw-works
drill string 8. Standpipe
9. Kelly hose
10. Goose-neck
11. Traveling block
12. Drill line
Mud 13. Crown block
circulation
14. Derrick
15. Monkey board
16. Stand (of drill pipe)
Kelly drive
17. Pipe rack (floor)
18. Swivel
Rotary table 19. Kelly drive
20. Rotary Table
Mud
tank 21. Drill floor
22. Bell nipple
23. Blowout preventer (BOP) Annular
24. Blowout preventer (BOPs) Pipe ram & Blind ram
25. Drill string
26. Drill bit
27. Casing head
28. Flow line
© SAP 2009
The figure depicts a drilling rig with a conventional Kelly drive, which turns the drill string. Modern
rigs are equipped with a topdrive. This is nothing else but a drive which is located at the swivel place
can slide down from the top of the mast to the rig floor (next slide).
The advantage of the topdrive system is that up to three drill pipes can be assembled together before
connecting them to the drill string (increased speed). In addition, the drill string can be rotated while
removing it out of the hole (“POOH“ = pull out of hole) and stuck pipe can be avoided. Hence
reaming of the well bore improves and round trip times can be significantly shortened.
Round trip, for example, for replacing a drill bit: pull drillstring out of hole (POOH), assemble new
drill bit and run in hole (RIH) again.

Kelly Drive Drill String and Topdrive – Explanation
Topdrive
Derrick
Rig floor
Drill pipe
Jahn et al., 1998

© SAP 2009
To transmit sufficient torque to the drill string (which is round), a certain type of bar has to be
screwed on top of the drill string. This bar is either square or hexagonal in its profile and called
Kelly.
The picture on the right shows the topdrive system of modern drilling rigs. Time of operations
(POOH, RIH) can be improved significantly.

Vertical and Directional Drilling
Directional Drilling - Well Bore
1. Intersecting vertical fractures in bore hole

Surface
location
2. Increased production in low permeability
reservoirs
3. Reduced water and gas coning

Vertical
4. Increased ultimate recovery = faster pay out
Kick off
True vertical depth
point 5. Description of directional wells according to

inclinations and build radius
Angle build
section
End of build
Angle hold
(“Tangent”) section
Total
depth
Horizontal displacement
(„kick“)
© SAP 2009
In recent years, there has been a significant enhancement in drilling and most importantly well
planning technologies. In the past it was only possible to drill vertically, not only because of lacking
drilling technology, but also because there was no proper 3d model available to plan the direction of
the well path. Nowadays companies drill more and more directionally. The advantages are quite
striking:
y Drill longer (horizontal) section in reservoir, better drainage, better reservoir performance
y Extended reach drilling, no additional platform or rig required to cover oilfield, less costs
For sure, there are also other reasons to drill directional wells, for example, to side-track a fish
(obstruction), to intervene in problematic wells, or simply because a surface location cannot be
picked right above the target at depth. Either morphology or even culture sometimes demand a
different surface location.

Drill Bits
PDC bits.
Normal tricone bits.
(Polycrystalline diamond component)
wikipedia.org wikipedia.org
Tricone bits have roller cones, PDC have fixed cutters
© SAP 2009
Drill bits are located at the end of the drill string and contain openings (jets) through which the mud
is discharged at high pressure to remove the cuttings (rock chips) out of the wellbore.
Up until 60 years ago, only tricone bits were available for drilling. The advent of polycrystalline (or
sometimes even natural) diamond and tungsten carbide in drill bit design significantly changed the
drilling technology. Still tricone bits are very useful also in hard basement formations, but drill bits
with fixed PDC cutters improve the rate of penetration significantly and hence help lowering drilling
costs. In shaley formations, PDC bits are especially effective. PDC bits are becoming increasingly
popular, particularly when drilling at high RPM with mud turbines / motors in directional drilling or
coiled tubing drilling.

Drill Motors
© SAP 2009
Mud motor (or Drilling Motor) refers to a Progressive Cavity Positive Displacement Pump placed
in the Drill string to provide additional power to the bit while drilling. The PCPD Pump uses Drilling
Fluid (commonly referred to as Drilling Mud, or just Mud) to create eccentric motion in the power
section of the motor which is transferred as concentric power to the drill bit (well). The Mud Motor
uses different rotor and stator configurations to provide optimum performance for the desired drilling
operation, typically increasing the number of lobes and length of power assembly for greater
horsepower. In certain applications, compressed air, or other gas, can be used for Mud Motor input
power. Normal rotation of the bit while using a Mud Motor can be from 60 rpm, to over 100 rpm.

Wells and Completions
Wellbore and Casing Scheme
Surface
Conductor /
stovepipe
Surface casing
Intermediate
casing
Casing
shoe
Production
casing
Liner hanger
Production liner
© SAP 2009
When a well for hydrocarbon production is being drilled, it must be taken into consideration that it
can be as deep as 7 km. Hence, it is obvious that one cannot utilize the same diameter from the top of
the well to the bottom. Either the well would collapse or fluids (either drilling mud or fluids out of a
productive zone) would be lost underway (in so-called thief zones). Also, since the volume of a
inside the well bore decreases with decreasing diameter, slim wells are more easy to handle than
wells with a large diameter.
The process of drilling a well must be safeguarded from time to time and the well bore stabilized by
running metal (often steel) pipes into the borehole. This process is called running casing. The overall
casing design is similar to a telescope with the largest diameters at the top and the smallest at the
bottom. Conductors are usually between 36‘‘ and 23‘‘ in diameter and production liners between 7‘‘
and 4½‘‘. The deeper the well is and the higher the bottom hole pressure, the more „telescopic“ a
well has to be.

Wells and Well Completions
Well Completion Components
Upper master valve
Lower master valve
Packer
Ground level
Casing shoe
Casing shoe
Upper completion
Production tubing
Plugging material
Production casing
Annulus
Production packer
Cement
Liner hanger
Casing shoe
Lower c.
Barefoot Predrilled or Cemented or

Perforations (open) slotted liner perforated liner
or casing
Reservoir
© SAP 2009
Completions are the interface between the reservoir and surface production. They are subdivided into
an upper completion and a lower completion (within the reservoir). There are multiple ways of
connecting to the reservoir pay zone, from high-tech intelligent completions with down hole
separation of production fluids to barefoot completions, which is just a bare hole in the rock.
“Completion design is a mix of physics, chemistry, mathematics, engineering, geology, hydraulics,

material science and practical hands-on well site experience.“ Bellarby, 2009
A multitude of lower well completion types exist, depending on the reservoir and production
characteristics. Usually, a liner is run, cemented, and then perforated.

Cemented and Perforated Liner - The Most Common Completion
Cement
Borehole
diameter Casing
Drilling damage
diameter
Shot spacing (in.)
spf = shots per foot
h
ngt
n le
a t io
Pe rfor
Phasing Angle
Perforation (90°)
diameter
Crushed zone
diameter
Bellarby, 2009
© SAP 2009
Perforating a cemented liner is a complex task where the layout and depth of perforations (“holes“)
has to be planned meticulously. A proper understanding of the petrophysical properties of the
reservoir zone as well the existing stress field is essential.
The process of perforating the liner involves placing of explosives into the borehole. Once ignited,
the charges burst open the liner and produces a long (depending on explosive material and shape of
the charge casing) fissure in the reservoir.

Completion Types, Upper Completion
Reservoir
Tubingless Tubingless Tubingless Dual tubing

completion completion completion with completion with
Bellarby, 2009 without packer annulus packer packers
© SAP 2009
The completion is technically the connection between the reservoir and the tubing. In general, the
Well Completion (WC) is perforation in the drill string plus additional technical installations which
connect the perforation into the reservoir with the surface installations of an oil field.

Production Network and Pipelines
Principles of Flow Control
14,000 Wax
12,000
Pressure (psi)
10,000 Reservoir
8,000
6,000 Hydrate Asphaltene

1
4,000
2
Bubble point
2,000 3
Flow line 4
0 50 100 150 200 250

Temperature (°F)
© SAP 2009
ROV = remotely operated vehicle, a submarine
The largest problem in production is handling all the phase changes that production fluids undergo
when they travel from the reservoir to the surface. This is because the pressure and temperature
regime changes along the well bore and flow line. Pipelines spanning large distances also experience
these problems, here usually condensate in the case of gas or wax in the case of oil are the most
common problem. In offshore production, the well and flow control are critical tasks, since all
maintenance activities are associated with tremendous costs (all installations are sub sea and only
accessible with ROVs) and more importantly, because the build-up of plugging scale will have a
disastrous outcome on equipment, personnel and environment.
The graph on the figure above depicts the most common phase changes in production. If the
reservoir produces hydrocarbons to the surface, the fluids will travel along the dashed PT path.
Firstly, asphaltenes will form (1) and clutter the walls of tubing and flowline. If pressure decreases
more, then the bubble point is crossed (2) and there will be two phases in the flowing production
volume, a gas phase, and a fluid phase. Once temperature decreases, the volume will loose another
solid phase and wax (3) is building up on the inside of production lines. The last phase change (4) is
especially critical in offshore environments where temperatures outside of the flowline (that is, at the
sea bottom) are in the range of a few degrees centigrade (30-40°F) and gas and water can form
hydrates (methane and water enter an ice structure) completely cluttering the flow line. Therefore,
glycol as defroster is often added to the production fluid.

Oil and Gas Permeability
© SAP 2009 North, 1985
When producing hydrocarbons from a reservoir, it must be taken into consideration that water, oil,
and gas display a completely different behavior during production. The permeability of the reservoir
changes with respect to the viscosity of the reservoir fluid. In other words, the same reservoir will
produce at different rates when water, gas, or oil are produced. This is why relative permeabilities
(for each phase) have to be considered. In essence, gas and water move much quicker than oil in the
reservoir when pumped.
Therefore, production engineers have to plan very carefully the production rate of every well. If a
well is producing on a maximum level for a longer period it can harm the performance of a field and
the total production of the field might be lower.

Asphaltenes and Scale
2 3
1
Bellarby, 2009
© SAP 2009
(numbers refer to numbers on image)
In the early life of field, asphaltenes will only be noticed after (downstream) the choke, this does not
yet affect the well completion
At a later point in time, the asphaltene deposition is moving upstream (downward) in the tubing,
owing to decreasing reservoir pressure; regular cleaning of the completion is mandated
Towards the end of the life of a field, asphalt may even clutter the lower completions and the inside
of the reservoir with catastrophic impact, production decreases even more rapidly, and workover of
the entire well is required (if possible)

Production Process and Surface Facilities
waste
injection or disposal
blow-down
Gas
Sales process
from a field
Production
Oil
Production
process
Water
Transportation
process
Solids
© SAP 2009
Hydrocarbon properties determine process design and need to be closely watched during the
production process:
y PVT characteristics – describe pressure, volume, and temperature of a production stream.
y Composition – describes the proportion of hydrocarbon components (C1 - C7+) determining the
fluid properties, and how many non-hydrocarbon substances (for example, nitrogen N2, carbon
dioxide CO2 and hydrogen sulfide H2S) are present. It is also common to measure GOR (gas oil
ratio) and water cut (percentage of water produced) as well as the composition of the formation
water itself.
y Emulsion behavior – describes how difficult it will be to separate the liquid phases.
y Viscosity and Density – a proxy for determining how easily the fluids will move through the
process facility.

Production Stages and Methods
Primary production / recovery

Gas exsolution drive
Water drive Utilizing the natural drive (pressure)
Gas cap drive inside a reservoir
Gravity drive (secondary drive)
Secondary production / recovery

Artificial lift
Increasing the pressure difference
Water injection between reservoir and surface
Gas blow down (gas injection)
Tertiary production / recovery / enhanced oil recovery (EOR)

Thermal recovery
Steam flooding / injection
In-situ combustion Increasing the solubility of remaining
Miscible gas flooding / displacement
oil in multiple solvents
CO2, CH4, N2
Chemical / polymer flooding Increasing the throughput in the
Production de-bottlenecking production flow network
© SAP 2009
Over the lifetime of an Oil and Gas Field, the Production Methods typically change. At the
beginning, a reservoir will produce on primary production method using the natural drive (pressure)
inside the reservoir. Once the natural drive is consumed, Secondary Production methods have to be
deployed. Either Gas and/or Water Injection scenarios have to be in place to maintain the production
level at the targeted path. Later on, tertiary production methods will be deployed to keep the
production level up.
In the older days, the Gas from an Oil field was very often just flared because the infrastructure for
Gas processing and transportation was not available in the specific area where the oil field was
located.
Nowadays, with the environmental issues of CO2 emissions, producers try to avoid Gas flaring as
much as possible. If no transportation is possible, the gas will be reinjected into the reservoir.

Primary Drives
Gas exsolution drive
1 2
Gas cap drive
Water drive
Gravity drive
© SAP 2009
Quite a large number of reservoirs do not have sufficient pressure for reservoir fluids to flow to the
surface. In this case, artificial lift is required right from the beginning of the life-of-field. Otherwise,
the decreasing reservoir pressure mandates the application of artificial lift methods.
Listed in order of importance:
y Beam or Piston Pump (BP)

y The iconic pump
y Continuous Flow and Intermittent Gas Lift (GL)
y Oldest lifting principle
y Electric Submersible Pump (ESP)
y Requires electricity downhole, performance measured with an ampere meter, expensive
y Hydraulic Submersible Pump (HSP)
y Similar to ESP, but obtains the power by fluids pumped down the hole, becoming increasingly
important
y Hydraulic Jet Pump (JET)
y No moving parts, energy transmitted by injecting the fluid.
y Progressive Cavity Pump (PC)
y A large rotating spiral

Artificial Lift - Kern River and Beam Pumps
© SAP 2009
Typical picture of an producing Oil Field

Artificial Lift - Gas-lift Process
Lift gas enters Gas enters tubing More gas enters Eventually the high
annulus and and starts to lower tubing; tubing volume of gas in
displaces liquid tubing pressure, pressure drops the tubing reaches
to valve depth but effect is slight allowing the the surface as large
well not flowing as pressures are annulus gas to slugs. Flow from
high and gas is expand into the annulus stops due
compressed tubing. Runaway to depleted
flow of a gas annulus and tubing
Bellarby, 2009 results. back pressure
© SAP 2009
Gas-lifted wells have been around for over 150 years; the principle is simple – lower the hydrostatic
pressure by injecting a light fluid (hydrocarbon gas) into the well. As such, their steady-state
performance is relatively easy to predict.
The figure to the left illustrates the gas-lift process. Monitoring the amount of gas injected and
correcting the production volumes for the gas-lift-gas is essential.

Secondary Recovery - Water Injection

© SAP 2009
The main goal during water injection is to drive the oil from the injector towards the producer.
There are multiple patterns to inject water from simple line drive to complex nine-spot patterns.

Tertiary Recovery - Enhanced Oil Recovery (EOR)
Injector CO2 injection Producer
CO2
Drive water
Water Miscible Oil
CO2 zone bank
CO2
Additional
oil recovery
Injector Producer
Steam-flooding
Steam and
condensed Hot Oil bank Oil and water zone
water water near original
reservoir temp.
© SAP 2009
Carbon dioxide (CO2) flooding is a process whereby carbon dioxide is injected into an oil reservoir
to increase output when extracting oil.
When a reservoir’s pressure is depleted through primary and secondary production, Carbon Dioxide
flooding can be an ideal tertiary recovery method. It is particularly effective in reservoirs deeper than
2,000 ft., where CO2 will be in a supercritical state, with API oil gravity greater than 22–25º, and
remaining oil saturations greater than 20%. It should also be noted that Carbon dioxide flooding is
not affected by the lithology of the reservoir area but simply by the reservoir characteristics. Carbon
dioxide flooding works on the premise that by injecting CO2 into the reservoir, the viscosity of any
hydrocarbon will be reduced and hence will be easier to sweep to the production well.
If a well has been produced before and has been designated suitable for CO2 flooding, the first thing
to do is to restore the pressure within the reservoir to one suitable for production. This is done by
injecting water (with the production well shut off) which will restore pressure within the reservoir to
a suitable pressure for CO2 flooding. Once the reservoir is at this pressure, the next step is to inject
the CO2 into the same injection wells used to restore pressure. The CO2 gas is forced into the
reservoir and is required to come into contact with the oil. This creates this miscible zone that can be
moved easier to the production well. Normally the CO2 injection is alternated with more water
injection and the water acts to sweep the oil towards the production zone. The Weyburn oil field is a
famous example where this method is applied in financially interesting conditions.
CO2 flooding is the second most common tertiary recovery technique and is use in facilities around
the world. In the scope of global warming, it is an available method to curb CO2 emissions.
CO2 injection is also called water alternating gas (WAG) method or CO2 flooding.
CO2 injections require a huge amount of CO2 which is not available all the time. Therefore natural
CO2 reserves can be a real alternative and get more and more important.

Flow Regimes of Multiphase Flow in a Well (and a pipeline)
modified after Ansari et al. (1990) and Bellarby (2009)
Dispersed bubble
Log Superficial Liquid Velocity

Bubble
Annular
Slug or churn
Log Superficial Gas Velocity

© SAP 2009
The geometry of a multiphase fluid moving through a pipe is a function of:
y Direction / inclination of flow
- Vertical wellbore
- Horizontal flowline / pipeline
y Superficial phase velocity
- Ratio of phases
y Number of phases
- Two-face, three-phase, multiphase
The behavior of moving fluids in the tubing, that is, the flow regime of it has to be accurately
predicted. It is fundamental to forecast flow rates, selecting the correct size of completion, assessing
the requirement for, and the type of, artificial lift, calculating erosion rates and a variety of other
tasks.

Two-phase Flow in a Horizontal Pipe
Intermittent Segregated
Plug Stratified
Slug Wavy
Distributed
Annular
Bubble
Gas
Oil
Mist
Bellarby, 2009
© SAP 2009
Similar to predicting the flow in a production tubing, it is essential to calculate the behavior of
phases in pipelines. Here, the gravity separation between the two phases (see figure on the left) is an
important issue and needs to be considered for correct pipeline flow.
With the advent of powerful computers and sophisticated numerical models, it is quite easy for the
petroleum engineer to accurately simulate and predict flow regimes and phase behavior. Usually,
these models are continuously updated in order to exert proper flow control. Especially in offshore
situations, where the facilities are hardly accessible, flow assurance modeling is an essential task.

Linear Asset Management - Overall Concept
Func. Loc. A8-100
Equip. S02519
Equip. S02656
Char: thickness 35 mm
Char: thickness 40 mm
Char: hardness 5 °
Work order: 901961
Operation 0010
Operation 0020
Work order: 901989
Operation 0020
Operation 0020
Notification 1007423
Item 001 : onsite inspection
Item 002: surface damaged
Meas. Point: soil ph value
Meas. Doc: 5.4 %
Meas. Doc: 5.8 %,
80.5 124.9
© SAP 2009
The picture shows the general concept of Linear Asset Management which is used in SAP-PM

Agenda
1. Business context
4. Operations plan
© SAP 2009

Well Tests and Meters
Meters
Single Multiphase Virtual Production Flowing well / tubing head Flowing Static
phase flowmeter metering allocation pressure survey bottom hole bottom hole
flowmeter pressure pressure
survey survey
Test No No No No No Yes, separate No Yes, separate
separator at test line test line
time of necessary necessary
measurement
necessary?
Shut-in of No No No No No No No Yes
well at time of
measurement
necessary?
Survey Continuously Continuously Continuously Continuously Continuously Monthly Continuously Yearly (extra-
intervals (routine) ordinary)
Information PVT & Q PVT & Q per PVT & Q per Q per phase PVT for full PVT for full PVT for full PVT for full
gathered separately phase phase and also on stream stream, Q for stream stream, Q for
for entire medium / each phase each phase;
flow allocation pressure
material level build-up after
shut-in
Location of Anywhere Anywhere At each node At each node Wellhead, Wellhead, Bottom hole, Bottom hole,
meter in the in the tubing head tubing head downhole downhole
network, network, gauge gauge
anywhere anywhere
Metering NA Less than Numerical Numerical NA NA NA NA
accuracy single phase method, method,
compared to flowmeters similar to usually better
normal flowmeter than
flowmeter flowmeters
Other name - - - - - Production - Well test
test
© SAP 2009
Meters are used to determine flow related data in a production network.
In a Production Accounting Environment the Meters represent the various stations of the processing
Network within an Oil Filed processing network. It starts with the Well Completions (Perforation in
the String) and normally ends with the Sales point, which can be a Tank from which the material is
discharged into a train track, or a pipeline or in vast areas just a load facility for trucks. The meters
will be connected in an accounting system in a logical way to represent the natural flow of the oil
from the reservoir to the sales point.
Once the Wells and Meters are established and the Allocation rules are set up, the meters and WC
will be used to capture production-related data.
On a well completion, there are different methods to capture the data. If a WC is equipped with a
well head meter, the device will measure the production flow in real time. In vast areas with
thousands of wells, the producer does not want to invest millions of dollars in the meters a well test
can be an alternative. During a well test, the well will be equipped with measurement devices and for
a certain period of time (for example, 24 hours). All production-related parameters of the well will
be measured. Based on this test data, together with the production time of the well, the production
system can calculate the production of the well for a month.

Well Tests and Meters
Well Tests
FBHP SBHP FBHP SBHP

Flow rate
well well
well shut-in well shut-in
flowing flowing
time
initial pressure
pressure pressure
BHP
drawdown drawdown
pressure pressure
buildup buildup
time
FBHP: Flowing bottomhole pressure
SBHP: Static bottomhole pressure
© SAP 2009
A well test is a method to determine important reservoir engineering parameters for a specific
reservoir zone from which a well produces. In principle, flowing and static bottomhole pressure
surveys need to be distinguished (FBHP / SBHP). SBHP surveys (“well tests“) are being carried out
maybe only once a year, since they require the well to be shut-in, that is, production to be stopped.
The result of well tests enables the reservoir engineer to forecast the production of this well and also
serves as the basis for production allocation.
Allocation is an essential process in reservoir engineering and production accounting. It needs to be
carried out by well and reservoir zone (lower completion).
Input data for and calibration of reservoir models
y Accurate input data for reservoir modeling: allocation provides validated volume flows
y History match of reservoir models: reservoir simulations predicting certain production scenarios
can only be validated with precise data on flow rates and pressure
Mass balancing extracted volumes
y Stable reservoir pressure: it is important to match injected and produced volumes by reservoir
zone to maintain reservoir pressure over time
Proper reserves mapping
y Size of remaining reserves: important to know where fluids have been produced in order to map
remaining reserves. This is a prerequisite for justifying and properly planning of infill or
injection wells.

Production Measurement & Allocation
High-Level Process Description
Production Engineering Production Network Modeling

Production Planning Near Real time Data
Measurement and Production Allocation
Maintain
Maintain Well Maintain Network Maintain Well Test
Measurement
Completions Structure Data
Points
Maintain
Maintain Well Maintain Well Maintain Production
Measurement
Completion Completion Flow Network (PFN)
Point Volumetric
Volumetric Data Downtime Data Allocation Profile
Data
Maintain Review/Analyze
Maintain Allocation Perform Production
Measurement Point Production
Basis Allocation
Allocation Profile Allocation Results
Close Production
Allocation
© SAP 2009
This figure shows the primary business process flow of a Production Allocation system. We see that
ownership-related, volumetric allocation-related, contractual allocation-related, volume valuation-
related, tax and royalty related, and revenue settlement related processing occurs. The process moves
from capturing ownership information to determining product volumetric and value information at
an owner and contract level to distributing revenue to accounting for taxes and royalties to finally
posting settlement information to FI.

Agenda
1. Business context
4. Operations plan
© SAP 2009

Balancing Downtime and Production
The Main Goal of Production
Engineering Operations
Development Production
0 yr 5 yr 10 yr 15 yr 20 yr 25 yr
Operating and maintenance objectives Production operations
Business objectives Product quality specification
Responsibilities to the customer Contractual agreements
Safety and environmental management Capacity and availability
Reservoir management Concurrent operations
Product quality and availability Monitoring and control
Cost control (OPEX) Testing & metering
Standardization
Flaring and venting
Waste disposal
Utilities systems
© SAP 2009
Yearly operations plan with certain budget
Updated with drop in jobs
Goal: maximize uptime to 98%

Planning Production
Production Plan for a Calendar Month
Cumulative Production
50
Maximum Capacity
45 Estimated
Actual
40 Planned
35
30
Quantity
25
20
15
10
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31
Calendar month
© SAP 2009
Maximum capacity: determined by max capacity allocation w/o downtime
Estimated: operations plan broken down into “factory days“; result of planning allocation with
planned downtime
Actual production: cumulative production per field in this case w actual downtime
Planned production: result of planning allocation with planned downtime (revised)

Analyzing Production
Standard E&P reports / Analyses
Compliance and regulatory reports (generic enough to fulfill most requirements)
Quantity of disposed or injected volume for a single well by production period
Quantity of hydrocarbons produced for single/multiple well, wellsite, field by production period
Management reports
Costs per barrel of oil produced within the production period
Drilling costs per 1000m drilled
Top producers / lowest producers per reservoir / field for production period
Production versus number of wells
Comparison with other reservoirs and fields in the same basin (that is, area)
Engineering reports
Effects of down-/uptime on production, production loss quantities due to downtime
Reservoir performance and decline (pressure, flow and chemistry)
Mass balancing: amount of extracted hydrocarbons versus injected material
Accounting reports
Total hydrocarbon production and dispositions quantities for production period (interval)
Hydrocarbon production quantities versus time (continuous)
Allocated sales volumes (physical quantities of product as well as financial revenues) for a period
(accounting month or production month) for specific objects
© SAP 2009

Production: Questions
1) Explain the two basic drilling methods that are used in Exploration and
Production Drilling.
2) What are the main Elements of the Upstream Oil & Gas Lifecycle?
3) Describe the main difference between a conventional Kelly Drive and a
Topdrive Assembly?
4) Which technology is required for directional drilling activities?
5) Which type of Drilling Drive is used for horizontal wells?
6) What are the main benefits of horizontal drilling?
7) Why is horizontal Drilling so important in Offshore Operations?
8) Name the production methods of an Oil filed which can be used during the
lifetime of the Oil Filed.
9) Why is Gas so important for an Oil Field, describe the secondary function of the
Gas in an Oil production environment?
© SAP 2009

Production: Lesson 3
Summary

Explain the basics of production
Describe how to assess well/reservoir performance
Explain allocation
Elaborate on planning for upstream production
© SAP 2009

Lesson 4

© SAP 2009

Petroleum Engineering: Lesson 4
Objectives

Describe the basics of petroleum engineering
Explain the asset side of production
Describe specific onshore / offshore requirements
© SAP 2009

Petroleum Engineering:
Business Example
Oil and gas companies try to combine minimal wear of equipment,

maximum uptime, and throughput. To achieve such goals, a
sophisticated asset performance analysis is required. Petroleum
engineering involves surface and sub-surface assets and is highly
complex especially in offshore environments. Oil & gas companies want
to assess asset performance over time to make the right decisions for
investments.
© SAP 2009

Petroleum Engineering Basics
Petroleum engineering is an engineering discipline concerned with the subsurface activities

related to the production of hydrocarbons, which can be either crude oil or natural gas.
These activities are deemed to fall within the upstream sector of the oil and gas industry, which
are the activities of finding and producing hydrocarbons. (Refining and distribution to a market
are referred to as the downstream sector)
Exploration, by earth scientists, and petroleum engineering are the oil and gas industry's two
main subsurface disciplines, which focus on maximizing economic recovery of hydrocarbons
from subsurface reservoirs. Petroleum geology and geophysics focus on provision of a static
description of the hydrocarbon reservoir rock, while petroleum engineering focuses on
estimation of the recoverable volume of this resource using a detailed understanding of the
physical behavior of oil, water, and gas within porous rock at very high pressure.
The combined efforts of geologists and petroleum engineers throughout the life of a
hydrocarbon accumulation determine the way in which a reservoir is developed and depleted,
and usually they have the highest impact on field economics. Petroleum engineering requires a
good knowledge of many other related disciplines, such as geophysics, petroleum geology,
formation evaluation (well logging), drilling, economics, reservoir simulation, artificial lift
systems, and Oil & Gas facilities engineering.
© SAP 2009
Petroleum engineering has become a technical profession that involves extracting oil in increasingly
difficult situations as the "low hanging fruit" of the world's oil fields are found and depleted.
Improvements in computer modeling, materials and the application of statistics, probability analysis,
and new technologies like horizontal drilling and enhanced oil recovery, have drastically improved
the toolbox of the petroleum engineer in recent decades.
Deep-water, arctic and desert conditions are commonly contended with. High Temperature and High
Pressure (HTHP) environments have become increasingly commonplace in operations and require
the petroleum engineer to be savvy in topics as wide ranging as thermo-hydraulics, geomechanics,
and intelligent systems.

Petroleum engineering has the following sub disciplines:
Reservoir engineering, which is trying to optimize production of oil and gas via
proper well placement, production levels, and enhanced oil recovery techniques.
Drilling engineering, which is managing the technical aspects of drilling

exploratory, production, and injection wells.
Production Engineering, which is managing the interface between the reservoir

and the well, including perforations, sand control, downhole flow control, and
downhole monitoring equipment; evaluate artificial lift methods; and also select
surface equipment that separates the produced fluids (oil, natural gas, and water).
© SAP 2009
The Petroleum Engineering is combining all three disciplines to optimize the economic behavior of
an oil or gas field. The Asset Field receives a permanent regime from the Petroleum Engineering
Department and from the Maintenance Department. Both Activities have to be planned and
administrated properly to optimize the economic behavior of the Asset.
Artificial lift refers to the use of artificial means to increase the flow of liquids, such as crude oil or
water, from a production well. Generally, this is achieved by the use of a mechanical device inside
the well (pump) or by decreasing the weight of the hydrostatic column by injecting gas into the
liquid some distance down the well. Artificial lift is needed in wells when there is insufficient
pressure in the reservoir to lift the produced fluids to the surface, but often used in naturally flowing
wells (which do not technically need it) to increase the flow rate above what would flow naturally.
The produced fluid can be oil and/or water, typically with some amount of gas included.

Petroleum Engineering Environment
E&P Partners
E&P Outsourced Oilfield Suppliers Online Government/

Partners Service Providers Service Marketplaces Other
Companies Regulators
Integration
E&P Operations
Explore Appraise Develop Produce Abandon
Integrated Workflows/Processes
Knowledge & Data Management
Reporting, Scorecards & Dashboards
Collaboration
Integration
Technical IT E&P Operations Support

Accounting
Reservoir Production Drilling Well Operations Procurement Prod Finance, HR
Engineering Capture & Activity Engineering Planning Offshore Revenue Regulatory
Monitoring Management Scheduling Logistics Legal, HSE
Joint Venture
Maintenance Management Prod Sharing
© SAP 2009
Typical Environment of Petroleum Engineering

Asset Oil and Gas Field
The typical Oil and Gas Field as an Asset contains the following Sub Assets:
Hydrocarbon Reservoir
Well Completions
Wells
Oil and Gas Gathering system
Oil and Gas Processing system, Dehydration Units, Stabilizer and Compressor
Stations and so on
Pipeline System
Tank farm, Storage, and Loading Facilities
Drill- and Maintenance Rigs
© SAP 2009
The Petroleum Engineering division of an oil and gas company is responsible for the permanent
development of the oil and gas fields.

Agenda
1. Some drilling and production case histories

1. Drilling: HP / HT
2. Oil: deep sea
3. Oil: sub-salt
4. Gas: pipeline
5. Gas: LNG
© SAP 2009

Drilling and Production Case Histories
Breath-taking Upstream/Midstream Projects
Shah Deniz, Azerbaijan

The world‘s most expensive well (250 M$)
Perdido, GoM
The world’s deepest subsea completion at almost 3,000 m
Tiber, GoM
BP’s giant subsalt discovery, deepest oil and gas well so far at 10,683 m TVD
Nord Stream, Baltic Sea

World’s longest offshore pipeline (costs ~7.4 BEur)
Nabucco, Iran & Caspian – Austria

Europe’s alternative to Russian gas (costs ~6 BEur)
Snøhvit, Norway
The world’s largest subsea as well as northernmost LNG project
© SAP 2009

Shah Deniz - Facts
HP/HT conditions with the world’s most

expensive exploration well to date (250 M$)
Reservoir facts
Water depths 50 – 600 m
Vertical relief 1,500 m
Mapped structure 300 km2
Reservoir depth 5,000 m to 7,300 m
Recoverable reserves
Approx. 626 bcm / 22.1 tcf of natural gas
(~225,000 M$)
3.000 MMbbl of oil (~330,000 M$)
Developmental solution
SCP (~700 km South-Caucasus-Pipeline: from
Azerbaijan, through Georgia to the Turkish border)
Statoil, 2008
© SAP 2009

Perdido - Facts
Evolution of deep-water drilling and Shell’s leading edge GoM Perdido project
Moored in approx. 2,380 m water depth
Subsea completion at approx. 2,925 m water depth
Discovered in 2002, production up in 2010 with 130,000 boe/day (approx. 15 M$ per day)
Shell, 2008
© SAP 2009

Tiber - Facts
Subsalt in Gulf of Mexico.
BP announced this giant discovery in
the Gulf of Mexico on Sep 2nd 2009. U.S.A.
Reservoir facts
Water depth 1,259 m
Mexico
The world’s deepest oil and gas well ever Tiber
drilled at 10,683 m TVD
Paleogene reservoir = subsalt discovery =
high risk because of reservoir imaging and
pressure prediction problems
Larger than 3,000 MMbbl of OIP, BP to
reveal further details
© SAP 2009

Nord Stream - Facts
Members of the Nord Stream consortium are

Gazprom (Russia), Wintershall (Germany), EON (Germany), Gasunie (Netherlands)
Project details
Length: 1,200 km
Provisional costs: ~7.4 B €
Construction begins in 2009, with the first pipeline expected to become operational in 2011,
the second pipeline in 2012, with a total capacity of 55 bcm/yr in 2018
Main supply from

Shtokman (Russia) with 134.1 tcf
Yuzhno-Russkoje (Russia) with
36.5 tcf
Nord Stream, 2008

© SAP 2009

Nabucco - Facts
Members of the Nabucco consortium are

OMV (Austria), MOL (Hungary), Bulgargaz (Bulgaria), Transgaz (Romania), Botas (Turkey)
and RWE (Germany)
Project details
Length: 3,300 km
Provisional costs: ~6 BEur
Construction is scheduled to begin in 2009, with the pipeline expected to become operational
in 2013, the final phase will be realized in 2018 with 31 bcm/yr
Main supply from

Shah Deniz (Azerbaijan) via SCP (South
Caucasus Pipeline) with 22 tcf
South Pars (Iran) with 436 tcf
Possible extension to Turkmen and Kazakh
reserves (altogether estimated at 207 tcf with
super-giant Tengiz accounting for 63.5 tcf)
Nabucco, 2008
© SAP 2009

Snøhvit - Facts
Production and landing of natural gas from the Snøhvit, Albatross, and Askeladd
fields in the Barents Sea and Europe's first export facility for liquefied natural gas
193 bcm of natural gas (~70,000 M$)
113 MMbbl of condensate (~13,000 M$)
5.1 million tonnes of natural gas liquids (NGL; ~2,000 M$)
Development solution
Remotely-operated subsea installations and pipeline transport to land
World’s largest LNG carriers (650 MEur investments)
Total investment approx. 8,000 MEur, total revenue approx. 24,000 MEur until 2030
Statoil, 2008
© SAP 2009

Snøhvit - Facts
Melkøya island – before and after …
Statoil, 2008
© SAP 2009

Petroleum Engineering: Lesson 4
Summary

Describe the basics of petroleum engineering
Explain the asset side of production
Describe specific onshore / offshore requirements
© SAP 2009

Unit Summary

Explain the basics of exploration and production of hydrocarbons
and the key differentiators to other industries
© SAP 2009

Refining & Midstream
Contents:
Refining
Planning & Optimization
Trading
Transportation (primary distribution)
Scheduling
© SAP 2009
Each person, in the home and with his or her motor vehicle (scooter, car), is a user of petroleum
products. Between the refinery, where heating oil, diesel, petrol and gas are produced, and the end
user, there is a distribution network that is responsible for getting these products to their final
destination. Making available to each person the right product, at the right time, at the right place and
at the lowest cost and in optimum conditions of safety and security, is the objective of petroleum
logistics.
In all countries, the logistics operation comprises the same stages. The aim is to ensure that all the
products are permanently available to meet the needs of all users: private individuals, road users,
industrial plants, public services …
The supply, storage, transport and delivery of products must also take place under the best possible
conditions of safety, security and respect for the environment.

Refining & Midstream:
Unit Objectives

Explain how refinery processes work and the challenges in oil procurement and
refining
Describe how Supply Chain Management (SCM) is handled
Explain different Trading transactions: the typical business transactions of
trading; the necessity to have exchange scenarios between O&G companies;
the need for hedging
List the typical tasks of transportation
Elaborate on the challenges of oil/bulk transportation management
Describe the key Modes of Transport (MoT)
Describe transportation scenarios including Freight and Demurrage Calculation
Explain how Scheduling handles the coordination of a movement from source
to destination
Explain Scheduling: the usage of nominations; Crude and Product Pipeline
Scheduling; Marine (Tanker) Scheduling
Analysis of Inventory Projection and Planning
© SAP 2009

Hydrocarbon
Exploration Development Primary Commercial
Supply & Gas Refining & Terminal Secondary
& Appraisal & Production Distribution Sales &
Transmission Manufacturing Management Distribution
Retailing
2 – E&P, Upstream
3a – Refining &
Manufacturing
3b – Midstream

Retailing
Support
© SAP 2009
Upstream
Settlement

Refining / Manufacturing Portfolio
Service Station
Upstream Midstream Refining Primary Secondary
(Convenience)
Supply Distribution Distribution
Retailing
Enterprise SAP SAP MII Lubes

Asset Environmental Manufacturing Manufacturing
Management Compliance Integration &
Intelligence
Plant Maintenance Compliance Mgmt. Real-time Analytics, Production Planning

Mobile Asset Permit Management KPIs Detailed Scheduling
Management Emissions Mgmt. Role-based Manufacturing
Supplier Greenhouse Gas Dashboards Operations
Relationship Mgmt. Real-time
Management connectivity, alerts
© SAP 2008

Refining & Midstream: Unit Overview Diagram

Lesson 1: Refining
Lesson 2: Planning and Optimization
Lesson 3: Trading
Lesson 4: Transportation (primary distribution)
Lesson 5: Scheduling
© SAP 2009
The petrol or diesel that we put in the tank of our car, the domestic heating oil that we burn for
heating in the winter, the cylinder of gas which contributes to the delicious dishes we prepare, and all
the chemical products that play a part in our everyday lives… they all come from oil. But we never
use crude oil directly.
Why is that? Why aren’t there motors and boilers that run on crude oil? The reason is very simple:
crude oil is an unstable mixture of several hydrocarbons, in varying quantities according to the
density of the product, and there is not just one crude oil, but a multitude of different crudes. In fact,
each oil field has its own history and its own particular composition of different hydrocarbons.
Some, black and viscous, contain many heavy molecules. Others, brown and freer flowing, are
lighter. They contain more or less dissolved gas. And all of them contain varying proportions of
sulphuric or acid products, very corrosive for metals. Of course, a universal motor adapted to each
and every fuel doesn’t exist, nor does a boiler that is resistant to very aggressive corrosive action.
That is why the crude oils must be purified and transformed into products having an almost constant
composition, well adapted to their use. These transformations are carried out in refineries.
But the overriding objective of a refiner is to respond to the demand for petroleum products. Today,
the development of road and air transport has accelerated, and the demand for light products has
soared. At the same time, we burn a lot fewer heavy products to produce electricity or for heating.
Worldwide demand is for about 40% light products (automotive fuels), 40% middle range products
(boiler fuel, diesel) and 20% heavy products. The only crude oil corresponding more or less to these
proportions is the light crude from the Algerian Sahara. But the majority of crudes extracted in the
world contain more heavy products. Refineries composed uniquely of a single distillation tower, as
in the past, are therefore no longer sufficient.

Other production plant is necessary in order to transform (we also say to convert) the heavy products
into light products. Several refining techniques exist to do this. It is because of the costs of
transformation that the heavy crude oils are less expensive than the light oils
This need to adapt refineries to the demand for petroleum products also explains the location of
refineries throughout the world [link to focus: Where are the refineries situated? A lot of them are in
the developed countries, the very large consumers, even in those that do not have any oil! By
constructing refineries on their own territory, they guarantee for themselves an independent refining
policy.

Refining: Lesson Objectives

Explain why and how crude oil has to be converted into finished products to
have value
Describe how crude oil quality is measured
Explain how refinery process units work
Explain challenges in oil procurement and refining
© SAP 2009

Refining: Business Example
Max and Fred are junior new hires in the trading division of the
European headquarters of a global oil company. They are developing
into roles in which they will work on contracts for crude supply as well
as for the selling of products. They need to understand the basic
principles of the refining process. Therefore, they learn about the most
important characteristics of the refinery feedstock, the main building
blocks of a refinery plant, and the most important refinery processes.
Moreover, they need to know the spectrum of refinery products and the
related product characteristics, as well as the possibilities for influencing
and to controlling the product distribution.
© SAP 2009

Oil & Gas is Readying Itself for the Energy
Revolution
© SAP 2009
Oil and gas have been the primary fuels and transportation energy sources through the 20th century
and into the 21st. There are, however, pressures on the system in aging and declining production
fields and competition from new alternative energy sources. Cambridge Energy Research Associates
(CERA), which is led by Daniel Yeargin, author of “The Prize”, one of the most popular books on
the history of oil, published a report entitled Break Point in 2008. This reports highlights that the
future shifts in future energy sources is not likely to be a smooth linear transition. Currently, the
world is one large petroleum market, where volumes move fluidly to regions that are in demand. In
the future; as alternative energy sources become available, different regulations force changes, and
supply and demand locations shift, the market is very likely to change with sudden shocks and even
regional differences. We saw this in the beginning of the 20th century as the world moved from coal
as a primary source to petroleum.
The upper right figure depicts three scenarios CERA envisioned going forward following the
economic decline last year. The line trending downward on the bottom reflects a scenario where
OPEC would provide price support through production cuts and as a result, the industry continues
with current investment plans. The line trending upward in the future entitled over-correction reflects
a scenario where the industry pulls back investments due to economic challenges in the short term,
and subsequently overcorrects and results in future undersupply causing returns to high and volatile
prices. Well, since this report was issued, the last year has definitely aligned with the over correction
scenario. While OPEC has attempted some production cuts, the demand has fallen so dramatically
due to reduced economic activity that prices and particularly refining margins have been severely
depressed, and the industry has dramatically retreated from much of their investment plans under this
challenging economic climate.

In addition to these investment and supply shifts, there is not a day that goes by that we do not see
some headlines about concerns over environmental issues, or new regulations being implemented.
These put further pressures on shifts in energy sources and use and expenditures in this by industry
are not recovered in increased margins.
While all these issues do point to a very stormy or bumpy ride in the future, petroleum is still
expected to continue to be the primary fuel energy source through our lifetimes.
Reference: Top two figures come from report by Cambridge Energy Research Associates (CERA)
entitled, “Break Point” Revisited

How Does this Impact our Business?
Capacity Constraints Operational Flexibility

Valero (virtual) Crude Imports - 1997
Millions barrel per day
ANGOLA
ARGENTINA
VENEZUELA
NIGERIA
COLOMBIA
INDONESIA
MALAYSIA
SAUDI ARABIA
GABON
UNITED
PERU
ECUADOR
CHINA PEOP
NORWAY
CHILE
MEXICO
IRAQ
CONGO
EGYPT
KUWAIT
BP Review of World
Statistical Data 2009 Excess Refining Capacity
Valero Crude Imports - 2007

Business Volatility
COLOMBIA
RUSSIA
SAUDI ARABIA
ALGERIA
VENEZUELA
CANADA
NIGERIA
ANGOLA
LIBYA
SYRIA
GAUTEMALA
ECUADOR
UNTIED
GABON
CHAD
KAZAKHSTAN
VIETNAM
MEXICO
IRAQ
BRAZIL
CONGO
US Department of Energy KUWAIT
US Department of Energy
© SAP 2009
Now, we will look at how all these market pressures and shifts influence our business.
The upper left chart shows the excess world refining capacity plotted against the crude price of West
Texas Intermediate (WTI) crude. WTI is one of the benchmark crudes used as a proxy for the crude
market. It is also the product that is traded on the NYMEX future exchange market for crude.
You can see an incredible and consistently downward trending excess refining capacity but there are
different drivers and causes. The decline lies in excess capacity results in the loss of smaller refiners.
The market in the 1980s was starting the shift toward larger refineries processing heavier sour crudes
and smaller sweet crude refiners were forced out of the system. The continued decline in the 1990s
was more on the demand side than the refining side. Explosive economic activity in Asia and India
outstripped growth in refining asset capacity. 2008 and 2009 have introduced yet a new twist. Shifts
in the industry including shifts from gasoline to diesel for transportation, which we will return to
later in the course, and dramatic overall drops in transportation fuels have caused refiners to slow
down or stop refinery processing units that specialize in making these transportation fuels. This is
unprecedented. These units are usually the highest margin units in the refinery (especially gasoline
production units), but now, the market is oversupplied in gasoline capacity. This has dropped
utilization and made what appears to be an upturn in excess capacity, however, this is not new
construction, but less use due to economics. Of course, this leads to declined investment and
overcorrection and high prices in the future as we saw in the last slide.
These market shifts are also causing business volatility. The bottom left corner depicts a proxy for
refining margins, which is really a calculation of the difference in the value between crude and
products as traded on the NYMEX futures exchange market. This is called a 3-2-1 crack spread and
is commonly used as an overview of industry refining margins. We will actually learn how to
calculate this later in the course and you will be able to monitor refining industry margins whenever
you wish through publicly available pricing data. Now, this chart shows a high degree of volatility
in refining margins. While there are some incredible peaks in 2005 and 2007 where refiners were
making around 30 dollars per barrel, a good size refinery can process 250,000 barrels per day so
that’s 7.5 million dollars per day in gross margin. During these times, refineries are considered
“money making machines”. The prices are typically cyclical with good years and bad, but overall
have held up ok. However, look what has happened since 2008. Margins have even dipped to
negative and running so low (~$10/bbl) they barely cover the cost of capital (if even that). During all
this time, look at the volatility of these margins. This makes forecasting revenue and maintaining a
stable profitability that the stock markets reward very challenging.
The two charts on the right show the challenges that market shifts bring into the operational area of a
refinery. We will learn in the course of today about what different crudes are and what is different
about them, but suffice it to say at the moment that all crudes are not the same and they dramatically
influence both the types of equipment in a refinery and also the operation of the refinery. These two
charts show the impact of tightening crude market. Valero is the largest US refiner. They are purely
a downstream refining company with no upstream oil exploration or production. They have
undergone significant acquisitions over the last ten years, but in the upper chart, we aggregated the
crude imports the refineries now own imported in 1997. It is obvious that there are three primary
providers. These three are one light, one medium, and one heavy crude. Valero had a nice balanced
supply from stable large providers for the bulk of their crude needs. This created a steady flow of
crude qualities to the refineries and stable operations. However, look at their imports in 2007. They
are down to one primary supplier from Mexico and some from Saudi Arabia. Mexico is currently
under declining production so this supplier is at risk in future. This causes them to supply their crude
needs from many other varied sources. Operationally, this means the refinery is getting a different
crude mix every day with impacts on operational stability, unknown impacts of corrosion, varying
quality characteristics, and so on. This lack of operational stability from diverse crude supply is one
of the key issues around reliability and utilization.

Why Refine?
1. T o trans form products of little us e into highly des irable ones

2. T o remove impurities that would caus e emis s ions during combus tion of the
fuel products
© SAP 2009
A very important although simple question - Why do we Refine? There are two primary purposes
for refining.
The first is to transform products of little use into highly desirable ones. We will talk in the next few
slides about what a barrel of crude is really comprised of and how do we turn a barrel of crude into
the desired gasoline, distillates, etc.
The second reason is to remove impurities that would cause negative environmental emissions
during the combustion of the fuel products. These include sulfur and other mercaptans, nitrogen,
benzene and heavy metals. This is a substantial differentiating element between crude oils and a
critical part of the processing of them.

Crude Characteristics
Crude is mixture of wide range of molecules. Each molecule boils at a

different temperature, which is the basis of distillation.
Key differentiating crude characteristics are weight (Heavy/Light) and
sulfur content (Sweet/Sour)
The majority of reserves are light/medium sour, but worldwide,
available crude is getting heavier and sourer.
© SAP 2009
Crude is a mixture of a wide range of molecules. Each molecule boils off at a different temperature,
which forms the basis of the distillation process, which we will discuss next.
Hydrocarbons may be gaseous, liquid, or solid at normal temperature and pressure, depending on the
number and arrangement of the carbon atoms in their molecules. Those with up to 4 carbon atoms
are gaseous; those with 20 or more are solid; those in between are liquid. Crude oils are liquid but
may contain gaseous or solid compounds (or both) in solution. The heavier a crude oil (that is, the
more carbon atoms its molecules contain), the closer it is to being a solid; this may be especially
noticeable as its temperature cools. Light oils will remain liquid even at very low temperatures.
Crude is generally classified by the geographical location it is produced because this determines
transportation costs, its b) API gravity (measure of density), and by its c) sulfur content. It is light or
heavy if it is low or high density respectively. It can be considered sour if it contains a high
percentage of sulfur and sweet if it is has a low sulfur content.
Other classification criteria include:
y Characterization
y Boiling Point Curve
y Nitrogen Content
y Metals (Nickel/Vanadium)
y ConradsonCarbon Residue (CCR)
y PONA Analysis (Paraffins/Olefins/Naphthenes/Aromatics)

y Viscosity Curve
y Carbon/Hydrogen Ratio
The majority of worldwide reserves are technically considered Light/Medium weight and Sour.
However, this represents a wide range and the actual ratio of available crudes on the market is
strongly trending toward heavier and more sour crudes.
The bottom right is an actual jar of crude. You will notice the dark color and if you could feel it, you
would notice the thick consistency of it. Of course, this is very different from the gasoline we use in
our cars and lawn mowers. On the next slide, we will discuss how we compare the content of crude
versus these desired products.

Three Basic Steps to Refining Process
Distillation Conversion Blending
LPG and Gas
LPG Alkylate Refinery

Alkylation
Straight run gasoline Fuel gas
Atmospheric
Distillation
LPG
Naphtha Hydro- Catalytic Reformate
Treating reforming Gasoline
Crude oil Middle distillates Hydro-
Treating Solvents
Heavy atm. Gas oil
Hydro- Catalytic Gasoline
Kerosene
Training and Blending

Treating cracking
Vacuum Slurry oil
gas oil Diesel
Distillation
Cycle oil
Vacuum
Solvent
extraction Hydro- Gasoline, Naphtha, Middle distillates Heating
cracking oil
Lube base stocks Lube oils
Solvent Lube oil
dewaxing Waxes
LPG and Gas Greases
Propane
deasphalter Gasoline, Naphtha, Middle distillates
Asphalt
Visbreaker Fuel oil
Asphalt Industrial
Delayed coker/ fuels
Gasoline, Naphtha, Middle distillates
Flexicoker
Coke
© SAP 2009
There are three basic steps (or phases) in refining that transform undesirable products into desirable
products.
The first step is crude distillation. These towers are also known as the crude towers. Only heat and
pressure are used to separate the crude oil into its basic components (or intermediate products). This
produces intermediate products such as naphtha and gas oils. These are called intermediate products
because they require further processing to be suitable for desired end products such as gasoline, and
so on.
The middle processing step is conversion. A number of different refinery process technologies are
utilized including processes to remove the impurities such as sulfur. The difference in this step is that
in addition to heat and pressure, catalysts are used to invoke chemical reactions that actually modify
the molecular structure. This is the key to transforming the undesirable products into desirable ones.
The magic is possible because the processes are are truly changing these products at the molecular
level. The flow of intermediate products between these units can be a very complex path. Refining is
very flexible, not only in ranges of feedstocks the conversion units can use, but also in the operating
range of the conversion units - so you can fine-tune the selection between gasoline or distillates out
of the same vacuum gas oil. The outputs of the conversion units are considered blend stocks. Most
are ready to go into products, but by themselves do not meet the specifications for these products and
must be blended together.
Thus, the last stage of refining is blending. Here, there is no chemical separation or conversion of the
products; they are merely blended together to meet a wide range of specifications of the desired
finished products. The process involves lining up various tank sources and piping them through a
blend header, which controls the rate of mixture and the resulting product is isolated in a dedicated

tank and final qualities are checked. Some advanced operations can use on-line chemical analyzers to
monitor qualities in real-time and blend directly into a ship or pipeline.
There is immense complexity in refining chemistry, process and catalyst technologies, and overall
operating planning and execution. It is the most complex manufacturing process in the world, but all
this complexity can be simplified into these three basic stages; Distillation, Conversion, and
Blending.
Diagram available from URL:

http://www.energystar.gov/ia/business/industry/ES_Petroleum_Energy_Guide.pdf and originally
annotated as Simplified flowchart of refining processes and product flows. Adapted from Gary and
Handwerk (1994) annotated as Gary, J.H. and G.E. Handwerk. 1994. Petroleum Refining:
Technology and Economics, 3rd edition, Marcel Dekker, Inc., New York, NY..

Steps to Refining Process
1) Distillation
Top vapor
Intermediates Final Products
fraction to < 90°F Butane and • Refinery fuel gas
condenser • Propane
lighter
• NGLs
reflux
Straight Run
downcomer
90-220°F More
• Gasoline
rectification
Gasoline Processing
Crude
downcomer
Trays
Unit
220-315°F More • Gasoline
Naphtha
downcomer
Distillation Processing • Jet Fuel
Feed Tower
• Kerosene
downcomer
Feed tray (Crude 315-450°F More • Jet fuel

Unit) Kerosene
Processing • Diesel
downcomer
• Fuel oil
• Gasoline
Strip
Light
downcomer
450-650°F More
Furnace • Diesel
Trays Gas Oil Processing
• Fuel oil
downcomer
Heavy • Gasoline
600-800°F More
• Diesel
Gas Oil Processing • Fuel oil
Vacuum
from
Reboiler Unit
• Gasoline
To 800+°F Residual Fuel More • Diesel
Reboiler • Fuel oil
Oil/Asphalt Processing
• Lube Stocks
Distillation applies heat and pressure to separate molecules from each

other, not crack them apart (as in conversion)
Above 650 F, process is operated in a vacuum to allow for higher
temperatures without uncontrolled cracking.
© SAP 2009
Now we will take a look at each of these three stages in a little more detail. The crude oil received to
the refinery has already undergone some clean-up in the production field where it is produced.
Natural gas, sediments, and radioactive and hazardous gases such as hydrogen sulfide, are removed.
In spite of this, it still comes to the refinery with undesirable amounts of basic sediment and water
(also known as BS&W) and salt. Sometimes, this settles out of the crude oil during shipment. There
is a pre-processing step not depicted here called a desalter. The crude is actually mixed with water
into an emulsion. It passes through electrical plates pulling the water with the salt out.
Once completed, this clean crude feedstock is heated; first by piping it close to, but separated from,
the much hotter already-refined product (this is a "heat exchange"); then by piping through a furnace
which heats the crude oil even more. The crude tower utilizes heat and pressure to cause separation
of the crude oil into components referred to as intermediate products, such as naphtha, gas oils, and
so on. Distillation does not cause any modification of the molecules, only separation. The volume
you put in equals the total volume you get out. The lighter molecules rise to the top, the heavier ones
drop to the bottom. Inside the tower, all the way up and down it, are distillation trays. These trays
allow for the natural flow of light gasses upwards while letting heavier liquids flow down. The action
of gases rising through the liquid aids the separation process. Thus, the following substances (lightest
to heaviest or from the top of the tower to the bottom) are produced: off gas, straight run gasoline
(composed of molecules with 5 to 10 carbons in length), kerosene distillate (with molecules of 11 to
12 carbons in length), light gas oil (13 to 17 carbons), and heavy gas oil (18 to 25 carbons), used for
lubricating oils.
There are two types of crude towers, atmospheric distillation and vacuum distillation. The
atmospheric tower is the first one the crude is introduced to. It operates at standard atmospheric
pressures. Because of this, it cannot utilize heat above about 650ºF, otherwise uncontrolled cracking
of molecules will occur. Hydrocarbons with boiling points higher than ~650ºF are known as

atmospheric residue and are pumped out the bottom of the tower. In some simple refineries, these are
used immediately for the production of asphalts. However, this leaves valuable gas oil hydrocarbons
trapped and their value is downgraded by selling them as asphalts or heavy fuel oils. Therefore, most
refineries have vacuum distillation units. Vacuum towers are also a distillation process, but they
operate in a vacuum, thus higher temperatures can be reached without cracking of the molecules.
This allows for the separation of the remaining valuable heavy gas oils to be stripped out. There is
still a residue from the vacuum tower which is a very heavy sludge. It can be used directly as asphalt
or burned as heavy fuel oils. However, there is a somewhat magical process in refining called coking
that can actually strip yet more valuable molecules from this vacuum residue.

2) Conversion
Deep
Light Medium
Coking
Reforming Catalytic Cracking
The process whereby A central process in refining Thermal non–catalytic

naphthas are changed where heavy gas oil range cracking process that
chemically to increase their feeds are subjected to heat converts low value oils to
octane numbers in the presence of catalyst higher value gasoline, gas
Octane numbers are and large molecules crack oils and marketable coke
measures of whether a into smaller molecules in Residual fuel oil from
gasoline will knock in an the gasoline and vacuum distillation column
engine surrounding ranges is typical feedstock
© SAP 2009
When we looked at the three stages of refining we learned that the intermediate feedstocks produced
through distillation are further processed by “conversion” processes. We call these conversion
processes because they use catalysts to invoke chemical reactions that actually change the molecular
structure and transform certain molecules into entirely different molecules. This is a very
sophisticated process that must be executed in incredibly large scales and must operate 24x7 in a
continuous process. Basic laws of physics state that mass cannot be created or destroyed. However, if
you change the molecules themselves, you can change volume. In refining, you typically get more
volume out than you put in. This is a value creating mechanism inherent to refining. Overall, you
may have around 5-8% total volumetric gain. Some cracking processes can have up to 15% gain in a
single unit. Other processes, however, such as reforming (reformulate molecules versus crack them
apart), actually produce less volume out than you put in. Again, at no point does the mass change,
just the volumes. This is one of the challenges to managing continuous manufacturing from the
planning, scheduling, and production tracking/accounting viewpoint.
The conversion processes vary greatly in what they accomplish and how they do it, but they can be
characterized by light, medium, and deep levels of conversion.
Reforming or “reformers” process naphtha into gasoline blend component called reformate. Its
primary purpose is to upgrade the octane value. The higher the octane achieved, the less total volume
and higher operating conditions/costs that must be incurred. It is a catalytic reaction process and
comes in two primary types. One continuously regenerates the catalysts and can operate for longer
periods (years) without shutting down. Other older types operate by loading a fixed bed of catalysts.
The unit is operated until the catalysts is consumed and then the unit must be shut down and the
catalysts regenerated or replaced. As usual, each comes with different capital and operating costs
considerations as well.

Fluid catalytic cracking “cat crackers” or “FCC units” are the most important type of conversion unit
in the refinery. In these heavy gas oils are injected into a tower where a continuous cycling of
catalyst and feedstock slurry is reacted together. The catalyst is continuously cycled out of the
reactor unit and regenerated (bad stuff that builds up is burned off it, thus re-exposing the surface of
the catalyst to create more chemical reactions). The CAT cracker is typically the primary gasoline
blendstock producer but also produces a distillate product and has been historically very profitable
unit in the refinery, (however, we will discuss a recent trend of reduced gasoline demand that has
caused some of this capacity to be idled).
We previously discussed that the result of the vacuum distillation process was vacuum residue. At
this point, apparently all the valuable molecules have been stripped out and with a thick heavy semi-
liquid like asphalt. However, there is yet one more process in refining that can squeeze the last few
valuable molecules out. This third type of conversion process is coking.
Coking has three types, but the most common, delayed coker, is a type of coker whose process
consists of heating the residual oil feed to its thermal cracking temperature in a furnace. This cracks
the long chain heavy carbon and hydrogen molecules of the residual oil into coker gas oil and pet
coke. Both are in a liquefied form in the mixture as it leaves the furnace and enters the coke drum.
In the drum, the coker gas oil vaporizes and separates from the mixture. It is directed to a
fractionation column where it is separated into the desirable boiling point fractions. The liquid coke
solidifies in the drum as it cools and the velocity slows down. After the drum is full of the solidified
coke, the hot mixture from the furnace is switched to a second drum. The top and bottom of the full
coke drum are removed, and the solid pet coke is then cut from the coke drum with a high pressure
water nozzle, where it falls into a pit and is recovered. So many lighter hydrocarbons have been
squeezed out of the crude by this stage that all that is left over is a solid charcoal like substance. Even
this product is further processed and is a valuable component in aluminum and steel production.
Coking is a very profitable unit because it takes such low grade feedstock and upgrades it to gasoline
and distillate components. It also has grown in importance because of the shift toward heavier crudes
available in the world. If you remember from our graphical depiction of the components of crude,
the grey band is the heavy feedstocks, which cokers consume and they make the desired products on
the right. The heavier crudes had a substantially higher content of this grey residue component.
There are other conversion technologies such as alkylation units, which produce a high octane
component for gasoline, and hydrocrackers which inject hydrogen to upgrade heavier fractions into
lighter products. It is very valuable because it can run a wide range of feedstocks and produce a wide
range of products. It, however, runs at extremely high temperatures and pressures and consumes
great amounts of valuable hydrogen. Other units known as hydrotreaters are dedicated to the removal
of sulfur alone and do not actually provide any other processing upgrade value to the hydrocarbons.

3) Blending
Typical Product Specifications 2006 Petroleum Products Consumption

Octane
20000
Reid Vapor Pressure 18000
Toxics (benzene, olefins) 16000
14000
Oxygen content 12000
Residual Fuel
Freeze point 10000
8000 Jet/Kero
Viscosity 6000
4000 Distillate
Cetane Index 2000 Gasoline
Sulfur content 0
Pour point North Central EuropeEurasia Middle Africa Asia &
America &South East Oceania
America
Gasoline Blending Problem

Component Unit Barrels RVP Motor Octane
Straight Run Gasoline Crude 4,000 1.0 61.6
Reformate Reformer 6,000 2.8 84.4
Light Hydrocrackate Hydrocracker 1,000 4.6 73.7
Cat Cracked Gasoline FCC 8,000 4.4 76.8
Normal Butane C4-Recovery ? 52.0 92.0
© SAP 2009
The table in the upper left corner lists key product specifications for various products. Octane is the
one most people are familiar with. You select an octane from 87 – 93 at the pump. This octane
typically has a little sticker next to it saying that (R+M)/2. These are two tests for octane and the
average of the them is the octane utilized for the final product specification. The R stands for
Research Octane, which is merely a laboratory chemical tests for octane. The M tests for Motor
Octane. A sample of the gasoline is ran through a highly calibrated engine and it is monitored. These
typically vary by about 8 octane points with Research being higher, but the average is what you are
choosing at the pump.
Reid Vapor Pressure (RVP) is a measure of hydrocarbon vapors and is required in the starting of
engines. This specification can vary by geography and seasons reflecting different environmental
temperatures and resulting vaporization profiles.
There are several different toxins which have a maximum concentration allowed in the fuels.
Oxygen content has gained significant importance in the last few years. You have heard about it but
may not have appreciated the connection. In the US (for example, but similar in other developed
countries), the Environmental Protection Agency mandates in cities that they reduce the amount of
airborne pollutants. Various state governments have determined that the best way to achieve this is
to regulate the specifications for transportation fuels. They mandate the amount of oxygen content
that must be present in the fuels (for cleaner burning). To meet this, refiners originally utilized a
compound MTBE (methyl tertiary butyl ether) to meet this requirement. This, however, was later
discovered to be toxic and it is highly (completely) soluble in water. So much so, that it is almost
impossible to clean the water up if contaminated. The normal tank leakage and spills at retail
gasoline outlets have been found to contaminate entire regional groundwater systems, thus its US
was banned, however, the requirement to maintain oxygenate levels was not withdrawn. Therefore,
the next best alternative for accomplishing this is by mixing in something known as ethanol, which is
typically produced from corn. Many people have heard about ethanol as a replacement transportation
fuel but may not realize it is for quality reasons and not just to replace volume. Another interesting
detail of this is that ethanol is pure grain alcohol (like the type you drink). In the US, they have to
add a petroleum based diluent to the ethanol to keep it from being taxed as drinking alcohol.
Freeze point is the temperature at which fuel forms ice crystals and could clog engine fuel filters
Viscosity is the measure of how easily jet fuel or diesel flows
Cetane index is the measure of the self-ignition properties of a fuel (the ignition delay) for diesel
engines
Sulfur content determines the level of sulfur dioxides in the vehicle exhaust
Pour point is the temperature at which the diesel fuel flows
Gasoline can have over 20 different blend components - streams that can be blended to make the
gasoline. Each one comes with a different set of properties. The lower table shows a simplified
blending problem. Certain components, their respective quantities, and associated properties are
provided. The question is how much Normal butane to add to hit a target RVP of 10. Solving for this
one target would yield 3,081 barrels of butane, which would provide a total of 22,081 barrels in this
blend. However, solving for both RVP and Octane targets would require the solution of two
equations simultaneously. In reality, a single gasoline blend might have to simultaneously meet 8 or
10 specifications. Deciding which of 20 different blends to use to achieve 10 different targets not
only for this blend but also utilize all your available blend stocks in the best fashion over the next 3
days is a very complex problem and typically requires complex optimization tools.
Petroleum products have different usage levels in different parts of the world. In North America,
gasoline is the primary transportation fuel. In Europe and Asia, distillate dominates.

Refining Types
1) Topping and Hydroskimming
Crude Propane/Butane
Unit 4% Propane / Butane
Reformer Gasoline
Low Octane High Octane Gasoline
RFG
30% Conventional
Distillation Tower
Hydrogen
CARB
Distillate Premium
Light Kerosene / Jet Fuel
Desulfurizer
Kerosene / Jet Fuel
Sweet Distillate
Crude Diesel Heating Oil Diesel / Heating Oil 34% Jet Fuel
Diesel
Heating Oil
Vacuum
Unit Gas Oil Heavy
Heavy Fuel Oil

32% Fuel Oil &
Other
100% Total Yield
Simple low upgrading capability refineries tend to run sweet crude
© SAP 2009
Topping Refineries are the smallest and least complex. They usually have only an atmospheric
distillation tower and maybe a vacuum distillation tower. Because the refineries lack the most
sophisticated refining equipment, the type of products they can produce is somewhat limited. The
quality of the incoming oil affects what the refinery can produce.
Hydroskimming refineries are equipped with desulphurization and reforming units, topping units,
and can increase the octane levels of gasoline and lower the sulfur levels in diesel fuel. A
hydroskimming refinery does not have conversion facilities to upgrade the heavier molecule
components in heavy crude oils. Their purpose is to strip off the light oil (gas/dist/jet) portions.
Therefore, they typically run a light crude, where we saw in our earlier slide were the blue, green,
and purple portions with minimal grey areas or residue. Since they do not have significant
conversion capacity, which modifies molecules, they are typically volumetrically balanced, yielding
about the same amount of products as crude consumed. Economically, they are not competitive in
markets such as the US. However, there is a resurgence of construction around this hydroskimming
and medium conversion-oriented configurations in Middle East construction. In OPEC countries,
they have minimal transportation fuels requirements but are constrained by OPEC quotas from
selling more crude. However, they can build refining capacity, process the crude in a minimal
conversion refinery. They sell naphtha to a worldwide petrochemical demand market, upgrade some
for gasoline for local use and sell the heavier components off for fuel oil to Asia. They are not
maximizing the potential value of the heavier portion of the barrel, but they are avoiding great capital
and operating expense and complexity. They would not have a market for full conversion into
transportation fuels anyway.

Refining Types
2) Medium Conversion / Catalytic Cracking
Crude
Unit Propane/Butane
8% Propane / Butane
Reformer Gasoline
Low Octane High Octane Gasoline
RFG
Distillation Tower
Hydrogen
45% Conventional
CARB
Distillate Premium
Light Kerosene / Jet Fuel
Desulfurizer
Kerosene / Jet Fuel
Sour Distillate
Crude Diesel Heating Oil Diesel / Heating Oil 27% Jet Fuel
Diesel
Heating Oil
Light Cycle Oil (LCO)
Alkylation Alky Gasoline

Unit
Fluid Catalytic
Gas Oil
Cracker (FCC)
Vacuum FCC Gasoline
Unit Heavy
24% Fuel Oil &
Other
Heavy Fuel Oil
104% Total Yield
Moderate upgrading capability refineries tend to run more sour crudes, while
achieving increased higher value product yields and volume gain
© SAP 2009
The medium conversion or cracking refinery adds one more level of complexity to the
hydroskimming refinery by reducing lower value fuel oil by conversion to gasoline and distillates.
The FCC (Fluid Catalytic Cracker) is the Oil is cracked in the presence of a finely divided catalyst,
which is maintained in an aerated or fluidized state by the oil vapors.
Primary conversion unit: The main motivation for adding FCC capacity is to boost gasoline
production. The feedstocks are typically vacuum gas oils. Oil is cracked in the presence of a finely
divided catalyst, which is maintained in an aerated or fluidized state by the oil vapors. The formation
of coke is an essential feature of the cracking process and this coke deactivates the catalyst. Spent
catalyst is regenerated to get rid of coke that collects on the catalyst during the process. Spent
catalyst flows through the catalyst stripper to the regenerator, where most of the coke deposits burn
off at the bottom, where preheated air and the spent catalyst are mixed. Fresh catalyst is added and
worn-out catalyst removed to optimize the cracking process.
The use of cracking conversion creates a volumetric expansion for the overall refinery. This,
combined with the highly valuable upgrading the FCC is performing, makes the economics for a
medium conversion refinery typically better than hydroskimming. It also can profitably run a slightly
heavier crude with a higher gas oil content, since it is going to be upgraded to gasoline.

Refining Types
3) High Conversion: Coking/Residual Destruction
Crude Hydrogen
Crude Gas Plant
Unit
Unit
Propane/Butane
7% Propane / Butane
Gasoline
RFG
Distillation Tower
Low Octane Gasoline Reformer 58% Conventional

High Octane Gasoline
CARB
Medium Hydrogen Premium
/ Heavy Distillate
Distillate
Sour Kerosene Desulfurizer Kerosene/Jet Fuel 28% Jet Fuel
Diesel
Crude Heating Oil
Diesel Diesel / Heating Oil
Hydrocracker Hydrocrackate Gasoline

Light Gas Oil
Ultra Low Sulfur Jet/Diesel
LCO
Alkylation
Unit Alky Gasoline
Fluid Catalytic
Cracker (FCC)
Vacuum Medium Gas Oil
FCC Gasoline Heavy
Unit
15% Fuel Oil &
Other
Heavy Fuel Oil Delayed Coke
Coker 108% Total Yield
Complex refineries can run heavier and more sour crudes while achieving the
highest light product yields and volume gain
© SAP 2009
The deep conversion refinery adds hydrocracking conversion. Hydrocracking is a two-stage process
combining catalytic cracking and hydrogenation, wherein heavier feedstock is cracked in the
presence of hydrogen to produce more desirable products. The process employs high pressure, high
temperature, a catalyst, and hydrogen. Hydrocracking is used for feedstock that is difficult to process
by either catalytic cracking or reforming, since these feedstocks are characterized usually by a high
aromatic content and/or high concentrations of the two principal catalyst poisons, sulfur and nitrogen
compounds. Hydrocracking produces relatively large amounts of isobutane for alkylation feedstock
and also performs isomerization for pour-point control and smoke-point control, both of which are
important in high-quality jet fuel. Because of the severe operating conditions and high consumption
of hydrogen, the benefits of hydrocracking come at a substantial capital and operating expense.
In addition to additional cracking capacity, the high conversion refinery adds coking capacity. The
coker takes the lowest quality residue left after all other valuable hydrocarbons have been extracted
and upgrades it to feedstocks for gasoline and distillates. It also produces petroleum coke, which
dependent upon the type of coker may have valuable properties for steel production or sold for
industrial fuel sources. As you follow the flow of liquids through the atmospheric crude unit, through
the vacuum unit, and out the bottom of the vacuum unit, this heaviest component is referred to as
“the bottom of the barrel” and hence the term “deep conversion”. The modern full conversion
refinery is the norm for large refineries. It typically has the greatest profitability with the ability to
run the heaviest and sourest crudes, which typically are sold at a discount while still turning them
into the desired ratio of high value fuels. With extensive conversion capacity, it has the greatest
overall volumetric uplift which adds to its profitability.

Why Refine?
Removing Impurities
Catalyst
Catalysts are an integral part of both functions of refining.
Catalysts may be solid or liquid.
Catalysts vary widely in size, shape, and function.
The most common catalyst in a refinery is that which removes
sulfur from oil.
Hydrotreating
High sulfur content is one of the undesirable aspects of
crude, and removing this sulfur is necessary.
Sulfur removal is required to protect downstream
refinery processes and to meet government regulations
for road fuels.
The process of hydrotreating uses hydrogen and a
catalyst to remove sulfur from oil by converting it to
hydrogen sulfide (H2S).
Sulfur is sold for use in the manufacture of fertilizers,
sulfuric acid, and a variety of pharmaceutical products,
like antibiotics.
© SAP 2009
The second reason we refine is to remove impurities that would cause emissions during the
combustion of the fuels. Catalysts are an integral part of accomplishing this. The science of catalyst
technology is the most high tech portion of refining. It is also the last area of significant on-going
innovation. There have not been significant breakthroughs in refining technology since cracking
processes developed in the 1960s.
Catalytic hydrotreating is a hydrogenation process used to remove about 90% of contaminants such
as nitrogen, sulfur, oxygen, and metals from petroleum. If these contaminants are not removed from
the refinery streams, they can have detrimental effects on equipment, catalysts, and the quality of the
finished product. Typically, hydrotreating is done prior to processes such as catalytic reforming so
that the catalyst is not contaminated by untreated feedstock. Hydrotreating is also used prior to
catalytic cracking to reduce sulfur and improve product yields, and to upgrade middle-distillate
petroleum fractions into finished kerosene, diesel fuel, and heating fuel oils.
Hydrotreating for sulfur removal is called hydrodesulphurization, or is commonly referred to as a

‘hydrotreater’. The processes include facilities for the capture and removal of the resulting hydrogen
sulfide (H2S) gas. The hydrogen sulfide gas is subsequently converted into byproduct elemental
sulfur. Approximately 85% of elemental sulfur is converted to sulfuric acid, which is used for mining
and fertilizer production.

Refinery Supporting Functions -
Energy & Green House Gases
Sulfur Plant
Fired 1.9%
Flaring GHG Sources
Heaters H2 Plant
2.7%
1.6%
Asphalt Blowing
0.10%
Blowdown Cooling Towers

Cat Coke 0.003%
25.2% 0.18%
Delayed Coking
0.058%
Other
0.8% Equipment Leaks
0.014%
Wastewater
Combustion Storage Tanks
Treatment
67.7% 0.007%
0.43%
Heat Integration Heat Exchangers
Transfers heat from a hot stream to

a cool stream without allowing the
two streams to contact each other.
© SAP 2009
The petroleum refining industry is one of the largest energy consuming industries. Energy use in a
refinery varies over time due to changes in the type of crude processed, the product mix (and
complexity of refinery), as well as the sulfur content of the final products. Furthermore, operational
factors like capacity utilization, maintenance practices, as well as the age of the equipment affect
energy use in a refinery from year to year. The major energy consuming processes are crude
distillation, followed by the hydrotreater, reforming, and vacuum distillation.
The main fuels used in the refinery are refinery gas, natural gas, and coke. The refinery gas and coke
are by-products of the different processes. The coke is mainly produced in the cracking and coking
processes, while the refinery gas is the lightest fraction from the distillation and cracking processes.
Natural gas and electricity represent the largest purchased fuels in the refineries. Natural gas is used
for the production of hydrogen, fuel for co-generation of heat and power (CHP), and as
supplementary fuel in furnaces.
Energy, and heat in particular, is such an important element of the process that the entire refinery is
built to maximize the production and retention of heat. The refinery units are all built next to each
other as depicted in the lower left corner. In this way, hot product leaving one unit can run in
adjacent pipes with cold liquids transferring the heat. This is accomplished with heat exchangers
depicted in the lower right corner.
Fired heaters and boilers are important pieces of equipment in the refinery from several viewpoints.
Operationally, effective management of the temperature of the process is a critical element in all
processes. Effective monitoring of the oxygen sensors and operating conditions must be maintained
to maintain effective combustion and efficiency and not waste fuel.

From a maintenance perspective, the tubes from which the liquid flows through, (especially crude
and coker units which utilize heavier/thicker feedstocks) can coke up in the tubes requiring
unplanned downtime or slowdown of the unit if not monitored appropriately. The heaters also are a
frequent source of safety incidents. The heater tubes transporting hydrocarbon liquids through the
flames heating it can overheat inside if they coke up causing a break in the tube pouring pure
hydrocarbons onto open flames. In addition, lighting the heaters upon startup can be a significant
safety hazard if operating procedures are not followed rigorously. Gas is introduced into the heater
but must be maintained at an appropriate ratio to oxygen. Then, an operator walks up under this box
the size of a 2 story apartment and sticks a lit torch into a hole in the bottom of it. The operator can
be burned by backblast of fire from ignition, or if it does not light and appropriate procedures of
clearing out the gas before attempting it again are not followed, catastrophic explosions can occur.
In addition to these issues around energy, combustion sources, direct process emissions, and flaring
account for 99 percent of the onsite GHG emissions (on a CO2e basis), which is becoming an
increasingly important issue as sustainability becomes a higher focus in petroleum companies and
regulatory agencies.
Excellent energy reference -

http://www.energystar.gov/ia/business/industry/ES_Petroleum_Energy_Guide.pdf
GHG graph from:

http://www.epa.gov/climatechange/emissions/archived/downloads/tsd/TSD%20Petroleum%20Refine
ry_EPA_01-22-09.pdf

Refinery Supporting Functions
Water
Steam
Steam is used in
the refinery as a
heat source, to
drive pump
turbines, and to aid
Water is an integral part of the in distillation.
refining process.
Water is used to make steam,
cool the process, and reduce
corrosion. Flare
Waste Water Treatment

The flare is a safety
All water that system designed to
does not leave accept material from
the refinery by a process that would
evaporation is have otherwise
treated by the overpressured.
WWTP.
© SAP 2009
Other supporting functions are critical in refinery production. Steam is used in the refinery as a heat
source, to drive pump turbines, and to aid in distillation.
All water that does not leave the refinery by evaporation is treated by the WWTP including rainwater
runoff that must be collected and treated.
The refinery Flare system includes recovery compressors to route gas back to gas plant and four flare
tips to combust any gas that exceeds the capacity of the recovery compressors. The flare is a safety
system designed to accept material from a process that would have otherwise overpressured.
They may be viewed as not as important as critical process units, but they are common systems to
the entire refinery and can, and frequently do, cause entire refinery shutdowns. Problems in an FCC
unit can be managed by alternative processing options or selling or purchasing related feedstocks and
blend components. Failure of steam generation, water flow to boilers, or sudden loss of electricity
can cause a complete and sometimes uncontrolled shutdown of the entire refinery. Overflows of
liquids into the flaring system and inadequate pressure relief can cause liquids to pour out the flare
system pooling on the ground and ignite. Poor process control can also release excess hydrocarbons
into the waste water treatment plant, killing the biological agents (for example, bugs) used to treat
the water and production must be reduced to match this treatment capacity.
Of these, water is emerging as the largest new constraint in refinery construction and sustainability
metrics. For many years, we didn’t really think about water use, but now extensive capital projects
are being implemented for the effective utilization of water including places like the state of
Minnesota in the US, who’s state motto is “the land of lakes” and has an apparent abundance of
freshwater supply. In arid regions of the world including the Middle East and Asia experiencing the
bulk of new refinery construction it is even more critical.

Markets
Gross Margin Calculation
Crack Spread - The price difference between a barrel of product and a barrel of Feedstock.
It is also called indicator margin, differential, crack, or spread.
Gas crack = 1 bbl gasoline minus 1 bbl crude oil
Heat crack = 1 bbl #2 heating oil minus 1 bbl crude oil
Feedstock sour and heavy spreads - Difference between WTI and cheaper feedstocks that
trade at a discount such as West Texas Sour (WTS), Mars, Alaskan North Slope (ANS),
residuals, and many others.
Gross Margin Light Crude Estimate - WTI 3/2/1 = 3 bbls of WTI make 2 bbls of gasoline
and 1 bbl of diesel
Gross Margin Heavy Crude Estimate - Maya 6321 = 6 bbls of Maya make 3 bbls of
gasoline two bbls of diesel, and one barrel of fuel oil.
Example - NYMEX 321 – www.nymex.com

CL = crude oil
RB = gasoline
HO = diesel (RB+HO posted in gallons, multiply by 42 = barrel)
Estimate of refining gross margin = ((2*Gasoline)+(Diesel) – (3*Crude))/3 or
10/16/2009 NMEX 321 = $5.31/bbl margin = ((2*$83.13)+($85.24) – (3*$78.53))/3
© SAP 2009
A pure refining company does not really care what the outright price of crude is. It can be a million
dollars per barrel as long as the equivalent product values are higher than this leaving an operating
margin for the refinery business. Therefore, most views of the markets are viewed as differentials or
spreads. Gas cracks show the difference between the value of gasoline and the crude itself. Heat
crack shows the value of heating oil versus the crude feedstock. Other critical spreads show the
difference between different quality feedstocks, such as heavy/light spreads or sweet sour spreads.
An important calculation in evaluating the refinery business is to estimate the gross margin of
refining in the market for any day. The primary calculation for this is known as a 321 crack . This
simply follows the general principle that out of three barrels of crude you can yield 2 barrels of
gasoline and one barrel of distillate. This is an easy to calculate rough proxy for available refining
margin in the market. Its even easier because the prices required are freely posted on Nymex.com.
Now, there are different spot markets and futures markets, and so on from which these products can
be derived, but this is a valid and easily obtainable view. So for example, you go to Nymex.com, the
codes for the three products Crude, Gasoline, and Heating Oil (or diesel) are CL, RB, and HO
respectively.
Now, we can remember the original slide we had that showed light crudes, such as WTI used for
NYMEX trading had more light products such as gasoline than heavier crudes. If you are a heavy
crude refiner, this would not be a very good ratio to use as an estimate. For heavy crudes, we use a
6321 crack. This merely replaces the price used for crude from WTI (light crude) to a representative
heavy crude, such as Maya (from Mexico). Then, the assumption of ratios changes to six barrels of
crude = 3 barrels of gasoline, two barrels of diesel and one barrel of fuel oil. The product ratio
reflects a little less gasoline composition and a little more heavy hydrocarbon component reflected as
heating oil. NYMEX does not trade these products, but other data sources such as the US
Department of Energy readily posts these prices.
Product Prices = http://tonto.eia.doe.gov/dnav/pet/pet_pri_spt_s1_d.htm
Crude Prices = http://tonto.eia.doe.gov/dnav/pet/pet_pri_wco_k_w.htm

Markets
Current Market Trends
Heavy-Light Compression Europe Diesel Shift

20,00
15,00
$/barrel
10,00
5,00
Distillates
Gasoline
WTI - Maya
Europe Europe
NA 2000 NA 2006 2000 2006
Gas Distillate Spread US Distillates
Gasoline
Gulf Coast
$/barrel
Jan-2006
Jan-2007
Jan-2008
Jan-2009
Apr-2006
Apr-2007
Apr-2008
Apr-2009
Okt-2006
Okt-2007
Okt-2008
Jul-2006
Jul-2007
Jul-2008
Jul-2009
GC Gas - Dist
© SAP 2009
The 18 months between early 2008 and mid 2009 have been unprecedented in the world economy
and the petroleum business has not escaped its impacts either.
The early 80’s saw a dramatic increase in production of heavy crudes, but there was not sufficient
deep conversion refining capacity to process it. Therefore, national oil companies like Venezuela
and Mexico formed joint ventures with US and European based oil companies providing capital to
improve production capacity and signing long term supply contracts as an outlet for their heavy
crudes. In spite of this growth in appropriate refining capacity, there were still an abundance of
heavy crudes on the market versus lights and refinery configurations. Heavy crudes traditionally
sold at a discount to light crudes. This heavy light spread depicted in the upper left corner usually
stayed around $15 dollars per barrel, which is quite an incentive. However, in the latest economic
downturn, demand reduced so greatly that OPEC countries making cuts in production decide to cut
their lowest profit crudes (e.g. heavy) and retain production in the more profitable (for the crude
seller) light crudes. In addition, major nationalized heavy crude producers such as Venezuela and
Mexico are suffering net production declines due to governmental policy and operating issues. This
has caused a dramatic compression in this differential between heavy and light. This has caused
some recent refinery shutdowns such as the Valero refinery in Aruba and threatens others as they slip
below profitability still incurring a high amount of capital deployed, higher operating expenses yet
realizing margins equivalent of easier light crude processing.
The second shift that has been occurring for some time is a shift in Europe to distillates as the
primary transportation fuel. The graph on the right shows the ratio of distillate to gasoline
consumption. This ratio has shifted 7% since 2000 while the US has stayed about the same. The
refineries in Europe didn’t overnight change their configurations though. Therefore, Europe is long
gasoline production and short distillate production. So extra gasoline is flowing from Europe to the
US suppressing gasoline prices while simultaneously pulling up distillate prices. The US has

historically seen both gasoline as the primary transportation fuel as well as the component of greatest
demand growth over time. US refiners have invested heavily in FCC conversion capacity to meet
this demand. FCC economics are always positive. No matter what else is happening with market
prices, historically all FCC capacity is fully utilized. However, due to the pricing pressures of
Europe’s demand shift and simultaneous dramatic decline in gasoline demand in the US due to
economic downturn, the history positive differential of gasoline over distillate has inverted and went
severely negative in the latter portion of 2008. This has caused the unprecedented idling of
significant FCC conversion capacity in the US and in Europe. US refining utilization hit a twenty
year low of 85.3% and has severely economically hurt refiners profitability.

Questions
1) What are the two purposes of refining?

2. Which has more valuable components in it, heavy or light crude?
3. What are the three phases of refining?
4. Which type of refinery configuration is more profitable, hydroskimming refineries
or deep conversion refineries?
5. What is the name of the calculation that is an estimate for light crude refinery
gross margin?
© SAP 2008

Questions & Answers
1) What are the two purposes of refining?

Transform products of little use into desirable products
Remove impurities
2. Which has more valuable components in it, heavy or light crude?
Light crudes have more valuable components such as gasoline, distillate, and jet,
whereas heavy crudes have more gas oils and residuals, which are not as valuable.
3. What are the three phases of refining?
Distillation, Conversion, Blending
4. Which type of refinery configuration is more profitable, hydroskimming refineries
or deep conversion refineries?
Deep conversion facilities have the opportunity of processing cheaper heavy crudes, yet
still upgrading them to the same ratio of valuable products
5. What is the name of the calculation that is an estimate for light crude refinery
gross margin?
321 crack spread
© SAP 2009

Refining: Lesson Summary

Explain why and how crude oil has to be converted into finished products to
have value
Describe how crude oil quality is measured
Explain how refinery process units work
Explain the challenges in oil procurement and refining
© SAP 2009


Lesson 1: Refining
Lesson 3: Trading
© SAP 2009

Planning & Optimization: Lesson Objectives

Discuss the key strategic imperatives for Supply and Trading
Explain what a representative Supply Chain of an oil and gas company could
look like
Describe how Supply Chain Management (SCM) is handled within SAP
© SAP 2009
Production is not where the Consumption takes place
Asia Pacific: Consumption more than twice as high as Production ! Æ Need to move Crude Oil
across the globe !

Planning & Optimization: Business Example
John Doe is working for Planning & Optimization. This department is

responsible for the different planning cycles (for example, yearly, monthly,
weekly for day to day business; longer term for strategic decisions).
John needs to make sure that optimization will also be included in the future;
usually only partly, for example, refinery production or lubes blending.
© SAP 2009

What is Oil and Gas Supply Chain Management?
What is Supply Chain Management? A few definitions …

“Integrated Supply Chain Management (ISCM) is a process-oriented, integrated
approach to procuring, producing, and delivering products and services to customers.”
[M.I.T]
Supply chain management involves coordinating, integrating and executing these flows
both within and between companies.
SCM’s aim is to optimize the activities occurring along the supply chain to maximize
asset usage, minimize costs, and drive maximum revenue from the activity.
Within the oil and gas Industry, we typically describe SCM stages of planning,
scheduling or operations, and execution as taking place, with constant and ongoing
tracking parallel to these.
Key Characteristics in Oil & Gas

Large quantities of products managed on a global basis
Typically long lead times for transportation
Highly fungible market, both in terms of products and partners
Long term contracts the normal basis for business
Anything goes, anytime, anywhere !! (OK, almost!)
© SAP 2009

Challenge of Oil & Gas Planning
© SAP 2009
In today’s complex and dynamic markets, petroleum supply chain operational teams struggle with
limited visibility into inventory levels, production schedules, distribution plans, and product
movement requirements to ensure orders are delivered in the most profitable and timely manner. Add
the complexity of global transportation issues, disparate systems, and organizational silos, and this
effort becomes a daunting challenge.
Challenges in Oil and Gas Planning arise around the following questions:
y Enough Storage Space Available?

y Storage Space – At what costs?
y Which transport mode to get supply on time?
y What crudes to feed the refinery with?
y How to schedule the crudes for the refinery?
y What demand should we meet?
y What is the optimal production?
y What is the optimal distribution plan?
Constraints, for example, for NOCs: Demand Forecast Calculation might not be relevant as Oil
Production is defined by external entities such as OPEC which greatly impacts the demand from
NOC’s production.

Strategic Imperatives & Involved Business
Partners
Terminal Refinery
Transp. System
Refinery
Optimized:
Inventory
Refinery Run scheme
Filling Station Terminal Refinery Feedstock
…
Optimized:
Inventory Transp. System
Inventory
Throughput
Replenishment Terminal
Utilization
Retailing
… Scheduling
Nomination
Ticketing
…
© SAP 2009
The following business partners of S&D can be involved in planning processes:
External third-party,
y For example, Crude oil supplier, Feed stocks trader, Exchange partner, Cargo Inspector, Shipping
Agent, Forwarding agent, Supply Sales customer, Crude Pipeline Operator, Product Pipeline
Operator.
Own International Company (but different entities),
y For example, Other affiliates, Global Crude Trading, Regional Product & Feed stock Trading.
Internal: Own Local Company (Transfer Pricing),
y For example, S&D – Refining - crude feed stocks, finished- and semi-finished products, S&D -
Fuels Marketing (finished products)
The Key Strategic Imperatives for Supply, Transmission, and Trading (Midstream) are as follows:
Increase Revenue:
y Obtain real-time supply chain data

y Optimize supplies to most profitable markets and segments
y Utilize integrated trading and supply positions to take advantage of market opportunities.

Lower Operational costs:
y Real-time visibility across entire supply chain

y Accurate forecasting tools / Integrated scheduling tools; Need real-time integrated positions
(physical = book), Need to link deals to hedges
y Central supply chain master data
y Seamless data capture
y Process Automation
y Increase the flexibility of designing new business processes

Planning Process Timeframes
Work Process Timeframe Results

Midterm Crude Strategy Annual, 3-5 yr horizon Crudes to contract, margin
forecast, Capital plan
Annual Crude Plan Annual, 12 month horizon Budgeted crude (type)
volumes, margin forecast
Crude Selection Day -60 Selected crudes,
vol. for acquisition,
Monthly Operation Plan Day -30 Crude charge requirements
(monthly average)
Weekly Operating Plan Day -7 Crude charge requirements
(weekly average)
Crude Operation Schedule Day -7,-3 Crude blending, movements,
charge plan
© SAP 2009
This matrix gives an overview on possible planning horizons.
Yearly, monthly and weekly planning:
The planning cycles are usually year, month, and week. Planning mostly includes optimization for
the refinery production. All other input is manual from S&D Trading, Scheduling, Transportation,
Terminal Operations, and Administration. It also requires input from Refinery Coordination and
Production as well as input from Fuels Marketing. Required data: crude/feed stock processing,
inventory, plant maintenance, product demand, and prices.
General guidance and strategy advice is given by global and regional headquarters. Also, advice on
crude availability is given. Usually, the overall responsibility stays with the local affiliate.
Global headquarters provides official publisher information, that is, quotes from Platts, Reuters, or
local quotes like OMR in Germany.
The next step is optimization of supply and distribution as a function of the demand. This may still
be done with spreadsheet and spreadsheet optimizer, and all input is manual with the risk of out of
date, or missing information.
Usually, standard price is used for inventory valuation based on published daily quotes as opposed to
moving average price, and between Refinery, S&D, and Marketing, transfer prices are used, that is,
the business lines are profit centers, competing internally.

Planning and Optimization:
Monthly and Weekly Planning
Monthly planning cycle for optimization

Weekly planning cycle is usually an update for operational reasons
S&D Trading Involved Partners

S&D Scheduling
S&D Transportation
Global and regional
S&D Terminal
headquarters
Operations S&D
Administration
Refinery Production
Guidance and strategy advice
Fuels Marketing
Official publisher information
Crude/feed stock
processing
Input Optimization of
Plant maintenance Supply and Decision making
Consolidation
Product demand Distribution
Inventory prices
© SAP 2009
The Decision-making process for supply optimization includes:
y Production from crude versus product purchase
y Max. crude throughput versus crude plus feed stocks throughput
y Local purchases versus imports
y High production plus supply sales versus production for demand only
y Local supply sales versus exports
The Decision-making process for distribution optimization includes:
y Cross tributary movements versus exchange pickups
y Rail versus barge

Planning Cascade in the Oil and Gas Industry
Demand & Supply Supply Network Refinery

Planning Planning Planning
Complete Enterprise
Solution
Op. Production Constant

Planning Optimization
© SAP 2009
The Planning cascade includes the following roles and scope:

Strategic Planner takes care of the Demand Plan:
y A forecast of market demand is created; The underlying market model is discussed; Price
sensitivity and product substitution are considered; Long term & global implications are taken into
consideration
Supply Network Plan
y The planner takes a look at the global network; Each refinery and terminal is analyzed on a global
scale; Constraints are taken into account; Global sourcing options are considered; Make or buy
decisions are taken
The Refinery Plan includes:
y The specific refinery configuration is derived; The operations plan is created; The optimal crude
slate and feedstock is selected; The plant configuration is made
A production plan might include:
y Specific lot sizing & timing is done; Timetable & workplaces are assigned; Precise production
schedule is made; Utilization optimization is carried out; Results are transferred to OSI.
Honeywell, Aspen and others
... for the entire supply chain, a cost or rules-based plan will be created.

Planning & Optimization within SAP
Demand Planning (DP)

APO DP calculates the demand forecast on a location in the
network:
Interactiveplanning
Various forecast routines
Show DP results in TSW SPW (what-if nominations
or rack issue forecast)
Supply Network Planning (SNP)

APO SNP calculates the sourcing quantities based
on the demand plan:
Interactiveplanning
Heuristics or Optimizer
Show SNP orders in TSW 3WP and SPW
© SAP 2009
SAP uses the capabilities of the APO (Advanced Planning & Optimization) to fulfill the tasks of
P&O in Oil and Gas. The functions are Demand Planning, Supply Network Planning (SNP),
Production Planning (PP-PI) for Lubes, and Transportation Planning
The key capabilities of the solution include: Demand Forecasting (rack), Exchanges Planning, Crude
Supply Planning, Long / Short Balancing, and Products Supply Planning.
The value creation potential lies in the maximization of use of costly supply chain assets (locations,
transport), use of term contracts/deals/exchanges, and the early identification of long/short positions,
in avoiding contradictory planning (saves time and risk of errors). Furthermore, APO gives a
complete overview of the whole cycle (avoids duplication/ reconciliation).
SAP APO Supply Network Planning (SNP) integrates purchasing, manufacturing, distribution, and
transportation so that comprehensive tactical planning and sourcing decisions can be simulated and
implemented on the basis of a single, global consistent model.
Supply Network Planning offers three basic strategies to carry out the planning:
y Heuristic and capacity planning
y Optimization
y Multilevel Supply & Demand Matching.

Starting from a demand plan, SNP determines a possible short to medium-term plan for fulfilling the
estimated sales volumes. Each algorithm plans for all sources of supply from the customer, through
distribution centers to the plants. They distribute production over the plants, select production
possibilities, explode the bill of materials (BOMs) and organize the procurement of semi-finished
goods or raw materials. The algorithms differ in the way they make decisions and the capacity
constraints that they consider. In SNP, you are provided with standard planning books (and views)
for each of the various types of planning available (that is, interactive SNP, capacity leveling,
distribution resource planning (DRP), Transport Load Builder (TLB), Customer Collaboration, and
scheduling agreement processing). You can, however, create your own planning books using
standard planning books as templates.
Safety stock planning within Supply Network Planning allows you to meet a service level while
creating a minimum amount of safety stock throughout your entire supply chain for all intermediate
and finished products at their respective locations (Safety stock is the quantity of additional stock
procured and/or held to satisfy unexpectedly high demand).
CUSTOMER EXAMPLES:
y Aramco: Single integrated, hydrocarbon planning and scheduling system
y ConocoPhillips: Supply and Production aligned to market demand

How APO is Structured
Synchronize supply with demand in your global

Advanced Planning & Optimization supply chain by balancing push and pull network-
planning processes and by handling
replenishment and production based on actual
demand.
Demand Planning
APO DP: Improves the forecast quality and planning
accuracy
Supply Network Planning APO SNP: Improves visibility across your global
Alert Monitor supply chain and lowers inventory
APO PP/DS: Supports you in creating optimized
Production Planning & production plans
Detailed Scheduling
APO gATP: Allows state-of-the-art sales order
confirmation planning processes
APO TP/VS: Optimizes transportation loads and
Global Available-to-Promise
minimizes transportation costs
APO Alert Monitor: Powerful exception message
Transportation Planning &
Vehicle Scheduling system integrated in all APO planning modules
© SAP 2009
The SAP SCM Solution suite is complete and holistic, spanning from supply chain planning and
execution to collaboration, visibility and performance management.
The solution being integrated by design helps companies meet their SCM needs at a low Total Cost
of Ownership.
SAP SCM provides companies a framework not only to meet the current requirements but also
provides a path for businesses to expand and grow operations internally, with partnerships, and
through acquisitions. It enables companies to collaborate effectively with their trading partners
across all aspects of supply chain planning and execution.
Finally, SAP SCM helps companies become real-world aware with timely visibility into supply chain
events, and analytics to monitor and analyze their performance so that they can pro-actively adapt to
the demand-driven and network nature of today’s supply chains and take timely decisions which are
aligned with their operational and financial metrics.

Process Overview
Demands
Historical t
Demand Optimization
Customer
Customer
Collaboration
Collaboration Demand
Demand Planning Coverage
SNP
SNP
Supply Network Planning t
Supply
Supply
STO Req.
PO Req.
Collaboration
Collaboration
Planned Receipts
t
SAP ERP /
Historical
Production
TSW
© SAP 2009
Demand Planning (DP)
The planning capacity at different levels of aggregation and sizing: destination, status, region,
weekly, monthly, quarterly, annually, and so on. Portfolio of various forecast methods: simple and
multiple linear regression, exponential tempering, mobile averages, Holt Winters. Measurement of
the causal effect of variables such as price, seasonal variance, and so on.
The scope of DP includes the development of statistical models for oil and gas products (time series
and multiple linear regression) for forecasting demand and a process of internal collaboration, with
customers and suppliers, through which forecasts would be shared amongst the relevant users, who
would review and adjust them where required by the plan, indicating the reason for any changes
through electronic notes. A consensus process would be used to generate a unique demand plan that
would be fed through the planning process. This demand planning process will support the annual,
quarterly and monthly operating planning processing.
Supply Network Planning (SNP)
This focuses on the overall supply chain to synchronize demand plans with sourcing and production
activities. It is possible to define multiple restrictions such as transport capacity, calendars,
production capacity and supplier capacity. It provides a support framework for decisions, allowing
the planner to carry out simulations and make medium-term adjustments to the supply master plan.

Integration between SAP APO and SAP TSW
P.O STO
APO Req Req
Contracts Nomination Update

ERP ati
on by carrier
TSW fir m
n
confirmed Co
Nomination
Goods physical transport

issue Delivery
Call-Off Ticket
© SAP 2009
APO DP and SNP exchange data with TSW in the form of stock transfer requisitions (and finally
orders) that are visible in the Stock projection worksheet and the Three-Way-Pegging that is used to
build up the nomination (Scheduling document).

Example: Integrated O&G Planning /
Optimization - Optimize vessel nominations
Forecasted
Total
Few Supply Vessel / Compartment
Customer
Restrictions Capacities, trans.duration
Demand
Refinery
3rd Party Terminal
SNP
Optimizer
© SAP 2009
This describes a customer example where an optimization process has been implemented (using APO
SNP) to plan vessel nominations / transports.
As we have seen before: the main output (document) from SNP is a Stock Transfer Requisition. The
SNP Optimization will generate one STO Req. for each compartment per day and terminal. To fulfill
the business requirements enhancements (in the interface SNP Æ ERP Æ TSW) have been made
following these objectives:
y Grouping per vessel together
y Split the stock transfer requisition to two Requisitions needed for TSW (TSW needs one line for
loading and another one for unloading).
y Mapping the taxed / untaxed valuation type (needed for tax handling purposes).

Summary: Benefits of integrated
Planning & Optimization
Integrated business processes
Accurate distribution optimization
Detailed scheduling of transports
Real-time Interaction planning / scheduling
Integrated real-time Interface APO / TSW
Efficient monitoring of your supply chain
Integrated Alert Monitoring
© SAP 2009

Planning & Optimization: Lesson Summary

Explain how Planning & Optimization is integrated in the overall Oil and Gas
Supply Chain
Understand challenges, key imperatives, inputs and output of the P&O process
Have an overview of how SAP systems cover the process
© SAP 2009
Q&A:
What kind of planning areas do you know?
Æ For example, Demand Planning, Supply Planning, Refinery Planning, Production Planning,
Transport Planning.


Lesson 1: Refining
Lesson 3: Trading
© SAP 2009

Trading: Lesson Objectives

Explain the typical business transactions of trading
Explain the necessity to have exchange scenarios between oil and gas
companies
Describe hedging
© SAP 2009

Trading: Business Example
Shekhar is a crude trader with an office in the trading division of the European
headquarters of a global oil company. It is common practice for him to
negotiate term purchase contracts with major suppliers of crude to fulfill
demands at the various refineries of the oil company in Europe. Shekhar may
also utilize term contracts with upstream entities within the oil company. The
organization structure for Shekar's trading division is driven by company needs
(tax optimization, only one player in the market and so on). Because of this, the
purchase process of crude becomes a transaction chain of supplier > European
trading division > receiving affiliate.
Toby is the demand manager for the fuels business at his organization. One of
his key tasks at the end of every month is to allocate supply for next month's
forecasted demand in the various supply, B2B, B2C and cards channels that
his organization trades its fuels into. For making this decision, he needs to
know the margins that each channel of trade offers, transactional details of how
each channel has been performing in the periods gone by, and what the
organizational neutral stock targets are for the coming period. On a day to day
basis, Toby has to follow the listings in each channel closely against the
allocated volumes to have early warnings on the non-performance or
under/over-performance of a particular channel. The overall margin
optimization from refining to customer is one of Toby's main activities.
© SAP 2009

Lesson contents
Oil Demand and Supply
Physical Markets and Pricing
Hedging Instruments – Forwards and Futures
Understanding market dynamics
Oil Contracts and Process Flows
SAP in the Oil and Gas Trading Space
Exercise: Airline Industry Case Study
© SAP 2009

Back to Basics of Demand and Supply and
Applying them to Oil
Price
Price
Demand Quantity Supply Quantity
Figure 1: Oil Demand Curve Figure 2: Oil Supply Curve

Price
Clearing Price
Quantity
Figure 3: Clearing Price
© SAP 2009
Oil Demand:
y Demand for Oil is highly inelastic in the short run. Irrespective of what petrol costs, your car
cannot easily switch to another fuel. If it is freezing cold and you need to heat your house, the
only option may be to pay more for heating oil. Likewise, if the price of petrol was to halve, you
would not drive twice as far, or turn the thermostat up from 21ºC to 31ºC. The result is that the
demand curve looks like the one shown in Figure 1 above. A large change in price (on either side)
only has a small impact on demand.
Oil Supply:
y Similar to Demand, the supply of oil is also highly inelastic in the short run, although for a
different reason. The cost of pumping a marginal barrel of oil is relatively low, once the capital
expenses of prospecting and building associated infrastructure has been done. An oilfield will cost
roughly the same to operate whether it is producing at 50% of capacity or at full capacity. Given
this, once they have an oil field in place, producers will tend to pump at their maximum
sustainable rate. Of course, there is always some flexibility: old wells can be uncapped, greater
concentrations of gas can be pumped into the well, scheduled maintenance can be postponed and
so on. However, these have costs, and oilfield owners will use these methods only when the price
of oil is high enough to justify it. The result is a supply curve like the one shown in figure 2
above. A large change in price only has a small impact on the available supply in the market.

The fact that this analysis misses is that although the supply and demand is relatively inelastic in the
short run, it is highly elastic over a longer horizon of time. A devastating hurricane in the US will not
cause a fundamental shift in the long-term consumer behavior. On the other hand, long-term
expectations of a price rise will cause both the demand and supply curves to shift. A case in point is
the oil shock of the 1970s, which caused the oil supply curve to shift fundamentally to the left in the
short term, but over a relatively longer period of time, the demand curve also shifted to bring in a
new equilibrium. This case is highlighted in the coming section.

Example Case discussion: The Oil Market
Upheavals of the 1970s and 1980s
Clearing Price Clearing Price
(new) (old)
Price
Price
Clearing Price
Clearing Price (new)
(old)
Quantity Quantity
Figure 4: Supply shortage of 1973 Figure 5: Change in consumer
behavior
Clearing Price
(old)
Price
Clearing Price
(new)
Quantity
Figure 6: Slump of the mid 1980s
© SAP 2009
During the Yom-Kippur war, many western nations took the side of Israel and OPEC announced
cutting of supply. Thus, for any given price level, less oil would be supplied in the market. This
caused the supply curve to shift to the left, and since the supply has to clear, the prices rose
dramatically as shown in figure 4 above. In actual fact, this is exactly what happened and the price of
Saudi Light crude jumped from under $3 a barrel in 1971 to almost $40 a barrel by 1980. The
consumption of oil however did not immediately match the new supply position, and it continued to
rise after the first oil shock of 1973 – despite soaring prices. Then, from a peak in 1976, consumption
began to fall to almost 15% from its highs, and continued falling even after the oil prices peaked in
1980 and the world economy slowly started showing signs of recovery.
This was a fundamental shift in the demand curve to the left as shown in figure 5 above, and was
caused by a number of measures by governments which had a significant long-term impact on
consumer behavior. Some of them were:
y In the US, a national speed limit of 56 mph was enforced to prevent inefficient consumption of
oil.
y Consumers shifted to more fuel efficient cars (a boon for Japanese car makers and a death knell
for many North American ones).
y National electricity generators chose to build coal and nuclear powered plants rather than oil fired
ones.
Since moves towards more energy efficiency and alternative sources of power are slow to ramp up,
in the long run, their effect on demand curves is significant.

Rising prices had another effect in the 1970s, they spurred investment in exploration and production
in areas that had previously not been cost efficient. Building rigs in the hostile waters of the North
Sea, or in the wilds of Alaska, made little sense while Saudi crude was available for $3 a barrel. But
if the Saudi’s oil was restricted, and the price had shot up to more than $30, then a lot of new oil
suddenly became competitive. Because the key expenses are upfront – building the infrastructure in
the first place – then once the new oil came on stream then it was unlikely to be removed,
irrespective of the price of oil. The oil supply curve moved to the right.
The impact of a supply curve that moved right (more supply at any given price), and a demand curve
that moved left (less demand at any given price) was a collapse in the market clearing price, as
shown in figure 6 above. By 1985, the oil price had fallen back to $10. On an inflation-adjusted
basis, oil was as cheap as it had been before the 1973 oil shock.
The lesson here is simple: there is no “over” or “under” supply, there is only the price at which the
market clears. And over the long-term, high oil prices will tend to encourage consumers to either
reduce energy consumption or shift to other forms of energy. Similarly, investment in either
inhospitable areas or in developing technologies will result in greater quantities of oil or synthetic
crude coming on to the market. Each boom in the oil price sows the seeds of its own destruction.
With this understanding of the clearing price, let us now see a summary of how price moved from
1947 to 2009 over a chart of historical world events to try to better comprehend the behavior of oil
prices and build a base upon which the rest of this lesson tries to explain the fundamental principles
of oil and gas trading.

Crude Oil Prices as Affected by World Events
2008 $/BARREL
© SAP 2009

Physical (Spot) Markets
Global oil spot prices

Monthly average dollars per barrel
Last updated September 2009
130
110
90
70
50
30
Aug- Sep- Oct- Nov- Dec- Jan- Feb- Mar- Apr- May- Jun- Jul- Aug-
08 08 08 08 08 09 09 09 09 09 09 09 09
Source: US Energy Administration
© SAP 2009
A spot transaction is an agreement to sell or buy one shipment of oil under a price agreed-upon at
the time of the arrangement. In a sense, a consumer's purchase of gasoline is a kind of spot
transaction - the consumer needed supply, found the price acceptable, and made no promise to make
additional purchases. More traditionally, however, the oil industry uses the spot market to balance
supply and demand. When a company temporarily has too much supply for its own needs, it will
offer some for sale in the spot market. Likewise, if it needs additional volumes to meet a demand
spike, or because supply is unexpectedly curtailed, it will purchase oil on a cargo-by-cargo,
shipment-by-shipment basis. In recent years, the growth of "merchant refiners" has depended on
viable spot markets. These independent refiners manufacture products not to fill their own marketing
networks, but to sell the oil in third-party transactions to the highest bidder.
Prices in spot markets send a clear signal about the supply/demand balance. Rising prices indicate
that more supply is needed, and falling prices indicate that there is too much supply for the
prevailing demand level. There are "spot markets" for different commodities and qualities (crude oil,
for instance, as distinct from gasoline or heating oil, and low sulfur crude oil as distinct from high
sulfur crude oil), and for different regions (Rotterdam/Northwest Europe, New York Harbor/U.S.
Northeast, Chicago/U.S. Midwest, Singapore/South East Asia, and the U.S. Gulf Coast, for
instance). The evolution of a regional market into a pricing center has its foundation in
logistics. These markets have a ready supply, transportation choices, storage facilities, and many
buyers and sellers.

Spot Prices and What Affects Them
© SAP 2009
Spot prices are reported for transactions in these different markets and prices in spot markets are
relatively "transparent" - they are reported by a number of sources and widely available in a variety
of media. While some of the most active spot markets offer deals on supplies that will be available
in the future (a "forward" physical market), most focus on "prompt" delivery of readily available
volumes.
The prices paid on futures markets further enhance the availability of price information to all
aspects of the oil market. While spot markets involve the trade of physical barrels of oil, futures
markets are designed as a financial mechanism. While everyone in the market wishes to buy at a
low price and sell at a high price, buyers and sellers are on opposite sides of the transaction and
their risks are inherently different. Different market participants may also have varying appetite for
risk, and speculators may wish to gamble that the price will move one way or another. The futures
market, a zero-sum game where there is a buyer for every seller, distributes the risk among market
participants according to their positions and appetites.
Commodity traders are responsible for oil prices by bidding on oil futures contracts. There are many
factors they look at when developing the bids that create oil prices (example from the US):
y Current supply in terms of output, especially the production quota set by OPEC.
y Oil reserves, including what is available in U.S. refineries and what is stored at the Strategic
Petroleum Reserves.
y Oil demand, particularly from the U.S. (as estimated by the Energy Information Agency). During
the summer, forecasts for travel from AAA are used to determine potential gasoline use. During
the winter, weather forecasts are used to determine potential home heating oil use.

Forwards
Example of a Forward Contract
100,000 bbls of crude at 53$ per bbl, 6

months from today
Party A Party B
The Variables:
The Underlier: Crude Oil in our example.
Notional Amount: 100,000 bbls in our example.
Delivery Price: 53$ per bbl.
Settlement date: 6 months from today.
Party A receiving the Underlier is said to be LONG.

Party B supplying the Underlier is said to be SHORT.
© SAP 2009
A forward contract - or forward - is an Over The Counter (OTC) derivative. In its simplest form, it is
a trade that is agreed to at one point in time, but will take place at some later time in the future. In the
example above, Party A and Party B have entered into a Forward contract which stipulates Party B to
deliver 100,000 bbls of Crude Oil to Party A on the actual date 6 months from today’s date in
exchange for a total payment of 5.3 million dollars.
A forward may be cash settled, in which case the underlier and payment never exchange hands,
however, the contract settles with a single payment for the market value of the forward at settlement.
Market value at settlement can be defined as the difference between spot price on settlement date and
delivery price, multiplied by the notional amount. If our example above was cash settled on the
settlement date, at contract maturity, let us assume that the spot price was 57$ per barrel. The market
value of this contract on settlement date would then be: 100,000 * (57 – 53) = 400,000$. If this
value is positive, like in our example, the short party would pay the long party and vice versa if the
value is negative.
Forwards are a convenient vehicle for hedging or speculation. For example, an airline can
conveniently hedge its fuel costs by purchasing jet fuel several months forward. The hedge
eliminates price exposure, and it doesn't require an initial outlay of funds to purchase the fuel. The
airline is hedged without having to take delivery of or store the jet fuel until it is needed. It does not
even have to enter into the forward with the ultimate supplier of the jet fuel. If the forward is cash
settled, the hedge can be put on with any counterparty.
Forwards entail market risk, pre-settlement risk and settlement risk. With cash-settled forwards, there
can also be a risk of manipulation of the underlier price index used for calculating the settlement
value. This has been a problem in oil markets when the paper market dwarfed the physical market. In
such a situation, a small physical transaction performed at an off-market price could impact the
settlement value of a far greater volume of paper transactions.

Futures
Physically: Two parties agree to a futures trade
100 March next year futures of WTI at 62$

per bbl
Party A Party B
Contract size: 1000 bbl.
No of contracts: 100
Underlier: A standardized exchange traded
material like WTI, Brent and so on
Legally: 2 trades, each party trading with an exchange/clearing house
100 March next year 100 March next year

futures of WTI at 62$ futures of WTI at 62$
per bbl Clearing per bbl
Party A Party B
House
LONG SHORT
© SAP 2009
A future is an exchange-traded derivative which is similar to a forward. Both futures and forwards
represent agreements to buy or sell some underlying asset in the future for a specified price. Both can
be for physical settlement or cash settlement. Both offer a convenient tool for hedging or speculation.
For little or no initial cash outlay, both instruments provide price exposure without a need to
immediately pay for, hold or warehouse the underlying asset. In this sense, both instruments are
leveraged.
The two fundamental differences between forwards and futures is:
y Futures are exchange traded while forwards are OTC traded.
y Forwards have both market risk and credit risk whereas Futures entail only market risk; the credit
risk being negated through a process of daily margining.
Futures are standardized instruments. You can only trade the specific contracts supported by the
exchange. Forwards are entirely flexible. Because they are privately negotiated between parties, they
can be for any conceivable underlier and for any settlement date.
A future is transacted through brokerage firms that hold a "seat" on the exchange that trades that
particular contract. Working through their respective brokers, two parties will transact a trade. That
trade is structured as two trades, both with a clearinghouse owned by or closely affiliated with the
exchange. Party A and B then have no legal obligation to each other. Their respective legal
obligations are to the exchange's clearinghouse. The clearinghouse never takes market risk because it
always has offsetting positions with different counterparties.

Every day, the profit or loss is calculated on the futures position. If a loss for a party, the respective
broker transfers that amount from the party’s margin account to the clearinghouse. If there is a profit,
the clearinghouse transfers that amount to the party’s broker who then deposits it into the margin
account. This is the daily margining process. Through the margining process, futures settle every
day. Unlike a forward, where all contract obligations are satisfied at maturity, obligations under the
futures contract are satisfied every day on an ongoing basis as mark-to-market profits or losses are
realized. This essentially eliminates credit risk for futures.
Because of its excellent liquidity and price transparency, the contract is used as a principal
international pricing benchmark.
Crude oil is the world's most actively traded commodity, and the NYMEX Division light sweet crude
oil futures contract is the world's most liquid form for crude oil trading, as well as the world's
largest-volume futures contract trading on a physical commodity. Additional risk management and
trading opportunities are offered through options on the futures contract; calendar spread options;
crack spread options on the pricing differential of heating oil futures and crude oil futures and
gasoline futures and crude oil futures; and average price options.
The contract trades in units of 1,000 barrels, and the delivery point is Cushing, Oklahoma, which is
also accessible to the international spot markets via pipelines. The contract provides for delivery of
several grades of domestic and internationally traded foreign crudes, and serves the diverse needs of
the physical market.

Hedging
By definition, hedging is an instrument that is used to mitigate market risks. The

exposure that the trade of a physical underlier has due to price fluctuations in the
market, can be hedged by entering into an opposite trade in a different market. In the
oil industry, the physical underlier is wet barrels of oil and the hedge trade is made
using forwards and futures by selling or buying paper barrels.
Depending on whether the entity expects to go long or short on wet barrels, the
opposite short or long paper barrel hedge is respectively made to mitigate the risks
that the physical position will create.
It is by no means as simple as doing just an opposite paper barrel trade and some of
the reasons for this are explained below. However, for the sake of simplicity and
understanding, we will take an example of a long hedge and a short hedge in the
next section to explain the actual processes further.
© SAP 2009
Futures are a type of derivative and derivatives are always leveraged in such a way that a small
fluctuation in the underlier’s value can cause a large change in the value of the derivative. This
inherent nature of futures invites speculators into the market who, for want of a better word,
speculate or gamble on the price of the futures and may cause an unrealistic market situation to
develop.
However, having speculators is necessary for the hedge to be complete. There are crude oil
producers and finished product consumers, but the actual physical product that they produce and
consume are vastly different from each other. Hence, it is not always possible to pair up a producer
with a consumer to fulfill a hedge. Speculators fill up this gap by entering into paper contracts with
any party wishing to go long or short on paper barrels. Of course both the parties need to agree on a
common outlook for the future for the trade to be completed, but the motivations are completely
different in an ideal world.
A speculator only wants to make money, and a oil producer or consumer wants to mitigate the risks
of price fluctuations. It is therefore obvious that the speculators cannot always make money and,
similarly, there are only some degrees to which risks may be hedged by oil producers and consumers.
The rally in crude prices in 2008 and the subsequent dramatic slump during the recession is a case in
point, when normal definitions of how to make a quick buck, and how to mitigate all risks, do not
apply anymore.
Airline industries (jet fuel consumers) are a typical example to highlight the complexity of hedging.
They know that they must purchase jet fuel for as long as they want to stay in business, and fuel
prices are notoriously volatile. However, there are not many standardized jet fuel based derivatives
that they can trade in. Hence, they hedge their positions using crude oil futures contracts to hedge
their fuel requirements and engaging in similar but more complex derivative transactions.

Example of Hedging - Long Hedge
Example Hedging Scenario: “Long Hedge”

Secure future sale of wet gallons at a fixed price
Date Cash Market Futures Market Financial

(wet barrels) (paper barrels) Effect $/gal
Market location price: 0.72 $/gal
Sept. 7 Agrees to deliver 168,000 gal in Dec. at
0.88 $/gal
New York Harbor price: 0.73 $/gal
Buys 4 Dec. contracts at 0.73 $/gal
Nov. 25 Market location price: 0.77 $/gal 0.11

Case A: Buys 168,000 gal at 0.77 $/gal
Rising Delivers against contract 0.88 $/gal
0.05
Crude Cash margin: 0.11 $/gal New York Harbor price: 0.78 $/gal
Prices Sells 4 Dec. contracts at 0.78 $/gal 0.16 net profit
Nov. 25 Market location price: 0.67 $/gal

Case B: Buys 168,000 gal at 0.67 $/gal 0.21
Falling Delivers against contract 0.88 $/gal
Crude Cash margin: 0.21 $/gal -0.05
New York Harbor price: 0.68 $/gal
Prices
Sells 4 Dec. contracts at 0.68 $/gal 0.16 net profit
© SAP 2009
A typical example for a “long hedge” is to secure a future sale of wet barrels (here, heating oil No. 2)
at a fixed price (for example, you need to bid a municipal contract which requires a fixed-price bid).

Example of Hedging - Short Hedge
Example Hedging Scenario: “Short Hedge”

Purchase of crude (long haul), sell delivered crude to US Gulf at spot price
Date Cash Market Futures Market Financial

(wet barrels) (paper barrels) Effect $/bbl
Foreign location: Purchase 600,000 bbl at Cushing:
Aug. 10 26.00 $/bbl for shipment to U.S. Gulf Sells 600 Oct. crude contracts at
Coast at additional cost of 0.50 $/bbl. 27.30 $/bbl
Gulf Coast WTI spot price: 27.50 $/bbl
Sept. 20 -0.50
Sells 600,000 bbl at WTI spot price of
Case A:
26.00 $/bbl
Falling Buys back 600 Oct. crude contracts at
1.50
Crude 25.80 $/bbl
Prices 1.00 net profit
Sept. 20 Sells 600,000 bbl at WTI spot price of 2.00

Case B: 28.50 $/bbl
Rising Buys back 600 Oct. crude contracts at
28.30 $/bbl -1.00
Crude
Prices 1.00 net profit
© SAP 2009
A typical example for a “short hedge” is the purchase (by a trader) of foreign crude (long haul from
Arabian Gulf), to be delivered to U.S. Gulf Coast and sold at prevailing spot prices. The trader fears
that prices will fall before delivery can be made. To protect his/her purchase (wet barrels), the trader
sells futures contracts (paper barrels) to fix his/her sales price, thereby fixing the resale margin.

Relationship Between Spot and Future Prices
Example Case 1:
Spot price today: 53 $ per barrel of WTI crude.
Future price today for a delivery 18 months in the future: 65 $ per barrel of WTI
crude, delivery point Cushing
Example Case 2:
Spot price today: 53 $ per barrel of WTI crude.
Future price today for a delivery 18 months in the future: 45 $ per barrel of WTI
crude, delivery point Cushing
© SAP 2009
Example case 1 above indicates a market situation called Contango. Contango points towards a spot
market situation in which price for a far future delivery is higher than the spot price of the material.
The term is also used for the amount by which the price for far future delivery is more than spot
price. There could be a multitude of reasons behind this situation however it points towards one
undisputable fact: There is a perceived supply glut (excess) in the near term market due to which
spot prices are lower than future prices.
Example case 2 above indicates a market situation called Backwardation. Backwardation points
towards a spot market situation in which price for a far future delivery is lower than the spot price of
the material. Opposite to Contango, Backwardation points towards the fact: There is a perceived
supply shortage in the near term market, due to which, spot prices are higher than future prices.
It is important to point out the fact that it is real observation of spot and future prices which
determine whether the market is in contango or backwardation. There is no speculation involved.
Spot prices are real market prices published by exchanges worldwide and are based on the previous
day settlement prices at the exchanges. Future prices also are real prices at which future contracts are
trading in the exchanges for a certain delivery term in the future.
The market being in contango or backwardation precipitates certain actions by the market players.
Let us take the example of oil producers who are short on future crude contracts (they have entered
into a contractual agreement to deliver crude, which makes them the short party in the agreement). In
a contango scenario, since they expect a higher price for the same barrel of crude being available in
the market for a far future delivery, they would be inclined to store as much of the available supply
as possible. They would do this only if the storage and carrying cost is not more than the amount of
the contango. This reduces the available supply in the near term market, driving the spot prices up
and bringing a correction into the market. The opposite is true for backwardation in which suppliers

expecting to get a higher price for near term delivery, increase the amount of supply available in the
market thereby driving the spot prices down and bringing a correction.
In 2005 and 2006 the crude oil market was in contango. This was a result of the perception either of
a future supply shortage or a present supply glut. Many traders may have taken advantage of the
arbitrage opportunity by buying present oil, selling a future contract and then simply storing the oil
for future delivery. It was estimated that perhaps a $10–20 per barrel premium was added to spot
price of oil as a result of this. A crude oil contango occurred again in January 2009, with arbitrageurs
storing millions of barrels in tankers to profit from the contango. This included Wall Street giants
such as Morgan Stanley, Goldman Sachs or Citicorp - turning sizeable profits simply by sitting on
tanks of oil. However, by the summer, that price curve had flattened considerably.

Relationship Between Future Prices and
Expected Future Spot Prices
Definitions:
1. Futures Prices: Price at which future contracts are trading in exchanges.
2. Expected future spot price: Speculation of the price at which the underlier will
trade at a certain date/period in the future.
Expected
Future Spot
Expected Price
Future Spot
Futures Price
Futures Price
Price
Time Time
Figure 1 Figure 2
© SAP 2009
Like the spot markets, the futures market may also be in contango or backwardation, however, this is
entirely speculative, as one of the important elements in the relationship is the expected future spot
price which is itself speculative in nature. The situation in which the futures market is in contango is
called normal contango, and the opposite situation is called normal backwardation.
Speculators enter into a futures trade with an expectation of what the future spot price will be. To
enter into the trade, they make agreements on a currently traded futures contract, which has a futures
price attached to it. If this futures price is more than the expected future spot price, and if the
estimation of the expected future spot price is fairly realistic around the settlement date, the futures
price would have progressively declined to the spot price before the settlement date. Thus, closer to
the expiration date, the futures contract would trade at a lower price than further away from the
expiration date. This is known as normal contango and is shown in figure 1 above.
The situation in figure 2 above is the reverse of normal contango and is called normal
backwardation. In this situation, as contracts go closer to the expiration date, they trade at prices
higher than those when the contract was further away from expiration date.
Impact on Trade:
y Normal contango/backwardation are not directly observable but can only be determined
retrospectively. On the other hand, a spot market contango and backwardation are directly
observable. Even if the market is in contango, the futures may either be in normal contango or
normal backwardation. Those traders that make a correct speculation of this nature of the futures
stand to gain. Since the hedgers are mainly interested in mitigating their risks, the speculators are
the ones out to make profits and, for them, profit can happen only when the futures are in normal
backwardation. Therefore, if they purchase (go long) a future correctly, assuming normal
backwardation, they will profit. Many speculators reaching the same conclusion about the normal
backwardation would drive futures prices upwards.

Contract Arrangements
Standard Kerosene of JIS K2203 Grade 1

Contract Unit 50 kl
Delivery Unit 100 kl
Price Quotation Japanese Yen per kiloliter

Minimum Price
Fluctuation JPY 10 PER 1 kiloliter
Current contract month:
Customer Position 250 contracts
Limit (for each 2nd contract month:
long/short position) 500 contracts
Other contract months: 1,500
contracts for each month
Refineries and oil tanks located in
Tokyo, Kanagawa, and Chiba,
Delivery Points provided with barge delivery facilities
and appointed by the Board
Physical delivery
Delivery (not cash settlement)
Deliverable Kerosene of JIS K2203 Grade 1,

Commodities which is refined within Japan or
cleared through the customs
© SAP 2009
Contract arrangements in the oil market in fact cover most oil that changes hands. Because of its
excellent liquidity and price transparency, the contract is used as a principal international pricing
benchmark.
In earlier decades, contracts covered almost all oil, with terms that were infrequently readjusted.
Even the pricing term of the contract was only seldom re-examined. Prices at all levels of the oil
market were relatively stable. Pricing power was more dominant in the hands of the seller, because
oil availability was the paramount issue for purchasers. After the very high prices of the early 1980s,
demand declined and supply increased, leading to significant price declines. At the same time,
additional players (both countries and companies) entered the oil market. Worries over supply
faded. It became apparent that the old constant price in most contracts was too high - higher than the
purchaser would pay in the abundantly-supplied open market. Purchasers rebelled, with many
abandoning contracts and relying instead on the spot market. To coax them back, suppliers granted
pricing terms tied to a market indicator - the spot market, for instance, or the futures market. Thus,
while most oil flows under contract, its price varies with spot markets. Contract arrangements for
different products are discussed in the next sections.

Pricing of Crude and Product Contracts
© SAP 2009
Most of the crude oil that flows in international trade is priced by formula: a base price, usually
based on a market indicator, plus or minus a quality adjustment. A common pricing term sets a base
of a spot price published by a particular source or publication. For crude oil sold into the U.S. Gulf
Coast, for instance, the base would commonly be the price of West Texas Intermediate crude oil.
This high quality crude oil, indigenous to the U.S. Southwest, is an informal benchmark for the
region. Analogously, crude oil sold into Northwest Europe is often tied to the spot price for the North
Sea's Brent Blend, and crude sold into Singapore or other South East Asian locations is often tied to
Dubai. The base price is then adjusted for quality. The value of a crude oil is based on the ease with
which it can be refined into high value products. Thus, denser crude oils with higher sulfur content
are worth less than lighter, low sulfur ones. Finally, the credit terms affect the realized price.
Other pricing terms have also been common in the past. One, briefly in use in the mid-1980s, based
the price of a crude explicitly on the spot prices of the refined products it could produce ("netback").
The netback proved ultimately unresponsive to markets. For instance, high refinery runs would
create a relative over-supply of products, thus reducing the market price of refined product and hence
also the back-calculated price of the crude oil. The price signal to the refiner - that the refinery was
overproducing - was thus muted at best.
In the United States, some domestically-produced crude oil is sold at a posted price. Named for the
sheet that was literally posted in a producing field, posted prices are established by the buyers,
usually refiners, but sometimes firms that aggregate supply, "gatherers“. Posted prices generally
apply to a crude oil "stream" - a crude oil or blend of oils of standardized quality (West Texas
Intermediate, Louisiana Light Sweet), with quality adjustments where the oil varies from the
standard. In past decades, posted prices remained relatively stable even while spot prices
fluctuated. Today, they more commonly reflect market conditions quickly. Companies may also add
a temporary premium to a posted price ("Posting Plus") to account for transient market conditions.

Contracts for products between suppliers and resellers and/or bulk consumers are often priced in a
similar way to international crude oil: a base price tied to a market indicator, then adjusted for other
factors such as volume, delivery terms, and so on. Bulk consumers may also be able to convince
their suppliers to provide fixed prices, or may be able to enter into the types of offsetting financial
transactions that will have the same effect.
Prices of petroleum products typically move together over time and all of these prices respond to
movements in crude oil spot prices, though often with a lag. As refinery utilization increases,
operating costs tend to rise and stronger product demand allows refiners to pass-on a greater
proportion of these costs.
Example for gasoline:
The complexity of the market structure is reflected in the multiple pricing levels ("classes of trade")
for gasoline. Thus, before it reaches the consumer, gasoline may be sold in one or more of the
following wholesale transactions:
y By refiners as it leaves the refinery: "refinery gate" prices
y By refiners or by resellers as it leaves a distribution terminal: "rack" prices, named after the
super-structure of pipes, hoses, and manifolds that delivers the product into a tank truck or tank
wagon
y By refiners or resellers to retailers at the gasoline service station: "dealer tank wagon" prices
Both refinery gate prices and rack prices are influenced primarily by spot and/or futures prices. At a
minimum, rack prices will conceptually exceed refinery gate prices by the transportation cost to
move the gasoline from the refinery to the terminal, usually by pipeline or by barge. Dealer tank
wagon prices represent the cost of the product to the gasoline retailer. In addition to reflecting overall
market conditions, dealer tank wagon prices include payments for additional services that a supplier
may provide to a retailer, especially a "branded" retailer - a gasoline station that sells gasoline under
the name of a large oil company. These services may include trademark, credit cards, and
advertising, as well as security of supply.

Trading Process Flow: Purchasing
Validity Third-Party or
Term Purchase Contracts: Upstream Supplier*
for example, with regular re-negotiation
Evergreen Contracts
Spot Purchase Contracts:
usually one time deal
Purchase
Contract
Pricing
nearly 100% based on a pricing formula
Can consist of complex formula structures
incl. price escalation (de-escalation based on: International Trading
-crude quality (API gravity, Sulfur,…). (Global/ Regional Head Office)
-transportation route
-destination
Purchase Sales
Terms Contract Contract
acquisition price plus fee for the service
*It is assumed that the upstream supplier is a

different/ own entity Receiving Local Affiliate
© SAP 2009

Trading Process Flow: Selling
Validity Local Affiliate

Spot Sales Contracts: one time deals to
eliminate unplanned surplus of product *Upstream Sales Transactions
Term Sales Contracts in case of regular are specific and called “Statistical Trade“
surplus
Sales Purchase
Contract * Contract
Pricing
nearly 100% based on a pricing formula
Can consist of complex formula structures
incl. price escalation (de-escalation based
International Trading
on:
(Global / Regional head office)
-crude quality (API gravity, Sulfur,…).
-transportation route
-destination Credit Check for Term Sales Contracts
Sales Contract exceeds standard credit limit checks due to high
Terms target volumes
market price plus fee for the service monthly or weekly nomination volumes could be used
as limit
done by Global / Regional Trading for international
customers
done by local Trading for local customers
3rd Party/ Customer
© SAP 2009
Spot Sale contracts are concluded for various reasons with all potential supply customers
(competitor, other trader…). These are one time deals, usually with one delivery only, to eliminate
unplanned surplus of product (refinery production imbalances, lower demand…). The pricing is
mostly formula/quotes-based as well, but may be fixed price.
Global/regional trading is responsible for the customer management with international supply
customers. The local affiliate concludes a standard sales agreement with the company trading
entities. The terms are variable, but usually the trading company purchases at market price and
charges a fee for the service provided.
Credit management is important and needs to reflect the specific oil business requirements related to
long term and high volume contracts, which amount to enormous cash value, definitely exceeding
standard credit limits. Oil customers must be considered differently or instead of using contract
target volumes, monthly or weekly nomination volumes can be used for the credit check. Again,
credit check is a split task and done by Global / Regional Trading for international, and Local
Trading for local customers.

Trading process Flow: Exchanges
Exchange Terminal
Hamburg
Sales to own Exchange

customer Purchase Contract
Exchange Agreement
Exchange Exchange
Purchase Sales
Contract Contract
Exchange
Sales Contract
Sales to customer
Exchange Terminal
of exchange (Refinery Distribution
partner Terminal)
© SAP 2009
EXCHANGES
An agreement between two oil companies to allow lifting of a product in exchange for the
entitlement to lift product at another time and location. It is possible to exchange oil products
because they are commodity products (unleaded = unleaded and so on). Exchange agreements give
us the possibility to borrow someone else's product and take advantage of that ability.
Additional reasons for exchanging product could be:
y The company wants to keep the supply in balance with the demand but has no terminals for a
specific market. (There is lack of supply capacity for that market. Therefore, logistical reasons are
the cause).
y We do not have enough allocation in a pipeline but some other company has enough capacity.
y We have enough capacity but doing it with an exchange agreement is cheaper.
In the SAP ERP System, a link exists between customer and vendor master data records, because in
the system, the exchange partner is both the vendor and customer at the same time. The exchange
agreement consists of the exchange header and of the assigned sales contracts and purchase
contracts.

There are different kinds of exchange agreements:
y In a borrow/loan exchange, materials are only posted internally, they are not invoiced to the
partner. A logical inventory is created. Excise duties and fees caused by material movements are
generally invoiced. A borrow/loan exchange is also known as a "pure" exchange. It is mainly used
in the United States. Companies in the U.S. using borrow/loan exchanges usually keep track of
the exchange balances and only charge for fees. As a result, only fees are settled. In a buy/sell
exchange, materials and taxes are invoiced. Although they might be posted internally, fees are
generally invoiced as well.
Exchange Terminal Hamburg owned by exchange partner
y Sales to own customers in tributary “North“ trigger purchase orders against the exchange
purchase contract. Sales are standard business for Fuels Marketing and are covered by standard
Fuels Marketing contracts (that is, there is no direct link to the exchange).
Exchange Terminal in Ingolstadt owned by German Oil
y Sale to the customer of the exchange partner (= Sales order against the exchange sales contract).

Enterprise SOA-Enabled Co-Innovation With
Triple Point
Industry Priority Need
Deal Status/ Trading Risk Commodity Management
Capture Event Decision Exposure Multi-industry Applicability
Mgmt Mgmt & Optim. Mgmt Oil, Utilities, Mining, CP, Agri, Trading
Integrated Trading & Risk Operations Unique Value Proposition

Only fully integrated, end-to-end solution
for sourcing, selling, trading & logistic
processing of commodities
Customer-led Co-Innovation
Global Industry Advisory Council
Work Group
Enterprise SOA-based
Enabled through SAP Enterprise
Services
SAP Oil and Gas IVN
SAP / TPT EBS Partnership
The Triple point commodity SL integrated
with SAP ERP is an endorsed business
solution which is available with SAP ERP
EhP3. SAP and Triple Point have a joint
Go-To-Market strategy with this solution.
TPT Commodity SL
© SAP 2009
Some terms explained:
IVN: Industry Value Network
EBS: Endorsed Business Solution
eSOA (Enterprise Service-Oriented Architecture): Enterprise SOA is a business-driven software

architecture that increases adaptability, flexibility, openness, and cost efficiency. This architecture
elevates the design, composition, and management of Web services to address enterprise
requirements.

Integration Landscape 2 – TPT & ERP
Master Data
SAP ERP 2005
Trade Deals and Prices
with IS-OIL
TSW Nominations Switch
TPT CSL TSW Active
Execution Details – Actual Movements
© SAP 2009
This is an overview diagram of how a Trading system (Triple Point in this example) and a
Scheduling & Execution system can work together in an integrated landscape.
Various data and information flows between the systems are summarized in the figure.

Trading & Operations Business Landscape &
Solution Fit
Market Tracking & Analysis
Deal Capture Commodity SL

Trading Decision Support &
Optimization
Paper Trade and

Risk Management Commodity SL
Physical Trade
Management Complex Risk
Management and SAP GTM / TRM
Modeling
Logistics Operations Management

SAP ERP including SAP for Oil &
Gas and SAP TSW
Financial and Management
Execution Enterprise Reporting and

Analysis
SAP BI (BW and SEM)
© SAP 2009
This figure shows a high-level overview of the business processes in an integrated trading,
scheduling, and execution environment (left side), and a high-level solution fit from SAP and Triple
Point (right side). The main applications shown in the solution fit are:
y Commodity SL by Triple Point
y SAP Global Trade Management and Treasury and Risk Management
y SAP ERP (Commodity management and bulk logistics instance) with Traders and Schedulers
workbench functions activated
y SAP NetWeaver Platform with SAP BI (including BW)
Triple Point Commodity SL is a powerful application for all decision support activities around
trading, for example, detailed Market Analysis, and Deal optimization. The physical or paper deal is
captured in the this application. Functions of Commodity SL and SAP GTM/TRM complement each
other in the area of physical trade management (positions management, risk management, and so on).
SAP ERP and IS-OIL are proven long standing solutions providing a strong backbone of execution
and back office operations. SAP TSW bridges the physical trading activities and execution activities
by providing a scheduling platform for operational planning and execution.

Team discussion
A N ic e W a y
to H e d g e ?
Airline Industry case study
© SAP 2008
In the case of the airline industry, they are short on jet fuel and therefore must go long on futures to
hedge the risk of volatility in spot prices.
Reminder What Hedging is For:

y Hedging is a financial strategy that lets airlines or other investors protect themselves against rising
prices for commodities such as oil by locking in a price for fuel. It has been described as
everything from gambling to buying insurance.
A company that does not hedge its fuel costs generally believes one, if not both, of the following:
y The company has the ability to pass on any and all increases in fuel prices to their customers,
without a negative impact on their profit margins.
y The company is confident that fuel prices are going to fall and is comfortable paying a higher
price for fuel if, in fact, their analysis proves to be incorrect.
Airlines can hedge in several ways; making financial transactions with banks, energy
companies, or other trading partners:
y They can buy forwards and/or futures contracts for crude oil or unleaded gasoline, and reap a gain
if prices rise, offsetting the higher cost of jet fuel.
y They can buy a “call option” that gives them the right to buy fuel at a certain price.
y They can also use collar hedges, a combination of rights to buy and sell at set prices (“call” and
“put” options). Collars provide protection from a decline in prices but less upside if prices rise.
y Airlines also use swaps, contracts that require them to buy oil or fuel on a certain date at a set
price. These are risky - one party in a swap wins, the other loses.

CASE STUDY: Facts and Discussions
Record oil prices

Arabian Light – Average monthly FOB spot price - 2008
Crude oil prices for August delivery
rose to $142.99 Friday on the New 140,00
York Mercantile Exchange before 120,00
US Dollars/Barrel
settling at €140.21.
100,00
NYMEX light sweet crude
$140 per barrel 80,00
60,00
40,00
20,00
0,00
ov
ec
t
ug
pr
ay
eb
un
ar
ep
ct
ul
an
-N
-A
-D
-M
-M
-A
-J
-O
-F
-J
-S
-J
08
08
08
08
08
08
08
08
08
08
08
08
20
20
20
20
20
20
20
20
20
20
20
20
SOURCE: Department of Energy AP Source: US Energy Information Administration
August Futures in June Spot prices for the year 2008

Figure 1 Figure 2
© SAP 2008
FACTS:
y By June of 2008, price of petroleum was soaring beyond any analyst‘s wildest expectation and
Crude Oil futures for delivery in August were selling at around 140$ per barrel (see figure 1
above).
y Analysis of crude spot prices for the whole of 2008 (figure 2 above) shows the beginning of an
irreversible slide in July of 2008. Crude finally ended up at around 40$ per barrel by December
2008
y In the first quarter of 2008, Southwest paid $1.98 per gallon for fuel. American Airlines paid
$2.73, and United paid $2.83 per gallon in the same period.
y The long-time successfully hedged Southwest Airlines posted a fourth quarter net loss after
incurring losses of $117 million on its fuel hedging portfolio.
CASE STUDY DISCUSSIONS:
y So, what was the secret of Southwest Airlines, in the case of the third point above ?
y Why did the situation mentioned in the forth point above happen?

Trading: Lesson Summary

Explain the typical business transactions of trading
Explain the necessity to have exchange scenarios between oil and gas
companies
Describe hedging
© SAP 2009

Transportation: Lesson Objectives

Describe specifics about a marine voyage and chartering a ship
Explain how pipelines work
© SAP 2009

Transportation: Business Example
Bruce is a marine voyage coordinator. He manages all aspects of marine

voyages in progress and the planning activities for future voyages (term charter,
spot charter, and contract of affreightment) within in an assigned commodity and
region. He is responsible for:
Preparing voyage plans for term and spot chartered voyages through inputs
from traders, schedulers, and charterers
Responding to changes in voyage schedules, communicating with vessel
operators, agents, and brokers; and relaying information to charterers,
schedulers, and traders; and making changes to related voyage plans
Preparing cost estimates for each voyage
Maximizing the utilization of marine assets on charter, reducing delays through
proactive communications, maximizing the full use of available tonnage, and
clearly understanding and communicating the impacts of alternatives and
changes to voyage plans
Verifying freight and performance of services relating to marine transportation
through a review of invoiced charges and obtain appropriate supporting
documentation
Providing primary communications contact (24/7) for vessel incident notification
and reporting on assigned equipment
© SAP 2009

S&D Transportation, Interactions
External Partners German Oil
S&D Supply & Distribution other German Oil Orgs

Publisher
Planning & Optimization Refinery Production

Authorities & Lubes Blending
Global/ Regional Head Office Trading

Local Tax
Broker Local Finance

Scheduling
Vessel Owner Fuels Marketing/

Retail
Transportation
Supplier
Gas
Terminal Operations
Customer
Lubes
Service Provider Administration
Aviation
Barge, Rail, Truck and Pipeline

Operator Marine
© SAP 2008
List of typical tasks of marine transportation group:
Negotiate Charter Party
Agree on laycan (supply or nomination window, demurrage, cancellation terms…), product or

product type and quantities (min / max), Inco-terms, supply location(s), freight (individual or World
scale) and demurrage rates, nomination and readiness, gain/loss rules, claim handling, arbitrage…
(Laycan stands for "laydays commencing / laydays canceling" and is a spread of dates which
provides for the earliest date for the ship to arrive and for laytime to commence and also gives the
last date for the charterer to cancel the charter if the vessel does not arrive by the date.)
It is common to use standard charter parties, provided by international brokers, vessel owner
associations, or oil companies. They may be amended or not.
Recap of Charter Party
Confirmation of charter referring to agreed standard charter party plus amendments or listing all
terms of an individual charter party.
Document Charter Party
Standard Charter Party: Fill in details of agreement and amendments. This may be done by a broker
if one was involved, or by the counterparty.

Write up individual charter party (not very common) and get confirmation/approval from the
counterparty.
Assign transportation units to schedules
Provide vehicles, own or chartered, to S&D Scheduling. Discuss timing and get confirmation
whether vehicles match the scheduling requirements. Re-visit assignments in case they are not
accepted by S&D Scheduling. Coordinate short notice requirements due to unexpected events.
Provide voyage instructions to vessel operator
Based on the charter party terms, the vessel operator and the vessel (or barge) master needs voyage
instructions. For spot charters, this information is more or less identical to the charter details, plus
some additional information like harbor and terminal / berth regulations, cargo quality and safety,
vessel tank preparation (COW), cargo inspection, contacts (ship agent, cargo inspector, terminal /
berth operators…). In the case of term charter and COA, all information about laycan, locations,
products and quantities has to be provided for every voyage.

Bulk Transportation & Modes of Transport
Service Station
Midstream Primary Secondary
(Convenience)
Retailing
Pipeline
Marine
Rail
Trucks
© SAP 2008
The majority of oil production sites are not where the demand for the oil is, therefore once the oil is
produced, it needs to be transported. Crude oil as it is comes out of the reservoir, is not much use for
end users and needs to be processed in refineries. As refineries are very expensive assets, they are
also not distributed in high numbers in areas where the customers are, and additional transportation
is required to get refined products to distribution hubs, from where they are distributed onward to
consumer markets. The transportation from the production site to the refineries and from the
refineries to the distribution terminals is usually referred to as ‘bulk transportation’, whereas the
subsequent distribution further down the supply chain is referred to as ‘secondary distribution’. This
lesson describes the processes in bulk transportation. The largest portion of crude and refined oil
bulk transportation is conducted by sea or by pipeline. Subordinate, but never-the-less important,
modes of transport for the bulk movements are rail and truck.
The average cost of oil transport by tanker amounts to less than one cent per liter and is only slightly
higher than the transport cost by pipeline. However, as production areas for crude and consumer are
separated by oceans, marine transportation is often the only choice. Also, marine transport has its
limitations, especially in northern countries where seasonal conditions (for example, ice) shut down
the transport routes for several months each year.

Major Flows of Crude Oil
190
627 Former USSR
703 106
1077 619 Europe
North America
307
1254
Middle East
135
488 Africa
381 Asia/Pacific
270
335
1183
South & Centr. America
Production
Mio tonnes/year
Consumption
Mio tonnes/year
© SAP 2008
Production Consumption:
Europe: 106 703
North America: 619 1077
South & Central America: 335 270
Africa: 488 135
Middle East: 1254 307
Asia/Pacific: 381 1183
Former Soviet Union: 627 190

Marine Transportation
Total Marine Transports

x6
1952 2002
time
Marine Hydro Carbon

Transports
x 10
© SAP 2008
Since the first tanker set sail about 120 years ago in 1886, both the fleet and the volume of oil
transported worldwide have grown dramatically. Nearly half the world's seaborne trade consists of
crude oil or petroleum products. Compared to the total volume of goods moved by marine
transportation, the volume of crude almost doubled from 1952 to 2002. Tankers move approximately
2 billion tons of oil every year. ¾ of this is crude and 1/4 is refined products. The largest tankers
carry up to 4 million barrels of crude oil, which is more than 600 million liters. Products such as fuel
oil, naphtha, jet fuel, and lubricating oils travel in smaller tankers with separate compartments for
different products.
A fleet of more than 4000 oil tankers larger than 1000 tons DWT (deadweight) is active world wide,
but about a third of the world's oil supply is transported by just 450 of them.
Tanker demand is expressed in "ton-miles" which is measured as the product of (a) the amount of oil
transported in tankers in metric tonnes, multiplied by (b) the distance over which this oil is
transported. For example in 2005 oil tankers moved 11,705 billion ton-miles of oil.
Tonnage of oil shipped is primarily a function of global oil consumption, which is driven by
economic activity as well as the long-term impact of oil prices on the location and related volume of
oil production. Tonnage of oil shipped is also influenced by transportation alternatives such as
pipelines.
The distance over which oil is transported is the more variable element of the ton-mile demand
equation. It is determined by seaborne trading and distribution patterns, which are principally
influenced by the locations of production and the optimal economic distribution of the production to
destinations for refining and consumption. Seaborne trading patterns are also periodically influenced
by geo-political events that divert tankers from normal trading patterns, as well as by inter-regional
oil trading activity created by oil supply and demand imbalances.

Oil Tanker Fact sheet
25years lifetime
Up to 400,000 tonnes Deadweight
Up to 20 or more cargo compartments
Hullthickness: 22 mm on the sides, 26 mm along the
bottom
Operation speed around 15 knots (28km/h) to 17
knots
Stops within max 15 ship lengths
Turn within max 5 ship length
25 – 40 people as Crew
Price of 40 Million USD for small and 120 Million USD
for large tankers
A costs up to $50,000 a day to operate
© SAP 2008
Two types of oil tankers can be distinguished: the crude tanker and the product tanker. Crude tankers
move large quantities of unrefined crude oil from its point of extraction to refineries. Product tankers,
generally smaller, are designed to move petrochemicals from refineries to points near consuming
markets. The two types of tankers are also referred to as either "clean" or "dirty". Clean tankers carry
refined petroleum products such as gasoline, kerosene, jet fuels, or chemicals. The “dirty” vessels
transport products such as heavy fuel oils or crude oil. Larger tankers usually only carry crude oil.
The industry of these highly specialized vessels has seen significant technological advancements
since the first tanker was on her maiden trip. Vessels have increased dramatically in size and carrying
capacity and they have progressed from coal-fired engines via steam-turbines to diesel engines.
Other innovations, including safe tank venting, inert gas systems, crude oil washing, sophisticated
engine room control systems, and satellite navigation all have had a significant impact on the safety
and efficiency of tanker operations. One of the most significant innovations in recent years has been
the double hull design, which became mandatory from the early 1990s as a aftermath to the Exxon
Valdez disaster. International regulations have lead to the phase-out of single hull tankers since then.
The loading capacity of a tanker is usually measured in deadweight tonnage (‘tons deadweight’
abbreviated to ‘tdw’ or ‘deadweight tons’ DWT, D.W.T., d.w.t., or dwt) is a measure of how much
additional weight a ship can safely load. It has to be kept in mind that this not only includes the
cargo, but also all the other load such as fuel, fresh water, ballast water, provisions, crew, and so on,
which contribute to 5 to 10% of the cargo. The term is often used to specify a ship's maximum
permissible deadweight, but it may also be used for the actual DWT of a ship not loaded to full
capacity. Originally deadweight tonnage was expressed in long tons but now it is usually given in
metric tons. Deadweight tonnage is not a measure of the ship's displacement.

The displacement of the ship is also used of a measure of the ship size and is called LDT (Light
displacement tonnes or Lightweight). The lightweight is the displacement in tons, without cargo,
fuel, lubricating oil, ballast water, fresh water and feed water, consumable stores, and passengers and
crew and their effects, but including liquids in piping. The ships loaded displacement is calculated by
lightweight and deadweight.
The measure for the speed of a ship is the knot (kn). 1 kn = 1 seamile per hour = 1.852 kilometers per
hour. A vessel with an operating speed of 20 kn sails with about 37 km/h.
Oil tankers have an operation speed around 15 knots (28km/h) to 17 knots
The low resistance of water, which makes it so attractive for carrying goods afloat, becomes a big
issue when it comes to brining a tanker to halt. Due to the huge mass of such a gigantic ship, it is a
task that cannot be accomplished immediately and needs to be planned well in advance. According
the rules of IMO, a tanker must come to stop within 15 (in exceptional cases 20) ship lengths. For a
300m sized tanker this translates into a distance of 6 km. The turn radius for such a ship must be
within max 5 ship length or 1.5 km for a 300 m tanker.
Oil tankers are not only used for transportation but also as floating storage units. This is preferably
done with ships close to the end of their days in duty. On average, an oil tanker has a lifetime of
about 25 years, which does not seem to be very long considering the investment of around 40 Million
USD for small and 120 Million USD for large tankers. On the other hand, the value of a single load
of such a giant tanker easily surpasses the value of the ship.
A typical oil tanker can cost up to $50,000 a day to operate.
The hull is covered by a steel plating with varying thickness from 22 mm on the sides to 26 mm
along the bottom.

Tanker Types
Oil Tanker (side view)

Oil Tanks Empty
Fuel Tank
Engine Room Pump Room Double Hull
AP ER FP
Oil Tanker (front view)

Center cut view
Double
Hull Oil Tanks
Segregated
Ballast Tank
© SAP 2009
After the Exxon Valdez oil spill disaster in 1989, when that ship grounded in the Prince William
Sound (Alaska), the US Government required all new oil tankers built for use between US ports to be
equipped with a full double hull. From 1994 onward, all newly build oil tankers were double hull
tankers. The existing single hull tankers had to be ‘phased out’ which means replaced by new double
hull tankers within the following 2 decades.
The double hull is often presented as a solution to the problem of oil spills. It is certainly an effective
solution for minor breaches resulting from collisions or groundings at low speeds. However, it does
not protect against collisions at full speed, fire, explosions, breaking during a storm, or dislocation on
reefs, all of which can generate major oil spills.
Furthermore, it makes inspecting vessels more difficult to carry out. It inevitably increases vessels’
prices, tonnage, and maintenance costs. The benefit of the double hull is comparable to that of a
motorbike helmet: it acts as a useful form of protection, but is not a cure all solution.

Free Surface Effect
G
G
© SAP 2008
As tankers grew in size, an effect surfaced that could cause serious trouble for a ship in bad weather
conditions when the tank was not fully loaded. The ship could become unstable and roll-over due to
an effect which is referred to as the ‘Free surface effect’. When wind and waves cause a ship to start
rolling, the cargo stars to move in response to the ship movements in the tank. For example, as the
vessel rolls to the left, a liquid will move so that much of it is now on the left side of a tank, and this
will move the vessel’s center of mass towards the left. This has the effect of slowing the craft's return
to vertical. As it takes time for the viscous liquid in the tank to respond to the ship’s movement, it
does not follow immediately. After the vessel rolls through the vertical towards the right, most of the
liquid moving in the vessel’s tank then slams into the right side of the tank, with the effect of causing
the craft to heel further over. In turbulent winds and heavy sea states, this can become a positive
feedback loop, causing each roll to become more and more extreme, until the ship rolls-over
(capsizes).
To mitigate this hazard, cargo vessels are built with multiple tanks, instead of fewer larger ones, and
possibly baffles within the tanks to minimize the free surface. Keeping the tanks either relatively
empty or full is another way to minimize the effect and its attendant problems.
A tanker typically is divided into several individual cargo holds. A ULCC can have more than 20
cargo compartments.

LNG Tanker
Exhaust
Tanks
Bridge
Muffler
Insulation
Liquefied
natural gas
( -60 C° )
Compressor
Engine
Gearbox
© SAP 2009
Transportation of gas is a completely different story. For the transportation of Natural Gas (main
component is methane) a different approach had to be taken. At normal pressures and temperatures
gas is not a liquid, but in a gaseous state. This means that, for the same quantity of energy content, it
occupies a volume 600 times greater than that of oil which in turn would increase the transportation
cost tremendously. The solution for this problem is to transfer the gas into a liquid state before filling
it into transport containers. The production of ‘Liquefied Natural Gas’ LNG can be achieved either
by increasing the pressure or by reducing the temperature or by any combination of the two. The
technically and commercially most efficient way is to reduce the temperature of the gas to less than –
160°C at a pressure only slightly above atmospheric pressure (max 230 mbar)
The liquid gas is transported in highly insolated spherical containers in ships with total capacities of
up to 150000 m3 in 4 to 6 tanks. New ships are planned with capacities of beyond 250000 m3. The
first LNG transport on a vessel was done in 1959. The market is increasing and marine transport of
LNG summed up to about 25% to the total international gas trade. The current global fleet of tankers
in service is around 300 LNG tankers (as of December 2008). LNG tankers have a very characteristic
form with several spherical tanks of which only the lower part is covered by the hull of the ship
whereas the upper half is above the deck.
The additional effort that is involved in the transformation and transportation of LNG results in five
times higher transportation cost of the gas compared to the equivalent amount of crude oil.
As the gas is kept in low pressure tanks, any gas that evaporates due to warming needs to be vented
off. It either is directly released to the atmosphere, or – if the ship is equipped accordingly it is used
as fuel for energy and electricity generation on the ship or even in the propelling engines. Newer
ships have facilities to ‘re’-liquefy the gas that evaporates When the gas arrives at its destination the
gas is converted back to its gaseous form before it is transferred into the distribution pipelines.

LPG
Even though LPG is transported in similar spherical tanks, the gas is stored under pressure, rather
than low temperature. As this gas consists of molecules with longer chains (propane & butane), it can
be transferred into liquid form easier and the technically and commercially most efficient way is to
apply a modest pressure of max 20 bar at room temperature. The pressure in the storage tanks is only
2-9 bar, depending on the surrounding temperature. The maximum capacity of a pressurized LPG
ship is limited to about 2000 m³ due to high manufacturing costs. Semi-refrigerated ships usually
hold 2500-5000 m³, with fully refrigerated ships having capacities up to 100.000 m³. The larger the
LPG cargo, the more economical it is to transport fully refrigerated.

Tanker size put into context
[m]
500
400
300
200
100
0
Titanic Eiffel Tower Panamax Empire State ULCC
(Paris) Building (NY)
© SAP 2009
Some of today’s oil tankers are enormous vessels. Those that can carry more than 330,000 tons of
cargo are called ULCCs ’ultra large crude carriers’. Such huge supertankers need very large ports to
load and unload their cargo and many ports are offshore terminals served by underwater oil
pipelines. Furthermore, they cannot pass through the Panama and/or Suez channel, but need to
circumnavigate the capes of South Africa and South America. However, the closure of the Suez
Channel between 1967–1975 was one of the factors that spurred the construction of these giant ships.
The biggest ULCC of all is currently the Knock Nevis (Jahre Viking), which is 458 m long, 69 m
wide and can carry more than 4 million barrels of oil – in comparison, the daily crude consumption
of Germany is 2.5 million bbl/day, the consumption of US it is 14.9 million bbl/day.
As marine vessels can change their names several times during their lifetime, it was necessary to
assign a permanent identification number that stays with the ship. The ship identification number
scheme was initiated in 1987 by the IMO (International Maritime Organization). The Number is a
unique seven-digit number assigned to propelled, seagoing vessels of 100 gross tons and above. It
remains unchanged upon transfer to another flag or owner and would be inserted in the ship’s
certificates. It is assigned by Lloyd’s Register - Fairplay Ltd. on behalf of the IMO. It consists of the
three letters, IMO, followed by seven numbers
To be registered, an ocean-going ship must be certified to be of a particular type and size and be
maintained to certain minimum standards. Despite that most national governments do not insist that
ships be "classed", there would be considerable difficulties in operating a ship without a "class"
category, because most insurance companies calculate the fee based on the class. The classification
of ships is done by Classification societies that survey the ships, both during their construction and
during operation. They are the principal means by which standards of construction and maintenance
are enforced, and ship certificates can be issued by Flag States. Classification societies are licensed
by "Flag States" to undertake this work on their behalf. The largest classification society is Lloyd’s
Register. It was founded in 1760 as ‘Lloyd’s Register of British and Foreign Shipping’. Up to this
day, the original headquarters in London still exists aside from others in Hong Kong and Houston.
Tanker classification
Frequency per Class % Available Capacity per Class %

PANAMAX
AFRAMAX
1 5 SUEZMAX 1 2
31 23
VLCC
ULCC
40
54
20
23
Classification Draft Width Length Heigth DWT

Panamax 12.5 m 32.3 m 294.0 m 63.0 m 60,000-75,000
Aframax 15.0 m 41.0 m 250.0 m 49.0 m 80,000-110,000
Suezmax 18,0 m 48.0 m 290.0 m 68.0 m 180,000-190,000
VLCC 21.0 m 60.0 m 360.0 m ∞ 290,000-310,000
ULCC 24.0 m 78.0 m 415.0 m ∞ 390,000-410,000
© SAP 2009
The following table shows a compilation of typically used tanker classes from different sources. The
classes are not standardized and you will find deviations of the classifications depending on the
source. However, certain classes such as Suezmax or Panamax are defined by physical limitations of
the seaway that cannot be exceeded.
The following list explains, in addition to the above-mentioned classes, other frequently found
classifications, going from small to big.
Handysize
A small bulk or oil tanker vessel that is suited to tie up at a T2 type pier. These vessels are a
maximum of of 10,000 to 30,000 dwt. These vessels are more maneuverable and have shallower
draft than larger vessels and therefore make up the majority of the world's ocean-going cargo fleet.
Handymax
A small bulk or oil tanker vessel of 30,001 to 50,000 dwt that is a larger version of the popular
Handysize vessel.
Panamax
An ocean-going cargo vessel of the maximum size possible to pass through the locks of the Panama
Canal, which are 1000ft long by 110ft wide and 85ft deep. These vessels are typically of 50,000 to
80,000 dwt, 965ft (290m) in length; 106ft. (32.25m) width; and 39.5ft (12.04m) draft.

Aframax
An ocean-going crude oil tanker vessel of standard size between 80,000 and 119,000 dwt that is the
largest crude oil tanker size in the AFRA (Average Freight Rate Assessment) tanker rate system.
Ships of this class are mainly used in the Caribbean, the North Sea, the Black Sea, and the Chinese
Seas. The limitation of size for this class is given by the size of ports in the areas where the ships are
used.
Capesize
An ocean-going cargo vessel that is physically too large to fit through the locks of either the Panama
or Suez Canals and therefore must voyage via Cape Horn at the southernmost tip of South America
to get to or from the Atlantic and Pacific Oceans, or the Cape of Good Hope at the southernmost tip
of South Africa to get to and from the Indian and Atlantic Oceans. VLCCs and ULCCs are a subset
of the Capesize group. Vessels of this size generally serve deepwater terminals.
Suezmax
An ocean-going cargo vessel of the maximum size possible to pass through the locks of the Suez
Canal in Egypt (120,000 to 200,000 dwt). This standard has evolved over time. Prior to 1967, a
Suezmax was a maximum of 80,000 dwt. The canal was closed between 1967 and 1975 because of
the Israel-Arab conflict. Upon reopening in 1975, after many modifications to the locks and canal
itself, the maximum was increased to 150,000 dwt.
Very Large Crude Carrier (VLCC)
An ocean-going crude oil tanker of 200,000 to 299,999 dwt. These vessels have greater flexibility
than ULCCs due to their smaller size, and are used extensively in the Mediterranean, West Africa,
and the North Sea. These vessels can sometimes be ballasted through the Suez Canal.
Ultra Large Crude Carrier (ULCC)
An ocean-going crude oil tanker of 300,000 to 550,000 dwt. These are the largest vessels in the
world and are used for carrying crude oil on long haul routes from the Arabian Gulf to Europe,
America and the Far East, via the Cape of Good Hope. These vessels require custom built terminals
for loading and discharge.

Flags of Convenience
Advantage when sailing under flag of convenience

Save taxes
Save hire for crew
Get a classification on lower standards
Able to charge lower freight rates
Make higher profits per voyage
Disadvantage of sailing under flag of convenience

Pay higher insurance rates
Be on black list of many ports
Higher risk of incidents due to substandard condition of ship, equipment, and crew
© SAP 2009
The country of registration of the ship determines the laws under which the ship is operated. Some
countries have less restrictive regulations for operating a ship and offer tax savings. This makes it
attractive for ship owners to switch to an ‘open registry’, which also changes the flag of the ship as it
is now registered in a different country to the ship owner. The ‘open registers’ are also referred to as
‘flags of convenience’ and usually have lower standards for vessel, equipment, and crew than the
traditional maritime countries, and often have classification societies certify and inspect the vessels
in their registry, instead of their own shipping authority.

Bunker Fuel (Heavy Fuel Oil) = Concentrate of
all Non-Volatile Components of Crude Oil
© SAP 2009
The term ‘Bunker fuel’ describes any type of fuel oil used aboard ships. It gets its name from the
containers on ships and in ports that it is stored in. However, even though a wide variety of fuels can
be used by ship engines, the most frequently used fuel in oil tankers is Fuel oil #6 also referee to as
Bunker “C”. The term bunker fuel is therefore often used as a synonym for Fuel oil #6.
The oil used as Bunker fuel is the heaviest remainder in the distillation process of crude oil. It
literally is the bottom of the barrel; the only thing more dense than bunker fuel is the residue which is
mixed with tar for paving roads and sealing roofs. It has a boiling point of more than 400 degrees F.
Bunker "C" fuel oil is a sticky, black liquid, similar in appearance and smell to asphalt sealing
compounds. At 10° C, it has a consistency of liquid honey or corn syrup. At 0°C, it barely flows. No.
6 oils represent approximately 5 to 8% of the original crude petroleum, but the exact yield depends
on the source, refinery design and operations, and product requirements. Fuel oil No. 6 contains
about 15% paraffins, 45% naphthenes, 25% aromatics, and 15% non-hydrocarbon compounds; the
hydrocarbons contain 30 and more carbon atoms. These long hydrocarbon chains are the reason for
the high viscosity of the bunker fuel.
Bunker fuel is also heavily contaminated with various substances which cannot be removed, so when
it is burned, it pollutes heavily. The thick fuel is difficult for most engines to burn since it must be
heated before it will combust, so it tends to be used in large engines like those on board ships. Ships
have enough space to heat bunker fuel before feeding it into their engines, and their extremely
sophisticated engines are capable of burning a wide range of fuels, including low quality bunker fuel.
Many oil spills have involved bunker fuel, leading some environmental organizations to call for a
ban on the substance. It is extremely difficult to clean up and it coats birds and shorelines very
effectively, because it's so viscous. Because bunker fuel also carries a range of contaminants, it can
represent a serious environmental hazard when it spills. However, bunker fuel is also extremely
cheap, and many shipping companies would lobby against any proposed ban out of concern for a
sudden jump in shipping costs.

Loading and Discharching & Lightering
© SAP 2009
The loading and unloading of tankers with petroleum fluid ranging from crude oil to liquefied natural
gas is a daily occurrence throughout the world. As a typical oil tanker costs up to $50,000 a day to
operate companies want to load and unload oil as quickly and safely as possible to minimize the cost
of transportation. The design of a loading facility is therefore usually a compromise of loading times
(demurrage) and construction cost. Flow rates of up to 100,000 barrels per hour are achieved.
The process of loading and unloading is very risky and small mistakes can lead to major desasters as
explosions or oil spills. Therefore this process is very much standardized and a sequence of steps has
been established. This is described in the section about the port activity.
A Marine Loading Arm is an articulated pipe system for the transfer of liquids or gases. It can be
maneuvered manually or hydraulically.
Cargo can be moved on or off of an oil tanker in several ways. One method is for the ship to moor
alongside a pier, connect with cargo hoses or marine loading arms. Another method involves
mooring to offshore buoys, such as a single point mooring, and making a cargo connection via
underwater cargo hoses.

Gauging systems
Visual Floating wire Radar gauge

gauge
© SAP 2009
To monitor the crude level in the tank, a gauging system is used. There are two basic types of
procedures for obtaining the gauges: Innage and Outage methods. An innage gauge, or bottom gauge,
is the depth of liquid in a tank, measured from the surface of the liquid to the tank bottom, or to a
fixed datum plate. An outage, or ullage gauge, is the distance from a reference point on the top of the
gauge hatch down to the surface of the liquid in the tank. At the time of World War II, virtually all
tank gauging and sampling was done through the ullage opening in the hatch cover. The
measurements were made during loading and discharge by a sailor peeking through the ullage hatch.
Using the reflected light from a hand mirror, some light was transferred into the tank to see the
position of the oil surface. For Custody transfer measurements, a more formal way by means of
manual steel tape was used. Fixed tank gauging systems were available from the 1950s, but came
into widespread use only in the 1970S with inert gas and closed loading. These systems rely on a
float attached to a steel tape that rides up and down on guide wires or rods in the cargo tank. The
floats are read on deck, directly from numbers printed on the tape or from a mechanical counter
driven by the movement of the tape. A gauging system, which does not need any moving parts or
direct contact with the cargo, is the radar gauge. This method uses a low power radar transceiver,
which is installed in a deck and takes advantage of the physical properties of the vapor/cargo
interface where the radar beam gets reflected.

Ship - Shore Comparison
140000 bbl
150000 bbl
Spill
Theft
© SAP 2008
When transferring cargo from the ship, readings are taken directly on the ship as the oil leaves the
tank and on land when it reaches the tank. This way, it is possible to monitor all differences that
occur between the volume that leaves the ship and the volume that reaches the tank on land. If there
is a significant difference, the reasons can be investigated. As environmental concerns increase and
governmental regulations get stricter, it is more and more necessary to store both readings in a
database for auditing reasons.

Loading and Discharge
Inert Gas
venting pipe
Inert Gas system
COW
Inert Gas
Crude
Loading Discharging
COW (Crude Oil Washing)

= cleaning of tank with crude oil
© SAP 2008
Today, cargo operations (both loading and discharging) must be conducted in a closed system, that
is, cargo vapors are not allowed to mix with oxygen. This is achieved by installing inert gas systems
and all access to the cargo tanks are kept closed during all operations. Prior to the requirement for
inert gas, tankers loaded or discharged cargo using the open venting method. The hatch covers were
open, allowing petroleum vapor to escape in the atmosphere. This could create a dangerous situation.
Closed operation also required the installation of reliable cargo measurement systems. During the
discharging operation, the inert gas system manufactures inert gas used to displace the liquid cargo.
The inert gas does not allow an explosive mixture to occur in the cargo tanks. During the
manufacture of the inert gas, the oxygen content of the inert gas is controlled to below 5 percent
oxygen. Since the requirement of inert gas on all tankers, there have been virtually no tanker
explosions from cargo operations. Today, if the facilities exist, tankers return the vapor plus the inert
gas mixture displaced while loading to the shore facility for processing, so that no vapor is released
to the atmosphere. The inert vapor displaced during loading operation is vented high above the
tanker’s decks.
Loading
Loading an oil tanker simply means pumping the oil into the ship's tanks. However, loading is an
operation endangered by spillage, fire, and explosion. Therefore, safety measures have to be taken
and a sequence of steps has to be followed.
When the crude is transferred to a gas-free tank it begins to vaporize; that is, it liberates gas into the
space above it. To avoid the danger of explosion, the tanks are filled with inert gases prior to loading
them with oil. As oil enters the tank, the vapors inside the tank must be removed to prevent a build-
up of pressure in the tank. For safety reasons, loading starts slowly at a low pressure to ensure that no
leakage occurs and that the equipment is working correctly. After the desired operating pressure is
achieved, the tank is filled until the next stage in the process is reached when the tank is almost fully
loaded, which is called the "topping-off" phase. Topping off is a very critical phase in the loading
process, where accidents can easily occur.
The cargo pumps used for crude oil ships are normally installed in a pump room located at the back
end of the cargo tanks. The pumps are connected to the cargo tanks through a network of piping that
runs through the cargo tanks at a distance of several feet above the bottom of the tanks.
For control of the dangers in the loading process, IMO and US Coast Guard regulations require
transfer flow to be stopped rapidly in the event of any emergency (which usually means valve
closures of less than 30 seconds).
Another typical activity during the loading process is to move water ballast to maintain proper trim.
Discharging
The process of moving oil off of a tanker is similar to loading, but differs in some steps. When the
transfer begins, it is the ship's cargo pumps that are used to move the product ashore. As Crude oils
are a mixture of many hydrocarbon liquids with volatile components that easily become vapor as the
pressure of the liquid is lowered. When a tanker begins pumping cargo, the pressure of the liquid at
the pump suction is relatively high because the liquid level is well above the pump. Pressure is lost
due to pipe friction as the oil flows through the suction piping to the pump. This pressure loss is
proportional to the square of the flow rate. As liquid is discharged ashore, the level falls, thereby
reducing the pressure at the pump suction. Eventually, the friction losses equal the pressure due to
the height of the liquid and the pressure at the pump suction is equal to atmospheric pressure.
Continued pumping lowers the pressure even more, and the reduced pressure causes the more
volatile products in the crude to flash into vapor. This can fill the pump with vapor and cause it to
lose suction in the tanks. To delay the loss of suction to the last possible moment and remove all of
the oil from the tanks, the pumps must have the ability to be slowed down. This reduces the friction
losses in the pipeline and improves the pumps ability to work without becoming vapor bound.
Therefore, crude oil pumping systems must have the ability to reduce speed. Ideally, they should be
able to run at any speed from idle to full speed.
Regulations to prevent explosions in the pump room prohibit electric motors and similar equipment
from being located in a pump room. The drive equipment must be located in the ship’s engine room
and drive the pumps through shifting that passes from the engine room to the pump room through
gas tight seals.
Parallel to the unloading of the tanker, the tanks are cleaned through ‘Crude Oil Washing’ (COW).
The crude oil washing plan is an integral part of a tanker's cargo discharge plan.

Transportation: Lightering
Maximum draft with full cargo on arrival at

lightering location (usually offshore)
Safe draft (max allowed) for destination location after partial

board to board discharge (lightering)
© SAP 2009
Most ports have draft limitations for vessels, that is, the water depth is not sufficient for bigger
vessels to enter fully laden. Despite this limitation, it might still be economical to use large vessels to
get a cheaper freight, but also bear the lightering cost. Lightering is loading or offloading by a ship-
to-ship transfer when the tanker is too large to enter the port. The lightering vessel is moored to the
larger vessel, protected by fenders. Flexible hoses are connected and the larger vessel pumps the
cargo to the lightering vessel in the open sea, either to its full capacity, or until the larger vessel
reached the max allowed draft for the destination location.
Depending on the deal, both vessels (tanker and lightering ship) discharge for the same customer at
the destination location or the lightered part cargo is sold to another customer, even at another
destination. At most, two lightering services can take place simultaneously for a tanker, one at each
side of the tanker. Offshore Lightering requires calm seas and favorable weather conditions. A
typical lightering area can be found in the Gulf of Mexico, called ‘Off Galveston‘ which is about 20-
60 miles from land. VLCCs are lightered offshore before proceeding to shallow water destinations in
the Gulf area.
Lightering is also done in case of an emergency, when a tanker is leaking oil and the cargo is
removed fully or partially to avoid the loss of the oil and prevent as much environmental damage as
possible. In this case, the lightering takes place as an open-sea transfer of oil between two large oil
tankers. Another emergency situation where lightering is used, is when a ship runs aground and
cannot be freed by its own engine or tug boats. In this case, lightering reduces the draft of the tanker
and will set it free again.
Lightering operations may be also performed “cross jetty” in deep water ports, for example,
Rotterdam Europort. A VLCC and a smaller tanker are moored to the same jetty. Then the VLCC
discharges into the smaller tanker using the jetty facilities (racks, pipes …). Upon completion of
loading, the smaller tanker proceeds to a destination with limited water depth and the VLCC
discharges the rest of its cargo in Europort.
Ballasting
Segregated Cargo tank

ballasting ballasting
© SAP 2008
Ballasting is done to correct the trim of a ship that starts her voyage empty or only partially loaded.
This improves stability and to ensures good handling characteristics of the ship. The amount of
ballast taken aboard depends on the vessel's light-ship displacement, the distance and route of the
ballast voyage, and the anticipated weather conditions. The amount of ballast taken aboard generally
varies from 20% to 50% of the vessel's total cargo-carrying capacity, but may be greater during
periods of severe bad weather.
Ballasting is the process whereby seawater is taken aboard into the cargo tanks or segregated ballast
tanks. 'Segregated ballast' means the ballast water is filled into a tank which is completely separated
from the cargo oil and oil fuel system and which is permanently allocated to the carriage of ballast.
When using the cargo tanks as ballast tanks, the water used for ballasting will be contaminated. A
considerable contamination of the ballast water is possible, as up to 0.5% of the loaded oil remained
in the tanks (as residue on the bottom and wax build up on the side walls). Due to environmental
concerns, discharge at sea was restricted to less than 1/30,000 of the cargo volume per journey for
vessels built after 1996, with the introduction of load-on-top techniques. This system involves
pumping oily mixtures resulting from tank cleaning operations into special slop tanks. The mixture is
then separated by settling and the water portion is pumped into the sea, leaving only crude oil. At the
loading terminal, fresh crude oil is then loaded on top of the remaining oil.
The governmental regulations and investments of certain countries in remote sensing of operational
discharge led to positive results. According to estimates of the US National Academy of Sciences,
operational discharge from oil tankers fell from above 1,000,000 tons in 1973 to 700,000 tons in
1981, and to less than 160,000 tons in 1989. It is important to note that these figures are only
estimations based on data from the waste reception facilities in ports and the proportion of oil tankers
which fulfill the Marpol Convention criteria.

Ship Cleaning - Crude Oil Washing and
Deballasting
OILY WATER SEPARATOR
A vessel deballasting at sea: several AUTHORISED DISCHARGE

kilometre-long trail containing oil and waste <15
threatening to pollute the shore BUNKER
TANK ILLICIT DISCHARGE
OILY W ATER
BILGE WATER
SLUDGE TANK
ILLICIT DISCHARGE
PUMP WASTE OIL

TANK
BILGE
WATER
DAILY TANK MAIN ENGINE

SETTLING
TANK
HEATER
FILTER
PURIFER STATION
© SAP 2009
The Cargo tanks must be cleaned from time to time for various reasons. One reason is to change the
type of product carried inside a tank. Also, when tanks are to be inspected or maintenance must be
performed within a tank. Critical factors influencing the choice include cleaning time, environmental
legislation, cargo type, and cleaning frequency. Essential for optimizing the transport capabilities of
a tanker, tank cleaning prevents cross-contamination of cargoes and reduces the levels of residues
remaining on board.
Until the late 1970s, cargo tanks were washed regularly with hot water at the start of the ballast leg
of the voyage to prepare them for ballast. On product carriers, additional washing and rinsing were
done to prevent cargo contamination.
Crude oil washing (COW)
In the mid-1970s the concept of washing tanks with crude oil (that is, the cargo itself) rather than
seawater was developed. Crude oil washing had a number of major advantages. The solvent action of
the crude oil makes the cleaning process far more effective than when water is used. First, it removed
wax and sludge buildup by dissolving it into the crude oil so it could be pumped ashore with the
cargo. Second, it minimized oil on board prior to ballasting and any subsequent cleaning for clean
ballast only required water rinsing to reduce oil content of the ballast to less than 15 ppm for
overboard discharge.
For Crude oil carriers, single-nozzle and twin-nozzle tank cleaning machines exist; the former type
being the most popular. Both types of machines are fixed. There are usually three or four crude oil
washing (COW) machines per cargo tank in large crude oil tankers. Normally, these are mounted at
the top of the tank but, in case there are some horizontal structural members near the bottom of the
tank creating access difficulties, it is necessary to bottom-mount one of the machines.
The nozzles deliver a powerful jet of crude oil on all tank surfaces by means of a slow spiral motion.
Single-nozzle machines are usually turbine-driven and the location of the drive units on deck ensures
that the system below deck is virtually maintenance-free.
The crude oil washing plan is an integral part of a tanker's cargo discharge plan and is monitored
throughout the unloading operation by means of stress, trim, and draft calculations, usually carried
out every hour. The COW plan needs to be approved by the staff at the discharge terminal, and
surveyors and inspectors may also ask to examine it.
Although COW machines are relatively maintenance-free, their performance must be continuously
monitored, at least through regular tank inspections, against the manufacturer's standards so that
problems can be spotted as they arise.
Crude oil washing introduces dangers due to the accumulation of explosive gases in the cargo tanks
as the cargo is offloaded.

Ship cleaning - Outside hull
Surface Hull Roughness
Marine Growth
Paint Roughness
Weld Beads
Buckling
© SAP 2009
The interactions that govern the resistance of the hull to steady forward motion usually demand the
greatest attention from the naval architect. Resistance to steady forward motion has four components:
(1) friction between the water and the hull surfaces, (2) energy expended in creating the wave system
caused by the hull, (3) energy put into eddies shed by the hull and its appendages (for example, the
rudder), and (4) resistance by the air to above-water parts of the ship.
A smooth surface is an obvious factor in reducing friction, but a surface that is smoother than
ordinary painted steel has a benefit that is trivial compared to its cost. However, marine growth on
the surface of the hull will increase the resistance which in turn can cause a significant increase of
fuel consumption.

Ship Charter - Types of Charter Agreements
Voyage charter: Charterer rents the vessel from the loading port to the
discharge port
Time Charter: The ship owner is paid on a per day basis for a certain period
of time. The ship owner is responsible for providing the crew and paying the
operating costs. The charterer is responsible for paying the voyage costs.
Bareboat charter: Charterer pays a fixed daily or monthly rate for a fixed
period of time for use of the ‘bare’ vessel
COA (Contract Of Affreightment): Quantity contract where the charterer
specifies a total volume of cargo to be carried in a specific time period and in
specific sizes
Subchartering: Chartering a vessel not directly from the ship owner, but
from a charterer
© SAP 2009
Freight contracts
There are two basic business models used when transporting crude oil. First, the owner of the crude
oil also owns the tankers and, therefore, transports crude oil in their own tanker. The second method
is to “charter” a tanker. In this model the risk of the transport is transferred partially, as, is the
absolute responsibility of the tanker owner to provide for the safety of the transport. The charterer
(crude owner) can influence the safe operation of the tanker but only through the terms of the
agreement. A completed chartering contract is called ‘charter party’.
Often, a charter is negotiated on the Spot Market (spot market: The market for immediate chartering
of a vessel. Spot contracts: Short term contracts, normally not longer than three months in duration).
Charter rates for tankers, can be even more volatile than oil prices as the pricing of crude oil
transportation services occurs in a highly competitive global tanker charter market. A broker is
usually involved in the deal and acts as an intermediary between the vessels owner and the charterer.
The charter rates on the Spot market are very volatile as shown in the following example, where an
increase between 100% to 800% within 2 months occur as the following example shows:
October 2002: Tanker freight rates in the spot market for Aframax have gone up from $10,375 per
day on September 4 to around $21,750 per day on October 25. Freight rates for Suezmax have also
gone up from $13,625 per day to $33,750 per day, while VLCCs (very large crude carriers) have
seen a spurt from $6,875 to $50,575 for the same period.
The world’s largest charterers of crude tankers in 2008 were Shell, ExxonMobil and BP, responsible
for 17% of all reported fixtures.

Incoterms, Freight cost & Risk
SELLER CARGO CUSTOMS CUSTOMS CARGO BUYER

TERMINAL TERMINAL
Free Alongside Ship (named port of shipment)
FAS
Free on Board (named port of shipment)
FOB
Cost and Freight (named port of destination)
CFR
Cost, Insurance and Freight (named port of destination)
CIF
Delivered Ex Ship (named port of destination)
DES
Delivered Ex Quay (named port of destination)
DEQ
© SAP 2008
Incoterms make international trade easier and help traders in different countries to understand one
another. Incoterms are divided into 4 groups (C,D,E,F) – differentiated by the starting letter.
Group C – Main carriage paid
CFR – Cost and Freight (named destination port)
Seller must pay the costs and freight to bring the goods to the port of destination. However, risk is
transferred to the buyer once the goods have crossed the ship's rail. Maritime transport only.
CIF – Cost, Insurance and Freight (named destination port)
Exactly the same as CFR except that the seller must in addition procure and pay for insurance for the
buyer. Maritime transport only.
CPT – Carriage Paid To (named place of destination)
The general/containerised/multimodal equivalent of CFR. The seller pays for carriage to the named
point of destination, but risk passes when the goods are handed over to the first carrier.
CIP – Carriage and Insurance Paid (To) (named place of destination)
The containerised transport/multimodal equivalent of CIF. Seller pays for carriage and insurance to
the named destination point, but risk passes when the goods are handed over to the first carrier.

Group D – Arrival
DAF – Delivered At Frontier (named place)
This term can be used when the goods are transported by rail and road. The seller pays for
transportation to the named place of delivery at the frontier. The buyer arranges for customs
clearance and pays for transportation from the frontier to his factory. The passing of risk occurs at the
frontier.
DES – Delivered Ex Ship (named port)
Where goods are delivered ex ship, the passing of risk does not occur until the ship has arrived at the
named port of destination and the goods made available for unloading to the buyer. The seller pays
the same freight and insurance costs as he would under a CIF arrangement. Unlike CFR and CIF
terms, the seller has agreed to bear not just cost, but also Risk and Title up to the arrival of the vessel
at the named port. Costs for unloading the goods and any duties, taxes, etc… are for the Buyer. A
commonly used term in shipping bulk commodities, such as coal, grain, dry chemicals and where the
seller either owns or has chartered their own vessel.
DEQ – Delivered Ex Quay (named port)
This is similar to DES, but the passing of risk does not occur until the goods have been unloaded at
the port of destination.
DDU – Delivered Duty Unpaid (named destination place)
This term means that the seller delivers the goods to the buyer to the named place of destination in
the contract of sale. The goods are not cleared for import or unloaded from any form of transport at
the place of destination. The buyer is responsible for the costs and risks for the unloading, duty and
any subsequent delivery beyond the place of destination. However, if the buyer wishes the seller to
bear cost and risks associated with the import clearance, duty, unloading and subsequent delivery
beyond the place of destination, then this all needs to be explicitly agreed upon in the contract of sale.
DDP – Delivered Duty Paid (named destination place)
This term means that the seller pays for all transportation costs and bears all risk until the goods
have been delivered and pays the duty. Also used interchangeably with the term "Free Domicile".
The most comprehensive term for the buyer. In most of the importing countries, taxes such as (but
not limited to) VAT and excises should not be considered prepaid being handled as a "refundable"
tax. Therefore VAT and excises usually are not representing a direct cost for the importer since they
will be recovered against the sales on the local (domestic) market.
Group E – Departure
EXW – Ex Works (named place)
The seller makes the goods available at his premises. The buyer is responsible for all charges.
This term may be the easiest to administer, however may not be in the seller's best interests. There is
no control over the final destination of the goods. It may be possible for the seller to negotiate better
freight rates than the buyer. A vehicle arriving to take delivery of the seller's goods under EXW may
not be suitable for carriage.

Group F – Main carriage unpaid
FCA – Free Carrier (named place)
The seller hands over the goods, cleared for export, into the custody of the first carrier (named by the
buyer) at the named place. This term is suitable for all modes of transport, including carriage by air,
rail, road, and containerised / multi-modal transport.
FAS – Free Alongside Ship (named loading port)
The seller must place the goods alongside the ship at the named port. The seller must clear the goods
for export; this changed in the 2000 version of the Incoterms. Suitable for maritime transport only.
FOB – Free on board (named loading port)
The classic maritime trade term. The seller must load the goods on board the ship nominated by the
buyer, cost and risk being divided at ship's rail. The seller must clear the goods for export. Maritime
transport only. It also includes Air transport when the seller is not able to export the goods on the
schedule time mentioned in the letter of credit. In this case the seller allows a deduction of sum
equivalent to the carriage by ship from the air carriage.

Freight rate: Worldscale
VOYAGE REVENUE - VOYAGE COSTS

DAILY HIRE =
VOYAGE ELAPSED TIME
[ (US$/MT)
WS100
] Cargo Qty.
* (MT) + [Port + Fuel + Canal Costs]
DAILY HIRE =
Round Trip Miles / Speed / 24
© SAP 2009
"Worldscale" refers to the "New Worldwide Tanker Nominal Freight Scale". The tanker industry
uses the ‘Worldscale’ freight rates index as a more convenient way of negotiating the freight rate per
barrel of oil on many different routes. The index is also devised to allow comparison of freight rates
for various size tanker routes. The method is copy righted and the index is jointly sponsored and
issued by Worldscale Association (London) Limited and Worldscale Association (NYC) Inc.
(together, the "Worldscale Association").

Freight rate: Worldscale - Standard Vessel
used for calculation
Total capacity 75,000
Average service speed 14,5 knots
Bunker consumption
Steaming 55 tonnes per day
Other 100 tonnes per round voyage
In port 5 tonnes per port
Grade of fuel oin 380 cst
Port time 4 days from one loading port to one discharging port
Fixed hire element 12,000 US$
Bunker price 116,75 US$ per tonne
Port costs Most recent available
Canal transit time 30 hours per Suez transit,
24 hours per Panama Canal transit
© SAP 2009
The concept was developed during the Second World War when the British Government introduced a
schedule of official freight rates as a basis for paying the owners of requisitioned tankers. The
schedule showed the round trip cost of transporting a cargo of oil on each of the main routes using a
standard size tanker. The rates were calculated so that, after allowing for port costs, bunker costs and
canal expenses, the net daily revenue was the same for all voyages. Owners were paid the rate shown
in the schedule or some fraction of it. The system was adopted by the tanker industry after the war
and has been progressively revised over the years, the last amendment being done in January 1989
when the 'New Worldscale' was introduced. However, the epithet "new" was soon dropped and now
it is generally understood that "Worldscale" refers to the new scale, while the previous scale is called
"Old Worldscale.
The calculation of the Worldscale rate is based on a standard vessel with a carrying capacity of
75,000 tons and a daily hire element of $12,000. Additional cost such as fuel consumption and port
cost are include in the calculation as well as average port time and Canal transit time.

Freight Rate: Worldscale - Example
Tanker Freight
Calculation Example
Worldscale level Tanker class LR2 85%

Flat rate (WS 100) Ras Tanura - Rotterdam 4.65 $/t
Actual rate 4.65 * 85/100 3.95 $/t
Total freight 250,000 t * 3.85$/t $987,500.00
Spot rates will vary in the market as driven by the forces of tonnage supply and
demand
Spot rates are typically quoted as a percentage premium or discount of the
published rate or WS100 rate
Therefore a LR2 of WS 85 is 85% of the WS100 rate
Similarly a Suezmaxrate of WS 125 is 125% of the WS100 rate
© SAP 2008
As mentioned above, the Worldscale system makes it easier for shipowners and charterers to
compare the earnings of their vessels on different routes. Here an example: a tanker is an available
spot and the owner agrees a rate of Worldscale 85 for a voyage from Ras Tanura to Rotterdam. To
calculate how much money he will earn he first looks up the rate per metric ton for Worldscale 100
from Rotterdam to Ras Tanura. Consulting the appropriate entry he finds that it is $4.65 per metric
tone. Since he has settled at Worldscale 85 he will receive 85% of this amount, i.e. $3.95 per metric
ton. If his ship carries 250,000 metric tons, the revenue from the voyage will be $987,500.00. It is an
equally simple matter to make the same calculation for a voyage to Japan.
The Worldscale system is used almost exclusively by crude oil tanker brokers in calculating voyage
rates for spot cargoes. There is no upper limit for the fixture of the rates on the spot market. The
lower limit is set by ship owner’s variable voyage costs. There are lower levels for bigger ships
(economies of scale) and for dirty versus clean ships (capital & operating costs). Longer journeys are
cheaper per mile.

AFRA Tanker Classes
Tanker sizes and

categories:
Category (AFRA) Size Range DWT (tons

deadweight)
Ultra Large Crude Carrier ULCC 320,000 +
Very Large Crude Carrier VLCC 150,000 – 319,999
Large Range 2 LR2 90,000 – 149,999
Large Range 1 LR1 45,000 – 89,999
Medium Range MR 25,000 – 44,999
General Purpose GP 16,500 - 24,999

Coastal, Small, Harbor/Inland Barge, Coaster < 16,500
Waterway Tankers
© SAP 2009
The AFRA (Average Freight Rate Assessment) system is a freight assessment system which is
composed of the weighted average of independently owned tanker tonnage. The system was
developed in 1954 by one of the oil majors (Shell Oil) as an indicator of freighting values for its
affiliated companies. AFRA results have been published by the London Tanker Brokers' Panel
continuously since 1954. The system classifies tankers of five different deadweight groups.
Shell and BP, the first companies to use the system, abandoned the AFRA system in 1983, later
followed by the US oil companies. However, the system is still used today. Besides that, there is the
flexible market scale that takes typical routes and lots of 500,000 barrels.
AFRA can also be relevant to the calculation of demurrage for tankers. For example, if a ship was
nominated to load an oil cargo at a certain day, the appropriate rate of demurrage is determined by
applying the AFRA appropriate to the size of vessel and to the date of presentation of the NOR
(Notice of Readiness). In our example the AFRA rate would be 103.7 % at that date. This figure is
used as a multiplier to be applied to the appropriate demurrage rate in the Worldscale demurrage
table.
AFRA results are published on the first business day of each month and cover six deadweight
groups: Medium range, Large range 1, Large range 2, Very large crude carrier, Ultra large crude
carrier
y In each of the groups, tonnage is divided into three categories:

- Long term charters
- Short term charters
- Single voyage charters

Laytime & Demurrage
Laytime Calculation
Laytime is the time period during which a vessel is at a port or berth
Agreement on allowed laytime is stored in the freight contract
Events (such as bad weather, breakdown of equipment) can subtract
or add time.
Demurrage Calculation
Demurrage is the contractually agreed penalty for exceeding the
laydays. Usually the the demurrage rate is negotiated as a portion of
the Worldscale rate.
The demurrage fee is calculated with the actual laytime based on the
formula: Demurrage costs = net demurrage time X net demurrage
rate X demurrage factor.
© SAP 2009
Laytime and Demurrage Calculation

y Laytime is the time period during which a vessel is at a port or berth. Demurrage is the
contractually agreed penalty that is due when a vessel remains too long at a location during load or
discharge operations. It is paid by the charterer to the ship owner.
Laytime Calculation
y The laytime calculation is a function that uses the laytime agreement from freight contracts and the
specific laytime events saved in the carrier nomination. In the freight contract you maintain
information about the allowed laytime of a vessel during loading, discharging, or lightering.
Potential laytime is calculated based on the nominated quantity and the expected pump rate which
can be achieved by the ship or at the assigned berth.
The system uses the formula:
Laytime potentially subject to demurrage = Total laytime incurred - (allowed laytime + excludable
delays).
Demurrage Calculation
y Demurrage is the contractually agreed penalty for exceeding the laydays. Usually the the
demurrage rate is negotiated as a portion of the Worldscale rate.
The demurrage fee is calculated with the actual laytime based on the formula: Demurrage costs = net
demurrage time X net demurrage rate X demurrage factor.´

Ship Vetting
The process of selecting a ship

In-depth assessment of a ship’s quality and suitability for a task
Established in the late 1980s and early 1990 because of need to
properly manage risk
Because shippers are now liable for damage when a petroleum spill
occurred
The risks from using substandard ships include:
Undue delays and costs while the ship is inspected in port
Falling foul of regulators
Rising insurance costs
Casualties - from delays through to total loss – which carry severe
commercial, human and environmental Costs
© SAP 2009
Oil disasters such as the Exxon Valdez in 1989 and the Prestige in 2002 have forced charterers to
exercise extreme caution in hiring only the most modern and well-maintained vessels to trade within
U.S. waters. The process of selecting a ship is called ‘Ship Vetting’ which basically is an in-depth
assessment of a ship’s quality and suitability for a task. If a ship cannot pass the vetting process, it
will not be hired to transport cargo. The vetting process was established in the late 1980s and early
1990s, when it became apparent to major shippers of crude, petroleum products, that many ships
were not operated or maintained in the proper manner. As environmental laws were set in place,
shippers also realized they could be liable for damage if a petroleum spill occurred. As a
consequence, they began a program of vetting and rigorous inspection. In this process the available
vessels are matched to the operational requirements of the Voyages and the need to properly manage
risk.
The risks from using substandard ships include:
y Undue delays and costs while the ship is inspected in port
y Falling foul of regulators
y Rising insurance costs
y Casualties –from delays to total loss - which carry severe commercial, human and environmental
Costs.
Today marine industry operators cannot afford to take these risks, either deliberately or through lack
of information.

Approaching a Harbor (1)
Vessel contacts harbor authorities or coast guard several days before arrival
Provide information about the tanker, the crew, and the cargo
Determine whether the ship is allowed to enter the harbor
Transmission of ETA (Estimated Time of Arrival) to the different parties (for
example, pilots, tug boats). Local agent is involved to communicate with the
different parties
One day before the port is reached, the tanker starts to slow down
Safety checks of the navigation systems, steering equipment, and engine
Fuel switching to a cleaner fuel is started
Depending on the weather conditions and the berth availability, tanker may
be diverted to a preliminary anchorage location until the conditions for
berthing are right
© SAP 2009
As described in some earlier sections, the process of loading and unloading is very risky and small
mistakes can lead to major disasters, such as explosions or oil spills. Therefore, this process is very
much standardized and a sequence of steps has been established, which all involved parties need to
follow. The times given in the below sequence vary depending on the local regulations.
1) At some point before the ship arrives at the port (3 to 4 days) she must contact harbor authorities
or coast guard and provide information about the tanker, the crew and the cargo. This data is used to
determine if the ship is allowed to enter the harbor.
2) As the approach to the port continues, the Estimated Time of Arrival (ETA) is transmitted to the
different parties who are involved in the loading/offloading process (for example, pilots, tug boats).
Usually, a local agent is involved who communicates with the different parties.
3) About 1 day before the port is reached, the tanker starts to slow down from operational speed of
15 to 20 knots to about 12 knots. Safety checks of the navigation systems, steering equipment, and
engine are executed and if required from the port, the fuel switching to a cleaner fuel is started.
4) Depending on the weather conditions and the berth availability, it may not be possible to dock the
tanker upon her arrival at the berth. In this case the Vessel will be diverted to a preliminary
anchorage location until the conditions are right.
5) In many harbors, it is required to take a pilot on board as the ship has approached to a certain
distance from the harbor (for example, 5 miles). By then, the tanker has slowed down to about 5
knots and will be operated at speeds between 3 – 5 knot when entering the harbor. The pilot advises
the Captain on how to navigate to safely reach the harbor. Pilots stay continuously in service during
the whole period from boarding the ship to fastening at the Berth. If the mooring operation gets
delayed, the pilots will be replaced after 72 hours.

Approaching a harbor (2)
Boarding of pilot
Assignment of tug boats
Inspectors inspect the tanker and review the crew

Ship is ‘cleared’ after successful inspection
© SAP 2009
6) Together with the pilot service, tug boats are assigned to the tanker and escort her as she
approaches the harbor. Depending on the harbor conditions, up to 4 tug boats are involved in pulling
and pushing the tanker alongside to the berth.
7) Once the vessel is moored, inspectors will board the ship to inspect the tanker and review the
crew. After successful inspection the ship is ‘cleared’ and the preparation of the cargo transfer
(load/discharge) is started.
8) A critical part of the process follows immediately after the ship has been cleared as several groups
(crew, berth personnel) need to interact and conduct their tasks simultaneously.
An example sequence is provided on next figure.

Cargo Transfer Operations
Placeoil spill boom around the tanker.

Sample and measure the cargo.
Conference of ship officer with terminal personnel to discuss the transfer plan
and emergency procedures. Sign documents to indicate mutual understanding
of all the procedures.
Connect transfer arms to the tanker’s pipe manifolds.
If required, load low sulfur fuel, into the tankers fuel tanks for use during cargo
operations.
Safety inspection of tanker conducted by senior officer of the tanker and
terminal personnel to assure the tanker is ready to transfer cargo.
Safety inspections by various other agencies are conducted in parallel, for
example, Fire Department, Environmental Officials, Office of Oil Spill,
Prevention and Response, and the Coast Guard.
© SAP 2009
When all the above listed activities are completed, the transfer of the cargo will begin. The cargo
transfer time will vary depending on the size of the tanker’s pumps and it typically takes around a
day. Even though the tanker size varies significantly, it is usually the capacity of the pumps which
are limiting factors in the load/discharge process. To assure the operation is proceeding according to
the plan without any incidents, the process is monitored closely by the involved parties as described
in the next section. After the cargo transfer is completed, cargo tanks will be inspected, documents
will be signed and exchanged, and cargo transfer arms will be removed.
At a prearranged time, the pilot will board the tanker, and tugs will arrive to assist the tanker during
her departure from the port. After the ship leaves the dock, it proceeds out the shipping channel,
dismisses the tugs, disembarks the pilot, and proceeds to her discharge port or her next loading port.

Disasters - Accidents
15
10
08
20
14
16
18 17
12 13
09
03
01 06
2
11
4
19
Source: Cedre, ITOPF

1 ~ 800,000 t 26 January 1991 Kuwait Gulf War 11 115,000 t 19 December 1972 Gulf of Oman Oil tanker Sea Star
2 ~ 500,000 t 3 June 1979 Gulf of Mexico Offshore weil IXTOC 1 12 103,000 t 23 February 1980 Greece Oil tanker Irenes Serenade
3 299,000 t 2 March 1992 Uzbekistan Fergana well 13 101,000 t 13 May 1976 Galicia, Spain Oil tanker Urquiola
4 276,000 t 19 July 1979 Tobago,Caribbean Oil tanker Atlantic Express 14 84,500 t 5 January 1993 Shetland Islands, Great Britain Oil tanker Braer
5 260,000 t 28 May 1991 Angola Oil tanker ABT Summer 15 73,000 t 15 February 1996 Wales, Great Britain Oil tanker Sea Empress
6 250,000 t 4 February 1983 Iran Nowruz offshore wells 16 67,000 t 3 December 1992 Galicia, Spain Oil tanker Aegean Sea
7 250,000 t 5 August 1983 South Africa Oil tanker C astillo de Belver 17 64,000 t 13 November 2002 Galicia, Spain Oil tanker Prestige
8 227,000 t 16 March 1978 Brittany, France Oil tanker Amaco Cadiz 18 40,000 t 24 March 1989 Alaska, USA Oil tanker Exxon Valdez
9 144,000 t 11 April 1991 Genoa, Italy Oil tanker Haven 19 27,000 t 27 July 2003 Pakistan Oil tanker Tasman Spirit
10 121,000 t 18 March 1967 Wales, Great Britain Oil tanker Torrey Canyon 20 20,000 t 12 December 1999 Bay of Biscay, France Oil tanker Erika
modified after www.black-tides.com

-
© SAP 2009
The three largest oil spills were caused by oil wells, either as accidents or war activities. All others of
the top 20 oil spills, however, were caused by tanker accidents.

Disasters - Who is Responsible?
Departure from Russia

English Insurer
Swiss charter
American classification
society Greek Captain
Shipwrecked in Spain
Greek Ship Owner Japanese Ship builder
Bahamian flag
* * Filipino crew
Liberian Ship Owner Destination: Singapore

Who is
responsible?
modified after www.black-tides.com

-
© SAP 2009
The Prestige was a 25-year-old, single-hulled tanker when it was damaged by a storm in November
2002. With the deadweithght tonnage of about 81,000 tons, it is an Aframax class tanker. It was
carrying nearly double the amount of oil as the Exxon Valdez. The tanker broke apart and sunk to the
bottom of the ocean without immediately spilling all the oil. Only the content of one of the twelve
tanks was spilled immediately, and more than 70,000 tons of fuel oil remained trapped in its cargo
holds, but leaked out in the subsequent years until the majority the remaining oil had been removed
by 2004. A report by the Galicia-based Barrie de la Maza economic institute estimated the cost of the
clean-up to the Galician coast alone at €2.5 billion. The clean-up of the Exxon Valdez cost USD 3
billion.
Current international law requires that all single-hulled tankers built after 1973 must be withdrawn
by 2015 (single-hulled tankers built before 1973 are no longer allowed)
Parties involved in a marine voyage:
y Seafarers
y Ship owners and Managers
y Shipbuilders
y Classification Societies
y Underwriters
y P&I Clubs
y IMO and ILO
y Flag State Administrations
y Port State Administrations
y Charterers and Traders

Ship Scrapping
© SAP 2009
When a tanker grows old and is no longer in service there is not much that can be done with such a
giant. However, it is a huge pile of Metal and therefore the last time a tanker is sold, its price is
usually negotiated based on the market price for scrap metal and the weight of the ship. The process
of taking the ship apart is called scrapping. This is usually done in ‘low salary’ countries such as
India and Bangladesh. The vessel an be moved during high tide onto a tidal flat and worked on
during low tide. Another method is to tie the ship to a dock and take her down piece by piece while
swimming.
The disposal costs for the hazardous waste onboard a 37,500 LDT Very Large Crude Carrier
(VLCC) have been estimated at 615,000 - 750,000 USD

Discussion
1) During the wars in the middle east oiltankers were target of attacks
Discuss:
How vulnerable is an oil tanker compared to other cargo ships?
What happens if a tanker is struck by a missile?
2) What is the relationship between Laytime and Demurrage?
© SAP 2008

Tanker Disasters
In 1986, Sea Wise Giant was

targeted by Iraqi jets while sailing
the Hormuz Straits. The Jets fired
several Exocet missiles into her
hull (one missile is estimated to
cost more than 250,000 $ US)
In total, 55 of the 239 petroleum

tankers (23 percent) were
completely sunk or declared CTL
(constructive total loss), compared
to 39 percent of bulk carriers and
34 percent of freighters
© SAP 2009

Pipeline - Transport Cost
3%
4%
Cost
Pipelines
Freight 25%
Moved Water Carriers
Motor Carriers
Less Railroads
More Than 2%
Than
17% 68%
Percentage of ton miles reported,

AOPLShift
Report, 2006
© SAP 2009
Pipelines are the mode of transportation that makes the oil market work. Generally, pipelines are the
most economical way to transport large quantities of oil or natural gas over land. Compared to
railroad or truck, they have lower cost per unit and higher capacity. Pipelines appear quite rarely as
isolated devices, in fact they are usually combined to complex and carefully choreographed pipeline
networks to move the raw materials (mainly crude oils) from where they are produced to where they
are processed, and finally the refined products from where they are processed to where they are
distributed for consumption. Oil or gas transported in pipelines can surmount enormous distances
before it comes to the consumer. For example, crude oil or refined products from the Middle East
arriving in the U.S. have already traveled more than 10,000 miles (16,000 km) and may be shipped
thousands of miles more across the North American continent. Each part of the journey of oil or gas
from the producing well to the consumer involves a special set of players.
Why are pipelines so important? In the U.S., the development of its vast pipeline system for
transporting oil and gas was a reaction of some events in World War II. At this time, the East Coast
was the largest consuming region in the U.S. and it relied on tanker shipments to supply its regional
refineries and to move refined petroleum products from the U.S. Gulf Coast. Once the U.S. was
involved in the war, German submarines started sinking tankers along the Gulf and Atlantic Coast
and in the Caribbean, which disrupted the flow of oil in the U.S. In a joint industry-government
effort, an alternative mode of transportation was found long distance, large diameter pipelines.
The invention of pipeline networks explicitly changed the organization of the petroleum industry and
simultaneously fueled the post-war economic boom in the U.S. The United States has the largest
network of oil pipelines of any nation. All of Europe, for instance, has a pipeline network that is only
1/10 the size of the U.S. network. Oil pipelines transport roughly two-thirds of the petroleum shipped
in the United States. They deliver over 14 billion barrels (more than 600 billion gallons or 2,270
billion liters) of petroleum per year. Because many volumes are shipped more than once (as crude oil

and then again as refined product, for instance), these annual pipeline shipments are equal to more
than twice the actual U.S. consumption of oil.
One reason for the low transportation cost of petroleum pipelines is that they depend on a relatively
small workforce of about 10,000. In the United States, oil pipelines transport 17% of all U.S. freight,
but freight costs are only 2% of the total bill. The cost to transport a barrel of petroleum products
from Houston to the New York harbor is about $1, or about 2 1/2 ¢ per gallon at the gasoline station.

Pipeline Network
Local distribution lines

Underground storage
Natural gas transmission line
Storage
Gas
facilities
Plant
Industrial users
LPG
distribution
Oil and Gas

Gathering lines
Gathering stations
Oil products line Product
terminals
Crude oil trunk line

Refining center
© SAP 2009
The value chain of both oil and natural gas begins in the oil patch, where oil and gas are extracted
from the underground reservoirs. Sometimes oil and gas are extracted as mixed streams. If this is the
case, field separators at the well site have to segregate it into oil and gas. After segregation, the two
commodities are treated separately from that point.
In general, pipelines can be classified in three categories depending on their purpose:
Gathering pipelines
A group of smaller interconnected pipelines forming complex networks. Its purpose is to bring crude
oil or natural gas from several wells nearby to a processing facility. Gathering pipelines are usually
short (about a couple of hundred meters) and with small diameters. Sub-sea pipelines for collecting
products from off shore production platforms are also considered gathering pipelines.
Transportation pipelines
Long pipes with large diameters that move oil, gas or refined products between cities, countries, or
continents. Transportation pipelines are part of transportation networks which include several
compressor stations (in gas lines) or pump stations (for crude or multi-products pipelines).
Distribution pipelines
In general, a composition of several interconnected pipelines with small diameters, used to take the
products to the final consumer. For instance feeder lines to distribute gas to homes and businesses
downstream or pipelines at terminals for distributing products to tanks and storage facilities.

Pipeline
Initial Injection Compressor / Final Delivery

Station Pump Station Station
Partial Delivery Block Wave

Station Station
© SAP 2009
Pipeline networks are a composition of several parts of equipment that have to operate closely
together to transport its content from location to location. The main elements of a pipeline network
are:
Initial injection station
The beginning of a pipeline system is the supply or inlet station where the product is injected into the
line. At the location of the initial injection station storage facilities, there are usually pumps or
compressors.
Compressor/pump stations
There are 2 main factors that cause a decrease of the flow rate from the start to the end point in the
pipeline. The factors are friction and gravity. Friction is caused by the liquid itself, as the atoms are
cohesive between each other and adhesive to the surface of the pipe. Gravity is an external impact
added by the relief of the landscape the pipeline is going through. To keep the flow on constant rates,
pumps (for liquid pipelines) and compressors (for gas pipelines) are located along the line at 20 to
100 mile intervals to move the product through the pipeline. Where these stations are located
depends on the topography of the terrain, the type of product being transported, or other operational
conditions of the network. Oil is generally propelled through pipelines by centrifugal pumps. Most
pumps are driven by electric motors, although diesel engines or gas turbines may also be used.

Partial delivery station
Also called an intermediate station, this facility allows the pipeline operator to deliver part of the
product being transported.
Block valve station
Valves are necessary for the protection and maintenance of pipelines. With these valves, the operator
can isolate any segment of the line for maintenance work, to isolate a rupture or leak for instance.
Even though it is not a design rule, in liquid pipeline block valve stations are usually located every
20 to 30 miles (32 to 48 km). The location of these stations depends on the nature of the product
being transported, the trajectory of the pipeline and/or the operational conditions of the line. A
special type of valve station is a regulator station, where the operator can release some of the
pressure from the line. They are usually located at the downhill side of a peak.
Final delivery station
The end of a pipeline is also called an outlet station or terminal. It is the location where the
transported product will be distributed to the consumer. It could be, for example, a tank terminal for
liquid products or a connection to a distribution network for gas products.
Oil moves through pipelines at speeds of 3 to 8 miles per hour. Pipeline transport speed is dependent
upon the diameter of the pipe, the pressure under which the oil is being transported, and other factors
such as the topography of the terrain and the viscosity of the oil being transported. At 3-8 mph it
takes 14 to 22 days to move oil from Houston, Texas to New York City.

Influencing Parameters in Pipeline
Transportation: API Gravity
Gasoline = 55°API
< 10°API
H2O = 10°API > 10° API
Sink
-> Float on water
Asphalt = 5-10°API
High API
Gravity
Crude
> 25°API
Low API
Gravity
Crude
< 25°API
Low API Gravity Crude has a higher density than crude with high API gravity
© SAP 2009
The petroleum industry has developed its own measure of density which is called API. API is the
acronym of the American Petroleum Institute, which established this measure. API gravity is
expressed in degrees API (ºAPI). Water has API 10. The larger the number, the lighter the material is
API > 10 will float on water API < 10 will sink. The API was introduced for practical reasons as it
leads to better readable scales on hygrometers. The API gravity is calculated from a formula that
involves the specific gravity (SG) and two constants. The constants were derived empirically. API
gravity = 141.5/SG minus 131.5
Crude oils can be classified as follows:
y Extra-light crudes (condensates): greater than 45 ºAPI
y Light crudes: between 33 and 45 ºAPI;
y Medium crudes: between 10 and 22 ºAPI
y Extra-heavy crudes: less than 10 ºAPI
There are organizations such as the American Petroleum Institute (API) that have developed
sophisticated formulas for the conversion of natural gas and petroleum liquids to standard conditions.

Transportation: Viscosity
Low viscosity Medium viscosity High viscosity High pour point

Gasoline Fuel oil Heavy crude oil Asphalt
© SAP 2009
Petroleum liquids are a mixture of carbohydrate chains of varying lengths. The longer the chains, the
more the tendency of the molecules to stick to each other which in turn results in a higher viscosity.
The higher the viscosity, the more energy it takes to move the fluid because of the internal resistance.
In general, heavy crude oils (low API gravity) are more viscous than the lighter fuels (high API
gravity) as shown in the figure.
As temperatures drop, liquids can get more and more viscous and cease to flow. This happens when
they reach their ‘pour point’. A highly viscous heavy crude oil in a northern country such as Canada
can reach its pour point during winter. It would be impossible to pump it out of its tank.

Transportation: Vapor Pressure
© SAP 2009
Vapor pressure is used to describe the affinity of a liquid to release molecules from its surface into to
gaseous stage at specific temperature/pressure conditions. This is different to boiling, where
molecules anywhere in the liquid can vaporize. Vapor pressure is an important consideration in both
natural gas and oil pipelines for different reasons. Even though natural gas primarily consists of one
type of molecule – methane, other molecules such as ethane, butane, propane and water are often
present in small percentages. When the vapor pressure of these heavier molecules is exceeded by the
combination of natural gas pipeline operating temperatures and pressures, they turn to liquids. These
liquids can damage compressors and other equipment or at least block the flow.
When line pressure in oil pipelines drops below the vapor pressure of the fluid, bubbles form. The
increasing the pressure when passing through a pump, causes the bubbles to suddenly collapse back
into liquids. This effect is called cavitation and can damage the pump. Another impact can be
observed when the line pressure drops below vapor pressure and gas accumulates to a certain
amount. The vapor can expand and reduce the viscosity of the liquid in such a way when passing
through meters and other equipment; they operate faster than maximum operation speed and get
damaged.
Furthermore, a phenomenon which is called ‘pulling apart the pipe’ occurs when the pressure in a
fluid pipe drops below the vapor pressure. The gas released in small bubbles within the liquid
increases the volume of the batch (by reducing the density) and more volume has to be pumped out
than it was being pumped in to get the equivalent volume. The pulling apart could happen after the
fluid has been moved up a hill and than rapidly goes down on the other side due to gravity. To
prevent this, pipelines are built in loops (see picture) as they go down a hill slope to increase the
friction.

Crude Oil Pipeline
Refinery
Gathering
Stations
Oil&Gas
gathering lines
r
nk o ne
u i Refinery
Tr in L
Ma
Tanker Import
Port
© SAP 2009
Oil and natural gas pipelines look essentially the same, obey the same form of physics and provide
the same service. By and large, they are installed in the same manner, are administered under the
same regulatory and face the same social difficulties. But nonetheless they are not the same. Various
differentiations are possible:
y oil pipelines versus natural gas pipelines

y crude oil pipelines versus refined products pipelines
y crude oil gathering lines versus crude oil main lines
y natural gas gathering lines versus natural gas transmission lines versus local distribution lines
Crude oil gathering lines are normally made from 2-inch to 12-inch (ca. 5 to 30 cm) pipe. They
connect a battery of smaller tanks in the production field with the collection of larger storage tanks in
the gathering station.
In general, gathering stations aggregate crude oil from many sources. When the gathering station is
located adjacent to a crude oil mainline (also called trunk line) the crude oil can be injected into the
continuous flow of crude oil as it goes past. When the injected crude oil is sufficiently different from
the passing flow, the pipeline can be stopped upstream of the gathering station, so that the volume of
differing crude oil can be pumped in as a separate batch. The batch is then tracked as it moves down
the pipeline until it is delivered to its customer or into segregated tanks at the destination. Generally,
the trunk system operates in “fungible” mode: the shipper receives the same quality of product that it
tendered for transport, but not the same molecules, while the delivering line operates in “batch”
mode: the shipper receives the same molecules that it tendered for shipment. Trunk lines usually
have a diameter of 8 - 24 inches (20 - 60 cm)

Finished Product Pipeline
Refinery
Regional Hubs
&
Distribution
Terminals
Refinery
© SAP 2009
The value chain of refined products pipelines begins at refineries and ends at petroleum products
terminals, which is a collection of large tanks located along the pipeline near consumers. From the
terminal, the petroleum products move to retail outlets or commercial and industrial consumers in
tank trucks. Many products with different specifications must be transported to the different receiver
locations, which all have to go through the same pipeline. How this issue is solved is described in the
next section.

Pipeline Batching
Crude Pipeline
Heavy Light Light Heavy
Light Light
High High Butane High High
sweet Sweet
sulfur Sulfur Sulfur Sulfur
Cycle Cycle
end start
Product Pipeline
Transmix that must be reworked
Compatible interfaces
Regular Midgrade Premium Midgrade Regular Jet

Diesel Diesel Diesel
Gasoline Gasoline Gasoline Gasoline Gasoline fuel
Cycle Batch Cycle

end Slug start
Cycle
© SAP 2009
Flow direction
Pipelines can be used for the transportation of multiple products as the different grades of products
move from end to end in successive batches. The most similar grades are grouped next to each other
to minimize contaminations and downgrading. One refined product or crude oil grade is injected and
begins its journey, then another, and another. A batch is a quantity of one product or grade that will
be transported before the injection of a second product or grade.
Fungible Batches: A "fungible batch" is defined as a batch of petroleum product meeting carrier's
established specifications, which may be commingled with other quantities of petroleum product
meeting the same specifications. When fungible, the products of several suppliers can be transported
in one slug through the pipeline (slug: a continuous stream of a single homogenous product within a
pipeline). Fungible products usually provide shipper with a significant degree of flexibility for.
scheduling, lifting and delivery times.
Segregated Batches: A 'segregated batch' is defined as a batch of petroleum product, which may not
be mixed with other quantities, for example, because of properties that differ from the fungible
specifications.
The pictures show the order of a typical batch sequence – above in a crude oil line and below in a
refined products line. It is a sequence of upgrading the product batches and than downgrading again.
In the crude oil line the sequence start and ends with heavy high sulfur as the lowest grade, with the
upgrading on light high sulfur, light sweet, butane and the downgrading on light sweet, high light
sulfur.
Similarly, the batches in the refined product line start and end with diesel, followed by regular
gasoline, midgrade gasoline and premium gasoline as upgrading batches and midgrade gasoline,
regular gasoline, diesel and jet fuel for downgrading.
Most multi-product pipelines begin a new cycle on a set time frame, such as ever 5, 7 or 10 days. The
multi-product lines for refined products follows a more formal sequence than the batches systems in
crude oil lines.
Where one product or type of crude butts up against the next, some mixing is inevitable. This volume
of mixed fluids is called transmix or slob and it is the schedulers role to keep it on a minimized level.
Some of the transmix can be added to one of the products:
y The interface material between two grades of gasoline normally meets the quality specifications
for the lower grade and is simply added to that tank.
y Interface between regular and midgrade gasoline goes in the regular tank; between midgrade and
premium goes into the midgrade tank.
y Interface between diesel fuel and jet fuel goes into the diesel tank.
The transmix from the gas to diesel interface, though, does not meet quality specification for either
product. It is normally pumped past intermediate terminals to the end of the pipeline, where it goes to
a transmix tank. From there, it is transported by truck or rail to a reprocessor, who separates it into
gasoline and diesel.
Making an error on cutting the batches may be quite problematic. Erring on the high side of the cut
from midgrade to regular gasoline, for instance, it not too big a deal, because it simply results in
more of the higher value product being downgraded a few cents per gallon. In contrast, mistakes in
making cuts between diesel and gasoline can spoil an entire 100,000-bbl tank. Gasoline in diesel can
result in dangerously low diesel flash point, while diesel in gasoline gives an end point too high for
efficient combustion. For this reason, some operators of pipelines still have a person physically at the
receipt location to monitor the incoming precuts and decide when to make the switch between tanks.
To track the different batches, it is important to detect the interface between the batches. In product
pipelines, the difference in fluid properties between two products may be small and interface
detectors must be quite sensitive. Densitometers have been used widely for interface detection, but
the use of the sonic pipeline interface detector was gaining acceptance in the early 1980s. Sonic
interface detectors precisely measure the velocity at which ultrasonic pulses travel over a liquid path
of known dimension. Sound velocity is a property unique to each material as is viscosity and density.
Because the sound transmission characteristics of each liquid are unique, its passage can be detected
by the sonic device. There is a general relationship between specific gravity and sound velocity for
petroleum products. The devices are sensitive enough to detect the interface between a regular
gasoline and a premium gasoline batch, even though the specific gravities of the two materials are
almost the same. In addition, compensation for temperature and pressure is required as sound
velocity is also influenced by both, besides the specific gravity of the fluid.
Batching petroleum for pipeline transport has become more complex with the proliferation of
product qualities (discussed more fully below). Colonial Pipeline, for instance, publishes
specifications for over 100 different grades of gasoline. Crude oil pipelines, too, must meet market
demands for delivering various crude types – such as high sulfur or low sulfur grades – to refineries
to align with the refineries’ schedules for producing jet fuel, asphalt, diesel, and other products and to
the refineries’ equipment. Lakehead Pipe Line's 1.3 million barrel per day system, for instance, can
contain up to 50 batches of crude oil of distinct qualities.

Pipeline Batching
A
30,000 bbl/d
10,000 bbl B
Diesel 60,000 bbl/d
60,000 bbl/d
Case 1: All diesel to Terminal B

Result: pipeline can continue to pump at its 60 kb/d maximum
Case 2: 5,000 barrels diesel each to Terminal A and Terminal B
Result: pipeline can continue to pump at 60 kb/d by stripping 30 kb/d
of the diesel off to Terminal A and sending the other 30 kb/d on to Terminal B
Case 3: All diesel to Terminal A
Result: pipeline must slow its flow down to 30 kb/d to accommodate the low
delivery rate at Terminal A. Only after the 10,000-barrel parcel has been
delivered to Terminal A can the pipeline raise its pumping rate back to 60 kb/d.
© SAP 2009
There are several scenarios discussed in the above figure on how the flow rates of material are
impacted by the maximum pump rates of the receiving or supplying terminals connected. In the
example, in ,a pipeline with a pump rate at 60 thousand barrels per day (kb/d) a batch of 10,000
barrels of diesel is sequenced between batches of gasoline. The two terminals have different
maximum pump rates:
Terminal A, maximum receiving capacity of 30 kb/d,
Terminal B, maximum capacity of 60 kb/d
Pump rate of the whole pipeline can be impacted by the pump at a single terminal, as shown in the
example with case 3

Natural Gas
Transmission
and Storage
19%
Commodity
Distribution 34%
47%
© SAP 2009
The economic analysis of the energy market forecasts a growing demand for natural gas in the
coming decades. World gas consumption is projected to more than double over the next two decades,
rising from 23% to 28% of world total primary energy demand by 2030. In the past, especially in
remote areas, the gas was of little economical use because it could not be transported easily. As a
consequence, it was flared and more recently it is reinjected into the reservoir. This way, the gas is
used to keep the pressure in the reservoir up and also it is not lost for later use. As environmentalists
think it the least offensive of the fossil fuels because of its clean-burning characteristics and smaller
impact on carbon dioxide accumulation in the atmosphere, the gas is becoming more and more
attractive as an alternative source of energy. Technologies have been developed to liquefy the gas at
the production side, which allows for easier transportation. The liquefied gas is known as NGL or
LNG (Liquefied Natural Gas). The natural gas value chain is generally described in terms of
production, processing and purification, transmission and storage, and distribution.
Natural gas pipeline networks are composed similar to oil pipelines of gathering lines and mainlines.
Different to oil however, the gas is also distributed to the end consumer via a pipeline. As we focus
on bulk transportation, the mid stream and primary distribution, the distribution to the end user is not
part of this section. In most instances, a producing well is part of a larger producing field that
consists of many, sometimes hundreds of producing wells. All of these wells need to be drained of
their production by a natural gas gathering system that collects and moves the gas to various
processing facilities. It is economical to collect gas from wellheads in this manner and deliver to a
large common processing facility rather than try to treat each individual well. A complex gathering
system can consist of thousands of miles of pipes, interconnecting the processing plant to upwards of
100 wells in the area.

Natural Gas Pipeline
Natural Gas Wells On-shore
Off-shore
Processing Plant to
Remove impurities
Transmission
Pipeline
Compressor
Stations
Underground
Storage
City Gate
Station
To Distribution Company
© SAP 2009
Most of the time, NG is found together with oil in the reservoirs, however there are also reservoirs
that contain only gas (and of course those that contain only oil). Natural gas, as it is used by
consumers, is much different from the natural gas that is brought from underground up to the
wellhead. Although the processing of natural gas is in many respects less complicated than the
processing and refining of crude oil, it is equally as necessary before its use by end users. The first
step in the production process is to separate the gas from the other hydrocarbons (crude oil) and
contaminations (sand, water). This raw gas consists of a mixture of short hydrocarbon chains such as
methane, ethane, propane, butane and pentanes. Methane, however, the shortest of the hydrocarbons
consisting of a single atom of carbon surrounded by 4 atoms of hydrogen, is the main component.
In the processing plants, the heavier components besides the methane are removed from the gas.
There are several reasons for removing the heavier hydrocarbons. Besides economic reasons, there
are also operational reasons which will be explained below:
If the heavier hydrocarbons are not removed from the natural gas, they can condense into liquids as
the move through the pipeline. These liquids will gather at geographically lower points and form a
barrier which results in inefficient pipeline operation, known as slug flow. Furthermore, the pipeline
can be completely blocked if the water freezes in winter. After the processing, the Natural Gas (CH4)
consists of approximately 94% Methane, 4% Ethane, and the remaining 2% of other gases, including
butane, carbon dioxide, nitrogen and iso-pentane.
For natural gas, pipelines are constructed of carbon steel and vary in size from 2 inches (51 mm) to
over 60 inches (1,500 mm) in diameter.
Natural Gas Transmission pipes normally have diameters between 24 and 36 inches (60 - 90cm) in
diameter. The primary function of the transmission pipeline company is to move huge amounts of
natural gas thousands of miles from producing regions to local natural gas utility delivery points.
These delivery points, called “city gate stations”, are usually owned by distribution companies,
although some are owned by transmission companies.
As the Gas travels through transmission pipelines, it is highly pressurized. To ensure that the gas
flowing through the pipeline remains pressurized and to compensate for the loss due to friction,
compression occurs periodically along the pipe. This is accomplished by compressor stations, which
are usually placed at 40 to 100-mile intervals along the pipeline. The natural gas enters the
compressor station, where it is compressed by a turbine. As fuel for the turbines, the gas itself is
usually used and there are contractual agreements with the shipper on how much of the gas is
required as fuel. In addition compressor stations usually contain some type of liquid separator, much
like those used to dehydrate natural gas during its processing. These separators consist of scrubbers
and filters that capture any liquids or undesirable particles from the natural gas in the pipeline.
After the final processing, natural gas is odorless unless mixed with a ethyl- or methyl-mercaptan
odorant. This is done where required by a regulating authority to easily detect leaks in populated
areas where the gas is consumed. Besides that, the gas is transported without additive and therefore
odorless.

LPG
Methane
Nonassociated gas Pipeline sales
c
LNG
Natural gas
Ethane Pipeline / tanker
Gas condensate d
LPG Pipeline / tanker
Associated gas Natural

Pipeline / tanker
gasoline
Stabilized
crude oil
a
b Refinery
Fig. 3.12 Oil – gas recovery scheme: (a) gas and gas condensate;
(b) oil and gas;
gas (c) vent-flare; and (d) gas processing plant
© SAP 2009
Liquefied petroleum gas (LPG) refers to the C3 and C4 hydrocarbons, propane, butane, propylene,
butylene, and the isomers of C4 compounds and their mixtures. Most commonly, the term is applied
to mixtures of Propane and Butane. LPG is gaseous under normal atmospheric conditions, but can be
liquefied by cooling and/or compression. It can be kept liquid under moderate pressure. LPG
behaves from hydraulic perspective similar to crude and refined products except for their lower
viscosity. This results in a lower pressure loss when being pumped through the pipeline. On the other
hand, LPGs are much more sensitive to pressure and temperature than crude oils due to their high
vapor pressure, their high compressibility and their low density. The high vapor pressure will result
in the ‘pulling apart effect’ described in the oil section more easy. However, as long as the pipeline
pressure stays high enough, this will not be an issue.
LPG is colorless, odorless, and heavier than air in the vapor state, it is necessary to add an artificial
odor to warn users of its presence. The most common odorant in use today is ethyl mercaptan.

Pipeline Meter Reading Systems
1. Flow Rate
2. Working Pressure
3. Operating Temperature
4. Metering Location
5. Odorant Requirement
© SAP 2009
Other than most traded liquids, oil changes volume when measure under different temperatures.
Furthermore as it is a mixture of different components, the gravity is changing. This means that 1 m³
of oil contains more molecules at 1°C than at 50°C and subsequently more energy. And as the energy
content of an combustible is the most important, it is more valuable. Therefore all commercial
transactions must be corrected by temperature and gravity. Similarly, a volume of gas has more
molecules at lower temperature and/or at higher pressure and therefore will result in more energy
when being burned. Commercial gas transactions are corrected by temperature and pressure.
Metering stations are placed periodically along interstate natural gas pipelines. These stations allow
pipeline and local distribution companies to monitor, manage, and account for the natural gas in their
pipes. Essentially, these metering stations measure the flow of gas along the pipeline, allowing
pipeline companies to track natural gas as it flows along the pipeline. Metering stations employ
specialized meters to measure the natural gas as it flows through the pipeline without impeding its
movement. In essence, the metering station is the company’s “cash register.”
Operators must be aware that batch changes are particularly important when batch interfaces pass
through pump stations.
For LPG, temperature and pressure can impose a high degree of error on the high vapor pressure
products such as the LPG’s. In the case of propane, a 10% error in temperature could effect
measurement by 1.4%, while a10% error in pressure could effect measurement by 0.3%. Due to these
characteristics, precise measurement of temperature, pressure and density are an absolute
requirement for accurate measurement.

Pipeline SCADA Systems
Main Control Room
Comm Comm
System System
Comm
System
SCADA
P P
RTU RTU
T Field T
T
Instrucments Field
Q Instrucments Q
p p
RTU
Inlet Outlet
Block value
© SAP 2009
Pipeline operations started well before the advent of computers and therefore it was humans that
made all decisions. With the rise of computer technology, control system designers have to decide
how much of the decision making should be done automatically and how much should be left up to
the controllers. Machines can make decisions quickly and consistently based on the information
given to them, while humans can introduce intuition, judgment and feeling. That, of course, can
proof sometimes positive and helpful and sometimes negative and destructive.
SCADA is the acronym for Supervisory Control and Data Acquisition. In some regard, the system
should maybe named DAASC, since data acquisition almost always has to happen before control
(but the acronym would not be as speakable as SCADA). These systems are sophisticated
communications systems that take measurements and collect data along the pipeline (usually in
metering or compressor stations and valves) and transmit the data to the centralized control station.
They are used to monitor and control processes in real time, so there is little lag time between taking
measurements along the pipeline and transmitting them to the control station. Equipment status scans
are taken every 6 to 90 seconds depending on the communication technology used in the field.
Pipelines have two peculiarities that sets their control apart from most other industries:
y Pipelines start at one point and extend to another point, that is perhaps thousands of miles away.
When something happens, controllers can not just walk over and take a look as they could in
plant. Since the geographic location of the event in the pipeline and the controller may be far
removed from another, adds a level of uncertainty and complexity to the control process. It makes
the communication part of pipeline SCADA critical to successful operation.
y Pipelines face regulations and standards by geographically and jurisdictionally overlapping

regulatory bodies. This is the reason, that the control system philosophies of any two pipelines can
be quite different.
However, for any successful controlling and monitoring process several pieces of instrumentation
have to work together. Field devices are needed to transmit the required data to a central control
station, where controllers (the people that operate the system) using computers remotely control the
pumps and other aspects of pipeline operations. Field devices consist of data gathering units and
communication systems. The instrumentation for data gathering includes flow, pressure and
temperature gauges and transmitters as well as other devices to measure the relevant data required.
These units are installed along the pipeline on injection and delivery stations, pump stations (in
liquid pipelines) or compressor stations (in gas pipelines), as well as on block valve stations.
The measured information is then gathered in local Remote Terminal Units (RTU) which transfers
the field data to the main control station in real time using a communication system, such as satellite
channels, microwave links or cellular phone connections. In the main control center the data from
multiple RTU along the pipeline is consolidated in one central database, called SCADA. On top of
the SCADA systems Advanced Pipeline Applications can be used. These software tools provide
extended functionality to perform leak detection, batch tracking in liquid lines), pig tracking,
composition tracking, predictive modeling, operator training, etc.
The information about the pipelines are continuously evalutated by both computers and operators.
Most pipelines are operated and monitored 365 days a year, 24 hours per day. In addition,
instruments return real-time information about certain specifications of the products being shipped
(the specific gravity, the flash point and the density, for instance) information that are important to
product quality maintenance.
This information allows to know exactly what is happening along the pipeline at all times, which
permits quick reactions to equipment malfunctions, leaks, or any other unusual activity along the
pipeline, as well as to monitoring load control.
Events
An important function of the control system is detecting, displaying and recording events. Events are
defined as changes to the pipeline or actions taken by an operator or by the SCADA system.
Examples for changes to the pipeline:
y Crude oil pumps begin to inject 150 bph into the pipeline.
y A gas plant ceases delivery to the pipeline, causing a loss of 150 Mcf per day.
y A compressor starts and increases pressure to 250 psi.
y A natural gas customer begins to withdraw an additional 10 Mcf per hour.
y A contractor ruptures a pipeline, causing a pressure drop.
Examples of operator-generated events are commands to:
y Start compressor to increase flow rate.

y Open a valve to begin a delivery.
y Shut down a pump to reduce rate.
y Place a remote device in maintenance mode.
Examples of systems-generated events:
y An automatic system initiatives a wide shutdown sequence.

y Files download to a tape backup device.
y A system device, like a printer or operator station, goes offline or comes back online.

Pipeline Leak detection
Aerial Patrols
Gas Sampling
Odorized Markers
Internal sensors
External sensors
Preventative Maintenance
© SAP 2009
Pipeline leaks not only lead to loss of oil, but it pollutes the environment. Therefore, leak detection is
a large element of profitability of a pipeline: Reducing lost product, cleanup cost, and associated
fines. It is important that pipeline operators quickly detect, locate, and respond to leaks of all sizes.
Almost any state has established regulations or internal policies to ensure the safety of the assets, of
the population, and of the environment where the pipelines run. Therefore, a leak detections system
is required that quickly detects leaks, identifies the location, size, and rate of the leak, but operates
with a minimum number of false alarms. In the days before the advent of computers the best control
of pipelines was physically walking along the line. Today, leak detection systems are closely
connected to SCADA systems.
The aim of any pipeline company is to meet government regulation, environmental constraints and
socials situations with a minimum of staff to run the operations, a minimum of operator training
requirements and an optimized insertion of technology and applications required to ensure
operational safety. For instance, in the State of Washington, is is mandatory for pipeline operators to
be able to detect and locate leaks of 8 % of maximum flow within 15 minutes or less.
In the extreme, natural gas leaks are greater safety hazards, while oil leaks present longer-lasting
environmental problems with extensive clean-up cost. Natural gas leaks release methane into the air
that quickly dissipates into the air because of its high vapor pressure. It something ignites the gas
cloud before it dissipates, the explosion and fire can be extensive and fatal. If the gas is not ignited,
and the leak is underground, a crater or hole may evolve in the ground at the leak site, but it usually
causes little lasting damage.
Leak detection with dogs has proved very sucessful. Dogs trained to either indicate the presence of
hydrocarbons (or specific odorants added to the gas) that passed through leaks in the pipeline and
migrated into the ground. The dogs are able to detect leaks buried as deep as twenty feet effusing
from holes so small they could not be visually detected.

Pipeline Pigs
Cleaning Pigs
© SAP 2009 Intelligent Pigs
Pipeline pigs and spheres are used for a variety of purposes in oil and natural gas pipelines.
Mechanical pigs are used for cleaning pipelines and to push water accumulations, for example, out of
a gas pipeline. In crude pipelines, wax build-ups occur from the paraffin components of the oil
during the winter period. These build-ups are blocking the flow of the pipeline and must be removed
by pigs. In addition, very sophisticated high tech pigs (smart pigs) are used today to monitor the
pipeline walls and to search for holes and corrosion spots. The pigs are equipped with sensors to scan
the pipeline walls for irregularities. The pigs are launched from pig launcher stations and travel
through the pipeline passively, being pushed as the gas or liquid moves forward. At the next station
down stream, the pigs can be removed, cleaned, and relaunched into the next segment.

Pipeline Corrosion
Erosion in a Pipeline Bacteria growth
77% of
Flow Droplets & wall loss
direction particles
Galvanic protection to prevent

Galvanic erosion on a pipeline
© SAP 2009
Corrosion in pipelines is a common phenomenon, and must be controlled effectively to prevent

pipeline leaks or structural problems. Although modern pipes are constructed of high quality steel,
this material will nevertheless corrode over time.
Inside corrosion
In natural Gas pipelines the heavier hydrocarbons and water vapor can condense into liquids as they
move through the pipeline. These liquids gather at geographically lower points and form a barrier
which results in inefficient pipeline operation the so called slug flow. Furthermore, the pipeline can
be completely blocked if the water freezes in winter. The Water collecting in low spot is also a major
cause of pipeline internal corrosion.
Outside corrosion
Moisture, soils, construction machines can cause corrosion and rusting of a pipe, after it has been
placed in the ground.
To prevent this, coatings are applied to the outside of the pipe. There are a number of different
coating techniques. In the past, pipelines were coated with specialized coal tar enamel. Today, pipes
are often protected with a fusion bond epoxy or extruded polyethylene, both of which give the pipes
a light yellow color.

Different types of corrosion can be distinguished:
Pitting corrosion: Pitting is the localized corrosion that forms pits in the metal surface, the rate of
corrosion being greater at some areas than of others. A surface finish will reduce this type of
corrosion. Pitting can also occur if the composition of the metal is not uniform
Erosion corrosion: It is the acceleration because of relative movement between a corrosive fluid and
the metal surface. All types of equipment exposed to moving fluids are subject to erosion-corrosion
in a piping system, particularly bends, valves, pumps.
Intergranular corrosion: This is a localized type of attack at the grain boundaries of a metal,
resulting in loss of strength. Grain boundary material acting as anode, is in contact was large area of
grains acting as cathode. The attack is rapid penetration deeply into the metal.
Stress corrosion: If a metal cracks when subjected to repeated tensile stresses in a corrosive
environment.
Galvanic corrosion (two-metal corrosion): Another mechanism that causes corrosion is when an
electrical current flows naturally from a pipe into the surrounding soil. This causes metal loss at the
anode (galvanic corrosion). To prevent this, cathodic protection is used, which is a technique that
involves inducing an electric current through the pipe making it work as a cathode of an
electrochemical cell. Another method is to couple the pipe with a metal that is more reactive and
takes over the role of the anode in the cirquit. This more active metal is also called a sacrificial
anode. Metals commonly used as sacrificial anode are magenesium, zinc, and aluminum.
Biocorrosion is a corrosion caused by bacteria that grow in accumulated water and solids in the
pipeline. Furthermore the bacteria can grow as biofilms, acoating on the walls of the pipe line.

Transportation - Rail & Trucks
© SAP 2009
Shippers of goods select transportation modes principally on the basis of cost and a comparison
between pipelines, trucking, rail transportation and ships shows strong economic reasons for favoring
pipelines.
Trucking
Trucking costs escalate sharply with distance, making trucking the most expensive mode of
petroleum transportation. In addition, the logistics of truck transport for high volume/long distance
shipments are so enormous that it proves to be completely impractical. Assuming each truck holds
200 barrels (8,400 gallons or 31,800 liters) and can travel 500 miles (800 km) per day, it would take
a fleet of 3,000 trucks, with one truck arriving and unloading every 2 minutes, to replace a 150,000-
barrel per day, 1,000-mile pipeline. In spite of the fact that trucks are ubiquitously available, trucking
is generally limited to short haul movements where alternatives are often unavailable. For instance,
movement between product terminals and retail outlets or consumers, and for small crude shipments
from marginal producing areas to storage points where crude is aggregated into pipeline-size
volumes for shipment to a refinery. However, despite generally being small in terms of both volume
per shipment and distance, such truck movements are essential to both the completeness and the
competitiveness of the overall oil distribution system.
Railroad
Railroad tank car costs do not rise as sharply with distance traveled, but their costs, too, remain a
multiple of pipeline and waterborne alternatives. Replacing the same 150,000-barrel per day pipeline
with a unit train of 2000-barrel tank cars would require a 75-car train to arrive and be unloaded every
day, again returning to the source empty, along separate tracks, to be refilled. Furthermore, rail
transportation is far from universally available in many regions in the world.

Questions
Questions:
What is fungible mode?
What is a batch?
What is a slob?
What is a transmix?
© SAP 2008

Transportation: Lesson Summary

© SAP 2009


Lesson 1: Refining
Lesson 3: Trading
Lesson 4: Transportation (primary distribution
© SAP 2009

Scheduling:
Business Example
Steve is Pipeline Scheduler in the Logistics and Distribution department.

He is responsible for the coordination of the movement of finished
petroleum products and crude
His duty begins with the initial transfer and ends when the
product/crude is delivered via pipeline to the final destination
He monitors and maintains schedule changes and monitors tank
inventories at the locations
He is responsible for the appropriate handling and communication of
any schedule changes resulting from changes of inventory at the
source or destination locations or of the pipeline capacity (outage,
fluctuation in pump rates)
This implies a high degree of communication (telephone, fax, telex, e-
mail), verifying contracts, provide load- / discharge data, fulfill tax and
legal reporting
© SAP 2009

Scheduling: Lesson Objectives

Describe the scheduling process of a pipeline
Describe marine scheduling
Explain a nomination
Explain how SAP functionality covers the scheduling process
© SAP 2009

S&D Transportation, Interactions
External Partners German Oil
S&D Supply & Distribution other German Oil Orgs

Publisher
Planning & Optimization Refinery Production

Authorities & Lubes Blending
Global/ Regional Head Office Trading Local Tax
Broker Local Finance

Scheduling
Vessel Owner Fuels Marketing/

Retail
Transportation
Supplier
Gas
Terminal Operations
Customer
Lubes
Service Provider Administration
Aviation
Barge-, Rail-, Truck- and Pipeline

Operator Marine
© SAP 2008
Tanker-, Barge-, Rail-, Truck- and Pipeline-Operator
Nominations, slates, programs: requirements in terms of product, volume and timing.
Service Provider
Ship Agents: tanker nominations
Cargo Inspection: quantity and quality.
Forwarding agents: customs-, import- export-clearing.
Global/Regional Head Offices sales
General guidelines, global/regional strategy.
S&D Planning
Input planning cycles: grades/volumes scheduled and nominated.
Operational constraints: turnarounds, unplanned shutdowns, capacity limitations.
S&D Trading
Slates, programs: open requirements in terms of product, volume and timing.

Spot transactions: emergency purchases,
S&D Transportation / S&D Terminal Operations
Nominations, slates, programs: requirements in terms of product, volume and timing.
S&D Administration
Movement documentation: schedule, nomination, shipment.
Claim/Service support: actual shipment data, approval of services rendered, invoice approval.
Refinery
Receives refinery run-plan for crude and feed stocks
Provides pipeline batch programs (crude & feed stocks, and finished products)
Local Tax
Tax status reporting for all movements
To ship oil or gas between the different locations independent of the mode of transport, requires a
plan for the transportation. Generating this plan is the task of a scheduler. Scheduling tasks are
different whether the schedules are generated as a carrier or as a shipper.
We start with the explanation of the scheduling process for Pipeline operators (carriers)

Carrier Scheduling
Commodity
Receive shipper 4) Proration
Distribution
Nomination
calculation
NO
1) Prepare 2) Prepare 3) Prepare System

Cycle plan Batch plan slug plan Capacity
OK
Develop
Schedule
© SAP 2009
Carrier scheduling process
Prior to using a scheduling system on a computer, manual scheduling was a very time consuming
effort and it took hours or days to set up a schedule depending on the size of the pipeline, the
frequency of events, and the length of the schedule. Consequently, schedules tended to be calculated
for only the next few days. The most difficult part to schedule a product pipeline is to decide the
order of the batches and the amount per batch. Once the schedule is established, it needs to be
updated continuously with changes to volumes and dates/times. Frequent communication with the
responsible people of operations, maintenance, terminals, connected carrier, and shippers is required.
The aim of the pipeline operation schedule is to establish the optimal sequence of injections in the
pipeline, their initial volumes and the product assigned to each to: (1) meet product demands at each
depot (2) keep inventory levels in refinery and depot tanks within the permissible range all the time;
and (3) minimize the sum of all pumping, transition, and inventory carrying costs. At the same time,
variations in size and position of slugs as they move along the pipeline as well as the evolution of
inventory levels in refinery and depot tanks have to be tracked over the time horizon.
Pipeline operators establish the batch schedules well in advance. For example, a shipper desiring to
move product from the Gulf Coast to New York Harbor knows months ahead the dates on which
Colonial will be injecting low sulfur diesel, into the line from a given location.
On a trunk line a shipper must normally ask for space on the line for a monthly volume (nomination).
Delivering lines, by their nature, have more changeable schedules; shippers can secure space on them
with a shorter lead-time, possibly even the same day. It is not uncommon for tendered volumes to
differ from nominated volumes, especially on delivering lines. These lines are closer to the end user

and must be responsive to the changing needs of shippers and their customers. Hence, the last minute
changes that are essential to the oil market balance are a routine part of pipeline operations.
The following refers to the above image:
y Cycle Plan only defines products and volumes for each cycle.
y A batch ID is assigned to each shipper/product combination
y Slug plan starts as a one-to-one relationship between batches and slugs. The scheduler sequences
the slugs and inserts buffer batches, merges or splits slugs when required. The slug plan only
establishes sequences but does not establish times
y Allocation or Proration is required when nominated volume exceeds pipeline capacity. Determine
the percentage of the required reduction and distribute over all batches (depending on
transportation contract rules)
Any request from an oil company for a transportation service on the pipeline during the next monthly
period is a transaction called nomination. A single nomination is a unique combination of shipper,
product, volume, origin and destination. Nominations initiate the scheduling process.
A cyclic scheduling process involving three stages is usually performed: the batch plan, the slug
plan, and the products pipeline schedule. Generally, pipeline operators use a recurring monthly
schedule involving cycles of 6-10 day length.
The batch plan for each cycle is found by dividing each nomination (provided by the shipper) evenly
over the number of cycles per month. In other words, a nomination will usually give rise to as many
batches of equal size as the number of monthly cycles. After completing the batch plan, the scheduler
is free to merge (or even split) batches provided they contain similar products. The slug plan starts as
a one-to-one relationship between batches and slugs. A slug identifies a continuous stream of a single
homogeneous product within the pipeline. The major attributes of a slug are both the product it
contains and its volume at the time it enters the pipeline. The scheduler sequences the slugs and can
subsequently merge and split them or insert buffer batches (“plugs”) to develop the slug plan. At any
time, one or more batches or even one or more partial batches may be contained in a slug as it moves
along the pipeline. The slug plan establishes the sequence and sizes of slugs, but not their entry times
and pumping rates. Finally, the pipeline schedule is generated for one or several cycles, depending
on the cycle duration. The basic information for the scheduling process includes the slug sequence
and the specified pumping rates. Variations in pump rates originate flow rate changes in the pipeline
stream.

S&D Scheduling, Interactions
Planning Schedule Working Schedule (cycle

(monthly nomination) nominations)
Length (days) Generally 15-45 days. This Generally the duration of one
is a long term schedule, pipeline cycle (1 to 10 days).
useful for a "birds eye view"
of the schedule for the next
month
Data Quality Much of the required data is This is a highly accurate

not known, but is estimated schedule, with all schedule
inputs known with relatively
high confidence
Involved parties Pipeline operations, Pipeline controllers, shippers,
maintenance, shippers, and terminals, and connected
connected carriers carriers
© SAP 2009
Throughout the scheduling process from generating the monthly planning schedule to the cycle
schedule, interaction between the carrier and the shippers is required. Scheduling Process in more
detail:
y Shippers provide monthly nomination midway through the preceding month.
y If nominated quantities exceed available capacity within any pipeline section, proration rules are
applied to each combination of shipper and pipeline segment, based on freight agreements, to
determine the shippers maximum total nomination segment.
y Schedulers communicate prorated volumes back to the shipper.
y If a shipper is cut back, he will designate which products to cut to meet the proration requirements
by submitting new nominations.
y Preliminary cycle plan by shipper is generated. The preliminary cycle plan divides the month into
equal periods and divides each shipper’s nomination volumes for each product equally across all
periods. Each shipper’s preliminary cycle plan is then communicated (e-mail, fax, web).
y Shippers provide comments and final approval of the plan (e-mail, fax, web, telephone).
y Schedulers complete the cycle plan.
y Schedulers complete the batch plan.

y Shippers complete the slug plan.
y Schedulers communicate the Planning Schedule to the shippers
y Schedulers obtain the connecting carrier schedules.
y Schedulers communicate the Workings Schedule to everyone concerned with operations.
y Throughout the month, schedulers generate modified schedules
y Every night at midnight, the system publishes tickets to inform shippers of the status of their
nomination/batches.
Even though pipeline and tankage maintenance events are already built into the schedule, there are
many factors which have an impact on a pipeline schedule:
y Pipeline operation interrupted or slowed down
y Number of types of product and specialty fuels (for example, ethanol, ultra-low sulfur diesel)
which limits the effective pipeline capacity
y Unplanned low inventory at pipeline and terminal tank farms because of increased demand
y Demand exceeds pipeline capacity
y Transition of different seasonal grades of products, for example, gasoline sold at a terminal is
different on different days
Pipelines in US are ‘common carriers’ by law, that is, oil pipelines cannot refuse space to any
shipper that meets their published conditions of service. If shippers nominate more volumes than
the line can carry, the pipeline operator allocates space in a non-discriminatory manner, usually on a
pro rata basis. This is often referred to in the industry as "apportionment." (Space cannot be
allocated to the highest bidder, nor on a first come, first served basis.)

Tasks of a Scheduler (Shipper Side)
Schedule volumes and manage tank inventories from receipt locations’ pipeline systems and coordinate
associated deliveries.
Resolve supply and demand exception issues to meet targeted customer service levels.
Monitor and manage customers’ imbalances and relative positions and provide analysis to shippers as per
industry timelines.
Process producer and pipeline forecasts, shipper, and pipeline nominations and trunk line schedules.
Relationships with internal operating and business groups, exchange partners, producers and other pipeline
companies
NOMINATIONS SCHEDULE
CHANGES Line Fill and Tank Data
SCADA
SCADA Snapshot
SCADA Delivery Terminals

Pump and
Delivery Terminal
Schedule by Delivery Carrier
Pipeline Schedule by
Segment Tank
Reports
Terminal
Delivery
Schedule by
PUMP ORIGINS REPORTS Time
Terminal Terminal
Refinery Batch Pump Special Delivery
Data Files Schedule by Reports Schedule by Reports
Origin Tank RVP
© SAP 2009
Shipper scheduling:
As described above, the nomination of the shipper is the starting point of the scheduling activity for
the pipeline company. Generating this nomination is the task of the scheduler in the shippers
company. It involves receiving and processing all requirements for demand and supply (volume and
type of commodity, modes of transports), and performing nomination balance calculations.
The scheduler has to include all of the following in his/her schedule:
y The product demands that are to be satisfied at every distribution terminal at the end of the
scheduling horizon
y Long term supply agreements
y Transport agreements with pipelines
y The available tanks at every depot, including the capacity and the product assigned to each one
y Maximum/minimum allowed inventory levels at refinery and depot tanks
y The scheduled production runs (product, amount and time interval) to be performed at the refinery
during the scheduling horizon
y Initial product inventories available in refinery and depot tanks
y The length of the scheduling horizon

Scheduling: Crude and Product Pipeline
Scheduling
Crude pipeline schedule must ensure the continuous flow of batches

Mistakes in scheduling lead to expensive pipeline or refinery stops
S&D Planning & Optimization
Economics and Signals
Refinery S&D Scheduling
Running Plan for Pipeline Batch

atmospheric pipe stills Program
Atmospheric Pipe tills (APS) distill crude oil into For crudes: Batch volumes are
various kinds of products. determined by the size of the crude

Running plan provides the running sequence of the storage tanks in the refinery
different crude types For products: receiving tank capacity
For crudes: planned target throughput = required determines the batch size
production of finished and semi-finished products
For products: no planned terminal throughput,
fluctuating demand, flexibility required

© SAP 2009
Inventory Projection Planning
As pre-requisite for scheduling all movements, a forward inventory projection is essential. It must
start with a real, physical opening inventory. Book inventory is used for stock projection only if there
is proof that all movements have been posted (which is usually not the case).
Crude Pipeline scheduling
The crude pipeline schedule must ensure the continuous flow of batches for all partners. The refinery
tank must provide enough space when the next batch arrives, otherwise the whole transport on
pipeline can be stalled. The storage into the tank must be completed before the crude is run to the
pipe still. Mistakes in scheduling lead to expensive pipeline or refinery stops, or force you at least
into emergency transactions.
Product Pipeline Scheduling
The product pipeline schedule is driven by the demand of the receiving distribution terminal. It
follows the same principle as explained for crude: the receiving tank capacity determines the batch
size. However, there is no planned terminal throughput, instead there is fluctuating demand. This
requires some flexibility of the schedules of all partners, that is, a broader delivery window.
Pipeline Batch Program
Batch delivery requests are nominated for crude, feed stocks, and finished products. Each pipeline
operator has a standard format for a batch request (nomination). The usually required information

includes: batch number, product grade, batch volume, date & time of earliest arrival, date & time of
latest completion of batch delivery. The pipeline operator assigns a unique batch ID to each
nomination. This gives most flexibility to the pipeline operator for the whole schedule for all
partners. Some pipelines request an arrival range only, for example, 3 days. This means that a batch
must be delivered completely within this range.
The pipeline operator sets up the overall pipeline program and provides each receiver with the actual
pumping start date and time and the pumping end date and time.
The required volumes are; from stock in the pipeline terminal, volumes in transit at sea under the
consideration of the related arrival date, and finally the requested (but not yet covered) grades and
volumes. The typical pipeline batch program covers 8 – 12 weeks with weekly, or spot emergency
updates.
Due to the complexity, schedulers use scheduling tools (spreadsheet stock projections, what if
simulation…) and automated program submission (auto Fax, flat file, EDI).

Trader
Supply Push Demand
Acquire/Trade Transport Refine Store/Distribute Market
Supply Pull Demand

Scheduler
Producer Customer
Supplier Terminals
Exchange partner Exchange partner
Terminals
© SAP 2009
The scheduling process as described before looks straight forward. However, there is additional
interaction based on economic drivers that influence the scheduling process. Depending on the
company’s philosophy, this interaction is driven more by pull or by push or any combination of the
two. The pull scenario is driven by the demand of the customers (exchange partners, customers at
terminals) at the end of the commercial process. The supply requirements are coordinated
accordingly and the trade department only negotiates trades that fill the gaps between own
production of crude and production capacity of their own refineries and the demand at the terminals.
Schedulers request the deals from the trader. The push process, on the other hand, is driven by the
traders who negotiate deals based on profitability considerations and they request schedulers to
accommodate the schedules accordingly.

Marine scheduling
Nomination
Feedback • Laytime calculation

• Demurrage calculation
Vessel arriving: ETA: • Measurement comparison
•Nomination • Berth Planning Board
•Vessel characteristics
• Worklist
•ETA/ETD
4 days •... • Display
Nomination Feedback
1 day
Few hours
Feedback Port
(or lightering location)
Terminal 1 Terminal 2 Terminal n
Facility 1 Facility 2 Facility n
Berth scheduling
Berth 1 Berth 2 Berth n Berth 99
Compatibility Check for conflicts
Marine Scheduling:
Vessel departing:
Berth Planning Board
Vessel berthing:
Berth Scheduling • Loading
Fleet Management • Discharging
Freight Contracts • Lightering
© SAP 2009
Marine transportation, being very competitive in transportation cost, is used whenever possible to fill
the gaps where pipeline transportation cannot be used. There are quite a few differences in the
approach of building the schedules compared to pipeline scheduling. When the ship is
loaded/discharged, a high volume is available almost instantaneously, as the transfer usually does not
exceed more than 2 days, even for larges tankers. Any delay in the loading/discharge process will
lead to high penalty charges (a VLCC can cost around 65,000 USD demurrage per day) which must
be prevented whenever possible. Therefore, enough commodity must be provided in the case of
loading or enough space must be available at the discharge location at the time the vessel arrives.
Besides that, harbor activity, berth availability, and weather conditions are factors that influence the
planning. Furthermore, the process of finding a ship that suits the purpose can take quite some time
(more than a month) and the movement must be planned well in advance (harbor restrictions, vetting
of ships that were never used before and so on).

Nomination
Nomination Maintenance is the central planning application in TSW to schedule, group,
and communicate bulk movements and transportation within a supply network. You use
the nomination to:
Schedule bulk material movements
Determine origin and destination locations
Specify the material, quantity, date, and type of business process (such as sales,
purchase, or internal transfers)
© SAP 2009
SAP solution for scheduling
With the days of cheap oil behind us, oil producers and other market participants are realizing an
attractive return on investment from replacing multiple and complex legacy systems with an
integrated solution that supports all segments of the value chain, and which have previously been
inaccessible from both an IT and economic perspective.
The nomination is the central planning document in the scheduling process
The nomination process is used to communicate between TSW and the carrier. The scheduler uses
the nomination to schedule bulk shipments. The system uses nominations as the basis for generating
subsequent SAP system documents, such as deliveries and shipping notifications. A nomination
typically has several line items, which the scheduler creates or changes according to stock levels and
planning proposals displayed in the SPW. The TSW nomination supports several movement
scenarios.
The nomination consists of a set of data, the minimum data required is: origin location code and a
destination location code for each batch. A supplier is required for some origin locations where there
are multiple suppliers for a tankage partner. A batch can be split according existing guidelines on
minimum batch sizes. The total receipt and delivery volumes must match.
A typical nomination for a purchase of product at the origin and the sales of the product at the
destination would consist of Header Information and two line items:

Nomination header
y Batch ID (nomination number)
y Cycle number
y Carrier
y Shipper
Line item 1
y Product
y Volume
y Origin Location
y Supplier/Consignee
y Origin Tankage Partner
y Origin reference document (if required)
y Load date/time
Line item 2
y Product
y Volume
y Destination Location
y Receiver (for example, customer)
y Destination Tankage Partner
y Destination reference document (if required)
y Discharge date/time

External TSW
System
Stock Projection
Nomination
schedule
Fax/ Replenishment
planning
Print/
Idoc/
XML
Partner
Ticket LIS info
structures
Проводки
SAP ERP
Delivery / Bulk Goods

Order shipping movement
shipment
notification
© SAP 2009
The planning and nomination processes enable the scheduler to schedule goods movements and meet
demand with a minimum of manual entries and the necessary visual information to make correct
decisions. The following sequence describes a possible scheduling scenario:
y You create long-term or spot contracts

y You generate the SPW to populate the SPW with data (from nominations, contracts, orders, and
tickets).
y You perform planning by generating replenishment proposals based on the demand information
from the SPW.
y You generate the Worklist.
y You create a nomination and assign contracts or orders to nomination line items.
y You send the nomination to different partners (such as carrier).
y You confirm or reject nomination line items, based on information from the partners.
y You enter the ticket details based on the carrier ticket and physical goods movements. You
validate the ticket against the nomination line items.
y The system automatically creates the underlying shipment documents and postings against the
nomination.

Marine Scenario: Real World versus Document
Flow
Real world
1. 2. 3.
System document flow
Con- Nomina- Ticket

MM
1. Deal
tract tion Ticket
Ticket
1
1
call-off
z Close shipment
z Update nomination
L-001
z…
TD
2. Shipment
Ticket
Ticket
D-001 Sales Goods
Ticket Delivery
3. xyz
xyz call-off issue
© SAP 2009
Once a movement is executed, a ticket is created and the movement is posted in the system. The
complete scenario could include all these documents as shown in the slide but not necessarily; it
depends on terms and conditions. Document Flow can consists of a number of documents: Deal,
Contract, Nomination, Ticket for loading (official note sent by a partner containing information
about a product movement, that is real product movement), MM Call-off, TD Shipment, Ticket for
discharging, Sales Call-off, Delivery, Goods Issue.

Marine Scheduling Functionality - Berth
Scheduling
Table View
Graphical View
© SAP 2009
Related to nominations, there is additional functionality in TSW to support Marine scheduling, such
as Berth scheduling.

Marine Scheduling Functionality - Demurrage
Calculation
© SAP 2009
Related to nominations, there is additional functionality in TSW to support Marine scheduling, such
as Demurrage calculation.

Questions
Describe data on a typical nomination
Describe the scheduling process for a pipeline (as carrier)
© SAP 2008

Scheduling: Lesson Summary

to destination
Explain the use of nominations
Explain Crude and Product Pipeline Scheduling
Describe Marine (Tanker) Scheduling and Barge Scheduling
© SAP 2009

Refining & Midstream: Unit Summary

Explain how refinery processes work and the challenges in oil procurement and
refining
Describe how Supply Chain Management (SCM) is handled
Explain the typical business transactions of trading; Explain the necessity to
have exchange scenarios between O&G companies; Describe hedging
to destination
Explain the use of nominations;
Explain Crude and Product Pipeline Scheduling
Describe Marine (Tanker) Scheduling
© SAP 2009

Contents:
Terminal Operations
Fuels Distribution
Retail Network Operations
Price Management & Optimization
© SAP 2009

Downstream Marketing & Retailing:
Unit Objectives

Explain processes and levels of automation in terminal operations
Explain the overall fuels distribution processes and typical challenges
Explain regional differences and operational models for retail networks
operations
Explain best pricing practice and differentiate between pricing requirements for
different lines of business
© SAP 2009

Oil and Gas Business Terms & Company
Organization: Course Overview Diagram
1 – Oil & Gas Business Terms and Company

Organization
Exploration Development Hydrocarbon Refining & Primary Terminal Secondary Commercial

& Appraisal & Production Supply & Gas Manufacturing Distribution Management Distribution Sales &
2 – E&P, Upstream
3a – Refining &
Manufacturing
3b – Midstream

Retailing
Support
© SAP 2009
Upstream
Settlement

Key Trends are Driving Change in Downstream
Marketing and Retailing Industry
Changing supply and demand side dynamics are driving the need for constant innovation
Increasing Demand Side Supply Side Operational

Governmental Pressures Pressures Efficiency
Regulation
Sarbanes Oxley Maturing markets, Reduced number High cost of

competition in of exclusive operation
Environmental
retail market brands
safety & New technologies
employee safety Increased Supplier (VMI, on-board
customer power & rationalization computing, RFID)
Sanction Party
intelligence
compliance Vendor Inflexible and
Additional globalization heterogeneous
Hedging laws –
demands for infrastructure
IAS 39, FAS133 Increased risks of
services
supply disruption Inability to provide
Hyper competitive Price volatility one version of
channels truth
Distributor High degree of
Consolidation manual processing
© SAP 2009
Point 1:
Sarbanes Oxley: The CEO/CFO must certify quarterly and annually that the SEC report being
filed has been reviewed and does not contain any untrue statements or omit any material facts.
Section 301 requires that Management certify internal controls and section 404 requires that
Management annually assess the internal controls and procedures for financial reporting
Emissions Reporting – Global governments are instituting tighter reporting controls and
emissions controls
Source: https://www.sdn.sap.com/irj/sdn/bpx-oilgas?rid=/webcontent/uuid/407b215f-c1bf-2910-
0cb2-e74e4d26aac2
Point 2:
On the demand side, downstream companies face a maturing market characterized by aggressive
competition, increasingly savvy customers, mounting demand for services, and a consolidating
distributor base. In response, we see the growth of marketing as a core discipline for downstream
success – with a focus on managing and optimizing prices across all channels of trade.
0cb2-e74e4d26aac2

Point 3:
Downstream companies are facing increased supply side pressures such as reduced brand
exclusivity and the proliferation of suppliers and vendors on the global stage.
To counteract these pressures, many companies will seek to maximize the use of term contracts,
reduce transportation costs through more efficient scheduling and routing, improve carrier
collaboration, and make improvements in the areas of demand planning and fulfillment
0cb2-e74e4d26aac2
Point 4:
As the cost of operations continues to rise, companies will seek to increase efficiencies by retiring
outdated legacy systems in favor of integrated platforms that support greater levels of automation
for critical processes. These include order-to-cash, on-board truck computing, terminal
automation processes, push replenishment and others.
0cb2-e74e4d26aac2

Business Background
Typical CEO questions

How do I control costs and maximize narrow profit
margins?
How do I achieve distribution excellence?
How do I build customer loyalty and increase
customer satisfaction?
How do I ensure sustained healthy growth of my
company?
How do I move beyond compliance and reduce
operational risk?
How do I maximize employee productivity & leverage
best practices globally?
© SAP 2009

Downstream Marketing & Retailing :
Unit Overview Diagram

Lesson 1: Terminal Operations
Lesson 2: Fuels Distribution
Lesson 3: Retail Network Operations
Lesson 4: Price Management & Optimization
© SAP 2009

Terminal Operations: Lesson Objectives

Describe why terminal management is key area of interest in downstream
operations
Explain the main terminal management business processes
List the levels of automation
Explain the automation of processes on different levels
Summarize how processes can be optimized & automated to reduce time and
costs and to improve visibility
Outline the SAP solution portfolio for terminal management
© SAP 2009

Downstream Marketing & Retailing: Profitable
Growth
Cost Control and Profit Margin Maximization Distribution Excellence & Customer Satisfaction
Low administrative and operational costs due to automated Streamlined forecasting and real-time requirements planning
processes, for example, short billing times through up-to-date result in more accurate forecasts
delivery information and reconciliation Integrated and automated replenishment and transportation
Reduced fuel purchasing and transportation cost (best buy planning leads to better decisions and reduced cycle times
support, optimal usage of fleet) Better inventory and service levels result in higher customer
Increased margin due to closed loop price management & satisfaction
optimization processes from refinery gate to retail pump Integrated onboard computers and real-time
communication increase driver productivity
Co
D ist.
ery ls
in Fue
Ref
ale
holes ers
W tom
s
m inal Cus o C
Ter ail Sup
ply
Ret ork i en
c e
w ven
Net Con
Terminal Management & Automation Business Process Platform

Full visibility into terminals Flexible and agile platform for
Integrated Fuel & Convenience Retailing
Integration of existing terminal addressing business needs
systems Integrated wet and dry good business Low TCO from integrated solution
Fully automated processes Managed margins Supporting compliance, transparency
Integration of suppliers Reduced cost of operation & growth
Increased customer visit basket size
© SAP 2009
Graphical representation of the overall downstream marketing and retailing business:
Terminal Management & Automation: In an ideal world customers would have full visibility into
terminals, independent from the systems that customers actually run in their terminals. No matter
what these systems are and what the field equipment is the customers have a unified view into their
terminal operations and can fully automate their processes from entrance handling through loading
and printing relevant documents when the driver leaves the terminal.
From an SAP solution point of view, SAP together with our EBS (Endorsed Business Solution)
partner Implico provide a terminal management solution that provides full visibility into terminals.
Dependent on customer‘s needs existing 3rd party terminal systems can be integrated or replaced.
Existing field equipment is integrated.
Other Business Processes
Distribution Excellence & Customer Satisfaction: Fully integrated and event driven auto stock
replenishment and truck dispatch management solution. It allows to quickly adapt the planning to
any event that occurs in the execution process. The truck dispatching can be done manually or by an
optimizer that supports the concept of can-go and must-go orders and takes into account axle weight
restrictions that ensures that the vehicle is balanced at all times during a trip. Real time integration to
customer tanks provide up-to-date inventory levels. With these concepts customers can come to
better transportation plans and reduced cycle times. Integrated onboard computer systems allow
efficient communication with hauliers and drivers.
SAP’s ERP solution together with Implico OpenTAS provide an event driven auto stock
replenishment and truck dispatch solution supporting manual and optimized trip planning.

An integrated fuel and dry goods retailing solution helps companies to reduce cost of operations and
manage margins by increasing customer visit basket size.
SAP offers such a solution in the combination of SAP Oil & Gas and SAP Retail which can be run
on the same instance, guaranteeing a low Total Cost of Ownership.
Cost Control and Profit Margin Maximization: With these processes in place marketers and
distributors are in a position to control their administrative and operational costs due to automation
and integration. As an example they can reduce billing times through up-to-date delivery information
and reconciliation.
Furthermore customers can increase their margin running closed loop price management &
optimization processes from refinery gate to retail pump. SAP together with our partners provide an
end-to-end price management and optimization solution. The components are SAP PMM by
Vendavo, KSS RackPrice, KSS PriceNet and Business Objects XCelsius for pricing dashboards.
Business Process Platform
In an ideal world customers would run their business processes on a Business Process Platform that
allows to flexibly integrate new solutions and new businesses, for example acquisitions in other
countries.
From an SAP solution point of view, SAP ERP with SAP Netweaver are the backbone of such a
solution. All other applications – SAP and partner – seamlessly integrate back into SAP ERP.

Business Background
Typical COO questions

How can I overcome information silos and poor
integration to partners?
How can I improve real time data availability and
data quality?
Where can I reduce manual processes and get
better control of business processes?
How can I quickly integrate acquired sites?
How can I adapt quickly to changing regulations
and handle different regulations in different
regions?
How do I ensure compliance and safety
regulations?
© SAP 2009

Terminal Management -
Downstream Oil & Gas Supply Chain
Service Station
(Convenience)
Retailing
Fuel terminals exist along the complete downstream supply chain

Products are typically in final form, suitable for delivery to customers
Additives are injected into products at loading racks or in vehicles
Ownership of fuel terminals
Single oil company ownership
Joint or consortium ownership
Independent ownership (third-party service provider such as Vopak or
Oiltanking)
Pick-up rights for other companies and customers of other companies
(products in separate tanks or commingled stock)
Scheduled truck deliveries or customer pick-ups
Safety is a major concern (for example, leakage to soil or water)
© SAP 2009
A fuel terminal is a facility for the storage of fuels, from which these products are usually
transported to end customers. A fuel terminal typically has tankage, either above ground or
underground, and loading racks for the discharge of products into road trucks. These vehicles
transport products to gas stations or commercial customers.
Fuel terminals exist along the supply chain from refineries down to secondary distribution terminals.
The products which reach the depot (from a refinery) are in their final form, suitable for delivery to
customers. In some cases additives may be injected into products at the loading racks or in vehicles.
The ownership of fuel terminals falls into three main categories:
Single oil company ownership, when one company owns and operates a depot on its own behalf.
Joint or consortium ownership, where two or more companies own a depot together and share its
operating costs.
Independent ownership, where a depot is owned not by an oil company, but by a separate service
provider, who charges oil companies a fee to store and handle products. Vopak and Oiltanking are
two of the largest independent terminal operators worldwide.
In all cases, the owners typically provide storage space and pick-up rights to other companies. Stock
owned by different companies may either be held in separate tanks or may be commingled within the
same tanks.

Terminal Management - High Degree of
Process Automation in Modern Terminals
Service Station
(Convenience)
Retailing
ERP Layer (central)

Manage contracts, logistics, inventories (book stock), and financials
Integrate different terminals (own and third-party) into the ERP system landscape to
gain visibility into operations
Terminal System on Execution Layer (central and/or local)
Entrance and security handling (identification of trucks and drivers)
Truck dispatching
Inventory management (physical stock)
Loading rack automation
Exit gate handling
Process Layer (SCADA, DCS and PLC systems)
Monitor and control field devices
Field Devices
Weight bridges, pumps, meters, scales, card readers, tank systems, and so on
© SAP 2009
In modern depots, there is a high degree of automation, centrally as well as on site, to manage all
kinds of operational processes and business scenarios. Automation is handled within several layers
from enterprise level to field control level. On enterprise level, ERP systems help managing
contracts, logistics, inventories, and financials. On execution level, Terminal Systems manage
processes like:
Entrance and security handling (identification of trucks and drivers)
Truck dispatching
Tank gauging
Inventory management (physical stock)
Product movements
Loading rack automation
Exit gate handling
On the process level, SCADA, DCS, and PLC systems collect data from various field devices to
monitor and control these devices. Such devices are weight bridges, pumps, meters, scales, card
readers, and tank systems.

From a business perspective, oil companies need to integrate different terminals (own and third
party) into their ERP system landscape to gain visibility. Companies need to manage their customer
contracts and orders and automate handling with reference to all these documents. This includes
scheduled truck deliveries as well as customer pick-ups. They need to manage their stocks per tank,
for their own and third-party stock, and handle legal tax requirements.
Furthermore, terminal operators must ensure that products are safely stored and handled and that
there are no leakages which could damage the soil or the water. Fire protection is a primary
consideration, especially for the more flammable products such as gasoline and aviation fuel.

Central
Levels of Automation According to ANSI/ISA-95
Order,
Inventory
Sales and Contract,
Financials Management
Level 4: Business
ERP Logistics Transportation
(Book Stock) planning and
Management
logistics level
Terminal Stock History

Reporting Communication
Management & Forecasting Level 3: Execution level
System Inventory Security Exit Gate
Custom Tax Management Entrance Management Truck Handling
Handling (Physical Handling (identification Dispatching & Paper
Stocks) truck & driver) Printing
SCADA/ DCS Loading Rack

Product Level 2: Process
Movements Tank Gauging
Automation
Automation control level
Measurement Technical Process

PLCs Values Control
Level 1: Field Level

Pumps, Meters,
Scales,
Card-Readers
Field
Equipment
Level 0: Physical
Local
process Level
© SAP 2009
Levels according ANSI/ISA-95:

Level 4: Business planning and logistics level
Defines the business-related activities needed to manage an organization
Level 3: Execution level
Defines the activities of the work flows
Level 2: Process control level
Defines the activities of monitoring and controlling the physical processes
Level 1: Field Level
Defines the activities involved in sensing and manipulating the physical processes
Level 0: Physical process Level
Defines the actual physical processes
See http://de.wikipedia.org/wiki/Automatisierungspyramide
DCS = Dispatch Control System

SAP’s Solution Portfolio for
Terminal Management
Service Station
(Convenience)
Retailing
SAP® ERP
Finance Enterprise Layer
SAP® Oil&Gas
SAP® OGSD Sales/Logistics Logistics Layer
Interfaces
Business processes Execution Layer
Implico Technical processes

OpenTAS® & Control
Process Control Layer
Interfaces
3rd Party: FMC, Meters, Scales, Pumps, Field Layer
TopTech, DKI, Valves, etc.
Siemens, ABB, etc.
© SAP 2009
SAP’s Solution Portfolio for Terminal Management
SAP EPR with SAP Oil and Gas Downstream covers processes like
Hydrocarbon Product Management (stock keeping in multiple units of measure and quantity
conversion)
Exchange Business
Contract & Sales Order Processing (including pricing and tax handling)
Delivery Processing & Billing
TAS/TPI Interfaces
SAP OGSD covers additional processes common in the secondary distribution business (telesales,
tour planning, data collation)
Implico OpenTAS covers terminal management on execution layer including the communication to
the ERP layer (for example, physical stocks inventory management, entrance & exit gate handling,
truck dispatching, security management)
Field layer – other third-party providers: Intellution, Schneider Quantum, Saab, Contrec, Limitorque,
Endress+Hauser, Emerson, Enraf, OSI, VAREC

Example Business Flow with SAP ERP and
Implico OpenTAS
Field
OpenTAS Equipment
Business planning
Telesales, Execution and process control
Pricing, and logistics
Contract
Entrance Gate
Handling
Contract Contract
Driver/ Truck
-Authorization
Material
Planning
SCADA / DCS /
Automation PLC
Order Systems
Process Data
Weight
Bridges,
Measurement Pumps, Meters,
Sales Order Load Data Data Scales, Card-
Readers, Tank
Exit Gate Systems
Update Stock /
Handling
Delivery Tax Posting
Invoice
Invoice Reporting
BOL
Delivery
Note
© SAP 2009
There are a variety of possible integration scenarios using SAP ERP and OpenTAS. In this example,
OpenTAS communicates directly with the SCADA system. In other scenarios, OpenTAS could for
example communicate with local third-party terminal systems and work as an integration layer
between SAP ERP and those systems.
Example Business Flow with SAP ERP and Implico OpenTAS:
Contracts are managed in SAP ERP

Contract data is sent to Implico OpenTAS via TAS interface
Driver shows up at terminal gate. Authorization checks are performed (for example, hand
scanning, iris scanning, and so on)
Truck is sent to the loading bay; materials and quantities are checked
The Automation order is sent to the SCADA systems. Logical work of loading is processed. For
example, close barrier, switch lights to red, initialize meter, check security-rules, start pumps and
so on.
Loading data is sent back to OpenTAS and processed.
Exit gate handling is done and required documents for the driver (BOL = Bill of Lading) printed
Load data is also sent back to SAP ERP via TAS interface. A sales order for the contract is
created with correct materials and quantities
Follow-up processing in SAP ERP – delivery document creation and invoice processing

SAP Solution for Terminal Management
Business Issues, Capabilities, and Benefits
Typical Business Issues Key Business Capabilities Benefits
Missing integration leading to Supports integration & Improved operational efficiency

information silos and harmonization of field and productivity
disconnection from partners equipment and third-party TAS Full integration of own and
No up-to-time data and poor components third-party terminals
data quality due to manual Depot stock management (per Improved data quality and
processes tank) for own stock and third- faster data availability
Poor visibility into and control party stock
Faster loading cycles
of business processes Automates and supports
Reduced labor costs and
Heterogeneous & standard terminal processes,
reduced administrative costs
incompatible processes in for example, check-in, loading,
check-out Reduced IT maintenance costs
acquired sites
Security management Increased safety and
Difficult to adapt to changing
(identification of trucks and compliance
regulations & to handle
different regulations in drivers)
different regions Printing of transport documents
Fail safe capable for 24/7
operation
SAP’s terminal management solution provides full visibility by integrating own and
third-party terminals and enabling communication between field systems and the
ERP system
© SAP 2009

Facilitated Discussion
1. Typical COO questions – do they apply to your organization?

2. What are the main issues with regard to terminal automation?
3. How applicable is the ANSI/ISA-95 standard?
4. Which system architecture is in place? What SAP Oil & Gas TAS Interface being
used?
© SAP 2009

Terminal Operations: Lesson Summary

Describe why terminal management is key area of interest in downstream
operations
Explain the main terminal management business processes
List the levels of automation
Explain the automation of processes on different levels
Summarize how processes can be optimized & automated to reduce time and
costs and to improve visibility
Outline the SAP solution portfolio for terminal management
© SAP 2009


© SAP 2009

Fuels Distribution: Lesson Objectives

Describe why fuels replenishment is key area of concern and list the typical
KPIs to measure the effectiveness of the distribution process
Explain the overall fuels distribution processes and the typical roles involved
Explain the main influencing factors for Automatic Stock Replenishment
Explain the main influencing factors for Truck Dispatch Planning & Optimization
Summarize the benefits of integrated replenishment and transportation
planning
Outline the purpose of truck onboard computers
© SAP 2009

Profitable Growth
Distribution Excellence & Customer Satisfaction
Cost Control and Profit Margin Maximization
Streamlined forecasting and real-time requirements
Low administrative and operational costs due to automated
planning result in more accurate forecasts
processes, for example, short billing times through up-to-date
Integrated and automated replenishment and
delivery information and reconciliation
transportation planning leads to better decisions and
Reduced fuel purchasing and transportation cost (best buy
reduced cycle times
support, optimal usage of fleet)
Better inventory and service levels result in higher
Increased margin due to closed loop price management &
customer satisfaction
optimization processes from refinery gate to retail pump
Integrated onboard computers and real-time
Co
D ist.
ery ls
in Fue
Ref
ale
holes ers
W tom
s
m inal Cus o C
Ter ail Sup
ply
Ret ork i en
c e
w ven
Net Con

Integration of existing terminal systems Integrated Fuel & Convenience Retailing addressing business needs
Fully automated processes Integrated wet and dry good business Low TCO from integrated solution
Integration of suppliers Managed margins Supporting compliance, transparency
Reduced cost of operation & growth
© SAP 2009
Distribution Excellence & Customer Satisfaction: Fully integrated and event-driven auto stock
replenishment and truck dispatch management solution. It allows you to quickly adapt the planning
to any event that occurs in the execution process. The truck dispatching can be done manually or by
an optimizer that supports the concept of can-go and must-go orders and takes into account axle
weight restrictions that ensure that the vehicle is balanced at all times during a trip. Real time
integration to customer tanks provides up-to-date inventory levels. With these concepts, customers
can come to better transportation plans and reduced cycle times. Integrated onboard computer
systems allow efficient communication with hauliers and drivers.
SAP’s ERP solution together with Implico OpenTAS provides an event-driven auto stock
replenishment and truck dispatch solution, supporting manual and optimized trip planning.

World Energy Markets Continue to be Volatile
Days of Gasoline Inventory Gasoline Spot Prices

25 400
350
USGC Conv Gasoline (cpg)

20
300
Source: Energy Information Administration
Source: Energy Information Administration

15 250
200
10
150
100
5
50
0 0
1993 1998 2003 2008 1993 1998 2003 2008
As Supply Continues to Tighten Any Disruption Leads to Volatility
Managing these Dynamics is a Challenge for Fuel Marketers & Retailers
© SAP 2009

Business Background
Typical Head of Distribution Questions

How do I maximize utilization of the fleet?
How to I minimize transportation costs and fuels
inventories?
How can I optimize fuel sourcing?
How can I automate my business processes (order-to-cash,
procure-to-pay, data collection), speed up billing cycles and
reduce Days Sales Outstanding?
Typical KPIs
Trips per scheduler
Costs of distribution
Number of schedulers per region
Customers / retail stations per scheduler
Number kilometers / miles
Driving times / driving hours
© SAP 2009

What Marketers and Distributors need to be
successful in Different Markets
Hyper-competitive
Maximize margins
Increase productivity with integrated and automated business processes
Price management & optimization throughout all channels of trade
Holistic optimization of transportation costs in integrated business model
(route optimization, fleet sizing, collaboration with carriers)
Mature
Optimize inventories
Active selling
Markets
Reduce fuel cost

Optimize Transportation Costs
Manage a brand through active marketing
Emerging
Participate in joint ventures for fuels and lubricants marketing

Track transportation process
Manage inventories
Regulated
Integration of financial and supply/demand business processes
Complexity
© SAP 2008
As companies move from regulated to emerging, mature and hypercompetitive markets, they need to
adapt abilities and processes that are not necessary in more regulated environments.
In regulated markets marketers and distributors have the basic need to integrate logistics and
financials.
As markets mature, management of inventories and transportation processes becomes more

important.
In mature and hypercompetitive markets, distribution excellence becomes a prerequisite in order to

compete successfully. This includes active management of inventories, active selling, improved
sourcing (best buy) and optimal usage of assets such as the truck fleet.
In a hypercompetitive market environment, a holistic approach optimizing transportation costs and

collaborating with partners becomes a necessity.

Customer and Replenishment Types
© SAP 2009
Different types of replenishment for different customers
Wholesale customers are typically replenished based on metered inventory or on fixed cycles.
Retail networks are typically replenished based on metered inventory.
Private customers (for example, heating oil):
“Will call customers” – either customer calls or pro-active approach using e-mails or call lists
“Keep full customers” – replenishment based on consumption (for example, degree day
forecasting)

Typical Fuels Distribution Process
Computer
Telephone
Integration
Manual
Orders Truck
Dispatch
Order Truck Product Delivery Create Incoming
Optimization
Pool Loading Delivery Reconciliation Invoice Payment
(TDO) /
Automatic
Planning
Stock
Replenish-
ment (ASR)
Sales/ Customer Terminal System Truck Onboard System

Inventory Data Data – Loading Data – Delivery Data
One of the main pain points of fuel distributors today is the missing integration of the end-to-
end business process (ASR, TDO, delivery execution, volume reconciliation). The goal is to
have the flexibility and reactivity to sense and respond quickly to market changes.
© SAP 2009
Main process flow and integration points with external systems.
Manual orders, for example, through telesales with integrated pre-scheduling; computer telephone
integration
Automatic stock replenishment based on inventory data and sales profile
Truck dispatch planning including
Optimized sourcing based upon product availability, contracts & costs
Dispatching: must & can go orders; trucks, trailers, compartments
Optimization of single and multi drop scenarios
Product loading and delivery with integration to terminal systems and truck onboard computer
systems
Automated reconciliation and posting of all transactions
Invoice and payment

Roles in Fuels Distribution
Spontaneous Order
1 TeleSales
3 SD Order Finances
Non-ASR- Driver BILL
Pre-Scheduling
Customers
PDA
8
POS
TL
2 4 5 6
Reconciliation
Sales info
Dispatcher
SD Delv
Automatic Station
Stock info Replenishment (ASR)
Dispatching
MM G/L 7
Workbench
ASR – managed ASR Order SD GI
DATA
service stations
Trip SD INV
Logistics
Optimizer
Backoffice
© SAP 2009
Roles in Fuels Distribution
Customer (ASR managed or non-ASR managed)
Telephone agent
Dispatcher
Financial Accountant
Fuels inventory controller

Parameters in Automatic Stock
Replenishment (ASR)
Address and
ASR Sales Address communication details
Sales & inventory
History (for
example, from
Station type (COCO, CODO)
POS system)
ASR Attributes Station Status (OPEN, SOLD)
Inventory Brand
Dispatching Area
Location area
Forecast Default terminal
sales Profile Sales Opening Alternative terminals
including Profile hours …
seasonality
Calendar to Delivery hours (24/7)
define public Calendar Service
Holidays, and class
so on
Product information
ASR Order Order Tanks / tank details, for example,
history history Products bottom safety, capacity,
dipping conversions
Forecast
calculation
details on
Forecast tank
Meters
product tank levels
level
© SAP 2009
Parameters required for creation of ASR orders

Automatic Stock Replenishment
Sales history Opening hours /

Service class
Inventory ASR Calculation

history
ASR
Order
Sales profile Product tanks
© SAP 2009
The purpose of the ASR process is to determine when a customer/retail station can or must be
replenished.
Volume decision depends on most recently polled sales & inventory (dipping) data of tank levels
Best practice is to manage the site inventories by tank, where interconnected tanks are treated as one
tank
Categories of replenishment orders: “Must Go” orders where delivery is required to prevent running
out of stock, “Can Go” where delivery is optional
Typical weaknesses of process at customers today:
No automatic recalculation when new data received
High level of manual (problem) orders
Difficult to tune (complex parameters)
Simplistic and non-responsive sales forecast (missing adjustments to short term trends)

Tank Characteristics
Tank capacity
Maximum physical tank size
Product /
Tank number Overfill protection
To prevent overfills of the tank during loading or
34550 L Tank capacity temperature related extensions
32300 L Overfill protection
30740 L Top safety buffer
Top safety buffer
One of the main targets is to avoid product left
28000 L Inventory level on vehicle (LOV) if sales are lower than forecast
Usable tank capacity

or if the truck arrives at the site earlier than planned.
Top Safety needs to be applied when determining
the earliest delivery time and maximum delivery
volumes.
Actual stock
Inventory level
To control usable tank capacity
Bottom safety buffer

5780 L Bottom safety buffer One of the main targets is to avoid run outs if sales
2070 L are higher than the forecast or if the truck arrives later
Unpumpable stock
at the site than planned. Needs to be applied when
determining the latest delivery time.
Unpumpable stock
Not usable stock
© SAP 2009
Measurement of volume in tank through tank dipping with the help of a strapping table
Tank strapping table: Table which is used to translate values from a vertical meter reading in a tank
or silo into volumes for a material. The values are different for every form of tank and for every size
of tank.

Stock Replenishment - Basic Principles
Stock quantity
Average sales/supply
Sales Forecast
Maximum Real sales/supply
Tank
Capacity
Top
Safety Level
Real Sales
Releasing
quantity Time until bottom stock
according to sales forecasts
Bottom Stock
Stock out
Time
Order Real Delivery
Trigger Point Time
© SAP 2009
Basic principles:
Bottom and top safety should never be penetrated during the planning process
Safety buffer should be set expressed in hours of sales, setting it in absolute volume value would
not reflect changes in sales profile
Safety buffers should be set by tank (or by product if ASR is managed at product level)
The objective of using safety buffers in the delivery planning process is to cover unforeseen
‘inaccuracies’, which may occur after the plan has been completed and the execution has started.
Possible inaccuracies:
Sales forecast: deviation of forecasted sales (used for planning) versus actual sales, for example,
pricing or weather
Execution time reliability: deviation of actual delivery time versus planned, for example, traffic,
loading rack delays
Bottom safety: aims at avoiding run outs if sales are higher than forecast or if truck arrives at site
later than planned
Top safety: aims at avoiding LOV (product left on vehicle) if sales are lower than forecast or if
truck arrives at site earlier than planned

Truck Dispatch Planning & Optimization
Opening hours Customer ASR orders and manual orders

Sales profile Order details Customer
Product tanks
details
Products and quantities
Sales/ Inventory Delivery time window(s)
Permitted load terminals Admitted load terminals
Truck compatibility Unloading times
… Truck compatibility
Terminal details Various degrees of automation & optimization
Loading times
Map support
Stock information
Full optimization still uncommon
Product costs
Compartment planning and vehicle stability
Requested Equipment
…
Trip Planning
/ Optimization
Truck availability Trips
Home base Truck details
Vehicle costs
Compartment details
Compatibility
Permitted load terminals
Equipment
Drive times
Distance Matrix Distances
Driver availability Driver details
Driver costs
Truck assignment
Driver compatibility
© SAP 2009
Talking points:
Best buy
Trip costing
Compatibilities
Orders – ASR and manual
Multi drop versus Single drop scenarios

Dispatching - Truck Stability and Overload
Checks
Compartment allocation /
Axle weight check
Truck and trailer overload restrictions need to be ensured

Axle weight factors describe the impact on an axle when a certain compartment will be loaded
King Pin has to be defined as virtual axle for trailer
© SAP 2009
Truck stability and overweight limits need to be ensured at all times during trip

Truck On-board Units
Bi-directional communication between

dispatch center and on-board unit
Driver receives trip details about times,
distances, and scheduled quantities for Load
and Discharge and texts with important
information
Dispatcher receives information about the trip
status, for example, accepted, started, and load
and discharge quantities
Driver can also enter
Events, for example, traffic or break down which
causes a delay of the delivery
Left-on-board quantities when trips are finished
Pre-delivery and after-delivery dipping
information on product tank level
On-board unit can also be used for GPS
tracking & tracing
© SAP 2009
The purpose of truck on-board units is to enable a bi-directional communication between central system
/ dispatch center and driver:
Exchange of trip data (loading and delivery points, routes, status)
Exchange of delivery data, stock measurements and left-on-vehicle quantities
Units can also be used for GPS tracking & tracing

Example Process Using SAP OGSD and
Implico OpenTAS
SAP ERP Master Data
CTI OGSD
Sales
I/F Support
OGSD OGSD
Order Create Incoming
Transport Data
Pool Invoice Payment
Planning Collation
OGSD
CPR Product
Delivery
OGSD Interface
OpenTAS
Terminal Administration & Automation System – Central Component
Terminal / OTC Transportation

Customer Service Planning
Depot /
Data Station (Haulier / Org.
Refinery Unit)
© SAP 2009
The main process flow and integration points with external systems using SAP ERP, SAP OGSD
and Implico OpenTAS:
Manual orders, for example, through SAP OGSD telesales with integrated pre-scheduling;
computer telephone integration
Automatic stock replenishment, based on inventory data and sales profile (for example, degree
day forecasting for private heating oil customers in SAP OGSD). CPR: Continuous Product
Replenishment.
SAP OGSD truck dispatch planning including
- Optimized sourcing based upon product availability, contracts, product costs and
transportation costs (SAP OGSD “Best Buy”)
- Dispatching: tour planning of loading points, orders and trucks on a map
- Optimization of single tours
Alternative: transportation planning in OpenTAS with full optimization and vehicle balancing
Product loading and delivery with integration to OpenTAS (terminal systems) and truck onboard
computer systems
Automated reconciliation and posting of all transactions (SAP OGSD “Data Collation”)
Invoice and payment in SAP ERP

SAP Solution for Fuels Distribution
¦ Poor visibility causes danger ¦ Optimized sourcing based ¦ Reduced transportation costs
of run-outs, leading to lower upon product availability, and reduced truck fleet
service levels & customer contracts & costs ¦ Reduced fuel cost through
dissatisfaction ¦ Integrated automatic stock agile response to market
replenishment with truck volatility
¦ Difficult to maximize/optimize dispatch planning and ¦ Reduced replenishment costs
utilization of fleets and optimization
¦ Reduced stock-outs
minimize transportation costs ¦ Dispatching: must & can-go
¦ Improved operational
orders; trucks, trailers,
productivity
compartments
¦ Sub-optimal fuel sourcing
¦ Tele-Sales with integrated pre-
scheduling
¦ Missing automation of
¦ Optimization of single and
business processes (order-
multi-drop scenarios
to-cash, procure-to-pay,
reconciliation) ¦ Automated reconciliation and
posting of all required
transactions in SAP
SAP’s fuels replenishment solution achieves distribution excellence by optimizing fuel

inventory levels and truck dispatch planning, and by automating fleet integration,
transportation processes, and volume reconciliation.
© SAP 2009

1. Typical Head of Distribution questions – do they apply to your organization?

2. What are the main KPIs to measure success?
3. What are the main issues with regard to fuels distribution?
4. Planning cycles – how do ASR and TDO work together?
5. Discuss the level of automation and use of technology.
© SAP 2009

Fuels Distribution: Lesson Summary

Describe why fuels replenishment is key area of concern and list the typical
KPIs to measure the effectiveness of the distribution process
Explain the overall fuels distribution processes and the typical roles involved
Explain the main influencing factors for Automatic Stock Replenishment
Explain the main influencing factors for Truck Dispatch Planning & Optimization
Summarize the benefits of integrated replenishment and transportation
planning
Outline the purpose of truck onboard computers
© SAP 2009


© SAP 2009

Retail Network Operations: Lesson Objectives

Explain the characteristics of Retail Network Operations in the
different markets/countries
Describe the different players and their geographical reach in
operating Retail Networks
Outline the lines-of-business and operation models at Retail Networks
List the different types of customers and how they are targeted
Explain the typical IT landscape for retail Network Operation including
the SAP solution coverage
© SAP 2009

Profitable Growth
processes, for example, short billing times through up-to-date result in more accurate forecasts
delivery information and reconciliation Integrated and automated replenishment and transportation
Co
D ist.
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in Fue
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Business Process Platform
Terminal Management & Automation
Integrated Fuel & Convenience Retailing
Integration of existing terminal systems addressing business needs
Integrated wet and dry good business Low TCO from integrated solution
Fully automated processes Managed margins
Integration of suppliers Supporting compliance, transparency
Reduced cost of operation & growth
© SAP 2009
An integrated fuel and dry goods retailing solution helps companies to reduce the cost of
operations and manage margins by increasing customer visit basket size.
SAP offers such a solution in the combination of SAP Oil and Gas and SAP Retail, which can be run
on the same instance, guaranteeing a low Total Cost of Ownership.

Business Background
Typical Questions for Head of Retail Operations

In which countries do we need to operate?
What is the best mix of operational models for a country?
Which line-of-businesses and service offering do we have
to establish in our network?
How can we service the different types of customers?
© SAP 2009

A Little History of Retail Network Operations
1888: Wiesloch, Germany:

First “fuel station” registered in history
1907/1913: Seattle/Pittsburgh: First US service stations
1920 –1980: “The era of the major brands”
Since the early 1980s: “The age of Marketing Diversity”
© SAP 2009
1888: Wiesloch, Germany: First “fuel station” registered in history:
Early one August morning in 1888 - without the knowledge of her husband - Bertha Benz set off in
Karl's three-wheeler with the couple's two sons on the journey from Mannheim to Pforzheim (60
miles) for the first overland journey, which marked the beginning of the triumph of the automobile.
When Bertha Benz undertook the first long-distance drive in history in the summer of 1888, gasoline
was sold by the bottle in pharmacies. Hard times for automobilists….
On her way, she was running out of gasoline and she stopped at Wiesloch city pharmacy and bought
two liters of gasoline…
1907/1913: Pittsburgh: First US service stations
Fueling up was not easy for early drivers. Only a handful of liveries and dry goods stores sold fuel.
In 1907, the Standard Oil Company of California saw the need for an easier and safer way to refuel.
Near its Seattle kerosene refinery, the company built the first U.S. service station. Although the
facility was little more than a shed, a 30-gallon tank and a garden hose, it drew up to 200 customers
per day. Delighted with the brisk business, the owners put a rain-blocking canopy on the shed - the
first example of a customer amenity
In 1913, Gulf Corporation made its own history by opening the first drive-up service station. The
brick, pagoda-style station was situated on a high traffic Pittsburgh street and featured free air, water,
restrooms, and a lighted sign touting “Good Gulf Gasoline."

1920 –1980: “The era of the major brands”
Prior to the oil embargo of 1973, gasoline was cheap and plentiful; companies competed on fuel
quality only.
Local service stations, almost always a major brand, provided the full range of services needed for a
car.
At that time, convenience stores did not offer gasoline, and gasoline stations offered few, if any,
convenience items.
Since the early 1980s: “The age of Marketing Diversity”
Starting from the 1980s, station marketing shifted from car to customer; from an emphasis on selling
a product or service for the car to providing a “retail experience” for the customer.
Stations added items, such as soft drinks, cigarettes, coffee, nuts, donuts, and candy to their
offerings.
The de-emphasis on fuel brands encouraged convenience chain retailers to sell gasoline as well.
Oil companies responded by establishing their own brands for convenience stores; they had to learn
how to become retailers.

What is Needed to be Successful with Retail
Networks
Hyper-competitive
Retailing Maximize profitable fuel throughput in existing networks (or divest)
Standardize and simplify business processes
Develop new profit centers, for example, c-store, car wash, fast food
Atomize replenishment of service station network
Minimize stock-outs
Mature
Optimize fuel throughput

Develop new profit centers, for example, c-store, car wash,
Markets
fast food
Push replenishment to service station network
Minimize stock-outs
Emerging
Develop infrastructure/networks to enable growth of local

economy including private households
Regulated
Provide fuel supply in a regulated market
Complexity
© SAP 2009
The situation in a retail network operation differs between the mature/hyper-competitive markets
(represented here by US and Europe) and the emerging/regulated markets (represented by the BRIC
countries)
Characteristics of the mature/hyper-competitive markets (US, EU):
(strong) competition by independents (hyper-/super markets as well as convenience retailers) as

niche or regional players
development of alternative profit centers or divest in a decreasing market and rationalize networks
Characteristics of emerging/regulated markets (BRIC):
situation different by country but retail networks are generally in growth mode (volume and
network)
retail networks are usually dominated by one or few local national oil companies

Fuels Consumption:
BRIC Countries and the Developed World
Motor gasoline consumption Transportation diesel consumption
70000,00 60000,00
60000,00 50000,00
Million liters
Million liters
50000,00
40000,00
40000,00
30000,00
30000,00
20000,00 20000,00
10000,00 10000,00
0,00 0,00
Brazil China India Russia Brazil China India Russia
Country Country
1990 2000 2005 1990 2000 2005
Motor gasoline consumption per capita Transportation diesel consumption per capita
Russia Russia
Country/Classification
Country/Classification
India India
China China
Brazil Brazil
Developed Countries Developed countries
0 100 200 300 400 500 600 700 0 50 100 150 200 250 300 350
Liters per person Liters per person
1990 2000 2005 1990 2000 2005
© SAP 2009
Fuel consumption is an important indicator to understand the importance of Retail Networks in a

given country or region.
Gasoline sales in the developed world is flat and diesel sales still growing.
Looking at the fuel consumption figure for the BRIC countries, we see different patterns.
Russia shows a strong decline after 1990 and stabilizes from 2000.
Brazil and India showing steady growth in absolute terms but only slight growth or even decline
in per capita numbers.
China shows strong growth in both absolute and per capita numbers.
Overall, compared to the per capita consumption of the developed countries, all BRIC countries still
show growth potential.
This indicates that Retail Networks will still increase in size and volumes sold there.

Mature and Hypercompetitive Market Trends
High fuel prices (due to taxation)

New entrants lead prices downwards causing thin sales margin
Incumbent oil companies respond with different strategies
New formats are deployed in Retail Network
Focus on customer types in another trend
© SAP 2009
The main characteristics of hyper-competitive and (to a lesser degree) mature markets are high fuel
prices with a thin sales margin.
High prices are caused by high taxation of motor fuels (with the only exception being the US).
Thin sales margins are caused by the strong competition from new players like hypermarkets (using
low fuel prices to attract customers) or newly entering foreign, usually national, oil companies.
The way the incumbent oil companies responded are diverse depending on the local situation; selling
the unprofitable sites, entering cooperation with retail companies, or establishing more
business/profit centers at high traffic and well-located sites in their network. This results in a highly
fragmented market with many players - each with its own branding and sales strategy; like
hypermarkets trying to generate traffic, new entrants trying to establish market share, and incumbent
oil companies deploying more convenience options like fast food and so on.
To strike a balance between a thin sales margin and good network coverage, new formats of service
stations are established, for example, by establishing un-manned, fully automated sites.
Specializing is another trend by which certain types of customers are addressed. One example are
truck-only, usually un-manned stations like Aral’s Automated Diesel Stations (ADS) or Q8’s
International Diesel Sites (IDS) in Europe for exclusive use of companies holding the corresponding
fuel card of that company. Another example of specialization is companies operating highway only
sites like Travel Centers of America in the US, where facilities a those sites are designed around
truck driver needs.

New Profit Centers at Retail Network
Additional business was always explored at service stations, but focus has
changed
A move to more customer/driver related offerings/services
C-stores developed into most important profit center
Sales Mix Gross Profit Mix
Fuel
72,1%
In-store Fuel
In-store 68,3% 31,7%
37,9%
Source: NACS Online - >
News & Media Center >
Fact Sheets > Motor Fuels
Fast food is most dynamic new business

Car wash still very profitable in some countries but a ‘give away’ in others
© SAP 2009
Besides fuels sales, service stations always explored additional business. Formerly, those were car
related businesses, for example, oil change, car repairs, tire sales. However, as modern cars have less
need for such services and car dealers keep more of this business themselves, a move to more
customer/driver related offerings/services happened within the last decades. This trend has
intensified as car fuels are seen as a commodity with little difference between brands, as well as a
thin margin on fuels which is partly due to competition by hyper markets. These factors have created
a need to increase customer returns and spending per visit. Therefore, convenience stores ( or c-store
for short) have developed into the most important profit center at Retail Networks as can be seen by
the numbers published by the Nation Association of Convenience Stores (NACS) in the US. Fast
food is the most dynamic new business within c-stores including food prepared on-site,
commissary/packaged sandwiches, hot dispensed beverages, cold dispensed beverages, and frozen
dispensed beverages. Sometimes, fast food is offered in a separate facility leading to royalty charges
when given to another franchisee of a fast food chain (for example, McDonalds).
Car washes can still be a very profitable in some countries, for example, Central Europe, but are a
‘give away’ in others when bundled with fuel sales.

Categories of Customers - From B2B to B2C
Customers of retail networks are of different natures and are

targeted specifically
Commercial customers or B2B (for example, transportation

companies):
Usually targeted with fuel cards/co-branded credit cards
Fuel cards can offer VAT re-claim within Europe
Are supported by special formats of stations
Private customers or B2C:

Targeted with loyalty or discount schemes
Additional offers beyond fuel
© SAP 2009
Customers of retail networks are of different natures; basically, private customers (B2C) or
commercial customers (B2B), which are targeted very differently, especially in mature and
hypercompetitive markets. Commercial customers like transportation companies or any company
operating a large fleet of vehicles are usually targeted with fuel cards or co-branded credit cards for
making purchases at retail networks. Fuel cards are offered by oil companies directly or independent
service providers which have acceptance agreements with retail network operators. Those cards offer
the customer control over fuel expenses, as invoices are itemized - showing where and when each
transaction took place along with the quantity of liters bought and the price charged, making the
expense administration simpler and eliminating the need for receipts. Fuel cards can be limited to
certain products that can be purchased and carry additional data about the vehicle like license plate
and mileage. With this additional information, and product level information, fleet reporting is
usually offered as well (for example, average consumption reports, tracking of trips and so on). In
Europe, fuel cards are very popular in the B2B segment as providers can offer VAT re-claim within
several European countries. Here, fuel cards represent a €56 billion market (2005) covering ~20% of
overall fuel sales in retail networks. They can be the sole form of payment accepted at special
stations, for example, ADS by Aral/BP in Germany, or IDS of Q8 in Europe, as shown on the
previous slide.
Private customers are also targeted by a from of payment, for example co-branded credit cards, but
increasingly, by loyalty or discount schemes to stimulate frequent returns. Loyalty schemes are
getting ever more sophisticated with redeeming options on-site and real time points account
management. Other forms of attracting private customers are bundling of services to a fuel purchase
(for example, free car wash when certain volume of fuel is bought), offering combo deals in
convenience stores (for example, fast food meals) should attract customers, or weekly promotions on
c-store items.

The players: IOCs versus NOCs and Regionals
International Oil Companies (IOCs) are reluctant or restricted to

enter emerging markets
Regional players are strong in some markets
Some Foreign / National Oil Companies (NOCs) are entering

mature/hypercompetitive markets
© SAP 2009
International Oil Companies (IOCs) are reluctant or restricted to enter emerging markets by local
market restrictions (for example, monopoly and price control at refinery rack in Brazil), legal
constraints (for example, fuel price controls or foreign investment constraints in China), or historical
incidents (for example, nationalization of oil companies in India 1974-756). This led, for example, to
the decision to leave the Brazilian retail network market by companies like Chevron and
ExxonMobil. In attractive markets like China, IOCs either enter via joint ventures with the NOCs
(for example, BP with PetroChina ~500 service stations in Guangdong and with Sinopec ~500
service stations in Zhejiang, ExxonMobil (22,5%) JV with Sinopec (55%) & Saudi Aramco
(22,5%)~750 service stations) to test the market and share risks or have only minor networks under
operation (for example, Chevron under the Caltex brand operates 85 service stations in China mainly
in Guangdong Province).
Regional players are already very strong in the US (for example, Valero, Tesoro) and some European
countries where the former (and now at least partly privatized) NOCs still dominate the local market
(for example, Agip in Italy, Total in France, GALP in Portugal, or Repsol in Spain). In some
emerging countries, regional players are also of importance. In Russia, most regions are dominated
by local (national) oil companies, for example, Sibneft in Siberia, due to a local monopoly on
refining. In Brazil, some local players besides Petrobras emerged recently, supported by the
withdrawal of IOCs, for example, Cosan by buying the distribution business of ExxonMobil and
Ultra by buying parts of Ipiranga (local company) and the distribution network of Chevron (Texaco
branded sites). In India, private oil companies Reliance Petroleum and Essar Petroleum started retail
network operations in the late 1990s but closed down parts of their network in 2008 due to fuel
subsidies given to Indian NOCs, which they could not compete on (lately, part of their networks
were re-opened when fuel prices decreased end of 2008).

However, some National Oil Companies (NOCs) are aggressively buying into
mature/hypercompetitive markets. NOCs are becoming regional players there. An example of this is
Lukoil which bought itself into some European markets like Belgium and Central Eastern Europe via
a take-over of networks from ConocoPhillips, and in Finland by taking over TEBOIL. In the US,
Lukoil took over the Getty network and parts of ConocoPhillips retail network. Another example of
oil companies from emerging countries entering mature markets in the Reliance Petroleum in
Australia where they act the exclusive distributor for BP. Additionally, Petrobras said it is
considering entry into the US retail network market in the near future.

Operational Models and Business Processes
Models on how retail networks are operated vary and are not homogenous
As well, operational models can differ by line-of-business (LoB), especially between

fuels and c-store operations
Business processes differ depending on the operational model
Operation models due influence the balance of

systems involved for local support with Point-of-sale
(POS) & local Back-Office System (BOS) on the one
side and for central management with Head-Office
System (HOS) and web-based BOS on the other.
© SAP 2009
Models on how retail networks are operated depend more on country specifics and less on oil
company strategy. In countries where unions are strong, oil companies tend to avoid directly
employing staff to run the stations. The operational model is also influenced by the ownership of the
physical site where the service station resides (company owned versus dealer owned). Typically,
more than one model is deployed in a country by a retail network company. Here, a definition of
operational models as used in the US:
A company-owned, company-operated station is owned by a oil company and operated by

personnel of the oil company. Almost all of these stations are supplied by the oil companies directly.
A lessee-dealer is a person who leases the station and land, including tanks, pumps, signs, and other
equipment, from the oil company and is supplied directly by the refiner or an affiliate or subsidiary
company of the oil company. The lessee-dealer is required by contract to buy gasoline from the
refiner at the price set by the refiner.
An open dealer is a person who owns (or leases from a third party who is not a refiner) the station or
land of a retail outlet. An open dealer has a supply agreement with the oil company and sells fuel
under their brand, but can be supplied directly by the oil company or a jobber under contract with the
oil company.
A jobber purchases branded or unbranded gasoline at a terminal owned or supplied by an oil

company, commonly called the “rack,” and distributes it to their own service stations or to those
owned or operated by others. Many jobbers have supply contracts with oil companies for purchases
of specific amounts of branded gasoline over a set period of time.

An independent dealer purchases unbranded gasoline, either on the spot market or at a refiner’s
rack. Independent dealers generally do not have long-term contracts with any particular brand. They
may also use a jobber to execute delivery of the gasoline purchased at the rack. Unbranded gasoline
may be sold under a local retail chain name such as Wawa, or Freestate, or a local individual owner,
such as “Joe’s Gas.”
The following formats are typical for the European fuels business:
Company owned / Company operated (COCO), that is, the retail site is operated by company
staff, usually by a subsidiary company of the oil company
Company owned / Dealer operated (CODO) consignment stock, that is, the dealer operated the
site for fuels but does not own the fuels which still belongs to the oil company
Company owned / Dealer operated (CODO) non-consignment stock, that is, the dealer operating
the site buys the fuels at time of delivery from the oil company
Dealer owned / Dealer operated (DODO) like above
Also, operational models can differ by line-of-business (LoB) especially between fuels and c-store
operations.
The following operational models for c-stores in branded service stations are in place today:
Stores operated by company (or subsidiary) employees under company’s c-store brand
Stores operated by franchisees under company’s c-store brand (with different stock ownership
models)
Stores operated by dealers unbranded
Stores operated by a partnership/joint venture between an oil and a retail company under a
separate brand
Influenced by the above mentioned operation models, business processes can differ widely. In
general, the more product at the site is owned by the oil company, the more business processes are
controlled centrally as opposed to local product ownership by dealers. If goods are owned by the
dealer/franchisee, more business process control is on a local level. Central business processes
controlled by the oil companies are supported by Head Office Systems (HOS) whereas local business
processes are supported by local systems like Point-of-Sales (POS) and Back-Office-Systems (BOS).
In the case of centralized operations, BOS can also be deployed on a thin-client (sometimes also
called web-based) architecture in a local web-browser by directly accessing the HOS.

Stakeholders in Retail Network Operations
Effective Retail Network Operations requires alignment between several stakeholders with different
business focuses
Vice-President Retail Head of wet stock Head of dry stock Head of

Network Operations operations operations Financials
Retail Network
Fuel Management Convenience Retail Settlement with Partners
Operations
How do I make best use of a How do I best manage How do I ensure the correct How do I ensure fast cash
retail network at controlled working capital in our network products offering within flow with minimal manual
costs to best serve our end while best serving our limited space and avoid out- interventions?
customers? customers? of-stock situations?
Supplier Invoice
Revenue Growth Manage fuel inventories Merchandising & Verification
Operating margin Optimize fuel prices Assortment Planning Vendor Rebate
Customer Satisfaction Automated Sourcing Management
Promotion Handling Payment Card processing
Dealer settlement
© SAP 2009
In Retail Network Operations, we have different stakeholders who care about it; each one with
different objectives (see slide for details on objectives). Besides a global VP or head, we usually find
a separation into Fuels Management and Convenience Retailing for the operational part, and one or
several departments for settlement-related purposes, such as Supplier Invoice Verification and
Vendor Rebate Management for Convenience, and Card transaction and Dealer settlement related to
the fuels business. In IOCs, it might even be that the convenience retailing business is put into a
separate subsidiary (for example, Retail Operations Company – ROC for short – at ExxonMobil in
Europe). Due to such a distribution of business process responsibility, it is quite common that the
supporting IT area is separated as well, with each one just caring about its own part, for example,
fuels stock management versus fuels settlement with dealer versus c-store management versus
payment card processing. In smaller organizations, the different businesses are more aligned and less
distributed across different departments, requiring more integrated IT support.

SAP System Architecture Proposal
Thin-client BOS
SAP ERP incl.

Industry Solutions
for
Retail and Oil and Gas
POS Data
POS Management
PIPE
© SAP 2009
Having the IT architecture for supporting Retail Network Operations, we will now look into which
solutions SAP can offer. SAP does not offer any solution for forecourt controlling (pump connection
and so on) or hand-held devices, or local Fuels POS (even though SAP acquired Triversity in the
past, the solution is not suitable for service stations yet). Our solutions are all head office based. POS
Data Management is the possible entry point for all POS sales transactions, making those available
for reporting on SAP NetWeaver BI and forwarding them in the appropriate format to the ERP
backend, which is enabled for the industry solution Retail and Oil and Gas. SAP Retail can cover the
needs for Convenience Retailing, for example, Merchandising, Assortment Planning, Retail Pricing,
Promotions, Supplier Invoice Verification and Vendor Rebate Management. SAP Oil and Gas covers
typical centralized functionality for, for example, fuel stock management with meters and tank dips,
and settlement of Payment Card transactions and with Dealer. For Back-Office, SAP offers the
capability to run it on a thin-client or web-based architecture, where the store manager via a local
web browser at the site can directly access the Head-Office system for convenience retailing
operations like replenishment ordering, pricing & promotion, POS cash balancing and so on.

SAP Solution for Retail Networks Operations
Business Issues, Capabilities and Benefits
¦ No timely update about goods ¦ Near real-time view at head quarter ¦ Updates sales data available for
sold at sites (incl. sales meter for on sales at the sites with data feeds analysis and fast response to
fuels and POS data) from pumps as well as POS market changes
¦ Missing view of differences of ¦ Timely overview of fuel stock ¦ Fast identification of gains and
book vs. physical fuel stock differences at all sites centrally (‘one losses of fuel stock at sites
¦ Decreasing sales and low margin version of truth’) ¦ Deliver a better shopping
hurting profitability due to wrong ¦ Provide best product, price and offer experience and increase customer
offer of product, price and mix with a view to overall profitability loyalty
quantities and consumer price perceptions ¦ Optimize working capital at sites
¦ High inventory and storage costs ¦ Optimize purchase orders based on while avoiding out-of-stock
due to limited space shopper demand and inventory situations
¦ High volume of payment card position ¦ Minimize charge-backs and re-
transaction with errors ¦ Verification of card transactions invoicing with banks
¦ Many claims from dealers due to against set of rules before posting ¦ Realize fast cash flow w/o manual
inaccurate invoices ¦ Billing based on accurate and interventions
¦ Overpaying suppliers due to verified sales data ¦ Minimize costly manual
wrong quantities or prices in ¦ Ability to match supplier invoices interventions and avoid overcharges
invoices against ordered and/or received
quantities and listed prices
SAP’s solution for Retail Network Operations combines the 2 leading industry solutions for Oil&Gas
and Retail to support all lines-of-business in their different operational models as well as facilitates
the management of all types of customers being served in Retail Networks
© SAP 2009

1. Typical head of Retail Operations questions – do they apply to your organization?

2. In which types of markets does your company operate Retail Networks?
3. Which of the trends in Retail Networks presented do you observe in your
environment?
4. Which are the operational models deployed in your company?
5. Which are the POS, BOS, and HOS suppliers deployed at your company for
Retail Network Operations? How are they integrated?
© SAP 2009

Retail Network Operations: Lesson Summary

Explain the characteristics of Retail Network Operations in the different
markets/countries
Describe the different players and their geographical reach in operating
Retail Networks
Outline the lines-of-business and operation models at Retail Networks
List the different types of customers and how they are targeted
Explain the typical IT landscape for a retail Network Operation including the
SAP solution coverage
© SAP 2009


© SAP 2009

Price Management & Optimization:
Lesson Objectives

Explain the importance of pricing for overall profitability, as well as the
challenges in the price management process in the downstream oil business
Outline the steps of a Best Practice for pricing
Describe the characteristics of different market types with regard to the price
management processes
Differentiate between pricing requirements for different lines of business
(contract-based business versus spot business)
List different pricing types and characteristics
© SAP 2009

Profitable Growth
processes, for example, short billing times through up-to- result in more accurate forecasts
date delivery information and reconciliation Integrated and automated replenishment and transportation
Co
D ist.
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in Fue
Ref
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holes ers
W tom
s
m inal Cus o C
Ter ail Sup
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Ret ork i en
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Full visibility into terminals Integrated Fuel & Convenience Retailing Flexible and agile platform for
Integration of existing terminal systems Integrated wet and dry good business addressing business needs
Fully automated processes Managed margins Low TCO from integrated solution
Integration of suppliers Reduced cost of operation Supporting compliance, transparency
Increased customer visit basket size & growth
© SAP 2009
Cost Control and Profit Margin Maximization: With integrated processes in place, marketers and
distributors are in a position to control their administrative and operational costs. As an example,
they can reduce billing times through up-to-date delivery information and reconciliation.
Furthermore, customers can increase their margin running closed loop price management &
optimization processes from refinery gate to retail pump. SAP, together with our partners, provides
an end-to-end price management and optimization solution. The components are SAP PMM by
Vendavo, KSS RackPrice, KSS PriceNet, and Business Objects XCelsius for pricing dashboards.

Pricing is the Most Powerful Profit Lever
Creates an improvement in operating profit of...

A 1% improvement in...
Price 11%
Source: McKinsey & Co.

Variable
Cost 7%
Sales 4%
Volume
Fixed 3%
Cost
0% 2% 4% 6% 8% 10% 12%
Profit Improvement
“In an industry where daily rack price changes can result in 40 to 50 percent swings in street margin, it is
imperative that we are competitive and profitable at every single location, for every single price decision.
KSS PriceNet gives Brookshire Brothers a definite pricing advantage over our competition. We
are able to analyze different pricing scenarios per location and price in a way that will not only generate
the highest volume results, but the greatest ROI as well.”
- Larry Negron, Director of Petroleum Marketing at Brookshire Brothers
“Now is the time for enterprises to invest in Price Management and Profit Optimization solutions. No other
software delivers the same ROI: 10% to 20% profit improvement. In fact, the more broken and
problematic your pricing processes are, the higher ROI you can expect.”
- Yankee Group
© SAP 2009

Key Challenges in Price Management Process -
A Constant Competitive Squeeze
Energy Security Shapes Policy

Increased risks of supply disruption
Policy impacts on regulations
Unconventional resource incentives, for
example Biofuels
Compliance & Complex &

Governance Volatile Market
Price Volatility
Price gouging
Changing supply/ demand Pattern
Governments control of Growing competitor activity
pricing practices of
retailers Subsidizing of state owned
companies
Anti competitive practices Growing consumer awareness
Continuous Margin Pressure
Sarbanes Oxley Fast Changing Business Environment Additional transparency through
Riskier Business Environment third-party price collectors
Consequences of Non-compliance
Globalization
Deregulation of markets
Increasing availability of information
New players entering markets
Divestments and structural changes
© SAP 2009
These trends and challenges put unprecedented pressure on processes, demand more complex
strategies to compete, reduce the margins for error, and increase the potential to be “out of the
market”

Business Background
Typical VP of Sales Questions

How can I quantitatively challenge my pricing strategy?
How can I adjust strategy, based on observed results?
How can I overcome the approach of my pricing analysts
to rely on intuition/gut feel?
How can I clearly document my pricing strategy and
enforce execution based on pricing rules?
How can I automate my pricing processes and focus on
exception handling?
How do I get better visibility on performance issues?
How do I ensure compliance standards, including audit
trails and approval workflows?
© SAP 2009

Typical Challenges in the Pricing Process
© SAP 2009

Only SAP and Partners Provide Fully Integrated,
Closed-Loop Price Management and Optimization
© SAP 2009

Best Practice Pricing
Audit trails
Authority levels
GOVERN Compliance Reports
Integration with broader governance & risk compliance
Alerts, exceptions
KPI assessment
MONITOR Role-based analytics
Feedback loop to update strategy
Price by exception
Manage exception
EXECUTE Rapid response
Automation
Translate strategy to rules, targets, constraints

Optimized prices
DETERMINE Consistent tactics
Market/customer analysis
STRATEGIZE Define objectives
Document goals
Fully integrated with front and back-office systems

Standardized, service based integration (that is, not custom)
INTEGRATE Consistent data definitions (customers, products, metrics)
Efficient maintenance & persistence of new info
© SAP 2009
Elements of a best practice pricing

A Closer Look to Price Management in Different
Markets
Regulated Emerging Mature Hypercompetitive
Number of
price changes Once per month Once per week Once per day Several times per
day
Increased
fragmentation:
Market NOCs only NOCs, other independents, Max. market
structure players entering hypermarkets, fragmentation
the market jobbers,
wholesalers,
retailers
Partial cost (limited) cost Cost Full transparency

transparency, transparency, transparency, on cost and price
Availability of
cost as driver limited (limited)
information for price change transparency on transparency on
prices prices
Government Partially Only limited Only limited

Freedom to controlled controlled by through control through control
set price (adhoc or government (e.g. of anticompetitive of anticompetitive
automatic through subsidies practices practices
formulae) or export taxes)
As markets mature they get more and more fragmented and complex
© SAP 2009
A National Oil Company (NOC) is an oil company fully or in the majority publicly owned (state-
controlled company). NOCs had a share of around 50% in 2005 global oil production and a share of
over 70% in global oil reserves.
An Integrated Major (International Oil Company, IOC) is a global oil company that is mostly
privately owned. IMs are opposed to NOCs, which have become increasingly dominant in the
international petroleum market.
Regional Player (often a NOCs or IMs subsidiary) is a private company acting in a certain region. It
may be involved in many sectors of oil and gas business.
Niche Player is a local company acting only in a definite sector of oil and gas business.

What You Need to be Successful in Different
Markets
Hyper-competitive
Quick reaction times

Maximization of volume sales and/or profit
Ability to optimize allocations across channels
Improved pricing effectiveness
Mature
Maximization of volume sales and/or profit

Performance forecasting to predict impact of prices changes
Markets
Quantification of competitor cross-effects

Cross channel analytics to provide insight into performance issues
Compliance reports
Emerging
Consistent implementation of prices

Ability to manage performance exceptions & competitive changes
Ability to set a pricing strategy and execute accordingly
Regulated
Price data management
Complexity
© SAP 2009
As companies move from regulated to emerging, mature, and hyper-competitive markets, they need
to adapt certain price management abilities and processes that are not necessary in more regulated
environments.
In a regulated market with rare price changes, basic price data management is enough to run the
business.
In a hyper-competitive market environment, there are many more requirements to an efficient pricing
process. Companies need to survive in a competitive environment with multiple price changes per
day. Therefore, a pricing solution needs to support quick reaction times and maximize volumes
and/or profit.

Market Types and Channels
Differing Competitive Situations, Objectives, and Cycle Times.

Level of regulation can be different for different product channels within the same country.
When moving from a regulated to a deregulated market, consumer protection is a major
© SAP 2009
concern – especially for the retail channel.
There are different channels for different products, with differing competitive situations, objectives,
and cycle times. Different channels & markets can have different grades of regulation/maturity even
within the same country.
For different channels, different solutions are needed to meet business requirements.
On an executive level though, it is important to have cross-channel visibility.

Pricing Types and Characteristics (Examples)
List pricing Spot/rack pricing

Non customer-specific list prices often tied to specific Non customer-specific prices at a terminal, depot for
market indices customer collecting product
Set up & evaluate list prices with appropriate Competitor-index based
benchmarks Market index based
Negotiate discounts, surcharges with existing Can be recalculated sub-daily
customer
Monitor deal compliance Optimized pricing
Non customer-specific prices that meet specific
Fixed pricing optimization objectives
Customer-specific negotiated price not tied to relative Volume clearance
benchmarks
Balance supply and demand
Negotiate with customer within appropriate guidelines
Maximize margin
Monitor deal compliance
Retail network pricing
Formula pricing
Retail pump pricing or dealer tank wagon pricing
Required when visibility is needed for pricing, customer-
Enhance market understanding
specific or non customer-specific
Set up & execute formulas Select and implement appropriate tactics to support
chosen strategy
Negotiate formula price with existing customer for a
Monitor performance & maintain an efficient process
new deal
Recalculate formula prices and notify customer
Monitor deal compliance
© SAP 2009

Typical Pricing - Rack Pricing Process
(Example: Supported by KSS RackPrice)
Time Issues Inputs
Morning What happened in the markets? Final closing prices

How well did I execute my strategy? Competitor prices
What are my price positions? Yesterday volumes
Any exception flags? Yesterday margins
How is my volume/financial performance?
Mid-day Where are the markets? Mid-day spots

What options do I have to price tomorrow? Desired strategies
What exceptions should I deal with?
How might competitors price tomorrow?
Should I modify any rule sets?
End-Day Which Scenario should I choose? Estimated market

When should I execute prices? closing prices
© SAP 2009
Fundamentals of the rack pricing process:
What is the underlying demand for each product? (->demand forecasting)
How will customers respond to changes in price? (-> price elasticity modelling)
How will competitors price? (-> competitor price prediction & strategy monitoring)
What is the breakdown of cost by product, customer, and channel? (-> margin analysis, scenario
create/compare, optimization)
What is the impact of supply constraints? (-> opportunity cost analysis, scenarios, optimization)
SAP Solution: KSS RackPrice (Endorsed Business Solution)

Example: Retail Pricing with KSS PriceNet
Field & Site Management

Field Management
Competitor
Define strategy Surveys
& site tactics
Head Office Proposed

prices
- Action exceptions
- Monitor margin/profit
- Assess compliance
- Improve process Management Team
Automatic
alerts Automated
reports
Field Management Exception
notification and
action
© SAP 2009
Fundamentals of retail pricing:
Enhancing market understanding
Selecting appropriate tactics to support chosen strategy
Implementing tactics consistently & accurately
Leveraging all relevant pricing knowledge & resources
Monitoring performance & focusing effort
Maintaining a responsive & efficient process
SAP Solution: KSS PriceNet (Endorsed Business Solution)
End-to-end Fuel Price Management System
- Combined power of Rules-based pricing and Price Optimization

- Utilizes historical information to gain insight into future performance
- Central Repository: Cost(s), own/competitive retails, volume trends, implemented prices
- Enables collection of competitor prices quickly and easily
- Web-accessible

Two Main Components
- Centralized pricing module
- Site-level (Web), or hand held (Mobile)
Automatically execute strategies 24x7
Exception-based review
- Reporting and Analysis
Helps fuel retailers by
- Providing control over pricing centrally
- Improving process and management of strategy
- Actionable insights from data
- More profitable volume achievement

Proven Results from Process Automation &
Price Optimization - Retail Fuels
Post Implementation Analysis

1.6 5.
1.4
Objective: maintain
Gross Margin Uplift (CPG)
1.2 1.
margin trends
1.0 in all sites and grow
6. gallons
0.8 4.
2. 3. 7. 8.
0.6
9.
0.4 Objective: maintain Objective: trade off sites
gallon trends in all sites between gallons and 10.
0.2
and grow margin margin
0.0
-1 0 1 2 3 4 5 6 7 8 9 10 11 12 13
Change in Gallons (%)
1. 110 sites, C-store, South East 6. 300 sites, C-store European Markets
2. 2,700 sites, C-store, National 7. 300 sites, C store, South West
3. 2,000 sites, Global C-store, National 8. 300 sites, C-store, European Markets
4. 380 sites, C-store, Mid West 9. 800 sites, C-store, North East
5. 800 sites, Grocer, National 10.350 sites, C-store, North East
© SAP 2009
The diagram above shows the proven results from a post implementation analysis of retail price
management and optimization projects implementing KSS PriceNet:
Customers on the left side show significantly higher gross margins (CPG – cent per gallon).
Customers on the right side show significantly higher volume sales.
Customers in the middle have reached a trade off between higher volume sales and increased
margins.

SAP Solution for Price Management

No means to quantitatively Quickly & quantitatively evaluate Strategy addresses key
challenge strategy scenarios for strategy changes competitors by location/channel/
Tendency towards status quo Customer demand & competitor product
and reliance on intuition/gut modeling: simulate impact on Validate strategic goals as
feel volume & margin achievable & consistent with
Strategy not clearly Role-based analytic tools enable desired price image
documented: potential for clear translation of strategy to Eliminate unnecessarily
analyst bias tactics, eliminating bias constraining strategies
Lack of clear, enforced pricing KPI assessments Eliminate analyst bias
rules, manual intervention Pricing process automation Faster “by-exception” resolution
needed to resolve Price optimization of pricing conflicts
Manual pricing processes Flexible reporting tools to Focus analyst time on value-
No feedback loop to adjust generate ad hoc or custom adding activities
strategy based on observed reports, exception alerts Margin and/or volume growth
results Price-change & other authority Rapid assessment of and
Inefficient reporting processes limits response to performance issues
due to lack of analytic tools Compliance reports Full audit trail to demonstrate
Lack of audit trail, limited compliance at all times
approval workflow
SAP provides a complete price management solution

for all channels of trade, from refinery gate to retail pump.
© SAP 2009

1. Typical VP of Sales questions - do they apply to your organization?

2. Do you have established global best practices?
3. How do you build and revise your price strategy?
4. Do you have an established pricing process?
5. What is the organizational set-up of the pricing team?
6. Which pricing technologies are implemented?
© SAP 2009

Price Management & Optimization:
Lesson Summary

Explain the importance of pricing for overall profitability as well as the
challenges in the price management process in the downstream oil business
Outline the steps of a Best Practice for pricing
Describe the characteristics of different market types with regard to the price
management processes
Differentiate between pricing requirements for different lines of business
(contract based business versus spot business)
List different pricing types and characteristics
© SAP 2009

Downstream Marketing & Retailing: Unit
Summary

Explain processes and levels of automation in terminal operations
Explain the overall fuels distribution processes and typical challenges
Explain regional differences and operational models for retail network
operations
Explain best pricing practice and differentiate between pricing requirements
for different lines of business
© SAP 2009

Contents:
Managing Assets in the Oil & Gas Industry
Integrated Business Scenarios to enable improvements
Physical Plant and Information Plant: Asset Master Data
Strategies and Processes in Plant Maintenance
© SAP 2009

Enterprise Asset Management:
Unit Objectives

Describe the importance of Asset Management for the oil and gas
industry, and explain pain points and issues that companies
currently have in managing assets
Explain key business scenarios that enable companies to improve
the management of assets
Understand the importance of the Health, Safety, and
Environmental aspects in achieving sustainable asset operations
Describe basic master data structures and processes in Plant
Maintenance, which are the foundation layer for Enterprise Asset
Management (EAM)
© SAP 2009

Hydrocarbon Commercial
Exploration Development Refining & Primary Terminal Secondary
Supply & Gas Sales &
& Appraisal & Production Manufacturing Distribution Management Distribution
2 – E&P, Upstream
3a – Refining &
Manufacturing
3b – Midstream

Retailing
Support
© SAP 2009
Upstream
Settlement

Business Example
You are the VP of operations and responsible for 5 oil and gas platforms in the
Gulf of Mexico (4 running, 1 currently in construction).
You are responsible for:
Safe, effective, and efficient operation and maintenance of the existing assets
On-time and on-budget delivery of the new assets
Together with experts from Engineering, Maintenance, Procurement, Operations, and

Environment, Health, and Safety, you are working on a proposal for an asset
management improvement program with the following targets
Maximize production output
Minimize hazards (HS&E)
Optimize resources
You will conduct a couple of workshops to identify current issues & pain points,
analyze value opportunities, and create a project roadmap reflecting priorities and
costs.
Possible outcome:
Improvements in data quality of asset-related information
Move from reactive maintenance to more preventive maintenance strategies
© SAP 2009


Lesson 1: Managing Assets in the Oil and Gas Industry
Lesson 2: Integrated Business Scenarios to enable improvements
Lesson 3: Physical Plant and Information Plant: Asset Master Data
Lesson 4: Strategies and Processes in Plant Maintenance
© SAP 2009

Managing Assets in the Oil and Gas Industry:
Lesson Objectives

Understand the definition and life-cycle approach of Enterprise Asset
Management (EAM) solutions
Explain the key business drivers in the oil and gas industry affecting Enterprise
Asset Management (EAM)
Outline current challenges in asset management for the oil and gas industry
© SAP 2009

Assets and the Oil & Gas Industry
Whether building and maintaining offshore production platforms, transportation

and storage facilities, or processing plants, refineries, and service stations, oil
and gas industry companies are involved in a very capital and asset intensive
business.
The current economic climate drives companies’ attention to asset management,
since the efficiency of both the development and operation of these assets
directly impacts the bottom line.
Example:
€1.5 Billion Project
Production -> € 1 Billion/year
Maintenance -> € 100 Million/year
€ 30 Million Spare Parts
© SAP 2009
Whether building and maintaining offshore production platforms, transportation and storage
facilities, or processing plants, refineries, and service stations, oil and gas industry customers are
involved in a very capital and asset intensive business. The current economic climate drives industry
attention to asset management, since the efficiency of both the development and operation of these
assets directly impacts the bottom line.

Defining Enterprise Asset Management (EAM)
Looks at complete organization, instead one plant

Enterprise - across departments, locations, facilities and business units
Uses standard business practices and KPIs
Focuses on assets and optimization, not just on maintenance

Asset Optimizes asset lifecycle decisions
Considers Health, Safety, and Environmental aspects
Balances performance, risk, and cost to achieve asset management

excellence
Management - improve utilization and performance, reduce capital costs, reduce
asset-related operating costs, extend asset life and subsequently
improve ROA
© SAP 2009
Term “Asset Management“ has been known for many years in the financial world as “getting the
best return from investments“
Nowadays, the term “Asset Management” it is also being used to describe the professional
management of any type of asset (for example, physical infrastructure, data and information, of
people, public image, reputation). Oil & Gas industry focus: Management of physical assets and
related data and information
Asset Management is a set of disciplines, methods, procedures, and tools.
The target is to optimize costs, performance, and risk exposure over the complete asset life-cycle.
Asset Management touches many different business areas within an oil and gas company (for
example, engineering, operations, maintenance, safety, and compliance).
Different business units have different interests, and some interests may be conflicting (for example,
minimum of maintenance costs and minimum of downtime) and coordinated objectives are
necessary.
Asset Management also has a strong focus on people - functional collaboration & teamwork, shared
understanding & problem-solving
SAP’s definition for Enterprise Asset Management (EAM)
y Looks at more than one plant, but is flexible enough to accommodate local variations (-> EAM
enterprise process, not a local plant topic)
y Uses standard business practices and KPIs (-> for example, support of industry standards like ISO
14224, 159226)
y Focuses on assets and optimization, not just on maintenance
y Optimizes asset lifecycle decisions
- design, construction, commissioning, operations, maintenance and decommissioning or

replacement of plants, equipments and facilities
y Considers Health, Safety, and Environmental aspects
y Balances performance, risk, and cost to achieve asset management excellence
Equipment availability and lost opportunities due to equipment malfunction are key metrics to define
asset performance
Different financial metrics to measure asset performance:
y Return on Assets (ROA) = Net Income / Total Assets

EAM versus Maintenance
CMMS – Computerized Maintenance Management System

EAM – Enterprise Asset Management
Focus
Asset CMMS
Maintenance
Spare Parts
Management Asset Visibility
Portfolio & Project
& Performance
Management
Asset
Planning &
Scheduling Maintenance
Operational Accounting, Optimization
Risk Costing,
Management Budgeting
Focus
Service
Procurement EAM EAM characteristic:
Integration of critical
© SAP 2009
business processes
Maintenance is a key element and the foundational layer of Enterprise Asset Management (EAM),
but EAM has much more Breadth and Depth……
Computerized Maintenance Management Systems (CMMS) are still widely used in industry.
Computerized Maintenance Management Systems mainly focus on maintenance and the
maintenance work order process.
Enterprise Asset Management (EAM) solutions have an extended solution set and also cover topics
like:
y Portfolio & Project Management

y Spares & Material Management
y Service Procurement
y Financial Accounting – Asset Accounting – Costing – Maintenance Budgeting
y Operational Risk Management
y Human Resources, Time and Payroll
y Maintenance Optimization
y Asset Visibility and Performance
It is considered best business practice to have all steps of the Enterprise Asset Management (EAM)
process integrated and seamless (in contrast of having piecemeal solutions)

”Truth in Data“ key principle: Everyone (for example, maintenance, operations, safety, engineering)
is working with the same data and information
EAM and ERP share common characteristics and total EAM value can be achieved by integrating all
critical ERP/EAM business processes

EAM Oil & Gas: Asset Lifecycle and Data
Needs of Involved Parties
Engineering, Procurement Operation and

& Construction Maintenance
Plant Design Data Maintenance Program Data
EPC Providers Owner / Operator
Collaboration Commission & Lineout

Design Condition Monitoring
Procurement Preventive Maintenance
Construction Work Order Recording/Reporting
Subcontracting Shutdowns/Overhauls
Handover Breakdown Maintenance
OEMs Owner / Subcontractor
Production Modifications
Documentation Extensions
Delivery Asset Retirement
Warranty
Equipment Data Asset / Maintenance Data

Equipment Manufacturing Capital Projects
Keeping Master Data and Business Processes Integrated

© SAP 2009
EAM: Asset Lifecycle
Scope of an Enterprise Asset Management solution (EAM): help companies manage physical assets
(such as production platform or refinery) over the complete life-cycle and across all processes,
including; investment planning, specification and design, procurement and asset construction,
operations and maintenance, decommissioning, and disposal.
Early phases of lifecycle:

Design & Specify, Procure & Build: during these phases, the owner/operator (Customer) contracts
with an EPC (Engineering Procurement Construction) company to design and build the new plant
(for example, Refinery, Offshore Platform). This phase typically lasts from 1 to 3 years. Near the
end of the building phase, a startup crew is brought in to begin the process of system testing and
handover. Each system is inspected, tested, and turned over to operations.
Also, Risk Assessment is part of the first lifecycle phase: Intent is inherently safe design (-> remove
risk in original design versus managing it over the facility lifecycle)
Long-term phase of life-cycle

Operate & Maintain: during this phase, the Customer can either manage the operations themselves or
outsource the work by contracting with a Service Company. The main task in the Operate and
Maintain cycle is to manage the daily operations of the plant and maintain the equipment. Ongoing
risk management (Health, Safety, Environmental Compliance, Process Safety) is also an important
aspect in the operate and maintenance phase.
The Operate and Maintain cycle typically lasts up to 40 years

Enabling Information across the asset lifecycle (Asset Information Management) is a key aspect of
Enterprise Asset Management. Main task: Data handover from early phases (80% of data must be
“turned over” to the owner/operator for Operate and Maintain phase)
EAM: Involved Parties and need for collaboration:
Engineering, Procurement, and Construction (EPC) companies
Equipment Suppliers (OEM)
Owner/Operator (Oil company running asset)
Subcontractors / Service companies (asset owner outsourcing part of Operate & Maintain to third
party.
For example, 60-70% of maintenance work on Offshore Platforms often done by external service
providers.

Oil and Gas - Key Business Drivers
Operating assets
Managing Health of Assets
with maximum Means...Managing Health of Business
effectiveness:
OPEX
Optimize capital
Portfolio &
The International Energy
Agency forecasts in the Energy Managing future asset investments to meet the
Projects:
Outlook 2006 that total energy
investment (oil, gas, coal, world’s growing energy needs
electricity) will need to be as
CAPEX
much as $20 trillion (in 2005 Means...Managing Critical Investment Decisions
dollars) from 2005-2030
Health,
Safety, and
Environment Managing Operational Assets
Means...Managing Target Conflicts
© SAP 2009
Key business drivers in the Oil and Gas industry affecting EAM:
OPEX: Operational Expenditure / Operational Cost : “Running the business”
Operating costs are the costs to produce, manufacture, and prepare products for sale – (for example,
energy costs, staffing, maintenance, and other costs to explore and produce oil and gas, and operate
refining and chemical plants)
In the Oil & Gas Industry, the main parts of Operating Costs are driven by asset maintenance and
operations (in contrast to other industries where maintenance and operations are only a minor part of
OPEX)
Implication: Most organizations will see maintenance improvements make a huge impact on the
bottom line.
Æ move from reactive to preventive maintenance (see lesson 4); extend productive lifetime of
assets, control and reduce maintenance spend; effectively manage contractors; identify and
disseminate best practice
CAPEX: Capital Expenditure: “Creating future benefits”
CAPEX is used by a company to acquire or upgrade physical assets such as property, plant, and
equipment.
Implication: Oil and Gas companies will have a continued need to manage their future asset
investments
Æ Business and Investment Planning, Integrated Portfolio & Project Management
Health, Safety, and Environmental Management
HSE has value in itself, but there is also increased pressure from regulatory side.
Implication: target to achieve sustainable asset operations
Æ Proactive health and safety management, monitor and reduce emissions, reduce energy
consumption
Group Discussion I:
What is Shown on the Slide?
Pre Development
The Development
Costs
+
Economic Limit
Time
Preinvestment
. /.
Y-axis = cost
Legend:
Revenues
CAPEX
OPEX
Tax Royalties/etc
Profit
Preinvestment
© SAP 2009
Question I: What is shown on the slide in a very high level?
y Costs = CAPEX + OPEX
y Revenues = Production * Price
y Annual Cash Flow = Revenues + Costs

Group Discussion II: How Can EAM Help to
Achieve Oil and Gas Business Objectives?
Pre Development
The Development
Costs
+ 4
4 Economic Limit
2
Time
Preinvestment 3
. /. 1
Business Objective: Legend:

1. Reduce CAPEX Revenues
CAPEX
2. Reduce Time to Revenue
OPEX
3. Reduce OPEX Tax Royalties/etc
4. Increase Asset Utilization Profit
Preinvestment
© SAP 2009
Question II: How can EAM help to achieve Business Objectives?

Why is Asset Management Still
Difficult for Many?
© SAP 2009

Managing Asset Lifecycle Continues to be a
Disjointed, Tedious, and Frustrating Process
© SAP 2009
Managing Assets today is, for many companies, a disjointed, tedious, and frustrating process.
Operating in a reactionary mode due to lack of visibility, control, and consistent procedures leads to
higher costs, lower productivity, and increased legal liability
SAP conducted a number of workshops with companies in the oil and gas industry to find out issues
and pain points in the EAM area. Key findings were:
y Sub-optimal portfolio of competing capital investments; no integrated portfolio and project

management
y Lack of interoperability across production asset’s lifecycle. Example: Turning over assets from
construction to operations
y Constant pressure to optimize business processes (reliability, availability, operations and

maintenance productivity)
y Lack consistent, accessible health, safety, and procedural standards and regulations across the
enterprise
y Lack of visibility on status & projected use of assets
y User adoption issues of existing solution and low utilization rate and data quality
The following slides will work out some issues and pain points in more detail.

Challenge: Maintenance Cost “Escalation”
Maintenance Cost
Escalation in the US
2000 Key Observations
1800
1600 Maintenance costs have risen 10-15% per year for the
1400 past 25 years
1200
1000
800 Approximately one third of the total maintenance
600 spend is unnecessary
400
200
0 Maintenance workers spend fewer than 4 hours per day
1979 1990 2000
USD in Billions
performing hands-on work
Downtime costs from lost production outweigh direct

maintenance costs by a ratio of 4:1
Necessary
Wasted
© SAP 2009
“Benchmarking Best Practices in Maintenance Management”, Terry Wireman, 2004
With respect to EAM, companies continue to face rising maintenance costs. In his study,
“Benchmarking Best Practices in Maintenance Management“, Terry Wireman was investigating the
status of maintenance cross all industries in the United States.
Key observations :
y Maintenance costs haven risen 10 to 15 % per year for the past 25 years
y Approximately one third of the total maintenance spend is not necessary
y Maintenance workers spend fewer than 4 hours per day performing hands-on work

Challenge: Integrated Project & Portfolio
Management
Doing th
Portfolio Management
er ight thin
gs!
Complete visibility of all current and proposed
Strategy & projects
Innovation
Alignment
Innovative culture, which supports the
generation of project ideas
Idea Generation
Make decisions on clear and valuable
information like portfolio value, balance,
Ability to make financial figures and strategic alignment
Visibility
Decision Know your current projects as well as your
capabilities
Doing th
Project Management e things rig
ht !
Managing scope, timeline and budget of
Scope &
Communication projects in an integrated way
Timeline
Define the resource demand and search for
suitable resources (e.g. based on qualification)
Project Execution
Track and monitor the execution of your projects
Collaborate with project team members
Resource
Project Costs Plan your detailed project costs
Management
© SAP 2009
Managing a complex portfolio of projects effectively can be a difficult undertaking, especially where
activities are planned and executed using point solutions across multiple corporate units. Gaining
insight into and control over the entire portfolio is a major challenge. Which projects are
underperforming? Which are out of sync with business imperatives? Which criteria were used to
approve the particular activity, and who was involved in the decision? Who’s over budget? Who’s
behind schedule? Who’s tying up resources without delivering results?
Portfolio management (-> doing the right things) addresses processes and organization to improve
planning, evaluation and management of complex portfolios (incl. capital-, R&D, maintenance
projects) through their lifecycle.
Project management (-> doing the things right) addresses on an operational level planning,
implementation & control of project related activities
Companies are currently having many different tools on operational level, project level and portfolio
level in place.
In most cases there is no integration of portfolio and project management.
An integrated approach for “Capital Project Portfolio Management” is necessary and will help to
replicate successful projects more cost effectively and with less risk

Challenge: Interoperability in Assets - Data
Handover Problem
The Business Challenge
Setting up and maintaining EAM master data
Turning over assets from construction to operations takes too much time and can be very
costly
Initially, the main pain lies in the handover from the builder to the operator
In the long run, the challenge lies in maintaining data accuracy and feeding changes back
to involved parties (-> constant changes of assets in operations, for example, modification
projects)
Engineering Partners
Commission/
Design Engineer Build
Field
Asset Owner/Operator Sites
Design Engineer Manufacture Sell Support

? Operate & Maintain Retire
OEM Suppliers
Correct Master Data: Foundation of every EAM improvement project!!
© SAP 2009
Data handover is the costly exercise of migrating massive amounts of data from EPC (Engineering
and Procurement Contractors) and OEM (Original Equipment Manufacturer) to Owner/Operator.
This data is created from project inception through execution to completion, at which point, as much
as 80% of such data must be “turned over” to the owner/operator in a format that can be used in an
EAM system. The data handover problem can be categorized in the following way.
Lack of Process
No process in place for Owner/Operator to initiate data handover

Different projects have unique data handover requirements
Owner/Operators have no consistent way to communicate data format
No process to complete request validation
Lack of support to initiate data handover from other systems
Missing collaboration tools for data handover
No tools in place to track communication between EPC and Owner/Operators

Different projects have unique data handover requirements
No central storage for attachments and reference documents
Duplicate transmission of documents and data
Decomposing data from various systems
Data is trapped in various systems and documents

No easy way to extract data from these systems
Data mapping is manual with high costs

As a result, oil and gas customers are spending millions to translate and re-enter the life-cycle data
created by the EPC and OEM companies into their EAM applications.
The direct impact of this lack of interoperability has been estimated by the US National Institute for
Standards and Technology (NIST) to cost the industry 1 to 2% of the capital it invests annually, due
to:
y Increased project cost from design changes, handover inefficiencies, and associated delays
y Unproductive efforts to reenter, gather, and analyze data used in both operating and decision
making processes

Challenge: Connecting Business and
Technical World
Integration of the “real-word” (Data Historians,
SCADA, PCS, and so on) necessary for advanced EAM
practices
Real-time process control system
?
integration
Integration of embedded systems
Predictive condition monitoring
MES
SCADA/HMI DCS MES Custom Plant SPC/SQC Laboratory Maintenance

Services Systems Systems Database Historians Systems Systems Systems
© SAP 2009
Advanced EAM scenarios will need the integration of business systems with technical systems.
Currently two isolated worlds in most companies.
Business System world:
y ERP, EAM,…
Technical System world:
y Data Historians, SCADA (Supervisory Control and Data Acquisition), PCS (Process Control
Systems), MES (Manufacturing Execution Systems), LIMS (Laboratory Information Systems),….

Challenge: Safe Work Practices:
Work Permit / Lockout & Tagout
Process Industry Challenges
The Process Industry (Chemicals, Oil & Gas, Mill & Mining) handles large quantities of
flammable and toxic materials, so the potential for serious accidents while employees
perform servicing and maintenance activities is always given.
To prevent such accidents, it is very important that safe systems of work are in place.
A Permit-to-work solution is an essential part of this.
What is a Permit-to-Work System ?
A permit to work system consists primarily of a standard procedure designed to

ensure that potentially hazardous routine and non-routine work can be carried out
safely.
Result: Approved and printed Work Permit document
An integral part of any permit-to-work solution is the method of the isolation /

work clearance procedure (Lockout/Tagout). The OSHA standard addresses the
practices and procedures necessary to disable machinery or equipment
© SAP 2009
Safe Work Practices essential to prevent accidents in the oil&gas industry.
Two basic procedures to ensure safety: Work Permits and Lockout & Tagout
For all work activities an approved and printed work permit document necessary.
Work Permit document will describe necessary safety pre-cautions to be implemented prior to work
execution.
Lockout/Tagout is a special safety precaution, which is needed in some cases.
Regulatory requirements to have safe systems of work in place:
y US regulatory body OSHA (other countries will have similar regulatory bodies)
US Occupational Health & Safety Administration
y OSHA http://www.osha.gov/
y OSHA CFR1910.119 relates to Process Safety Management
y EPA RMP, Responsible Care

Need for Safe Work Practices: Piper Alpha
(1988)
Piper Alpha (1988)
“On July 6th, 1988, valve maintenance was ongoing. The shift supervisor was not able to
complete the maintenance work in the shift, so he wrote handover notes and gave them to the
contractor. The contractor did not read them and signed off the permit for the work. The next
shift personnel came and started operation. They did not know that the valve had been replaced
by a blind flange and that there was no pressure release valve. There was a steady release of
gas condensate into the air, after initial pressure built up, and finally there was an explosion”
(Source: http://en.wikipedia.org/wiki/Piper_Alpha)
© SAP 2009
Two main lessons from Piper Alpha:
y Inherently safe design (for example, minimize storage of hazardous material , emergency exits,
and so on)
y Implementation of Safe work practices (for example, work permit and Lockout & Tagout
procedures)
Phillips Chemicals 1989:
y 23 fatalities - this was the specific incident that resulted in OSHA (Operational Safety and Health
Administration) regulations for Process Safety Management (reg CFR1910.119)

Challenge: Stronger Focus on Process Safety.
BP Texas City Refinery Explosion (2005)
Process safety accidents can be prevented.
On March 23rd 2005, the BP Texas City refinery

experienced a catastrophic process accident. It was
one of the most serious U.S. workplace disasters of
the past two decades, resulting in 15 deaths and
more than 170 injuries.
Although we necessarily direct our report to BP, we

intend it for a broader audience. We are under no
illusion that deficiencies in process safety culture,
culture, management, or corporate oversight are
limited to BP.
We urge these companies to regularly and

thoroughly evaluate their safety culture, the
performance of their process safety management
systems, and their corporate safety oversight for
possible improvements.
Preventing process accidents requires vigilance.

The passing of time without a process accident is
not necessarily an indication that all is well and may
contribute to a dangerous and growing sense of
complacency.
© SAP 2009
Lessons from BP Texas City Refinery Explosion:
y A stronger focus on Process Safety and Compliance is necessary. Companies should improve
their process safety performance
y “Baker Report“: This study was initiated by BP due to the catastrophe at its Texas City Refinery,
which exploded, killing and injuring several people.
y BP shared the report with the industry to ensure that the findings and lessons learned at their
refinery could be shared, and that the changes that were implemented could prevent the same
catastrophe from happening elsewhere.
Definition Process Safety Management (PSM):
y The application of management systems to identify, understand, and control process hazards to
prevent process-related injuries and incidents. Its goal is to ensure that a properly designed facility
is kept that way, and is operated safely, in the manner it was intended. Process safety involves the
operation of facilities to handle, use, process, or store hazardous materials/chemicals in a manner
free from episodic or catastrophic incidents
y Process Safety Management (PSM) is becoming more and more a regulatory obligation for the
industry (for example, OSHA PSM standards
http://www.osha.gov/SLTC/processsafetymanagement/index.html)

Background Information
The Baker Report* from 2007 identified several recommendations that needed to be implemented at
global plants and refineries; initiating an examination of existing manufacturing processes and
related safety, compliance, and operational risk measures used in plants.
The study found that operational processes (not only at BP, but other plants) were not consistent in
plant environments and that information sharing, consistent process steps for working with
machinery and executing operations, and worker / vendor partner training and certification were not
always tracked or consistent to ensure safety, compliance, and reduction of risks. The tragedy at BP
and the initiation of this study to identify problems within the plant / operational processes has
driven the O&G and other manufacturing-based industries to change the way they manage
operations, maintain assets, and maintain visibility / transparency on any issues (incidents) occurring
at the plant.
Senior management (C-level and Plant Managers) are in need of better tools to analyze, monitor, and
maintain visibility on these operations. Most manufacturing industries are focused on improving
manufacturing processes and implementing changes found in the Baker Report. This means changing
behaviors, making operational processes more consistent, sharing best practices across plants,
continuously educating workers and service vendors that work in the plants, and improving
information availability on processes / procedures, compliance, safety, and risks.

Continuous EAM improvement programs
Strategic approach to achieve EAM business objectives and value necessary
EAM Maturity
Planning, Building, and Commissioning Assets
Optimized Asset Operations and Maintenance
Operational Risk Management
© SAP 2009
The described challenges lead to opportunities. What should companies do ?
Most oil & gas companies will have EAM solutions in place and they have accomplished much, but
they must continue to look for ways to drive more value from their enormous asset investments. The
evolution of EAM solutions over the last years in areas like functionality, usability and technology
will help on this way. EAM improvement road-maps will be dependent on the EAM maturity of
companies. “Laggards” are having other problems as opposed to “Best in Class” companies
A strategic approach to achieve business objectives and value is necessary.

Companies often engage specialized EAM business consultants for the definition of continuous
improvement programs (e. g. definition of business objectives, analyze value opportunities, project
roadmap reflecting priorities and costs)
In the next lesson the 3 main Business scenarios for Enterprise Asset Management (EAM) will be
discussed in more detail
y Planning, Building , and Commissioning Assets
y Optimized Asset Operations and Maintenance
y Operational Risk Management

Managing Assets in the Oil & Gas Industry:
Lesson Summary

Understand the definition and life-cycle approach of Enterprise Asset
Management (EAM) solutions
Explain the key business drivers in the oil and gas industry that affect
Outline some of current challenges in asset management for the oil and gas
industry
© SAP 2009


© SAP 2009

Integrated Business Scenarios to Enable
Improvements: Objectives

Explain the main stakeholders, objectives, and process steps of the main
business scenarios that enable improvements in how companies manage
assets
© SAP 2009

Integrated Business Scenarios
PLAN & PROCURE &

COMMISSION OPERATE MAINTAIN RETIRE
DESIGN BUILD
Planning, Building, and

Commissioning Assets
© SAP 2009
Planning, Building and Commissioning Assets
Manage evaluation/building/buying of assets, including handover to operating owner from

construction/engineering.
Sweat the Assets - Maximize available run time, manage facilities and suppliers to ensure Service
Level Agreements are enforced, and minimize spare part investment.
EAM Master Data and Maintenance Planning & Execution are key topics within this scenario.
Keeping your People, your Plant and your Assets, and the Environment Safe are the key topics here.
There is some overlapping in scenarios, but business scenarios are a good way to frame out scope of
Enterprise Asset Management (EAM)
‘Commissioning’: All activities needed to bring a newly constructed plant into regular production
(for example, inspections, pre-commissioning, first start-up)

Key Stakeholders & Objectives
COO/CFO Steering Committee PMO VP of Engineering
Asset Portfolio Capital Project Asset Information

Management Management Management
How do I extend and How do I assess risks and How do I make sure How do I facilitate an
preserve operational opportunities to avoid projects are executed on effective handover and
capacity in the most wrong investment time and on budget? make sure the assets are
effective way? decisions? ready to run?
Capital Expenditures Average break-even Cost Schedule Index Master data

Time-to-operate time Budget at Completion completeness
ROA / Break-even Average planned ROI % Overdue project tasks Cost to develop asset
deviation info
Milestone attainment Schedule Perf. Index
Total deviation of % Visual asset
Earned Value
planned budgets information
% Projects with high risk Avg. time to access info
Cost of data handover in
% of capital project
© SAP 2009
This Business Scenario is about the early stages of the Asset Lifecycle. It is the entire process, from
early business planning, evaluation of project proposals, through to project governance and
execution. The goal is the operational readiness of the asset, which means that the project needs to be
completed on time and on budget, and all asset-related information needs to be available.
This slide describes the key stakeholders and their key KPIs. The roles will vary by company:
Steering Committee
There might be a VP of Portfolio Management, or the team reports into the respective Asset Owner.
PMO
PMO stands for Program Management Office (-> “Execution of Capital Project”)
Scenario: Planning, Building, and Commissioning Assets could be divided in 3 main steps:
Manage Asset Portfolio: “How do I assess risks and opportunities to avoid wrong investment
decisions? “
Capital Project Management: “How do I make sure projects are executed on time and on budget ?”
Asset Information Management: “How do I facilitate an effective handover and make sure the assets
are ready to run?”

COO/CFO Steering Committee PMO VP of Engineering

Asset Portfolio Capital Project Asset Information
Management Management Management
COO, CFO Long-term Capital Program

Controlling Planning Budgeting Governance
Engineering Electronic Transformation

Development
Plant / Maintenance Import of Eng. and OEM
Collaboration
Engineering Data collaboration
Capital Projects Project and

Initiate Project Planning Project
Investment
Project Manager Project / Estimation Execution
Controlling
Plan Asset Technical

Maintenance Replacements /
Collaborative Document
Assets
Maintenance Manager Construction Management
Additions Management
Supply Chain MRO and

General Technical Parts
Services
VP, Supply Chain Contracts Management
Procurement
© SAP 2009
Asset Portfolio Management
Asset Portfolio Management is about the funneling of any kind of investment opportunities (for
example, CAPEX or OPEX investments) from idea stage to project closing.
It is a flexible phase gate process with risk evaluation and ranking capabilities through stages like:
Identify, Asses, Select, Define, Execute, Operate.
Portfolio Management is having an integration with Project Systems. During project execution,
Portfolio Management will “act like a dashboard” for Management “to keep on top of Projects” (for
example, actual cost rolled-up from ERP accounting)
Capital Project Management
Capital Project Management is about the efficient management of capital projects with engineering
and construction partners. The focus is on the owner/operator side of the project, as big oil and gas
projects normally managed externally by the EPC (1 or more). It is about the effective monitoring of
progress and cost of projects.
A Project Management System (for example, SAP ERP PS) is the tool for project planning and
accounting based on work break-down structures. Parts/equipments and services could be procured
related to the project structure, with the option to keep separate project stock.

Asset Information Management
It is about the management of EAM master data for maintenance and operations. The main focus is
the electronic handover of engineering information during capital projects. You can collect and
prepare EAM master data, even before the EAM system is implemented. Load the engineering
structure from the plant design system and transform the structure to relevant asset structures.
Collaboration with equipment suppliers is required to complete maintenance information. Enrich the
master data with visual information which allows to build illustrated part catalogs. Finally, master
data and documents are synchronized to EAM and underlying document management systems.
Main SAP and partner solutions
y SAP Portfolio and Project Management (SAP PPM )
y Integrated tool set for full project life-cycle from idea stage to project closing
y Flexible phase gate process with risk evaluation and ranking capabilities
y Integration with operations project management for full visibility of progress and status across
the portfolio
y SAP ERP Project System (SAP ERP PS)
y Structured information exchange with engineering and construction partners
y Project planning and accounting based on work break-down structures and networks
y Procurement of parts / equipment and services related to the project structure with the
possibility to keep separate project stock
y Progress monitoring and cash management
y Management of asset under construction accounts until final settlement to fixed assets
y NRX Asset Center
y NRX Asset Center, an SAP Endorsed Business Solution provides the capability to collect and
prepare SAP master data even before the ERP system is implemented. Data manipulation is
easy until synchronized to ERP, which becomes the system of record during the maintenance
and operations phase.
y NRX Asset Center provides collaboration features to collect the necessary information from
vendors or within the company. Drawings can be hot-spotted to created illustrated parts books.
The collection of visual information can be organized efficiently
y The synchronization to SAP ERP comes fully automated and preconfigured. Information is
automatically kept in synch

PLAN & PROCURE &

DESIGN BUILD

© SAP 2009

Asset Operations and Maintenance
Engineering Maintenance Procurement Operations

COO
Asset Planning and Operations and Spare Parts
Service Procurement
Scheduling Maintenance Management
Key Issues
How do I maximize the How do I optimize How do I make sure How do improve How do I ensure the
return of my assets? maintenance my assets are up and service delivery and right supply of parts
resources? running? reduce service without keeping
costs? excessive stock?
Typical KPIs
Minimize Downtime Business planning MTBF (Mean Time Reduce request and Number of spare part
Keep Assets Profitable MTTR (Mean Time Between Failure) order cycle time stock outages
Enforce Service Levels to Repair) Schedule Percentage of Spares Inventory
Maximize Wrench Compliance compliant turnover
Efficient Maintenance
Time OEE (Overall transactions with Percentage of
Activity
Equipment services contracts equipment with parts
Contain Maintenance Stay in Budget
Effectiveness) Increase list
Cost
transparency and
minimize errors for
procure-to-pay
process for services
© SAP 2009
This Business Scenario is about the operate and maintain stages of the Asset Lifecycle. This scenario
is the “basic” and “foundational” layer for all other scenarios. Most companies start EAM
implementation activities with scenario.
Main focus: Master Data and Maintenance work order process (-> will be explained in lesson 3+4)
This slide describes the key stakeholders and their key KPIs
Scenario: Asset Operations and Maintenance could be divided into 4 main steps:
Asset Planning and Scheduling: “How do I optimize maintenance resources? “
Operations and Maintenance: “How do I make sure my assets are up and running?”
Service Procurement: “How do improve service delivery and reduce service costs? ”
Spare Parts Management: “How do I ensure the right supply of parts without keeping excessive
stock?”

Engineering Maintenance Procurement Operations

COO
Optimized
Asset Planning and Operations and Spare Parts
Operations and Service Procurement
Scheduling Maintenance Management
Maintenance
Business Maintenance Asset and

Initiating Production Inventory
Operations Planning & Cost Maintenance
Maintenance Planning Management
Budgeting Budgeting Reporting
Technical Asset
Document Master Data
Engineering Asset
Management
Performance
Management
Management Management
Maintenance Work Preventive & Demand Service Consumption

Shutdown Sub- Refurbishment
Planning & Clearance Corrective
contracting
Planning & Delivery
Processing
Driven
Scheduling Management Maintenance Creation Confirmation Planning
Operational Operational Catalog Parts

Procurement Sourcing Procurement Management Procurement
Order Service Invoice

Service Provider Collaboration Entry Collaboration
© SAP 2009
Spare Parts Management
Inventory Management and parts procurement are the main topics here.
Also “clean-up” and consolidation of underlying master data (material, vendor) are in scope here.
Service Procurement
The main parts of maintenance activities in the oil & gas industry (-> 60-70 % in Upstream) are
outsourced to external service providers
A standardized and automated service procure-to-pay process is the target
Sourcing and supplier self service functionalities, service entry, and invoice collaboration
Operations and Maintenance
A maintenance work order process for Breakdown, Corrective, and Preventive Maintenance (-> to
be explained in lesson 4) is the main topic.
Also, the safety layer on top of maintenance activities with work the permit system and
Lockout/Tagout (-> box Work Clearance Management) is part of this scenario.
Asset and Maintenance Reporting/Analytics

Asset Planning & Scheduling
Technical Asset Management for structuring/modeling of your real world assets in the system with
help of functional locations and equipments
Main topic (-> to be explained in lesson 3)
Also very important specific planning and scheduling functionalities (for example, Maintenance
Planning & Scheduling)
Main SAP and partner solutions Asset Planning & Scheduling
y SAP ERP Plant Maintenance (SAP PM), Partner solution Reliability Centered Maintenance
and Optimization (RCMO) by Meridium
y Develop work procedures (Task Lists) including job instructions, spare parts, drawings, skill
requirements, work centers.
Maintenance strategies can also be derived with a Reliability Centered Maintenance (RCM)
methodology.
y Automate creation of preventive maintenance orders.
y Load drawings, work, and operating procedures into Document Management System and link to
relevant equipment.
y Complete Task Lists and Maintenance Plans drive a zero-based maintenance budget.
y Integrated project management for planning, budgeting, scheduling, and reporting of maintenance
projects
Operations and Maintenance
y SAP ERP Plant Maintenance (SAP PM), SAP Manufacturing Integration and Intelligence
(MII), SAP Analytics (BI), SAP Work Clearance Management, Partner Solutions from
Syclo for mobilization of asset management, SAP VIP by NRX
y Use of SAP Analytics (BI), SAP Manufacturing Intelligence and Integration (MII), to access
yield, quality and condition information, and access to complete maintenance history.
Integrated Work Clearance Management supports work permits and lockout/tagout safety
procedures.
y Use of Mobile Asset Management application avoids delayed back office processing

Service Procurement
y SAP Supplier Relationship Management (SAP SRM), SAP ERP Materials Management
(SAP ERP MM)
y SAP Business Suite covers the entire service procure-to-pay process including service requests
from ERP integrated to sourcing and contracts, purchase order processing, supplier collaboration
and settlement
y Integration to Materials Management for Service Requests and use of Supplier Relationship
Management (SRM) bidding engine and Supplier Self Services for efficient web-based bidding
collaboration and service fulfillment
Spare Parts Management
y SAP ERP Material Management (SAP ERP MM), SAP Master Data Management (SAP
MDM)
y Automated parts replenishment through consumption-based Material Requirements Planning

(MRP).
y Automatic forecast model selection, re-order point (ROP) and re-order quantity (ROQ)
calculation.
y Use Master Data Management (MDM) to identify obsolete and redundant part numbers. Forecast
in the material master.
y Eliminate manual planning work through creation of Bills of Materials (BOM) and assigned to
Equipment / Functional Location.
y Flexible order settlement against various cost receivers, including fixed assets

PLAN & PROCURE &

DESIGN BUILD

© SAP 2009

What is Operational Risk Management?
An Emerging Term
SAP’s understanding of Operational Risk Management is:

A move from focusing on “lagging” indicators to focusing on “leading” indicators of risk in
enterprise operations
An enterprise approach to understand and manage various levels of risks (Health, Safety,
Environmental Compliance, Process Safety) associated with production
A natural progression of converging operational, safety, and compliance business processes
A toolset for proactive, empowered decision-making
Key Principles
Proactive over Reactive
Right Information to the Right People at the Right Time
in the Right Format
Information flows across operational silos for
Performance & Joint Clarity
Continuous Learning and Improvement is core
Stakeholders need to be informed and involved in
unobtrusive ways
© SAP 2009
Operational Risk Management is an emerging term
Operational Risk Management (ORM) is a management system approach to ensure Safe, Compliant,
and Reliable operations; and to continuously improve the operational performance. Operational Risk
Management (ORM) key for sustainable asset performance.
ORM brings concepts from Occupational Health & Safety (1970s), Process Safety Management
(1990s), and new risk-based approaches like Risk Based Process Safety (RBPS) into a common and
integrated management system approach.
Leading indicators are indicators used to predict the future (as opposed to lagging indicators, which
measure past performance).

Plant Manager, Plant Manager,

Chief Compliance Officer COO or Plant / Maintenance /
Environmental Industrial Hygiene and
VP Manufacturing Engineering Manager
Engineer Safety Officer
Keep the Stakeholders Keep the Keep the Keep the

Informed and Involved Environment Safe People Safe Assets Safe
How do I meet all How do I gain visibility How do I manage How do I execute a How do I ensure safe
external and internal to the status of EHS emissions, GHG, health and safety operations through
EHS requirements and risks and energy, and worldwide program, ensuring cost-effective
prevent serious performance? compliance efficiently? policies are followed maintenance?
incidents? globally?
Cost of Enterprise EHS Incidents Notices of Violations Injuries and Near Overdue
EHS Compliance EHS Performance Emissions to Water, Misses Maintenance of
Corporate Fines Metrics Air (including Green Fatal Incidents Safety Critical
& Penalties House Gas), and so Equipment
EHS Risks Lost Time Injury
Safety Record on Rate Ratio Planned /
Overdue Risk
Energy Unplanned
Public Reputation Mitigations and New Cases of
Consumption Maintenance
Tasks Occupational
Illnesses Work Permits
Safety Trainings Maintenance Costs

© SAP 2009
Operational Risk Management connects the stakeholders with the operational management of safety
for the environment, the people, and the assets.
-> This enables you to stay compliant, and to create a proactive safety strategy and realize it in daily
operations.
Operational Risk Management is a “cross topic” (along asset/process life-cycle, business units,
involved departments)
Target to drive towards a zero incident rate and decrease total costs across multiple plants by
reducing risks (identify, plan and execute mitigating actions, establishing leading indicators,
monitoring compliance, maintaining mechanical integrity) and improving operational visibility
“How do I meet all external and internal EHS requirements and prevent serious incidents?”
The stakeholders of this topic might vary from company to company.
Scenario: Operational Risk Management could be divided into 4 main steps:
y Keep the Stakeholders Informed and Involved: “How do I gain visibility to the status of EHS
risks and performance? “
y Keep the Environment Safe: “How do I manage emissions, GHG, energy, and worldwide
compliance efficiently? ”
y Keep the People Safe “How do I execute a health and safety program ensuring policies are
followed globally?”
y Keep the Assets Safe: “How do I ensure safe operations and mechanical integrity through cost-
effective maintenance and reliability programs”

Operational Risk Management - Objectives
COO, Chief Plant Manager, Plant Manager,

CCO Plant / Maintenance /
Compliance Officer Environmental Industrial Hygiene and
Engineering Manager
Engineer Safety Officer
Keep the Stakeholders Keep the Keep the Keep the

Informed and Involved Environment Safe People Safe Assets Safe
COO / Chief
Compliance
Officer
EHS KPI
EHS
Monitoring
VP Operations / Risk Audit
Plant Manager and Health
Mgmt Mgmt
Compliance Environmental Permits & and Maintenance
Reporting Requirements Mgmt Safety Mgmt
Mgmt Occupational
Health Mgmt
Reliability
Operations Centered
Action,
Data collection Work Permits, Maintenance
deviation and Operating Safety
for emissions, Lockout /
response
consumption Procedures Training
Tagout
planning
Environmental Engineer Industrial Hygiene and Safety Officer Maintenance / Engineering Manager
© SAP 2009
Operational Risk Management enables stakeholders to create an operational risk management (risk,
compliance, safety, operations) strategy for implementation across multiple plants.
Work processes support a 'best practice' approach and clearly identify performance goals and
objectives per plant, providing transparency to the operations team
Keep the Stakeholders Informed and Involved
Visibility and proactive management of operational risks
Corporate performance monitoring on environment, health, safety & compliance
Easy-to-use dashboards monitor the EHS performance of countries, locations, and Org. units, and
compare with company wide targets.
Compliance reporting to external stakeholders and authorities is provided (to meet the legal reporting
requirements)
Support of internal or external Audits

Keep the Environment Safe
Run business operations in accordance with environmental laws and company policies to avoid or
reduce pollution, save energy, and prevent brand image exposure.
Company-wide transparency, management, and measurement of:
y applicable environmental laws and company policies
y emissions and resource usage
Keep the People Safe
Proactive health, safety, and certification program ensuring policies and guidelines are followed
globally
Closed loop processes including risk and exposure assessments, standard operating procedures,
safety measures, certificates, heath surveillance, incident management
Keep The Assets Safe
Ensure safe operations, avoid incidents that harm people or the environment, and improve asset
productivity
Best practice solution:
y Adapt maintenance plans to risk potential of assets, to increase reliability with reduced efforts
SAP and Partner Solutions
Keep the Stakeholders Informed and Involved
SAP GRC Risk Management, SAP EHS Management (Reporting functions), SAP NetWeaver
BI, Business Objects, SAP MII and SAP ERP (Audit Management).
Closed loop risk management allows you to perform EHS risk analysis, monitor measures for risk
mitigation, risk prevention and monitor results.
Visibility into operational performance metrics, enabling drill down
Compliance reporting to external authorities
Audit management solution that meet ISO 19011 standard

Keep the Environment Safe
SAP EHS Management (Environmental Compliance), SAP MII (optional to collect data )
Management of permits, licenses, and requirements
Inventory Management of emissions like Green House Gases and GHG credits
Predefinition and handling of early warnings, alerts, and measurements
Incidents management
Data collection for emissions, consumptions, and measurements
Internal and external reporting
Keep the People Safe
SAP EHS Management (Health & Safety); SAP Enterprise Learning (SAP ERP HCM), SAP
Work Clearance Management (SAP WCM)
Managing industrial hygiene and safety; including risk assessment, incident/ accident logs, exposure
profiles
Occupational health management including health surveillance protocols
Standard Operating Procedures for safe handling of hazardous substances
Execute and manage safety courses, briefings and certificates
Lockout/tagout and work permits to protect maintenance workers
Keep The Assets Safe
SAP ERP Plant Maintenance, SAP Work Clearance Management (SAP WCM), SAP Mobile
Asset Management, Partner Solution RCMO by Meridium , Partner Solutions from Syclo for
mobilization of asset management.
Asset Information Management
Reliability-Based Maintenance Strategy
Work Clearance Management to perform works permits & lockout/tagout

Integrated Business Scenarios to Enable
Improvements: Lesson Summary

Explain the main stakeholders, objectives, and process steps of the main
business scenarios that enable improvements in how companies manage assets
© SAP 2009


© SAP 2009

Physical Plant and Information Plant: Asset
Master Data: Lesson Objectives

Explain the basic concept of hierarchical structures of functional locations and
equipment to represent asset functionality
Understand the basic functionality of a Classification System, Catalogs, Task
Lists, and Measurement Points
© SAP 2009

EAM System Demo
© SAP 2009
Not many people will have worked with an EAM solution (SAP or a solution from other vendor).
Therefore, this demo will show some basic features from the scenario "Optimized Asset Operations
and Maintenance" and give you a first “look and feel" of an EAM solution

“Physical Plant” and “Information Plant”
To enable operational readiness and excellence, the “information plant”

must match the “physical plant”
Physical Plant
Information Plant
“ACTIONABLE
INFORMATION”
© SAP 2009
Target that “Information Plant” is matching the “Physical Plant”:

y Right Information To the Right People at the Right Time in the Right Format
y “Information Plant” is built on “structured” and “unstructured” data
y “Collective Minds” of different departments are defining an asset in the “information plant”.
Examples of Information related to the “Physical Plant”: Chemical Hazard Information (Toxicity,
Corrossivity, Reactivity, Special Hazards, and so on), Process Technology Information, piping and
instrumentation diagrams (P&IDs), control system logic, material and energy balances, hazards
related to chemical reactions, Process Equipment Information (drawings, ventilation system,
electrical classification, P&ID, facility data), Description/Documentation of Work & Safety
procedures (for example, Operating Procedures, Safe work procedures, mechanical integrity
procedures, startup/shutdown procedures, bypass procedures)
Operational Readiness
Operational Readiness for capital-intensive organizations can be defined as the state of preparation
and readiness of people, processes, applications, and information to support on-time and on-budget
delivery of capital projects, and the safe, effective and efficient operation of new and refurbished
assets.
"In asset and construction oriented industries, properly managing very large amounts of structured
and unstructured data is crucial. MDM and information management in the Asset discipline are
increasingly being looked upon by asset-intensive organizations as a strategic way to ensure on-time
and on-budget plant startup, and subsequent safe and reliable plant operations and maintenance.”
Andrew White, Research VP, Gartner

Asset Information is Integral to Oil and Gas
Companies
Technical Objects: Functional Locations and Equipment

fundamental structuring elements for Asset Information
© SAP 2009
Asset Information is needed in many different departments and asset information is fundamental for
many business processes:
An enterprise must have a common system of reference to identify all of it assets (for example, to
fulfill corporate governance regulations)
This is done by creating unique master records for each technical object
This lesson will focus on fundamental information needs in the maintenance department. Master
Data structures in maintenance will lay the
foundation for all asset related information
Functional locations and equipments are the key elements for structuring asset data and information
Technical objects are either functional components of process systems (functional location) or
individual physical objects
that execute process functions (equipment)
Functional Location and Equipment are both technical Objects with similar functionality (for
example, master data, available functions) and characteristics
Finding the right modeling approach for functional locations and equipments (What is a functional
location? What is a equipment?) is big challenge in every EAM implementation project, and
different companies will have here different modeling approaches.
Today’s Reality:

y At many companies, physical plant = information plant is not yet a reality
There are problems in managing huge amounts of master records and asset information.
(approx >100,000 functional locations and 100,000 equipments + 1,000,000 Million documents
per large plant in the Oil and Gas industry)
y Sometimes companies work with a “simplified” model of Physical Plant (-> missing functional
location and equipment data in Information plant)
y Asset Information is distributed in many, many different applications and information “silos”.

Equipment, Assembly, Spare Parts
Equipment
Bill of Material (BOM)

Assembly
Techn.
object
Spare
Materials (Spare Parts)
Assembly Assembly
Part
Spare Spare Spare

Assembly
Part Part Part
Spare Spare
Part Part
© SAP 2009
A piece of equipment is an individual object that is to be maintained independently.
Pieces of equipment can be installed and dismantled at functional locations.
You should always create an equipment master record for a technical object if:
y Individual data is to be managed for the object (for example, year of construction, warranty
period, usage sites)
y Maintenance tasks are to be performed for the object, either regular, planned, or resulting from
damage
y A record of the maintenance tasks performed for the object must be kept (for example, for
insurance or compulsory annual inspection purposes)
y Technical data on the object is to be collected and evaluated over a long period of time
y The costs of maintenance tasks are to be monitored for the object
y Records of usage times at functional locations are required for the object

Maintenance Bill of Material (BOM): Assembly and spare parts
A maintenance bill of material (BOM) is a complete, formally-structured list of the components

making up a technical object or an assembly. The list contains the object numbers of the individual
components together with their quantity and unit of measure. The components can be stock or non-
stock spares or assemblies, which in turn can be described using maintenance BOMs.
Maintenance BOMs are primarily used for the following purposes:
Structure description
y A maintenance BOM describes the structure of a technical object or material. Using maintenance
BOMs, you can specify exactly where maintenance tasks are to be performed on a technical
object.
Assignment of spare parts
y A maintenance BOM is used in plant maintenance to assign spares for a technical object or
material

Equipment: Installation/Dismantling
Product structure browser

© SAP 2009
Equipment can be installed and dismantled at functional locations.
You can monitor the installation times for a piece of equipment from both the functional location
view and the equipment view.

Technical Objects: Functional Location
Functional locations are hierarchically ordered structures that

represent a technical system, building, or part thereof.
Production Plant
Structuring criteria:
spatial
Production Area 1
technical (components)
functional (process oriented)
Press shop
Purpose
Welding plant
usage data (What was installed?)
plan, execute, and document maintenance
Assembly area
tasks
cost monitoring
Production Area 2
Shipping area
© SAP 2009
Functional locations are hierarchically ordered structures that represent a technical system.
Functional locations are rollup points for costs, reliability data, or any other data.
Pieces of equipment are installed within the functional location hierarchy, at the point at which they
execute their respective functions.

High Level Organizational Structure
Top-level Functional Locations
Global Oil
Company
Upstream Midstream Downstream

Division Division Division
Europe Americas Asia Pacific
Asset Alpha
Asset Beta
© SAP 2009
Example:
High level organizational structure of assets within a global Oil and Gas Company
1st level structuring of functional locations by business unit (for example, Upstream, Midstream,
Downstream)
2nd level structuring by regional aspects (for example, Europe, Americas, Asia Pacific)
3rd level structuring by production assets (for example, Asset Alpha, Asset Beta)
The next slide will continue with Asset Alpha (Production Platform or Refinery)

Asset Alpha - Production Hierarchy
Asset Alpha
FPSO Platform Wells Process

Facilities
Power Sea Water Fuel Gas Well Site 1 Well Site 2 Well Site 3 Separator
Injection Compressor
Gas Turbine Pump 1 Well 1 Well 2 Well 3 Gas

1 Treatment
Gas Turbine Well Storage

Pump 2
2 Completion 1 Tanks
Well
Completion 2
Submersible
Pump
© SAP 2009
The Asset Alpha structure is further structured into facility areas (for example, FPSO, Platform,
Wells, Process Facilities) on level 4
Level 5 is, for example, is the further structuring of the facility area Platform (for example, Power,
Sea Water Injection, Fuel Gas Compressor)
Under the functional location, Power, we are now reaching bottom-level functional locations on level
6, where equipments are installed
The data relationship between (bottom-level) functional location and equipment can have a one-to-
many relationship (many equipments could be installed
under a functional location). The recommendation is here a one-to-one relationship.
Best Business Practice Process Industry/ Oil & Gas
Top level functional locations identify facility areas, while the bottom-level functional locations
identify individual equipment functions. It is important to distinguish between bottom-level
functional locations (-> identifying process functions) and equipment (-> identifying physical asset
performing that function).
Equipment items are installed in bottom-level functional locations.

Master Record of a Technical Object
Classification
Master Record
Functional Loc. / Equip.
Documents /
Technical drawings
General
Multilingual texts
Location
Addresses / Partners
Organization
Measuring points /
Counters
Structure
Catalogs
Permits
How do I add additional data fields?

© SAP 2009
The master record of the technical object (functional location / equipment) will have a pre-defined
(limited) number of views and data fields in every EAM System:
Example:
y General: Class, object type, reference data, manufacturer data, and so on
y Location: Location data, address
y Organization: Account assignment (for example, company code, cost center), responsibilities (for
example, maintenance planning plant)

Classifying Technical Objects
Example: SAP Classification System
Class:
Pumps
Characteristics:
Lifting height in meters
Power requirement in
Watts
Connection type
Assign additional features in detail to a technical object that the master

record cannot handle
© SAP 2009
Classification is a cross-application function in the SAP System that is used by other applications as
well as Asset Management.
One aim of classification is to assign features in detail to a technical object that the master record
cannot handle in this quantity.
Classification also provides a very different search option whereby objects can be sought and found
according to characteristics and their features. Example: Power requirement = 2,000 Watts AND
lifting height = 10 meters AND ...
You have the option of searching by a replacement component (for example, pump with the same
characteristics) for the refurbishment. The system uses the classification data as the basis for the
search. In the results list, you can select a component and copy it into the order.
Best Business Practice Process Industry/ Oil & Gas
Class hierarchy per ISO 14224 should be used. ISO 14224 also defines characteristics that should be
captured for each equipment class.

Working with Classification System
Machines
Characteristic: Pumps Motors Gears
Lifting height
Power requirement Turbine Recipro- Water Connection type

Pumps cating Pumps Transporting capacity
+ Lifting height Pumps + Lifting height
Power Connection
requirement type
Lifting height Transporting
capacity
Lifting height
© SAP 2009
A classification system has the task of describing objects using characteristics, and grouping similar
objects into classes, to classify them and make them easier to find.
The structure of a classification system consists of three steps:
y Defining the features: First you describe the features of an object that are represented using
characteristics. You create the characteristics centrally in the SAP system.
y Creating the classes: You must store the objects to be classified in classes. These classes must
be structured. Characteristics are then assigned to these classes.
y Assigning the objects: When you have created the classes required for classification, you can
assign objects to these classes. The objects are described using the characteristics contained in
the class.
Characteristic inheritance is the transfer of a characteristic and all its values into all the subordinate
classes of a class hierarchy. The characteristic is therefore not contained in the subordinate classes.
Characteristic inheritance enables you to define a central characteristic, which is required in all the
subordinate classes, just once to a superior class and not have to assign it explicitly to each class.
If you create a class hierarchy, the characteristics for all the superior classes are inherited by the
lower classes. Therefore, characteristics that you have not assigned explicitly to the class, but which
originate from superior classes, are also displayed on the valuation screen.

Catalogs
Catalogs for:
Object part Cause of Damage Task
Damage Activity
Catalogs Structure: Example:
Catalog Damage
Catalog
Code Group Mechanical

Damage
Code Code
0010 Corrosion
0020 Broken glass
0030 Engine defect
… …
© SAP 2009
Catalogs are used when maintaining notifications for the coded entry of results and activities.
Coded entry is particularly useful for analysis. There are certain standard analyses, which can be
used to analyze these codes.
Catalog: Combination of code groups, grouped together according to content
(for example, damage, cause of damage).
Code groups: Combination of code groups, grouped together according to content
(for example, damage to vehicles, pumps, motors). Or Mechanical damage, electrical damage and so
on.
Codes: Description of damage, an activity and so on.
Advantages of catalogs: No incorrect entries
Codes can be used as the starting point for workflows and follow-up actions
Statistical evaluations are possible using standard analyses
Catalogs are critical for equipment reliability data!
Best Business Practice Process Industry/Oil and Gas
Catalogs should reflect ISO 14224 equipment class failure coding.

Consideration of Industry Standards in EAM
System Design
Recommendation: Facilitate data capture per ISO 14224 and data

exchange per ISO 15926
ISO 14224, “Petroleum and natural gas industries - Collection

and exchange of reliability and maintenance data for equipment”
ISO 159262, “Industrial automation systems and integration - Integration of lifecycle

data for process plants including oil and gas production facilities”
© SAP 2009
Technical Objects and Object structures are the foundation for an EAM solution. This should be
designed in compliance with industry standards.
Many standards (global, national, industry, company level) found around the world, sometimes
“contradictory”.
The Oil and Gas industry was powerful enough to develop and impose its own de facto standards.
There are many global standards now for the oil and gas industry, which have been generated by ISO
Technical Committee 67, in conjunction with the American Petroleum Institute (API)
ISO 14224 “Petroleum and natural gas industries - Collection and exchange of reliability and
maintenance data for equipment”
Example: Definition of Equipment Failure Codes
Every equipment class should have failure codes per industry standard ISO 14224 or equivalent
company standard
Issues today: Equipment Failure Codes are not used at all or different plants will work with Different
Failure Codes for the same type of equipment…
Benefits of working with standardized Codes:
Accurate data for cost, reliability and safety studies. Better identification of problem areas, problem
equipment types and problem equipments
ISO 159262, “Industrial automation systems and integration — Integration of lifecycle data for
process plants including oil and gas production facilities”
Example: Handover of EAM Master Data from EPC to owner/operator
Automated handover of data based on industry standard 15926 or equivalent company standard
Issues today: Manual re-entering of data.

Measuring Points and Counters
Functional Locations
Measuring Point
Equipment
Measuring Point
Measuring Points describe a particular

condition of a resource
Numeric value with unit of measure
temperature of coolant Measuring Point
number of rotations per minute of a turbine
Non numeric value
Fluid level of a tank
Counters describe the usage of a resource Measuring Point

Delivery rate of a pump
Service life of a gear
© SAP 2009
Measuring Points and counters are master data objects, which can be assigned to technical objects
(Functional Location / Equipment).
You want to document the condition of a technical object at a particular point in time.
Documenting the condition of a particular object is of great importance in cases where detailed
records regarding the correct condition have to be kept for legal reasons.
This could involve critical values recorded for environmental protection purposes, hazardous
working areas that are monitored for health and safety reasons, the condition of equipment, as well
as measurements of emissions and pollution for objects of all types.
Measuring Points and Counters are also the basis for counter-based or condition-based preventive
maintenance strategies (topic for lesson 4). Example: Maintenance activities are always performed
when the measuring point of a technical object has reached a particular state, for example, every time
a brake pad has been worn away to the minimum thickness permitted

Measurement Documents
Measuring Point Measuring Point
Measuring Point Measuring Point
© SAP 2009
Data for measuring points and counters are added into the system with measurement documents.

Task Lists
Master Data for a series of standard operations (Library of Jobs)
Material PRT
10 Switch off Target time
20 Dismantle Inspection
Characteristic
30 Clean
40 Reassemble
50
60
Which operations
have to be
performed?
© SAP 2009
In your company, specific maintenance work should be performed for all pumps at regular intervals.
This work consists of a series of standard operations (for example, switching off, safety check,
disconnecting power supply of pump, and so on).
Therefore, these operations are grouped together in one task list, which can be used repeatedly for
different maintenance orders.
Task Lists could be combined into task list groups. A task list group contains all the maintenance
task lists with the same or similar maintenance steps.
Depending on the task list type, task list groups are either object-based (equipment task lists, or task
lists for functional locations) or object-independent (general maintenance task lists).
Example:
Task list group 1 for measuring device M-105
Task list no. 1 - Steps for inspecting measuring devices
Task list no. 2 - Steps for calibration
Task list group PUMP_WTG for pump maintenance
Task list no. 1 - Steps for pump inspection
Task list no. 2 - Steps for exchange of gears
Task list no. 3 - Steps for maintaining pump motor
PRT: Production Resource Tool
Unlike machines and fixed assets, production resources and tools (PRTs) are movable (not
stationary) operating resources that are required to perform an activity and can be used repeatedly.
For example, PRTs include documents, engineering drawings, jigs and fixtures, and measurement
instruments.

Physical Plant and Information Plant: Asset
Master Data Lesson Title: Lesson Summary

Explain the basic concept of the hierarchical structures of functional locations
and equipment to represent asset functionality
Understand the basic functionality of a Classification System, Catalogs, Task
Lists and Measurement Points
© SAP 2009


© SAP 2009

Strategies and Processes in Plant
Maintenance: Lesson Objectives

Explain basic maintenance strategies (Breakdown, Corrective, Preventive)
Outline the approach to and outcome of Reliability Centered Maintenance
(RCM)
Understand the process steps in maintenance work order process
© SAP 2009

Maintenance Organization/Roles
What & Why? Strategy and Framework

Maintenance Management, Maintenance Engineer, Reliability Engineer
Who & How? Planning and Execution of Maintenance

Planner, Supervisor, Technician
Planner Supervisor Technician
Plan Evaluate Planned Understand and

Maintenance work prepare for work
Tasks Distribute Work Execute
Coordinate within team delegated work
between teams Check and Record and
Ensure asset inspect report
and resource completed Work observations
utilization
© SAP 2009
Plant maintenance comprises the following activities:
y Inspection: Determining the actual condition

y Maintenance: Maintaining the target condition
y Repair: Restoring the target condition
The maintenance organizations usually perform other technical activities, which do not belong to
Plant Maintenance, but should be performed using the same tools for maintenance order planning
and processing, for example:
y Modification or construction
y Cleaning
y Revisions
y Tool assembly and erection of fixtures
y Production assistance
What and Why? Strategy and Framework (“management“)
Task: Development, implementation, and periodic evaluation of an effective asset maintenance plan

When performing maintenance, you use various strategies aimed at optimizing the asset availability,
thus minimizing the risk of outages and minimizing the maintenance costs.
Maintenance was in the past synonymous with repair (“fix-it-when-it-breaks”)
Today’s best business practice: Moving to a more proactive operations and maintenance philosophy
based on preventive maintenance strategies.
Who and How? Planning and Execution of Maintenance
The typical role of the Planner is planning maintenance task execution. The planner also interacts
with other departments to ensure that when work execution starts, there is minimum disturbance and
a technician can utilize available time efficiently
The Maintenance Supervisor receives input from planner and distributes / dispatches these tasks to
technicians. The supervisor also oversees the execution and ensures the successful completion of the
delegated work.
The technician is a subject matter expert for a known asset. The technician evaluates the work
delegated to him/her, and based on experience, adopts the task and executes the task efficiently.
Once the task delegated to the technician is finished, the technician will record the task as complete
and enter the time and materials used.

Maintenance Philosophies/Strategies
March
4
Corrective Preventive
Breakdown Maintenance
Time-Based
Un-planned
Performance-based
Corrective Maintenance
Planned Condition-based
Predictive Maintenance
© SAP 2009
Many different definitions/terms about maintenance philosophies/strategies can be found in

publications (for example, definition of preventive/corrective maintenance)
Corrective maintenance: Corrective maintenance is correcting a failure that has occurred or is in

the process of occurring (“problem exists”)
Corrective maintenance is used to repair problems identified by a given "method of detection“,
which may include preventive maintenance. Corrective maintenance could be planned or unplanned.
Breakdown Maintenance: Unplanned emergency repair of inoperable equipment. Immediate

attention to minimize serious consequences.
Maintenance tasks are reactive and the focus of these tasks is how quickly the machine or system can
be returned to service.
Breakdown maintenance is a philosophy, AKA "run to failure“.
Corrective maintenance: The concept of corrective maintenance is that proper, complete repairs of
problems are made on an as-needed basis. All repairs are well planned, implemented by properly
trained personnel, and verified before the machine or system is returned to service. Corrective
maintenance could be the result of a regular inspection which identifies the failure in time for
corrective maintenance, then performed during a routine maintenance shutdown.
Preventive maintenance is, in contrast, tasks which are implemented before a failure occurs and
corrective tasks are scheduled to correct.
y Preventive maintenance includes testing, lubrication, cleaning, adjusting, and component

replacement to extend the life of equipment. Its purpose is to minimize breakdowns and excessive
depreciation.
y In its simplest form, preventive maintenance can be compared to the service schedule for an
automobile.
y Preventive Maintenance capabilities allow maintenance to be carried out at predetermined

intervals, or to other prescribed criteria, and the use of measured
physical parameters against known engineering limits for detecting, analyzing, and correcting
equipment problems before a failure occurs.
y Usually, these schedules for preventive maintenance are formulated on the basis of an equipment
repair history, design life, service plans recommended by the original equipment manufacturer
(OEM), and the mean time between failures (MTBF).
y Preventive maintenance could be divided into three areas:
- Time-based: When a certain deadline has been reached (for example, every 6 months), the
preventive maintenance tasks are triggered.
- Performance-based: When a certain level has been reached (for example, every 10,000 km),
the preventive maintenance tasks are triggered.
- Condition-based: When a status is above or below a certain prescribed range (for example,
profile depths lower than 15mm or temperature higher than 85ºC), then preventive
maintenance tasks are triggered.
Real-time, condition-based data input is used to continuously adjust the performance expectation (for
example, based on process variables like temperature, vibration analysis, flow rate, revolutions per
minute, and oil analysis)
Condition–based maintenance strategies are also known as predictive maintenance strategies.

Predictive maintenance strategies are preventive strategies without a fixed schedule/deadline.
A comprehensive maintenance program will use a combination of all three approaches (Breakdown
Maintenance, Corrective Maintenance, Preventive Maintenance) and strategy should be based on the
criticality of equipment.
Examples:
y Equipment where consequences of failure or wearing out are not significant and the cost of this
maintenance is not greater than preventive maintenance Æ Corrective Maintenance
y Equipment where a failure would have expensive or unacceptable consequences Æ Preventive

Maintenance based on Condition Monitoring

Preventive Maintenance: Reasons
Legal regulations (for example, technical inspection of vehicles)

Quality assurance (for example, customer demands)
Reduction of breakdown frequency of assets, thereby:
Lowering costs of restarting,
Prolonging the lifecycle of assets
HS&E considerations
Manufacturers’ requirements
Lowering of maintenance costs
© SAP 2009

Group Discussion: Maintenance Strategy for 3
Identical Pumps
Operating Context ?? Failure Consequences?

Working Personal and Equipment Safety
Environmental Health/Compliance
Operations
Economics
Line 1
B C
Working Stand-by
Line 2
Failure Management Strategies?

© SAP 2009
Group discussion:
Development of maintenance strategies for 3 identical pumps A, B, C
General recommendations from vendor always right approach?
Identical strategy for all 3 pumps?
Consideration of Operating Context and Failure Consequences

What is RCM?
Reliability-Centered Maintenance (RCM)

“An analytical process used to determine appropriate failure management strategies
to ensure safe and cost-effective operations of a physical asset in a specific
operating environment”
ÆRCM Process to develop maintenance strategies
For decades, manufacturers have used RCM to:

Improve operational reliability
Optimize equipment performance
Make better design and lifecycle decisions
Control risk
RCM was first applied commercially in the 1960s in the airline industry
As a result, today’s planes
are over 100x more reliable
Now utilized in nearly every major asset intensive industry

© SAP 2009
RCM is a systematic approach to find the best maintenance strategy to ensure the reliability of a
technical system
Reliability Centered Maintenance is a formal method to determine the maintenance requirements of

an asset in its operating context.
Reliability
Definition by IEEE:
y The ability of a system or component to perform its required functions under stated conditions for
a specified period of time.
Definition by Elsayed:
y Reliability is the probability that a product or service will operate properly for a specified period
of time (design life) under the design operating conditions without failure.
Analytic definition:
y Reliability is the probability that the time of failure is later than a specific time: R(t) = P(T>t)

How Equipment Fails - 6 Basic Patterns
“bathtub curve” 4%
1 2% 11% age-related
5%
2 7%
14%
89% NOT age-related
68%
© SAP 2009
Some theoretical background of RCM
y The “bathtub curve” is a common model to describe the failure rate of equipment (Pattern 1)
y Periods of bath-tub; infant mortality (decreasing failure rate), useful life (constant failure rate),
and wear-out (increasing failure rate)
y Thinking: “Failure, for most parts of an operation, is a function of time and age”. This is not the
reality!
y Time-based Preventive Maintenance and overhaul activities have NO big impact on your
equipment reliability and, in fact, can sometimes be harmful.

The 7 Questions of RCM
1. What are the desired functions and performance standards? Functions

To fill a tank at a minimum rate of 100 gal. per min
2. In what ways can it fail to fulfil its functions? Functional Failure RCM
Tank fills at a rate of less than 100 gal. per min
3. What causes each functional failure? Failure Modes

Filter clogs due to debris
FMEA
4. What happens when each failure occurs? Effects
Flow rate is restricted until pump can no longer meet process demand
5. In what way does each failure matter? Consequences

Production impacted, line must be taken down to repair, 1 hr of downtime
6. What can be done to predict or prevent each failure? Task

Monitor flow, alert when flow is impacted.
7. What can be done if the failure cannot be predicted or prevented? Redesign

Build valve and piping to redirect flow ahead of filter
© SAP 2009
Method developed by John Moubray in his book “Reliability-Centered Maintenance“ (-> RCM)
The RCM process asks seven questions about the asset or system under review
FMEA: Failure mode effects and criticality analysis . Short version of RCM study (questions 3-7)

RCM Study
Functional
Analysis
Criticality
Assessment
Criticality
High Medium Low
Reliability Failure Modes

Centered and Effects Structured Review
Maintenance Analysis
Maintenance Evaluate Strategy

Strategy and Optimize
Implement Strategy in Collect Work

EAM History
© SAP 2009
RCM study requires some effort (for example, setting-up analysis team from different disciplines
and support of trained RCM facilitator)
y First a criticality ranking is performed to identify the high, medium, and low critical equipment
y If the equipment is scored as a high criticality piece of equipment, then a complete RCM study is
performed.
y If the equipment is scored as a medium criticality piece of equipment, then an FMEA study is
performed.
y If the equipment is scored as a low criticality piece of equipment, then sometimes a simple review
of the maintenance plan is performed and a possible run to failure strategy is chosen
y Once the strategy is fully developed – it is implemented in EAM system and information (# of
failures, failure codes, downtime, time between failures, and so on) is captured over time to
analyze the effectiveness of the maintenance strategy and keep it updated as necessary.

Typical Outputs of the RCM Process
Predictive & preventive maintenance tasks

Monitoring and Inspection tasks
Other Recommendations:
Changes to operating practices
Changes to spares and holding stocks
Changes to skills training
Changes to tools required
Physical changes to asset configurations
© SAP 2009
Most oil and gas companies will have experience with RCM strategies
Issue: Most RCM initiatives are one-time exercises, but not living programs.
The challenge lies with the difficulty of implementation:
y Most RCM tools are stand-alone systems, disconnected from existing maintenance, inspection,
and operational systems.
y Loading RCM recommendations into EAM is a manual, time-consuming process.
y Once loaded, the connection with the original RCM analysis is lost.
y Measuring results over time is difficult.
y Keeping the RCM process evergreen is nearly impossible.

Basic Maintenance Work Order Process
Breakdown / Corrective Maintenance
Technical object Date

1 Notification Create task lists for different objects
Description Malfunction
Maintenance
Work to be performed Material Planner
2 Planning Create maintenance plans
Internal/external resources Tools
Order release Capacity levelling

3 Scheduling Schedule maintenance plans
Printout Availability check
Technical /
4 Execution Planned/unplanned
Process maintenance mat. withdrawal
orders
Store person
Time conf Order settlement Maintenance

5 Completion Technically complete maintenance orders
Tech. completion Technical confirmation Supervisor
History
Material usage, orders, notifications, PMIS, usage list
© SAP 2009
The basic cycle for maintenance processing within the SAP EAM comprises five steps
(any EAM solution will have similar steps):
y Step 1: Malfunctions and other requirements are detailed in the notification and entered in the
system.
y Step 2: In the planning, orders are created for the requirements outlined in the notification. The
order contains the tasks to be performed, together with the materials and tools required.
y Step 3: In the control step, the order undergoes checks (for example, material availability check,
capacity requirement check) which are important for the subsequent release. If no serious
problems arise (for example, spare part not available for required date), then the order is put into
process and - usually in the same step - the shop papers are printed.
y Step 4: In this step, the task is performed on site. The required materials are withdrawn from
storage with reference to the order. Unplanned withdrawals of material (that is, withdrawals that
have not been reserved through the order) are also possible.
y Step 5: The completion phase is composed of the partial steps of time confirmation (enter the
actual times worked), technical completion (completing the results), and technical completion.
The Controlling department can settle the order at the same time.

Work Order
Order header:
Reference object, dates, priority, description
Operations:
Work center, duration, description, external services
Components:
Material, services, quantity, availability check
Object list:
Technical objects, notifications, material
Further information:
Costs, Partners, Maintenance plan information...
© SAP 2009
Work/Maintenance Order central object in work order management process.
Every work activity (routine, non-routine) should be based on an underlying work order
Header data is information that serves to identify and manage the maintenance order. It is valid for
the whole maintenance order - for example, the number, description and type of order, scheduled
dates for order execution, priority of tasks, creator, last person who changed the order and so on.
The object list consists of functional locations and/or pieces of equipment and/or assemblies.
You can use operations to describe the work to be performed when the maintenance order is
executed. For example, work center, planned time, control key.
Materials are spare parts, which are required and used up when the maintenance order is executed.
Production resources/tools (for example, tools, protective clothing, trucks) are required to execute
the maintenance order, but are not used up.
The data in the settlement rule provides information on who usually bears the costs. It is proposed
from the master record for the reference object and can be changed when the first settlement rule is
maintained for the order.
Cost data provides information on how high the estimated, planned, and actual costs are in the value
categories, and which cost elements are relevant for the order.

Planning Alternatives:
Internal or External Processing
Internal processing External processing
© SAP 2009
There are basically two options for assigning work to be performed in the planning phase :
For internal processing, internal workshops, which are defined in the system as maintenance work
centers, execute the work.
For external processing, external companies are hired.
Within a task list, a control key defines whether an operation is to be processed internally or
externally.
External processing of work order tasks common for the oil and gas industry (-> service procurement
process).

Planning, Scheduling, and Dispatching
Work Raise Work Evaluation Planning & Execution Dispatching Execution &
Identification Notification & Estimation Scheduling Planning task Recording
New Incoming work
Weekly Schedules Daily Schedules
Unplanned Work
Free for Emergency
Emergency
Corrective Corrective
Planned Work Maintenance Maintenance
Ready to be Scheduled
Preventive Preventive
Maintenance Maintenance
Weekly Bucket Daily Bucket
© SAP 2009
Planning – allocation of resources to a work order which could contain, materials, crews, contractors,
or tools
Scheduling – allocating the work order into the desired time frame in which the work should occur
Dispatching – allocating work orders to specific work crews or individuals (hopefully based on the
schedule)
To Schedule or Not to Schedule?
Planning, other than day-to-day allocation of work by supervisor, will result in improved efficiency.
How Much Scheduling?
A very detailed schedule that, because of emergencies, becomes obsolete after the first hour or two
of use is of little value.
Good scheduling: 60 to 80 percent adherence to schedule

Preventive Maintenance Process
1 Create task lists for Maintenance

Task List different objects planner
Maintenance Maintenance
2 Create maintenance plans
planner
Plan
Schedule maintenance Maintenance

3 Schedule plans planner
Maintenance Process maintenance Maintenance

4 Order orders technician
Technical Technically complete Maintenance

5 maintenance orders supervisor
Completion
© SAP 2009
In preventive maintenance, the Maintenance Planner sets up a Maintenance Plan and Schedule and
maintenance orders are automatically generated by the maintenance plan.
y Step 1: The task list defines object-dependent or object-independent process steps to be

performed.
y Step 2: The maintenance plan is created for the object and serves to automatically generate
orders (also: notifications, service entry sheets) in accordance with particular guidelines.
y Step 3: The scheduling is responsible for the regular call up of orders (notifications, service
entry sheets) as well as for recalculating planned dates.
y Step 4: The maintenance order is automatically generated by the maintenance plan and entered
in the order list, from where it is processed like other orders.
y Step 5: The technical completion marks the order and the corresponding planned date in the
maintenance plan as finished. The date of the technical completion is used in the maintenance
plan for calculating the next planned date.

Condition Monitoring Scenario
Standard interfaces Notification
Measurement
Document
Process Data Event
Filter
Process Control
System
EAM
SCADA System
© SAP 2009
Condition Monitoring Scenario: Online transfer of condition data (measurement documents), which,
under certain conditions, automatically results in tasks (notification).

Final Group Discussion:
EAM Benchmarking Analysis
Overall Companies
(n = 130)
Metric Maintenance Approach Breakdown
Average Q1
Weekly Maintenance Schedule Attainment 15.7%

64.3 90.5
Rate (in %)
46.3%
Asset Utilization (in %) 81.0 97.6 38.0%
Unplanned Downtime or Outages (in %) 13.0 4.0
Wrench Time (in %) 47.8 75.0

Reactive Maintenance Preventive Maintenance
Overtime Hours (% of total hours) 13.8 5.0 Predictive Maintenance
MRO Inventory Obsolescence

8.4 0.7
(as a % of Total MRO Inventory)
Rework Time (in %) 12.2 5.0
© SAP 2009
Your company participated in an EAM Benchmarking Study and your results are exactly “Average”
Good result? Where are the problems? What could be done to improve the actual situation?
Wrench time: Productive time a maintenance technician is working
ASUG (American SAP user group) and SAP did a Benchmarking Analysis with companies running
SAP EAM.
The results allow for the following generalization::
y Key EAM Metrics
- This dashboard summary provides an overview of the benchmarks for some of the key metrics
associated with the asset maintenance process. Based on the SAP EAM benchmarking study
analysis, these Average and First Quartile benchmarks are drawn from all the EAM study
participants
y Maintenance Approach Breakdown by work types on Equipment
- This chart shows the maintenance approach adopted by the participants
- Reactive Maintenance is still the most pervasive form of maintenance approach, however
companies are increasingly shifting to Preventive maintenance.
- Predictive maintenance is also gaining importance with forward looking organizations.
Possible Target figures:
y Predictive 50%
y Preventive 25%
y Reactive 25%

Strategies and Processes in Plant
Maintenance: Lesson Summary

Explain basic the maintenance strategies (Breakdown, Corrective, Preventive)
Outline the approach to and outcome of Reliability Centered Maintenance
(RCM)
Understand the process steps in the maintenance work order process
© SAP 2009

APPENDIX –
Key figures and indicators
Business Terms
1. Introduction
1.1. Units of measurement
1.2. The most important O&G business KPIs
2. Financial key figures and indicators
2.1. US-GAAP
2.2. non US-GAAP
3. O&G specific key figures and indicators
3.1. Upstream
3.2. Downstream
3.3. HSE (health, safety and environment) performance indicators
4. Business Terms Collection
© SAP 2009

Introduction
Units of Measurement
Typically, oilfield units (barrels and cubic feet) are used internationally, whereas SI
(meters and tonnes) units are used in western Europe. Standard (international)
currency is the US dollar. Volumes (barrels, cubic feet) are reported on an
international basis, and masses (tonnes) on a Western Europe basis.
Dollar Barrels of oil equivalent for gases and other
Million (106) energy materials
Abbreviation BOE
Billion (109)
1 BOE equiv. to 5,610 scf gas or 159 m3 gas
Trillion (1012)
Tonnes for liquids (and also gases)
Barrels for liquids
Abbreviation = t
Abbreviation BBL Equiv. to 7.33 barrels
Equiv. to 158.98 liters
MMBBL = million barrels (106) Cubic metres for gases (and also liquids)
Abbreviation = m3
Standard cubic feet for gases Equiv. to 35.3 standard cubic feet
Abbreviation SCF
Equiv. to 0.028317 cubic meters
BCF = billion cubic feet (109)
conversion factors
TCF = trillion cubic feet (1012)
© SAP 2009

Introduction
The Most Important KPIs
Return on average capital employed Production unit costs

(ROACE)
From StatoilHydro (StatoilHydro capital markets day, Jan 2008)

© SAP 2009

Financial Key Figures and Indicators
Usually, international companies report financials according to US-GAAP (“Generally Accepted

Accounting Principles”) and reserves according to SEC standards. Non-GAAP financial
measures are: ROACE, CAGR, normalized production cost per barrel, net debt to capital
employed ratio.
Sales and other operating revenues
Net income:
Net income is equal to the income that a company has after subtracting costs and expenses from the total
revenue.
Income by major operating area:

Upstream
(Midstream, depending on company organization)
Downstream
Other (for example, chemicals, mining, and so on)
Investment, capital expenditure per business area, CAPEX:

Capital expenditures (CAPEX or capex) are expenditures creating future benefits. A capital expenditure is
incurred when a business spends money either to buy fixed assets or to add to the value of an existing fixed
asset with a useful life that extends beyond the taxable year.
Debt ratio, net debt to capital employed ratio:

The relationship between net interest-bearing debt and capital employed
© SAP 2009

Financial Key Figures and Indicators,
Continued
Net cash flow:
The balance of the amounts of cash being received and paid by a business during a defined period of time
Liquidity:
The term refers to a company's ability to meet its obligation when and in the event they fall due
Interest-bearing-debt / net interest-bearing debt:

Gross interest-bearing debt less cash and cash equivalents
Impairment:
A downward revaluation of fixed assets for showing the true rate of ROACE
Return on (average) capital employed (ROACE or ROCE) in %
NetIncome + MinorityIn terest − AfterTaxFi nancialItems

ROACE =
NetFinancialDebt + Shareholders ' Equity + MinorityIn terest
© SAP 2009

Financial Key Figures and Indicators,
Continued
Compound Annual Growth Rate (CAGR)
1
Vtn
CAGR (t 0, tn) = ( ) tn −t 0 − 1
Vt 0
CAGR is used to describe the growth over a period of time for some element of the business, usually
revenue. CAGR is not an accounting term, but remains widely used, particularly in growth industries, or to
compare the growth rates of two investments because CAGR dampens the effect of volatility of periodic
returns that can render arithmetic means of that interval irrelevant.
Dividend per share
Earnings per share
© SAP 2009

Upstream-Specific KPIs
Net income per barrel of oil equivalent (boe)

Replacement cost profit before interest and tax ($ billion)
Finding costs ($/boe, for example, five-year rolling average)
Finding and development costs ($/boe, for example, on a five-year rolling average)
Lifting costs, unit production costs or production costs ($/BOE)
Costs per barrel of oil produced / SCF gas lifted / produced
Costs per BOE produced
Also: normalized production costs to exclude currency effects of USD
Reserves replacement ratio (%)

1. Revisions and improved recovery
2. Extensions and discoveries
3. Purchases of reserves-in-place
4. Sales of reserves-in-place (MINUS)
5. The sum of all above: total reserve additions
6. Production (MINUS)
7. The sum of 5 and 6: Net change in reserves
© SAP 2009

Upstream Key Figures and Indicators,
Continued
Net proven reserves (in billions of BOE)
Usually per operating area (APJ, NA, ME, and so on)
Exploration expenses
1. Exploration expenditures (activities)
2. Expensed, previously capitalized exploration expenditure
3. Capitalized share of current period’s exploration activity (MINUS)
4. Exploration expenses: the sum of all above
Daily / annual production

Gas (scf, standard cubic feet)
Oil (barrels, BBL)
Total (barrels of oil equivalent)
Completed exploration and extension wells

Also: amount of meters drilled, or average amount of meters drilled per well
Costs per well, costs per meter drilled
© SAP 2009

Upstream Key Figures and Indicators,
Continued
Production per share
Cash and income per BOE

E&P income per BOE
E&P cash contribution per BOE
© SAP 2009

Downstream Key Figures and Indicators
Traded volumes per day of oil
Actual throughput (refinery) in millions of tonnes
Total energy and retail sales volume
Petrochemical margin (USD/tonne)
Refining capacity per share
FCC (fluid catalytic cracking) or refining margins (USD / bbl)
Cash and income per BOE

R&M income per BBL
R&M cash contribution per BBL
© SAP 2009

Performance Indicators for Health, Safety and
Environment (HSE)
Total recordable injury frequency
The number of fatalities, lost-time injuries, cases of alternative work necessitated by an injury,
and other recordable injuries, excluding first-aid injuries per million working hours, for
example.
Lost time injury frequency

The number of lost-time injuries and fatal accidents per million working hours, for example.
Serious incident frequency

The number of incidents of a very serious nature per million working hours. (An incident is an
event or chain of events which has caused or could have caused injury, illness and/or damage
to/loss of property, the environment or a third party. Matrixes for categorization have been
established where all undesirable incidents are categorized according to the degree of
seriousness, and this forms the basis for follow-up in the form of notification, investigation,
reporting, analysis, experience transfer and improvement.)
Sickness absence
The total number of days of sickness absence as a percentage of possible working days
(excluding contractors).
© SAP 2009

Performance Indicators for Health, Safety and
Environment (HSE), Continued
Oil spills
Accidental oil spills to the natural environment from a company‘s operations.
Carbon dioxide emissions

Total emissions of carbon dioxide in, for example, millions of tonnes, from a company’s
operations.
Nitrogen oxide emissions

Total emissions of nitrogen oxides in thousands of tonnes for example, from a company‘s
operations.
Energy consumption
Total energy consumption in terawatt-hours for all operations of the company.
Non-hazardous waste recovery rate

The recovery rate for non-hazardous waste comprises non-hazardous waste from a
company’s operations and represents the amount of non-hazardous waste for recovery in
relation to the total quantity of waste.
© SAP 2009

Incoterms
Incoterms or international commercial terms are a series of international sales

terms, published by International Chamber of Commerce (ICC) and widely used in
international commercial transactions. They are used to divide transaction costs
and responsibilities between buyer and seller and reflect state-of-the-art
transportation practices. They closely correspond to the U.N. Convention on
Contracts for the International Sale of Goods. The first version was introduced in
1936, and the present dates from 2000.
© SAP 2009
Setting rules and standards
Arbitration under the rules of the ICC International Court of Arbitration is on the increase. Since
1999, the Court has received new cases at a rate of more than 500 a year.
ICC's Uniform Customs and Practice for Documentary Credits (UCP 500) are the rules that banks
apply to finance billions of dollars worth of world trade every year.
ICC Incoterms are standard international trade definitions used every day in countless thousands of
contracts. ICC model contracts make life easier for small companies that cannot afford big legal
departments.
ICC is a pioneer in business self-regulation of e-commerce. ICC codes on advertising and marketing
are frequently reflected in national legislation and the codes of professional associations.

Why are Trade Terms Important?
Trade terms are key elements of international contracts of sale, since they tell the
parties what to do with respect to:
Carriage of the goods from seller to buyer
Export and Import clearance
They also explain the division of costs and risks between the parties.
Risk
Cost
© SAP 2009
Short Expressions
Merchants tend to use short expressions, such as FOB and CIF, to clarify the distribution of
functions, costs, and risks related to the transfer of goods from seller to buyer. Unfortunately,
misunderstandings frequently arise with respect to the proper interpretation of these expressions.
It was considered important to develop rules for the interpretation of the trade terms which the parties
to the contract of sale could agree to apply. Incoterms – for international commercial terms –
constitute these rules of interpretation. These rules were first published in 1936, and their official title
is “International Rules for the Interpretation of Trade Terms”.
What do trade terms tell you?
While the contract of sale determines the quantity and quality of the goods – as well as the price –
trade terms deal with questions relating to the delivery of the goods.

Incoterms 2000
Group E Departure EXW Ex Works

Group F Main carriage not paid by FCA Free Carrier
seller
FAS Free Alongside Ship
FOB Free On Board
Group C Main carriage paid by CFR Cost and Freight
seller
CIF Cost, Insurance and Freight
CPT Carriage Paid To
CIP Carriage and Insurance Paid To
Group D Arrival DAF Delivered At Frontier
DES Delivered Ex Ship
DEQ Delivered Ex Quay
DDU Delivered Duty Unpaid
DDP Delivered Duty Paid
© SAP 2009
The abbreviations: E-, F-, C-, and D-terms
The different nature of the trade terms can be evidenced by the new grouping of the terms in four
categories, using the first letter as an indication of the group to which the term belongs.
• The letter F signifies that the seller must hand over the goods to a nominated carrier Free of risk and
expense to the buyer.
• The letter C signifies that the seller must bear certain Costs even after the critical point for the
division of the risk of loss of or damage to the goods has been reached.
• The letter D signifies that the goods must arrive at a stated Destination.

Oil Business Terms: Commercial
BOL – Bill of Lading
Important document provided by the Supplier and stamped and signed by the
vessel master to confirm the handover of a cargo of product. Usually three
originals; supplier, master and receiver. Receiver must provide his/her original to
the master upon arrival in discharge port to proof that he/she is entitled to receive
the cargo.
© SAP 2009

Oil Business Terms: Commercial II
Commodity Exchange –
Trading institutions for crude and products. For example, NYMEX > New York Mercantile
Exchange, IPE > International Petroleum Exchange London. Paper barrel trades of
standard products (Diesel, Heating Oil…) and marker crudes (Brent, WTI > West Texas
Intermediate, ANS > Alaskan North Slope in the Western Hemisphere, and Dubai, Oman,
Tapis in the Asia Pacific region).
COA – Contract of Affreightment
Obligation by a shipping company to provide transportation capacity for a specific time
period and volume as opposed to provide a specific vessel. That means the owner has
more flexibility. He can use any of his vessels if suitable.
Netback –
Industry term referring to the net FOB cost of product offered on a delivered or CIF basis. It
is derived by subtracting all costs of shipment from the landed price
Rack Price –
Price charged by a supplier to a customer that buys transport truck lots at a terminal, on an
FOB basis
© SAP 2009

Oil Business terms: commercial III
ETA – Expected time of arrival of barges or tankers.
Laycan (Lay time and cancellation) –

Agreed lay time as per charter party. Usually 36 hours per loading or discharging,
that is, for FOB lifting 72 hours in total. Cancellation based upon compliance with
agreed load or discharge window.
NOR – Notice of Readiness –

Official written statement of ship’s captain reporting actual time of arrival and
readiness to load or discharge. Important time regarding lay time and demurrage.
Demurrage –
Based upon agreed laycan rules the hours on demurrage are calculated, either full
or partial hours, and exemptions.
Arbitrage (related to trading) – Simultaneous purchase and re-sale of similar or

identical commodities in different markets.
Book Transfer – Transfer of title of a cash commodity to the buyer without a

corresponding physical movement.
© SAP 2009

Oil Business Terms: Commercial IV
Futures – Standardized contract for the purchase or sale of a commodity which is

traded for future delivery under the provisions of exchange regulations.
Hedging – The simultaneous initiation of equal and opposite positions in the cash
and futures market. Hedging is employed as a form of financial protection against
adverse price movement in the cash market.
Landed Price – The actual delivered cost of oil to a refiner, taking into account all
costs from production or purchase to the refinery.
© SAP 2009

Some abbreviations
CAPEX: Capital expenditure

EPS: Early Production System
GCFD: Giga cubic feed per day
GTL: Gas-to-liquid
IOC: International oil companies
IRR: Internal rate of return
LNG: Liquefied gas
MBBLD: Million barrels per day
MBOED: Million barrel of oil equivalent per day
MOC: Major oil companies
MTPA: Million tonnes per year
OC: Oil company
OI: Oil industry
ROCE: Return on capital employed
…
© SAP 2009

Other
Crude slate - is the industry term for the list (slate) of all types of crude oil processed
by a refinery.
Tributary - Defined distribution areas, with similar or same transportation economics.

Boundaries are dynamic; they may be changed if necessary due to market impact or
changing supply sources
TAS – Terminal Automation System
© SAP 2009

Helpful links
http://www.adventuresinenergy.org/index.html
http://www.planete-energies.com/content/oil-gas.html
http://www.api.org/aboutoilgas/
www.rigzone.com / www.rigzone.com/calculator
http://www.bp.com/conversionCalculator.do?&contentId=7044197&categoryId=9023766
www.hoovers.com Æ Company information
© SAP 2009

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What are some of the major business terms discussed in the document?

What are some of the major business terms discussed in the document?

What are some of the major processes covered across the oil and gas value chain?

What are some of the major processes covered across the oil and gas value chain?

TIOG10

Oil and Gas Business Processes

SAP for Industries - SAP for Oil and Gas

 SAP for Industries - SAP for Oil and Gas

Copyright 2009 SAP AG. All rights reserved.

All rights reserved.

This course will give you an introduction to the following:

This course will prepare you to:

This course is intended for the following audiences:

 You will accompany several new and experienced people in

This course will prepare you to:

© SAP AG TIOG10 1-1

After completing this unit, you will be able to:

© SAP AG TIOG10 1-2

1 – Oil and Gas Business Terms and Company

Exploration Development Hydrocarbon Refining & Primary Terminal Secondary Commercial

4 – Downstream Marketing &

5 – Enterprise Asset Management

Supply, Transmission & Trading

Refining & Manufacturing

Refining Operations; Lubes Manufacturing Operations

Downstream Marketing & Retailing

Enterprise Asset Management

© SAP AG TIOG10 1-3

© SAP AG TIOG10 1-4

Oil and Gas Business Terms & Company Organization

© SAP AG TIOG10 1-5

After completing this lesson, you will be able to:

© SAP AG TIOG10 1-6

© SAP AG TIOG10 1-7

Onshore Hydro Power

Synthetics & Plastics

© SAP AG TIOG10 1-8

These segments face the following challenges and objectives:

Production, which involves finding, extracting, and transporting crude oil

© SAP AG TIOG10 1-9

 More than half of the proven oil reserves is in Middle East,

Oil and Gas reserves

© SAP AG TIOG10 1-10

Oil Production & Producing Oil Wells Data

(excludes shut in, injection or service wells)

© SAP AG TIOG10 1-11

Reserves are those quantities of petroleum claimed to be commercially recoverable by application of

© SAP AG TIOG10 1-12

A Decade of Reserve Changes

Gas Reserves (in bcf)

© SAP AG TIOG10 1-13

West Texas Intermediate 1996 - 2009

© SAP AG TIOG10 1-14

Brent Oil Prices – Potential Price Paths

Scenarios: Short Term Price Support Baseline Overcorrection

© SAP AG TIOG10 1-15

Biomass Oil and gas will remain

The balance of future supply and demand remains challenging

© SAP AG TIOG10 1-16

2 000 Other renewables

SAP for Industries - SAP for Oil and Gas

You will accompany several new and experienced people in

More than half of the proven oil reserves is in Middle East,

Own the operational process

Close the Oil and Gas Supply Chain Loop

Carbon & Hydrogen

Microscopic plants and animals

> 50 years, some say 60 – 90 years