Cost management and performance evaluation in petroleum upstream industry part b


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Cost control and management is not appropriate only for manufacturing and commercial industry;
cost management is applied in upstream industry such as Petroleum exploration, development and
production cost. Many Petroleum Companies don’t pay more attention to cost control and
especially during exploration phase except if Companies face financial dilemma, declining
production or if they see they cannot meet their planned schedule of Capital program that lead
them to not meet their obligation, commitments and required return, therefore, they start
considering cost reduction or control. This paper provide management accountant, cost controller,
financial controller, financial manager, internal auditor and cost recovery auditor with brief of cost
control, how cost is analyzed and managed and performance is measured in Petroleum upstream

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Cost management and performance evaluation in petroleum upstream industry part b

  1. 1. Cost Management and Performance Measurements forPetroleum Upstream Industry – Part BHamdy Rashed, CMA, CAPMBsc of Accounting,E-mail:,February 15, 2013AbstractCost control and management is not appropriate only for manufacturing and commercial industry;cost management is applied in upstream industry such as Petroleum exploration, development andproduction cost. Many Petroleum Companies don’t pay more attention to cost control andespecially during exploration phase except if Companies face financial dilemma, decliningproduction or if they see they cannot meet their planned schedule of Capital program that leadthem to not meet their obligation, commitments and required return, therefore, they startconsidering cost reduction or control. This paper provide management accountant, cost controller,financial controller, financial manager, internal auditor and cost recovery auditor with brief of costcontrol, how cost is analyzed and managed and performance is measured in Petroleum upstreamindustry.Keywords: Cost Management and analysis for petroleum exploration, Optimizing production, exploration anddevelopment programs, Project Cost Management and Analysis for Petroleum Upstream Industry, ProcurementCost Management, Drilling Cost Management, Production Cost Management, G&A Cost reduction.In the previous paper “Fundamental CostAnalysis In Petroleum Upstream Industry – PartA”, we discussed the fundamental cost analysisthat help non-financial or nonaccountant tounderstand the basic cost management.In this paper we will discuss about the costmanagement and analysis for measuring theperformance of oil and gas companies. And howOil and gas companies can manage the costs andalign its frequently activities to the strategies toachieve their strategic objectives by controllingand managing the costs through several controltechniques and balance scorecard. This paperscreening the concepts of balance scorecard andcontrol techniques.We will explain how each department in thecompany can contribute in and measure itsperformance for achieving the strategies of thecompany in the Part D. Part C will cover the costmanagement and analysis for performanceevaluation in more technical and managementaccounting view.In this paper we start our section number with 5to be in consequent with the previous paper of“Fundamental Cost Analysis In PetroleumUpstream Industry – Part A”5) Cost Control TechniquesCost control techniques can help PetroleumCompanies achieve good financial results andovercome difficulties they face. Cost control canallow Company to know if they are really spendmore than it should be for petroleumexploration, development and production. The
  2. 2. Cost Management and analysis for performance evaluation Hamdy Rashed; CMA, CAPM    2 below techniques will give our accountant moreinformation about how to manage such costs.5.1) Cost and Contract AnalysisPetroleum Company shall breaking down thecost and classifies them by managementfunction and nature to enable to assignresponsibility of cost to appropriate managementor department and should track them and recordthem in proper cost accounts.Management accountant, cost analyst or costcontroller should develop Worksheet of actualcosts and applying statistical analysis todetermine the correlation between cost andvariable factors.Management accountant, cost analyst or costcontroller should conduct with technical staff toknow the appropriate relationship betweenvariables and costs formulas.Petroleum Company should authorizemanagement accountant, cost analyst or costcontroller to analyze service contracts andmeasure the hidden (implicit) costs ofContractors due to inefficiency, missed details ofStatement of Work (SOW), inappropriateevaluation criteria, inappropriate applying tenderand procurement process.For example, Petroleum Company can calculatethe total costs incurred by its drilling servicecontractor. Contract Analyst should consider theefficiency of drilling wells and experience ofdriller by computing the hours that it is taken fortrip time for changing bits. The lower hours thehigher efficiency of contractor is and lower costscan incurred. Also, the higher experiencedrilling engineer, the lower probability of lostcirculation and stuck pipe that are due to lack ofknowledge and experience of personnel ordrillers then the lower costs can be achieved.The higher technological which driller use, thelower costs can be achieved by avoiding lostcirculation and stuck pipe. Also, the experienceof drillers or drilling personnel or managementto drill in different type of drilling such ashorizontal drilling or deviated drilling that canreduce the total costs by saving the cost of siteconstruction.Missed Contract details that describe the SOW,open contract, providing information unequallyto suppliers with knowing that changes will beincurred after winning the business can causehigher services costs.5.2) Reporting and Accounting System.Management accountant or cost controller shallrealize that different companies use differentfinancial and cost accounting system.Petroleum Company shall combine betweenfinancial and cost accounting and determinewhich cost accounting system is the best to helpseveral level of decision makers. Also, cost andfinancial reporting is important to know theprofitability and measure the performance ofPetroleum business segments.Financial accounting is different from cost orproject accounting, Company’s system shouldbe designed in manner that can provide relevant,reliable, consistent and comparable informationto several stakeholders. The financialinformation is most likely used by investors,creditors, analysts, stock brokers, government,management and employees but the cost orproject accounting information is most likelyused internally by different level of managementand employees.Financial and cost accounting system shouldcategorize, group and consolidate transactions orevents by designing accounts codes thatdetermine the transactions that can becategorized, grouped and consolidated andreported in specific manner to meet the financialrequirements which is ruled by GAAP or IFRS,and that could be categorized, grouped andreported in specific manner to meet the cost or
  3. 3. Cost Management and analysis for performance evaluation Hamdy Rashed; CMA, CAPM    3 project requirements which is ruled byprevailing industry’s practices, stakeholders’needs and company policy.We will assumed that how the costs of twovehicles hire, one is leased for supportingseismic acquisition activities and it is non-recoverable and another is leased for supportingdevelopment activities for drilling Well A, howthese costs should be recorded in the financialand cost accounting system. Company’s systeminclude chart of accounts that contains thefinancial accounts, project and cost accounts,cost recovery accounts. Let’s assume thatseismic acquisition compaigne was approved byAFE300 and it is categorized under sub-accountNo. 10 that is assigned for G&G expenses andG&G is expensed but intermediated by secondhead account no. 70 and first head account No.02 which is assigned for exploration andevaluation and element cost no. 6000 is assignedfor vehicle hire. Also, the AFE200 for well Acampaign was approved by partners, which iscategorized under sub-account no. 25 that isassigned for drilling cost which is under secondhead account no. 20 that is assigned underdevelopment costs and first head account no. 02.And R is assigned for the recoverable costs codeand N is assigned for the non-recoverable costscode. The coding will be lined as follow:02.70.10.AFE300.6000.N02.20.25.AFE200.6000.RBased on the above coding line. The codingcontains Financial accounting codes thatrepresents exploration and evaluation code (02),exploration (70) or development (20) codes andfinancial activities coding that determine if it isseismic or drilling the seismic acquisition codeis (10) and drilling code is (25) + Projectsaccounting codes which is flexible codes that isestablished based on AFE for example (seismicacquisition AFE300 and AFE200 for drillingWell A) + cost accounting code that representsthe detailed type of costs and assigning code6000 for vehicle hire+ Recovery accountingcodes.Based on appropriate accounts coding, theCompany will be able to generate theappropriate reporting for several purposes. Andbased on the above example, the company cangenerate financial statements by grouping all theamounts of transactions that contains explorationcode (70) in the income statements underexploration expenses and development cost thatcontains code 20 under capital expenditures ofexploration and evaluation balance. Also, cangenerate cost reports that grouped the costs byfunction (exploration, development), activity(G&G, seismic acquisition or drilling) and bydetailed type of costs elements, and can generatea cost recovery report to the government bygrouping the transactions that contains recoverycode.Also, the financial, project and cost accountingsystems must be integrated, the system shouldbe designed smartly to enable to enter non-financial input data in the project systems andcost accounting system such as volume ofreserves, volume of production, depth of well,area that run seismic based on service requisitionor technical reports on frequently basis to enablethe cost accounting system to calculate the costof production, and cost at completion forprojects and completion percentage formanagerial purposes and determine the DD&Aand accrued expenses for financial purpose.5.3) BudgetingBudget is tool for planning at the beginning ofthe period and can be used as tool of control atthe end of the period to help management tomeasure the performance against plan of sales,capital expenditures, production cost. Therefore,Petroleum Company prepares comprehensiveMaster budget by using computer software to
  4. 4. Cost Management and analysis for performance evaluation Hamdy Rashed; CMA, CAPM    4 enable Company to compare the actual figures toestimated figures easily.Petroleum Company may use one or all of thebelow type of budget processing.5.3.a) Traditional BudgetTraditional budget is adding and subtracting apercentages in comparison to last period to findnew budget for the coming year. This is moreappropriate to be used for utilities expenses,sales budgets and specific production costsitems.5.3.b) Zero-Based Budget (ZBB) and Activity-Based Budget (ABB)ZBB and ABB examine costs and benefit for allactivities, ZBB start from scratch but ABB not.These techniques help Company to measure theperformance of management’s effectiveness butpreparation of ZBB consume lot of time to beprepared. Many Oil and gas companies useproject budget which is more similar to ABB.Theoretically budget can be used for identifyingstandard costs for all cost elements, butpractically standard costs cannot be used inpetroleum upstream industry for all costelements, it might be used to time writing coststo monitor and plan for the cost of expatriatesbut it is difficult and impractical to applystandard costing system for all costs elements.6) Breakeven and Cost-Volume-Profit(CVP) AnalysisCVP and breakeven analysis help managementaccountant to perform useful analysis. breakevenis branch of CVP analysis that determine thesales which matches the costs and generate zeroprofit.Petroleum Company can use CVP andbreakeven analysis to know the followinga) Daily production and sales volume thatis required to breakevenb) Daily production and sales required toearn a desired profit.c) How the changes in oil/gas price,variable operating costs and fixedFinding & Development costs.However, the oil/gas price is less to becontrolled, but Major oil producers andconsumers in the world participate in determinethe oil/gas price in world market. Therefore, riseof breakdeven price is mainly caused byincreasing in operating costs and increasing inF&D costs. The below formulas compute thebreakeven point (BEP) and CVP in units.             Where: Variable Cost per unit = DirectProduction cost ÷ Volume of production inbarrels                   Where: Operating Profit before tax = Net profit ÷(1-Tax rate)7) LeverageLeverage is common techniques is used inPetroleum upstream industry, it calculates theoperating leverage and financial leverage whichshows how much an sales increase/decrease by1% can expect Company’s Earning Per Share(EPS) to increase or decrease by percentage. Thehigh degree of leverage is, the high risk theCompany would face if the production orcommodity price is declined.
  5. 5. Cost Management and analysis for performance evaluation Hamdy Rashed; CMA, CAPM    5 The high oil/gas price enable inefficientproducers to continue exist and enables toproduce from inefficient wells which it wasinfeasible before increase of oil/gas price andbecome feasible after rising price of oil.8) Performance Measurement andScorecardsPerformance is measured through KeyPerformance Indicators (KPIs) which areessential tools used by management tounderstand how far their business is successful.The KPIs are grouped together and presented indashboard which is called scorecard to enablethe management to take a glance over the viewof how the Company is performing its business.Most of Scorecards grouped such KPIs into fourprospectives or more as follow:Financial prospective measures theperformance of for-profit organizationswhichever they are public or private. Financialprospective includes the following KPIs- Operating Profit MarginOperating Profit Margin can provide anindication of the operating efficiency of acompany. Operating profit is calculated bydeducting the operating costs from revenuegenerated from normal course of business, therevenue generated from extraordinary items ordiscontinued operations is not considered, anddivided by the operating revenue to getoperating profit margin:Operating Profit Margin = (Revenue – OperatingCost) ÷ RevenueThe information of the above formula isobtained from the financial statements andperiodical financial or accounting reports of asystem. Company can monitor this indicator onmonthly, quarterly and annual basis.If a company faces difficulty to generate revenuefrom normal course of business activity andoperating profit margin is reasonably high, it cangive an indication to cost leadership strategy thatcompany may follow and the ability ofmanaging operating cost well, otherwise, thecompany may seek to sell part of its workinginterests to generate revenue and recover part ofits costs.- Net Profit MarginNet Profit Margin can provide an indication ofthe overall business efficiency of a company.Net profit is calculated by deducting theoperating costs, financing cost, general andadministrative cost, cost of extraordinary ordiscontinued operations from all revenues thatare generated from normal course of business, orextraordinary and discontinued operations, anddivided by the operating revenue to getoperating profit margin:Net Profit Margin = (Revenue – Operating Cost+ Other Income – Finance, G&A & Otherexpense) ÷ Revenue of normal course ofbusinessThe information of the above formula isobtained from the financial statements andperiodical financial or accounting reports of asystem. too Company can oversea this indicatorperiodically.If Company faces low operating profit marginand high net profit margin, it gives strongindication that Company generate revenue fromnot main business activity e.g. sell part of itsworking interests in some licenses- Total Shareholder Return/ Return OnEquityReturn on ordinary Shareholder’s Equity(ROE) measures the profitability exclusively thereturn on the real owners’ funds. Stockholders
  6. 6. Cost Management and analysis for performance evaluation Hamdy Rashed; CMA, CAPM    6 are primarily interested in the relationshipbetween net income and their investment in thecompany. This is probably the single mostimportant ratio to judge whether the firm hasearned a satisfactory return for its equity-holdersor not. Its adequacy can be judged by comparingit with the past record of the same firm, inter-firm comparison and comparisons with theoverall industry average. The higher rate is, themore efficiency in utilizing the owners’ funds.ROE = (Net income-Preferencedividend)/Average Ordinary Shareholder’sEquityThe information of the above formula isobtained from the financial statements andperiodical financial or accounting reports of asystem. Company can measure its profitabilityfrequently.The more costs are decreased, the higher ROEratio will be. The high ROE gives an indicationthat company does not need to depend on loan tofinance its projects.- Capital Expenditures to Revenue RatioOil and Gas Companies intend to acquire newproperty, develop current proved property, oreven explore unproved property to generatefuture benefits. This ratio is comparing thecapital expenditures to sales or revenue (Capexfor specific period ÷ Revenue for the samespecific period) which gives us impression ofhow much Company is investing for futurebenefit. Lower ratio is not always goodindication and vice versa for higher ratio. Toknow how better the Company invest for future,the ration should be compared with the averageindustry or other peers’. Also, Company shouldconsider that much investing in petroleumacquisition, exploration, development withoutproducing enough oil or gas can give badindicator about the technical managementperformance of Company.Information for calculating the above ratio isobtained from accounting or financial systems.But different accounting method can lead us todifferent results and misstate this ratio, but manycompanies prefer to charge all the explorationcost to Capex then to take it off to expenses togive total capital expenditures for the currentperiod.- Price/Earning RatiosMany companies use price/earnings ratio toknow how their stocks (shares) are attractive instock market for potential investors. This ratiosearches for the relationship between the stockprice and company’s profit.P/E Ratio = Current stock price ÷ (Net profitsper share)Also, this ratio can express the time forrecovering back the initial investment in buyingCompany’s stock. In cost management, P/E ratiocan be increased if the cost managed to bereasonably decreased. Therefore, the higher P/Eratio is, the more stock is attractive for potentialinvestors who pay more for each dollar (unit ofcurrency) of net income, and the more expensivethe stock is.- Finding & Development Cost RatioIt can be used for evaluating the efficiency of acompany in adding new reserves. If we want tomeasure the performance of technicalperformance of companies or managements thefinding cost ratio which include only explorationcosts the reserves extensions and discoveries canreflect how efficient they are, the high ratio, themore efficient they are. To know how the overallefficiency or experience of company’smanagement, we can consider all the costs andall reserves additions into your considerations.[Charlotte J. Wright and Rebecaa A. Gallun, 5thEdition, 2008,Fundamentals of OIL & GAS
  7. 7. Cost Management and analysis for performance evaluation Hamdy Rashed; CMA, CAPM    7 Accounting, PennWell Corporation, Tulsa,Oklahoma, USA. Page 711-713]- Success RateThis rate is calculated by dividing the cost ofdrilling successful well to total cost ofinvestment in drilling wells, that shows theperformance of exploration and drillingdepartments. The higher rate is, the highertechnical performance Company has and goodindication that Company is managing its Capitalexpenditures well.- Present Value of expected cash flow forproved and probable reserves per shareMcDep LLC is independent researchers focusedon stocks of oil and gas Companies, whichoriginate McDep ratio that measures Company’sability to generate discounted cash flow in futurefrom oil/gas or other business for covering itsmarket capitalization at current stock price anddebt. The Company that is low MarketCapitalization and debt to present value ofoil/gas reserves and other business is performedbetter and more profitable than Company’s stockis high capitalization and debt to present valueratio.Internal process prospective include thefollowing KPIs- Capacity Utilization RateCapacity utilization is good measure thatprovides management with oversight how theproduction facility units are utilized and are theirappropriateness to the production when they arepurchased.Capacity Utilization Rate = Actual production perday ÷ maximum quantities is produced per day forthe facility equipments.The lower rate is, the more slacks are, andhigher inefficiency is in the process. And cangive strong indication that Cost of facilityequipments is high too because Companypurchased assets has much higher capacity thanthe wells can produce. Which can increase thefinding cost, DD&A, decrease the operatingprofit and net profit that may lead Company toface difficulty in profitability in future.Information for calculating the above rate isobtained from technical internal process systemand capacity of facility equipments can beestimated and obtained from equipment data thatis provided by manufacturer.- Earned Value or Budget Cost of WorkPerformed (EV or BCWP)Earned Value is one of operational processesthat used as a tool for combining costs,schedule, performance and riskmanagements. It measures how much thevalue of actual work performed duringperiod of timeBCWP = Percent work complete x Initial BudgetCost (BAC)Where: Percent Complete = BCWP ÷ BAC- Cost Variance (CV) and CV%It computes the difference between actualcost and what it is expected to spend.CV = Budgeted costs for work performed(BCWP) – Actual costs for work performed(ACWP)Positive CV gives better indication of doingbetter on costs than it is planned.- Schedule Variance (SV) and SV%It computes the difference between wherethe project is and where the project isplanned to be in the schedule.
  8. 8. Cost Management and analysis for performance evaluation Hamdy Rashed; CMA, CAPM    8 SV = Budgeted costs for work performed(BCWP) – Budgeted costs for work scheduled(BCWS)Positive amount indicates that project is ahead of schedule and negative variancereflects to beyond schedule- Cost Performance Index (CPI)It is the rate at which project performance ismeeting cost expectations during a period oftime or from beginning up to a point in time.CPI =If the CPI is equal or greater than 1, it isfavorable value that indicates costperformance is perfect or physical progressis accomplishing at less than forecastedcosts. and vice versa- Schedule Performance Index (SPI)It is rate which project performance ismeeting schedule expectations up to point ina time. The performance Indices measurethe efficiency as percentage. If the SPI is equal or greater than 1, it isfavorable value that indicates scheduleperformance is perfect or physical progressis accomplishing at faster than plannedschedule. and vice versa and vice versa- Estimate At Completion (EAC)Is the amount which the project is expectedto cost at its completion.     or   EAC is frequent evaluation of project status.The revised EAC does not mean thatcorrective action is taken. Company shouldknow the factors that cause the increase inEAC to know where is the overrun activitiesthat occur high cost? It is preferred toidentify the EAC by group of activities toconsider the actual or revised of workpackages not yet begun into the calculationof EAC.Also, Time at completion (TAC) is useful tonow the new length of the project, the longerthe project is the longer time and highercosts it needs to be completed.         - Estimate To Completion (ETC)It is the expected cost that is required tospend from the current point of time to theend of the project.- Variance At Completion (VAC)It measures the difference between theoriginal budget and what we expect to spendat completion. If the result is positiveamount it indicates that Project team isdoing better than projected and negativeindicates to project is run over on costs.Project Manager or Cost controller should notonly monitor the costs, they should manage thecosts. Cost controller should prepare Project
  9. 9. Cost Management and analysis for performance evaluation Hamdy Rashed; CMA, CAPM    9 Reports to the executives and internal auditorthat contain the following information:- Performance that show the progress todate such as PV, EVand AC, andmaterial procurement and usage if thereis no any Materials Report issued byMaterials and Logistics.- Status that identify where the project istoday and shows CV and SV.- Projection that calculate the EAC, ETC,SPI and CPI.- Exceptions that justifying the variancesand identify the problems, causes andsituations.o Indication of drilling problems suchas the flow out and flow in, mudreturn rate, mud pit volume, cannotpickup pipe.o Causes of drilling problems such ashigh formation permeability, lowformation pore pressure, usingwrong drilling fluid or mud weight.Carving, differential pressure.o The results of drilling problemssuch as Cost of mud used, cost offishing, loss of hole.- The lessons that are learned fromdrilling programs. Such as Lack ofexperience and knowledge of personnel,and needs of crew education, and studywells in area, using centralizers, drillcollars.Learning and Growth prospective thisprospective focus on employees. Nowdays andin future the employees represent significantassets. However, such assets are notaccountingly recordable in ledgers. Thisprospective include the following KPIs- Human capital value added (HCVA)Human capital value added is calculated byadding the employment costs to operatingprofit and dividing the results by number offull time employees. The bigger the ratioovertime, the better profitability peremployee goes.- Average employment and training costsby skillsThe average employment and training costsby level of skilled employees providemanagement the cost rate of different levelof skilled employees which can be used forcost allocation or to enable the company toknow how much they spend for each level ofworker in salary or training and whether thecost- Employee satisfaction index (ESI)To measure employee satisfaction, thecompany needs to have survey, ask fewquestions and ranking the optional answer,the survey questions needs to cover the styleof leadership, communication, culture orwork environment and staff developmentopportunities. Scoring the answers and givehigh rate for positive answer and low ratefor negative answer, then compute thepercentage of total scores to total questions.The higher index the better indication ofhigher satisfaction.- Employees Turnover and averageemployee tenureRecruiting and developing employees takelong time and more cost. Employeeretention save such time and costs. Also,replacing employees or promotinginappropriate people can cost company alot.. Therefore, oil and gas companiesintended to recruit and retain talented staffspecially in technical and finance oraccounting departments. The company canmonitor the employees turnover by trackingthe such ratio overtime and in different type
  10. 10. Cost Management and analysis for performance evaluation Hamdy Rashed; CMA, CAPM    10 of job. The employees turnover is calculatedby dividing the Total number of leavers inspecific job over specific period by averagetotal number of employees during the sameperiod. The lower ratio the moreemployment settlement is, indication of lessproblems in management practices,philosophy and leadership style and lesscosts and time incurred in recruiting newemployeesAverage employee tenure ration enableCompany to know how long its employeestay in the organization on average by total,gender, level of management, type of job ordepartments. The longer tenure the lowercosts incurred for recruiting and trainingstaff. Also, the longer tenure indicates tohigh employee satisfaction and loyalty to theCompany. Average employee tenure ration(AET) is calculated as follow:∑(Years of service x (Number ofemployees) ÷ Total number of employees- Salary Competitiveness RatioCompany needs to know how much theypay to their employees in comparison tocompetitor’s pay or market price toemployees in similar position and job area toenable Company to know if it is potentialemployer and if payment is a reason to leavethe company. This ratio can be calculated asfollow and for specific job and position andby industry.Salary competitiveness ratio = Salaryoffered by the Company ÷ Salary offered bythe competitor or marketCompany should consider the efficiency,effectiveness and proficiency of employeetoo before paying more than competitors orabove industry average because payingsalaries to inefficient and ineffective or lowproficient employees costs a company a lotfor low quality of work.Corporate Social Responsibility ProspectiveHealth, Safety, Environment and Security(HSES) issues have criminal and civil effects.The criminal law imposes on natural or in-kindpersonnel for protecting another natural or in-kind personnel. Criminal court may allocate thepunishment among the personnel who commitsthe offences. Court can award compensation tovictims or injured party. Civil Law concernsabout the disputes between personnels. Plaintiffmay bring complaint to court to getcompensation and defendant try to reduce thecompensation through involving the plaintiff incontributory negligence. Civil courts is lookingfor liability of two parties rather than for guiltyand non-guilty that are concerned by criminalcourt. HSES cases always have civil disputesthat caused by accidents, illness, breach of lawor contractual terms and negligence.The employers should reasonably andpracticably ensure they achieve minimum legaland ethical requirements of HSES and welfare ofall employees that can include the following:a. Safe System or Workb. Training and Supervisionc. Safe place of workd. Written Safety policies and procedurese. Insure for work accident and fidelityf. Safeguard materials and people who arenot in their employments but affected byemployers’ activitiesEmployees should take reasonable care ofthemselves and others who are affected by theiractivities, and should follow Company’s HSESpolicy to enable Company to achieve their legalobligations and reducing potential risks.
  11. 11. Cost Management and analysis for performance evaluation Hamdy Rashed; CMA, CAPM    11 Suppliers or contractors must follow Company’sHSES policies or their own policies whichever isbetter for eliminating or reducing risks of HSES.As we indicate to employer’s responsibilitiesthat HSES policy should be maintained andmonitoring its application. The HSES policyshould be clearly and simply stated to beunderstandable by different level of skills. Thepolicy should include the following:a. Names and position of HSES peoplewho are in charge and HSES advisorsb. Duties toward each others (employers,employees, suppliers, customers,community)c. Short-term and long term objectiveThe HSES’s objectives and performance targetscould be mentioned in brief as follow:a. Reducing number of accidentsb. Reducing number and period ofabsenteeism.c. Reducing criminal and civil claimsd. Achieving international or nationalSafety requirements and obligationsCompany shall frequently assess the risks ofHSES by determining the volume and costs ofseverity and the likelihood of occurrence. Thento determine the proper and urgency of actions.However, HSES is new and important issues,Companies should not exaggerate its care ofHSES on other accounts of successful factors.Company should always look for cost andbenefit of HSES controls.Corporate Social Responsibilities include thefollowing KPIs:- Injury/Incident IndexHealth and Safety issues could causeincreasing costs that representscompensation to injured party, violation ofregulations, cost of losing opportunity forhiring skilled employees, attracting newlong-term and ethical investors orcontracting with high quality-experiencedsuppliers and paying high insurancepremium.Company should measure injury/incident tototal working hours ratio which reflects thereduction of criminal/civil claims, reductionof number of accidents/injury and reductionin costs.The Injury/accident Ratio is calculated asfollow:Injury/Accident Index = Number of injury oraccident ÷ Total working hours * specificnumbers- Pollution mission rateEnvironment pollution is one of mostserious challenges that our planet isencountered. Most of Oil and GasCompanies play important role to mitigatethe environment pollution, the mosteffective index that measure the pollutionrate is “Carbon/gas mission rate”, “wastereduction rate”. Many countries adoptlegislation for environment protection. Also,some oil and gas companies might begranted ISO 14001 that cover theenvironment protection requirements. Thelower pollution rate that caused byCompany, the less long-term costs may beincurred and higher image the company cancreate for itself among community. Forcalculating the carbon or gas emission rate,the following factors should be considered:o Number of business travelo Energy consumed by companyo Transportation of materials andcommodity
  12. 12. Cost Management and analysis for performance evaluation Hamdy Rashed; CMA, CAPM    12 o Waste generated.- Gender Work ParticipationWoman and Man are working to improvetheir community. After activating theinternational organization for woman rightsand claiming for equality with man inobtaining equal opportunity for working andconducting managerial duties. OilCompanies’ social responsibilities are toenhance gender work participation.Therefore, some oil companies announce intheir sustainability report the gender workparticipation in different level ofmanagements.Female employees Percent  Number of Females in CompanyTotal Number of employeesThe higher female employee percentencourage the high skilled woman to joinworking in such companies. Also, to reducenumber of claims that are related to genderdiscrimination if companies take such targetseriously.References‐ PMBOK, 3rdedition.‐ Charlotte J. Wright and Rebecaa A. Gallun,5th Edition, 2008,Fundamentals of OIL &GAS Accounting, PennWell Corporation,Tulsa, Oklahoma, USA