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DISCUSSION DOCUMENT Project Objectives, Approach and Citations

DISCUSSION DOCUMENT Project Objectives, Approach and Citations. Hydrocarbon Supply Chain Accounting Redesign. January, 2002. Table of Contents. Our understanding of your project objectives Project scope: Your hydrocarbon supply accounting process Insights needed from other companies

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DISCUSSION DOCUMENT Project Objectives, Approach and Citations

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  1. DISCUSSION DOCUMENT Project Objectives, Approach and Citations Hydrocarbon Supply Chain Accounting Redesign January, 2002

  2. Table of Contents • Our understanding of your project objectives • Project scope: • Your hydrocarbon supply accounting process • Insights needed from other companies • PwC project advantage • Project approach discussion • The PwC advantage – citation details: • Alliance consulting projects • Downstream Bulk & rack e-markets • BP front-middle-back office • Koch & PwC*STARS software • Hydrocarbon supply & accounting e-engineering • Related Shell Europe consulting work

  3. Project Objectives Certain objectives have been defined in our discussions to date… • Get external input (See page 5) to start a new accounting redesign project • Scope is bulk and rack transactions for USA refined products • Gather data from the following companies (or equivalent): • BP Amoco • ExxonMobil • Chevron • Citgo • Phillips Tosco • Use available internal PwC data sources – no industry surveys • Finish the work and present the results by February 14 Define: What can we do to do this differently than other internal initiatives…

  4. Project Scope Your hydrocarbon supply chain accounting process… • Data Capture • Refining • Equity Terminals • Outside Supply Points • Contracts/Schedules • SAP • Master Data • Errors • Staff Demographics • Number of Staff • Average Tenure • Degreed vs. Non-Degreed • Process • Data Flow • Organizational Alignment (with Mktg, Refining, Terminals, Supply, Trading) • Process Flow • Throughput • Number of Contracts, By Type • Number of Monthly Transactions • Reporting • Operational Source • Financial Source • Responsibilities

  5. Project Scope The external data that you are seeking for bulk & rack transactions… Data Capture • identify how what/how data is source captured • identify if SAP used and what modules • identify number of master data sets • identify how third party data is captured Process • organizational alignment - accounting vs. business units • reporting relationships - accounting vs. business units • physical location as it relates to supported groups Reporting • how is operational reporting handled; i.e., system, organization, timing • how is financial reporting handled;i.e., system, organization, timing Staff Demographics • how many accounting staff support the hydrocarbon supply chain effort • average tenure of accounting staff • breakdown of staff levels - clerks, analysts, specialists, etc. Throughput • number of contracts with transactions monthly (average), by contract type • number of transactions processed monthly, by type of transaction;i.e., exchange, sale, purchase,equity, etc. • complexity of supply system

  6. PwC Advantage: Client Relationships PwC has a long audit & consulting engagement history with your target companies…

  7. PwC Advantage: Specific Project Results From just one project we have the following data on the full industry… Data Capture • identify how what/how data is source captured • identify if SAP used and what modules • identify number of master data sets • identify how third party data is captured Process • organizational alignment - accounting vs. business units • reporting relationships - accounting vs. business units • physical location as it relates to supported groups Reporting • how is operational reporting done: system, organization, timing • how is financial reporting done: system, organization, timing Staff Demographics • how many accounting staff support hydrocarbon supply chain • average tenure of accounting staff • breakdown of staff levels - clerks, analysts, specialists, etc. Throughput (Monthly Avg) • number of active contracts, by type • number of transactions processed, by type of transaction • complexity of supply system Data Capture • Implied • SAP- Yes, Modules - Implied • No • Implied Process • Yes • No • Implied Reporting • Systems Yes, org/timing - No • Ditto Staff Demographics • Yes • No • Yes Throughput • Yes • Yes • Public Info

  8. Approach Discussion: Putting it All Together We have the resources and know the bulk & rack problem. What is best approach… • To leverage your other internal data sources: • Booz Allen S&T Benchmarking Study • API Downstream Industry Accounting Data • Equiva Deal Flow Project “To-Be” vision, data, processes • Combined audit team root-cause analysis project • Bob Werner team project results • Any other initiatives??? • Apply other available PwC accounting benchmarks: The Financial Management Benchmarking Program (FMBP) is PwC’s premier benchmarking service, that allows participants to assess the relative performance of their financial processes and gain an insight into best practice with a view to improving performance. • Key challenges: • How best to apply the statistical data? • How to guarantee confidential treatment of competitor information?

  9. The PwC Advantage: Related Project Experience Our related citations have been categorized as follows… 100 EQUIVA Trading Koch Supply Book Club Rack Pack BP Supply Star Enterprise Koch S&T Degree of Process Improvement BP OTI Shell IT Assessment 0 Degree of Difficulty to Implement 100

  10. Alliance Consulting Projects PWC consulting has worked with the Alliance since its inception. In addition to the two consulting citations shown below, our audit practice has also been involved in various projects to help improve efficiency and reporting accuracy… Alliance Downstream Software Benchmarking Assessment EQUIVA - Crude & Products Trading PwC was engaged right after formation of Equiva Trading. The primary project objective was to define a world class, integrated front-middle-back office deal flow process for Equiva Trading. The PwC project covered: assessment, mapping, detailed process documentation, risk/control review and change management for the USA trading operation. In the words of Art Nicoletti, the project took every aspect of a deal to: “(1) follow it through the books & records, (2) understand what parts are adding value, what parts are cost and (3) what parts are losing value." Another objective was to anticipate a major system upgrade initiative. • PwC was engaged to provide a downstream software benchmarking analysis survey for Shell, Texaco and StarEnterprise to: • Assess the key operational and corporate systems within each of the three companies, • Benchmark the systems to determine the best currently available system within each business function of the proposed new entity • Identify gaps that could be filled by third party software products and • Map existing and third party applications into the framework of the current SAP implementation plans to define a high level target system environment. • Operational functions surveyed included crude oil supply, trading and transportation, manufacturing (excluding process automation and refinery modeling), refined product marketing and retail.

  11. Downstream (bulk & rack) e-Markets Two recent industry consortium projects, jointly managed by PwC, have provided both data and insights to new approaches to reach a new level of industry efficiency… Book Club IME - Bulk: Middle, Back Office Processes Rack Pack – Rack: Company & Customer Transactions This industry consortium was made up of 14 companies representing 75-80% of USA refining capacity: ExxonMobil, Chevron, BP, Equiva, Conoco, Sunoco, Marathon, Valero, Coastal, Citgo, Hess, Premcor, Tosco and UDS. The vision was to "move toward an industry owned and led company to build and maintain a web-based hub and standard industry model" (solution) for handling: Market data Deal capture Contract management Nominations Exchanges Scheduling Delivery Settlement PwC helped develop the business case, confidentially surveyed all the participants for cost savings, defined new processes and helped with technology selection. The Rack Pack is an alliance of seven of the top US petroleum refiners: Citgo , MAP, Equilon, Motiva, Koch, ExxonMobil and Valero They were considering creation of a services hub for the refined products rack and terminal-related business processes, including wholesale marketing and transportation. The scope covered: Price/Adjustments Document Deal Process Orders Arrange Transportation Actualize Movements Administer Contracts Accounts Receivable Customer Credit PwC was engaged to systematically and objectively determine the business case and scenarios for moving forward. Challenges included the need for strict confidentiality due to the sensitive nature of the customer transactions.

  12. Front-Middle- Back Office Citations PwC BP citations are important because BP-OTI is a recognized leader in efficiency and innovation. PwC has been involved with BP since 1992. We have been able to translate these engagements (and others) into a “core consulting competency”… BP UK - Oil Trading Inc. (OTI) British Petroleum - Supply BP (U.S.) contracted with PwC to reengineer their downstream petroleum business and to develop client/server applications to support the newly redesigned businesses. Both BP and PwC staff made up the three teams: Crude, Product Operations and Trading. The work centered around accounting for both crude and product movements from deal inception through operations and invoicing, as well as exposure position analysis & reporting. Specific business functions were: Deal Entry, Contract Administration, Supply/Demand Forecasting, Allocation, Operations and Scheduling, Inventory Management and Reporting, Performance Measurement, Valuation, Settlement, Invoicing and Statements and Pricing. For BP’s OTI affiliate, PwC did a detailed redesign of the front, middle and back office operations to improve service to internal and external customers. Six distinct acquisition and sale processes were reviewed: crude & feedstocks, products, LPG, futures/options, derivatives and outside processing. Over 200+ OTI staff were involved with detailed validation sessions and six cross-functional workshops to define the new OTI business. Ultimately all divergent processes were standardized and new performance measures were implemented and high level system requirements were defined.

  13. Koch - Merchant Refiner Reengineering PwC has worked with Koch since 1996. As a merchant refiner, they are recognized as an “efficient operator” – especially in exchanges and rack transaction processing. Their best practices have been codified in the PwC*STARS software… Koch Supply – PwC*STARS Koch Supply & Trading Koch Industries is the second largest privately owned company in the USA, with three refineries, 30 terminals and extensive pipelines. The PwC project began with a operations & accounting reengineering project for all bulk & rack refined product movements. A joint PwC/client team developed five improvement projects with over $20 million of potential savings in reduced inventory, better customer service and less price risk. A custom, three tier, client server system PwC*STARS was designed and developed to capture the benefits. The system is still in use at Koch and PDVSA. PwC conducted an Assessment, Benefits & Costs (re-engineering project at Koch Supply and Trading (KS&T). It included trading and risk management for crude (domestic & international), feedstocks, all refined products and chemicals for Koch's domestic and global supply operations. The project identified a range of process and system improvements to streamline the front-middle-back office measurement and accounting processes. Key project outputs included: high-level business model, integrated deal flow process model, quantification of current costs for each process (Staff FTE's and other costs) and a risk assessment & controls review.

  14. Hydrocarbon – Accounting Re-engineering The citations below cover both bulk and rack transactions across a wide variety of business lines, centralized vs.decentralized decision making and the application of structured customer research to set an implementation direction… BP USA – Bulk & Rack Marketing Star Enterprise - Supply/Marketing PwC was selected to conduct a highly focused ten week reengineering “Assessment” of Star’s downstream crude & product supply processes. The objective of the Assessment was to identify revenue improvement projects as Star faced decreased refinery margins and increased competition. The work was conducted with joint PwC & Star cross-functional teams and covered the entire supply chain: planning, crude selection & acquisition; product supply and trading; terminalling, distribution and rack sales. The team used off-site facilitated workshops with 60+ Star staff, management interviews, identification of 350+ issues, definition of a business model with key communication links and development of new performance measures. Reengineering design projects were quantified in three priority areas: Improved crude selection & acquisition, Improved distillate disposition and Development of a Star marine chartering capability. BPUSA marketed 550, 000 B/CD of refined products with 4 refineries and 70 terminals and bulk plants. PWC assisted in reengineering the downstream bulk & rack order fulfillment process. The work covered: customer setup, pricing, supply, exchanges, order entry, dispatch, delivery, invoicing, cash application and customer service in eight different channels-of-trade: Retail, Consumer, Jobber, Jet Fuel, etc. The four study objectives were to: improve customer service, eliminate duplication, standardize and simplify all processes and eliminate rework. We documented and flowcharted 220 bulk & rack processes across the eight different classes of trade. Additionally, we visited 10 other oil companies to find industry "best practices" that could be incorporated into BP's vision of a new way of doing things. Finally, market research with 100+ customers was conducted to implement around the customer driven priorities.

  15. Related Shell Europe Citations With the new reporting structure between Shell’s USA operations and Royal Dutch Shell, it is important to understand the new climate and business direction. PwC has worked on a key set of related projects with Shell in Europe… Stasco: Mid & Back office Shell Europe & Asia: Supply Chain Shell International Trading (Stasco) Inc. is the largest of 3 worldwide regional supply trading organizations operating in London. Again, PwC was retained to act as primary facilitator to help build on an internal re-engineering project by conducting over a dozen top and mid level vision sessions with 40-50 key Shell decision making staff. The project was primarily a “mid and back office” efficiency improvement which started when a trading deal had been completed. The Shell “As-Is” work followed every process needed to accurately track and close and settle a deal for both crude and products. The workshops reached consensus on a valid and achievable “To-Be” vision which became the basis for future implementation work by the Shell team. Shell Europe recently started a multi- regional effort to improve supply chain decisions in Europe and Asia. PwC was retained to work with six SEOP and SOPE teams to define new business processes for this supply chain orientation. The work scope covered: refinery planning & scheduling, primary distribution, supply planning, data management, the customer interface and demand planning. PwC acted as primary facilitator to help expedite the internal re-engineering project, set the guidelines for the business case, defined a solution (data) architecture and examined applicability of new supply chain software to improve Shell’s Europe and Asia supply decisions.

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