Money begets money.
Italian Proverb
The Finance Processes discussed here are:
- Capital Allocation: the allocation of Group funds for capital development between companies.
- Budget: the way in which budget estimates are prepared and approved.
- The OPMG does not deal with the process that is necessary if non-Group funds are needed in order to develop an opportunity nor with the interfaces necessary with Joint Venture partners to obtain total project budget approvals. The latter will be subject to standard company procedures.
Capital Allocation Process
Allocation of funds for new opportunities/projects is managed through the annual
Capital Allocation Process. The process requires that support for any proposal is obtained
from, firstly, the Regional Business Directorate and then the EP Executive Committee. A
pre-requisite for approval is a satisfactory outcome from the Value Assurance Review
Process up through VAR4. Opportunity/Project Managers will need to manage their
funding plans within the local OU or New Venture Capital Allocation programme and
guidelines. A general overview of the EP Planning Process is shown in Figure 3.10.1.
EP Planning Process
Budgets
Purpose of budgets
A budget can be defined as an agreed and approved sum of money allocated for expenditure
on a specific work scope. Budgets are the means by which project costs can be compared
with financial resources, and they enable decisions to be taken concerning the provision and
deployment of Company funds. They represent financial targets against which performance
can be measured and requirements assessed.
Project work scopes take a certain amount of time to complete, and if there are a series
of work scopes (such as the various stages of project evolution), the resulting series of
budgets can be used to plan the phasing of the overall expenditure.
On a more general level, budgets can also be related to certain time periods, such as a
year, half-year, or five-year period, for general longer term planning purposes.
In short, budgetary control enables activities to be matched to financial capabilities.
Group budget procedures and Project Management
When implementing a project, the selection of the budget procedure is governed by a
number of factors.
Size of an OU
If an OU is very small, i.e. is engaged in single-string ventures or is dormant,
involvement on the part of the Service Companies will be more extensive, possibly with a
project team being established at The Hague. In this case, consultation with the SIEP
Finance department on budget procedures will be necessary.
OU’s financial position
Any commitment entered into will need shareholder approval for provision of Group
funds and/or third-party finance.
Annual programmes as opposed to individual projects
If the OU’s budget consists of annual recurring programmes (as in the case of major
Operating Units with established operations), the level at which Group budget
procedures start to apply and also the timing of submissions for inclusion in the annual
budget book will be governed by internal Operating Unit budget procedures.
Size of project
- Projects costed at less than the chief executive’s discretionary limit will be fully
covered by internal OU budget procedures. Generally, any commitment entered
into, or expenditure incurred, should be covered by an authorisation
(under delegated authority) from the chief executive. - Projects costed at a sum greater than the chief executive’s discretionary limit
(frequently far in excess of the limit) are subject to Group budget rules. These
entail reporting expected expenditure to the Service Companies seeking
technical support from Advisers and authorisation from shareholders.
Stage of project evolution
Budget proposals are required at various stages in the evolution of a project.
Precisely which stages will be covered by a budget proposal and how many proposals will be necessary depends entirely on the scale and duration of the project. Generally, however, budget proposals need to be submitted for the following, as applicable:
- the full project cost
- initiation and feasibility study (identification phase)
- all front-end engineering work (definition phase)
- one-year’s front-end engineering work, budgeted on an annual basis (as for mega projects, for example)
- detailed design, construction and materials procurement (execution phase); extra funds required to cover expenditure in excess of previous budgets
- revisions or updates due to any reason
Regardless of the reason for a budget proposal, the submission procedure and available
processing routes will always be the same. The key points to note:
• Many budget proposals can be approved directly by the Regional Director of the
EXCOM, if already approved in the OU’s annual plan. Large projects, however may still need a second look and approval, even though these are already in the annual plan.
• In many OUs where partners are also involved it will be essential that project planning also takes their approval process and cycles into account.
The Group budget proposal (Return 502)
The opening page of the document must state the following information; the name(s) of
the OU(s) involved, the Group interest in that company, the function of the investment
(Exploration or Production), the purpose of the development, the amount of capital
involved on a 50/50 basis, its phasing, and any contingency incorporated.
The rest of the document should be assembled under the following headings:
- The relationship of the proposal to the country/Company objectives.
- Previous proposals/estimates.
- The proposal.
- This paragraph should give brief historical background information on the project, an outline description of the development plan, aspects of any agreements entered into relating to the project, the various alternatives considered, the risks involved (technical, political, commercial), social and environmental considerations, manpower availability.
- Profitability.
- Financing method.
- Corporate action (if applicable).
- Abbreviations (if applicable).
Budget revision
Budget revisions must be processed:
• if the latest cost forecast exceeds the Authorised budget;
• if there is an approved scope change from the project execution plan or project
specification.
Allowances and contingency in budgets
Refer to 4.2.2 Capex Estimating.
Commitment and cost reporting/control
Refer to 4.2.4 Commitment Control and Approvals, 4.1.2 Developing a Work Breakdown
Structure, 4.9 Reporting, Monitoring & Analysing.
Obtain commitment approval
Approval of the budget by the asset holder empowers the activity manager to proceed with
full (or partial) activity implementation. However, the release of funds is done via a step by
step authorization for individual commitments, or groups of commitments, using RFAs.
The form for seeking commitment approval has various names, depending upon the
particular OU. In this Guideline it will be referred to as a Request for Authority (RFA).
Other common names for it are Approval for Expenditure (AFE) or Approval for
Commitment (AFC).
The number of RFAs to be raised per project will depend on the size and complexity of
the project. Each RFA should cover the commitments of a group of defined and
independently controlled activities.
Commitments can be either external or internal. External commitments are formal, and
are in the form of contracts and purchase orders to third parties. They are generally
referred to as ‘commitments’ in the contractual or legal sense. Internal commitments are
agreements with in-house departments for the provision of work and/or materials.
Refer to the OU finance department for more information on commitment approval
procedures.