Docstoc

Prelude to ONGC

Document Sample
Prelude to ONGC Powered By Docstoc
					                         INDEX
                                            PAGES


Chapter 1 Introduction

   ONGC                                   1-14

   Budget                                 15-54

Chapter 3 Data Analysis & Interpretation   57-67

Chapter 4 Recommendations                  68-69

Chapter 5 Conclusion                       70




                                                   1
                               INTRODUCTION

COMPANY PROFILE

 Prelude to ONGC

       Oil & Natural Gas Corporation Limited (ONGC) is an India Public Sector Petroleum
Company.


ONGC: Historical Profile
1955 Oil and Gas Directorate, GoI

       After independence, the National Government realized the importance of oil and gas
for rapid industrial development and its strategic role in defense. Consequently, while
framing the Industrial Policy Statement of 1948, the development of petroleum industry in
the country was considered to be of utmost necessity. In 1955 a Petroleum Division was
formed within the Geological Survey of India to take up oil exploration ourselves. This
resulted in formation of the Oil and Natural Gas Directorate by end of 1955 at Dehradun.
This Directorate later became Oil & Natural Gas Commission (ONGC).

1956 Oil and Natural Gas Commission

       Keshava Deva Malaviya, Minister of Natural Resource and Scientific Research
(NR&SR) realized the importance of an indigenous petroleum industry in India and laid the
foundation of ONGC in August 1956. The scientists and engineers of Oil Gas Commission,
fuelled by his pioneering spirit, have made ONGC the Numero Uno Exploration &
Production Company of Asia.

1959 Autonomous Statutory Body

       Raised from mere Directorate status to Commission, it had enhanced powers. In 1959,
these powers were further enhanced by converting the commission into a statutory body by
an act of Indian Parliament.

1994 Public Limited Company

       The liberalized economic policy, adopted by the Government of India in July 1991,


                                                                                        2
sought to deregulate and de-license the core sectors (including petroleum sector) with partial
disinvestments of government equity in Public Sector Undertakings and other measures. As a
consequence thereof, ONGC was re-organized as a limited Company under the Company's
Act, 1956 in February 1994.

1999 Strategic Alliance

       During March 1999, ONGC, Indian Oil Corporation (IOC) - a downstream giant and
Gas Authority of India Limited (GAIL) - the only gas marketing company, agreed to have
cross holding in each other's stock. This paved the way for long-term strategic alliances both
for the domestic and overseas business opportunities in the energy value chain, amongst
themselves.

2003 Entering New Horizon

       In the year 2002-03, after taking over MRPL from the A V Birla Group, ONGC
diversified into the downstream sector. ONGC will soon be entering into the retailing
business. ONGC has also entered the global field through its subsidiary, ONGC Videsh Ltd.
(OVL). ONGC has made major investments in Vietnam, Sakhalin and Sudan and earned its
first hydrocarbon revenue from its investment in Vietnam.

2005 ONGC Golden Jubilee

       On August 14, 2005 ONGC stepped into its 50th year. During these 50 years ONGC
witnessed a rapid rise to become the most valuable “NAVARATNA” company of
independent India.

Since its inception, ONGC has transformed the country’s upstream sector. Its activities are
spread throughout India and significantly in overseas territories, the hallmark of ONGC is its
self-reliance and development of core competence in Exploration, Drilling & Production
3activities at globally competitive level. ONGC is the only fully–integrated petroleum
company in India, operating along the entire hydrocarbon value chain.




                                                                                            3
ONGC: Activities Undertaken

       ONGC has undertaken several physical activities in the petroleum sector. The
activities can be divided into Upstream and Downstream Activities.

             Upstream Activities

                     Exploration

                     Production – Survey (Seismic Survey), Drilling (Exploratory Drilling
                     & Development Drilling)

                     Development

             Downstream Activities

                     Refineries

                     SEZ

                     Services

                     Power




                                                                                       4
ONGC: Financials

             ONGC posted a net profit of Rs. 167.016 billion (2007-08), the Highest ever
               by any Indian Company
             Net worth Rs. 699 billion
             Practically Zero Debt Corporate
             Contributed over Rs. 300 billion to the exchequer



ONGC Group of Companies

      ONGC has entered into different activities through its subsidairy companies.
Following chart shows the group companies of ONGC.




                                                                                       5
    Chart :ONGC Group Companies




6
Mission & Vision

       To be a world-class Oil and Gas Company integrated in energy business with
dominant Indian leadership and global presence.

World Class

      Dedicated to excellence by leveraging competitive advantages in R&D and
       technology with involved people

      Imbibe high standards of business ethics and organizational values

      Abiding commitment to safety, health and environment to enrich quality of
       community life

      Foster a culture of trust, openness and mutual concern to make working a stimulating
       and challenging experience for our people

      Strive for customer delight through quality products and services




Integrated In Energy Business

      Focus on domestic and international oil and gas exploration and production business
       opportunities
      Provide value linkages in other sectors of energy business
      Create growth opportunities and maximize shareholder value


Dominant Indian Leadership

      Retain dominant position in Indian petroleum sector and enhance India’s energy
       availability




                                                                                         7
Future Plans

      ONGC looks forward to become an integrated energy provider, with:

     New Discoveries and fast track development
     Equity Oil from Abroad
     Downstream Value Additions & Forward Integration
     Leveraging state-of-the art technology and global best practices
     New Sources of Energy
     Production from small and marginal fiel




ACHEIVEMENTS



     Ranked as the most respected Public Enterprise in India in 2007 “Business World
      Survey, with 19th position in the league of the most-respected Indian Corporate(s).
     Rated ‘Excellent’ in MOU Performance Rating for 2006-07 by the Department of
      Public Enterprises, Ministry of Heavy Industries in Public Enterprises, GOI.
     Oil Industry Safety Directorate (OISD) has selected Ahmedabad Asset and MRPL for
      the year 2006-07 (as number one in Group-4 category (Oil & Gas Assets) and Second
      in Group-1 Refinery category respectively).
     Topped the visibility metrics in Indian Oil and Gas Sector and the only PSU in the top
      10 list of Indian Corporate newsmakers.
     “Golden Peacock Global Award 2007 for Excellence in Corporate Governance 2007”,
      for the 3rd consecutive time, conferred by World Council for Corporate Governance.
     Bagged the coveted winner’s trophy of the maiden “Earth Care Award for excellence
      in climate change mitigation and adoption” under the category of GHG mitigation in
      the small/medium and large enterprises.
     Conferred with “Infraline Energy Excellence Award” for its services to the Nation in
      Oil & Gas Exploration and Production category.
     Bestowed with “Amity Award for Excellence” in Cost Management.




                                                                                             8
COMPETETIVE STRENGHTH

    Strong intellectual property base, information, knowledge, skills and experience
    Maximum number of Exploration Licenses, including competitive NELP rounds. ONGC has
     bagged 85 of the 162 Blocks (more than 50%) awarded in the 6 rounds of bidding, under the
     New Exploration Licensing Policy (NELP) of the Indian Government.
    ONGC owns and operates more than 15000 kilometers of pipelines in India, including nearly
     3800 kilometers of sub-sea pipelines. No other company in India, operates even 50 per cent of
     this route length.




                                                                                                9
Financial Position

       The fiscal 2007-08 was yet another year of growth and success for the company,
which along with other group companies excelled in its endeavors. ONGC has come out with
laudable improved performance, despite various odds against it in the year 2007-08. It has
achieved the highest ever Sales Revenue of Rs. 601,370 million and Net Profit of Rs 167,016
million during 2007-08. That reflects an increase of 5.7% and 6.8% respectively. The total
Net Worth of the company has increased with healthy 14%.




                                                                                        10
                                 FRONTIER BASINS

          India is bestowed with 26 sedimentary basins; spread over 1.78 million square
kilometres offshore areas, with a prognosticated hydrocarbon resource base of 21 billion
tonnes that has been established as proven reserves. Seven basins are presently producing,
rest being exploration, awaiting listing on the hydrocarbon map of India. Of the nineteen
onland, seventeen are categorized under Frontier Basins, which either have indication of non
shows or have perceived prospectivity by analogy with other similar petroliferous basin and
these basins are least explored and in the knowledge building stage of exploration.

          These frontier areas hold the potential to contain vast hydrocarbon accumulations and
discoveries that could make the difference between self-sufficiency in energy sector area.

The frontier basins of yesteryears are the producing basins of today and the frontier basins to
be converted as producing basins of the future.

          The history of frontier basins, erstwhile NRBC, dates back to the inception of ONGC
entrusted with the stupendous task of carrying out exploration for both hydrocarbons and the
hereto non-producing onland sedimentary basins of India a spectrum that reveals in the
geographical disposition (from the northern state of Jammu and Kashmir to the southern) or
geomorphology (from the high mountainous areas of Spiti to the plains of Ganges extensional
basins like Gondwanas to compressive regimes like Himalayan Foothills as young as the
Karewa Basin to as old as the Proterozoic Vindhyan Basin) or logistics(the populated areas of
the Zanskars to the densely populated and well connected areas of civilization in northern
India).

          It is such diversity of challenges that the frontier basins thrives in its pursuit of
hydrocarbons difference between India’s self-sufficient in energy sector and economic
bankruptcy




                                                                                             11
                                  INTRODUCTION

       Management is declared efficient if it accomplishes its objectives with minimum
efforts and costs. The various activities within a company should be coordinated by the
preparation of plans of actions for future periods. So, planning has become the primary
function of management these days. Most of the planning relates to individual situations and
individual proposals. However, this has to be supplemented by continuous comparisons of the
actual performance with the planned performance. These detailed plans are usually referred
to as budgets.

       Budget is one of the essential tools available to the Management for Planning and
Control of organization’s operational and financial activities and helps in regulation of
expenditure in consonance with organizational goals/ objectives.

       In an organisation like ONGC, where operations are enormous, nature of the business
complex & expenditure involved are huge; the Budget assumes a very special significance. It
sets forth both Physical and financial targets, intended to be achieved considering the
organisational objectives in a given time frame with respect to various activities viz.:
Exploration, Drilling, Production, R&D, JV operations etc., spread over different Assets,
Basins, Plants, Institutes, JV Groups.

       It is with respect to the significance of budgetary control in the management of a
business enterprise that the project, “Budgeting system in Frontier Basin of ONGC” was
undertaken.

       The project focuses on various aspects that are involved in the budgetary control
system. This project report intends to give a brief overview of the budgeting system being
practiced in Oil and Natural Gas Corporation Ltd.

       The report also gives an insight of the performance of ONGC for the past five years.
An analysis of the performance has been made by finding out the variances (actual vs. target).
This analysis will help the company to know the areas where major variations have been
detected. It will provide a basis for future budgeting programme.

       Finally, based on the findings from the study, certain conclusions have been drawn
and recommendations for the performance improvement are given.




                                                                                           12
                                     OBJECTIVES



The project on budgeting systems has been undertaken while keeping the following
objectives in consideration.

   1. To learn and understand the budget forecast, activity planning, preparation of budget,
       monitoring and controlling of budget.
   2. To analyze variance of actual performance with the target set.
   3. To highlight the key areas where action needs to be taken.
   4. To analyze the past budgets.




                                                                                         13
                                      LIMITATION

1. Time Limitation

2. Exposure limitation in production area

3. Unable to visit store location physically due to far off location

4. No physically job at evaluating is in software form




                                                                       14
                                    BUDGETING


Definition

       “A Budget is a financial and/or quantitative statement prepared prior to a given
period of the policy to be pursued, the work to be done and the expenditure to be incurred
during that period, for the purpose of achieving a given objective.”

The process of preparation of budgets is called Budgeting.

       A Budget is a comprehensive and coordinated plan expressed in financial terms for
the operations and resources of an enterprise for some specified period in the future.

Simply put a budget is a formal statement made based on past experiences to analyze and
monitor the future expenditure and revenues from specific activities.

It helps to coordinate the activities of the organization.

A good budget is characterised by the following:

a)     Participation: involve as many people as possible in drawing up a budget.
b)     Comprehensiveness: embrace the whole organisation.
c)     Standards: base it on established standards of performance.
d)     Flexibility: consider changing circumstances.
e)     Feedback: constantly monitor performance.


       Analysis of costs and revenues: this can be done on the basis of product lines, sections
or cost centres




                                                                                            15
                      BUDGETARY CONTROL PROCESS OVERVIEW

Budgetary controls – definition
             Budgetary control is a technique whereby actual utilization is compared with budgets
to make the budget an effective financial control tool. Any differences/ variances are the
responsibility of key individuals who can either exercise control action or revise the original
budgets after providing necessary justifications to the top management.

            Budgetary control is defined by the Institute of Cost and Management Accountants 1
(CIMA) as:

            The establishment of budgets relating the responsibilities of executives to the
requirements of a policy, and the continuous comparison of actual results with budgeted
results, either to secure by individual action the objective of that policy, or to provide a
basis for its revision.

            Budget is a formal statement of the financial resources set aside for executing specific
activities in a given period of time. It helps to coordinate the activities of the organization.

            A good budget is characterised by the following:

           Participation: involve as many people as possible in drawing up a budget.

           Comprehensiveness: embrace the whole organisation.

           Standards: base it on established standards of performance.

           Flexibility: consider changing circumstances.

           Feedback: constantly monitor performance.

           Analysis of costs and revenues: this can be done on the basis of product lines, sections
            or cost centres.




1
    CIMA - The Chartered Institute of Management Accountants is a leading membership body in UK that offers an internationally
recognised professional qualification in management accountancy.



                                                                                                                           16
Importance of budgetary controls


       The budgetary process is a significant tool of financial control vested with the
management of a commercial entity. This control mechanism becomes more prominent for a
flagship Navratna Public Sector Undertaking (PSU) like ONGC. The budget exercise
incorporates the entire gamut of plan and non-plan activities during the budget year. Since the
Company is a Government of India (GOI) undertaking, plan budget of the Company forms
part of the plan budget of GOI through its administrative ministry i.e. Ministry of Petroleum
and Natural Gas (MoP&NG)

       The importance of budgetary controls has increased in the present context when most
of the producing fields in the Company have entered the maturity phase. As a result, while
the production levels are under pressure, the intensified secondary method of production
tends to be accompanied by rising recovery costs. This poses a bigger challenge with regard
to establishing effective cost control mechanism in the entire spectrum of activities.

       Another area of major concern is increase in rates of all oil field services and
equipments with increase in Exploration and Production (E & P) activities by all E & P
operators across the globe due to prevailing high prices of crude oil.




                                                                                            17
Advantages of budgetary controls
Key advantages of budgetary controls are given below:

a)     Compels management to think about the future and forces management to draft
       detailed plans for achieving the targets of each section and operation;

b)     Promotes coordination and communication within the organization;

c)     Clearly defines areas of responsibility and ensures that in-charges/ managers of work
       centers are responsible for the achievement of budget targets for the operations under
       their control;

d)     Provides a basis for assessing the performance of the organization at various levels
       through a variance analysis. Budget is a yardstick against which actual performance is
       measured and assessed;

e)     Deviations from budget can be investigated thereby enabling remedial action to be
       taken on an ongoing basis based on the variances observed;

f)     Motivates employees by participating in the setting of budgets; and

g)     Improves the allocation of scarce resources.




                                                                                          18
Objective
       The objective of this manual is to:

a)     Facilitate the company in the preparation of its revised budgets, budget estimates and
       commitment budgets;

b)     Facilitate the company in monitoring actual performance against the planned budget;

c)     Adhering to statutory requirements with regard to declaring the Company’s plans to
       be included in the GOI’s five year plans;

d)     Define the roles and responsibilities of each location, region and Corporate Budget
       Cell (CBC) vis-à-vis budget preparation and monitoring.



Scope
       The procedures and guidelines provided in this manual are applicable to all the
locations within the Company.

       The following topics have been covered in this chapter:

a)     Budget formulation;

b)     Execution and operation of approved budget;

c)     Budget monitoring; and

d)     Budget for interest bearing personnel advances.




                                                                                          19
                  BUDGET TERMINOLOGY AT ONGC



a)   Plan expenditure (Capex): Plan expenditure includes capital expenditure and
     new schemes in a Financial Year (FY). Plan expenditure adds to the existing
     capacities and includes the following:

        Schemes/ Lump Sum Turn Key (LSTK) projects;

        Fixed assets to be acquired (other than intangible assets);

        Survey expenditure;

        Exploratory drilling expenditure;

        Developmental drilling expenditure;

        Activities related to Joint Venture (JV), capital expenditure; and

        Research & Development (R & D) expenditure.



b)   Non-plan expenditure (Opex): Non-plan expenditure is operating expenditure
     arising out of schemes/ projects implemented and fixed assets acquired in the previous
     years so as to maintain the existing capacities. Non- plan expenditure includes the
     following:

        Staff expenditure;

        Manpower cost;

        Consumption of stores, spares and consumables;

        Insurance;

        Power & fuel;

        Repairs & maintenance;

        Contractual payments including hire charges;

        Workover operations;

        Water injection desalting and demulsification;


                                                                                        20
           Pollution control;

           Transport expenses;

           Other production expenditure;

           Transportation and freight;

           Idle rigs;

           Project overheads;

           Regional overheads;

           Headquarters overheads; and

           Other expenditure.



c)   Natural head-wise budget: This budget includes the total plan and non-plan
expenditure for all assets, basins, institutes, JVs and corporate functions together, each
divided into natural heads, viz, capital, stores & spares, contractual payments, manpower and
other charges. Capital expenditure in case of non-plan expenditure includes only replacement
capital items charged off to revenue.

d)   Activity budget: This budget represents the total plan and non-plan expenditure for
all assets, basins, institutes, JVs and corporate functions together. The plan expenditure is
further divided activity-wise, viz, survey, exploratory drilling, developmental drilling, capital,
R & D expenditure, JVs plan expenditure, etc. The non-plan expenditure is divided into
operating expenses (for the Company and JVs) and purchases of condensate, gas and other
products.

e) Commitment budget: This budget represents provision for long lead procurements
and contracts including long term supply orders where delivery of material/ utilisation of
services are expected after two years from the end of the current financial year (FY). For
example: commitment budget for FY 09-10 prepared in FY 07-08 will include anticipated
deliveries/ utilisation of services during FY 09-10 and beyond.

f) Operations budget: This budget represents operating expenditure for the current FY,
next FY and the FY subsequent to the next FY.




                                                                                               21
g) Fund Centre (FC): FC is a structure in the Funds Management (FM) module in SAP
that shows the responsibility for managing the application of funds associated with it. It is
also used to budget and perform budget availability checking. Under the CRC structure each
CRC entity has been identified as a FC in SAP.

h) Commitment Item: Budgets are stored in Commitment Items (CI) in SAP. The
commitment items in FM module have been mapped with the relevant general ledger codes in
the FI module to facilitate checking of fund availability at the time of budgeting. Equipment
is an example of a CI.

i) Foreign exchange budget: Estimated expenditure in foreign currency is converted in
INR at rates given by the Corporate Budget cell and included in the RE, BE and CBE.




                                                                                          22
                                    ONGC


ASSETS                               BASINS       PLANT    JV     SERVICES



                          PLANNED             NON

                                         PLANNED

SURVEY     EXPLORATORY     DEVELOPMENT               RESEARCH &    OTHERS
                                                    DEVELOPMENT
             DRILLING         DRILLING


         CAPITAL
                                     Activities

         STORES



          SPARES



         MANPOWER
                                       Natural Heads


     CONTRACTUAL




                         Figure 1




                                                                        23
STATUTORY PROVISIONS WITH RESPECT TO PREPARATION OF
BUDGETS



a)     Budgets to align with the targets set in the Memorandum of Understanding (MoU)
       signed with the GOI.

b)     Budgets to align with targets forwarded to MoP&NG for the purpose of five year
       planning:

c)     Annual budget to be forwarded to MoP&NG



       The budgetary process provides flexibility to the managers in their operations and at
the same time makes them accountable for cost of operations. At the corporate level, budget
allocations to the assets, basins, services, institutes and corporate functions are made on the
basis of physical work programme and overall resource generations. The assets/basins,
institutes and service chiefs have operational flexibility to provide for the budget items and
re-appropriation within the budget items.

       In line with the internationally accepted accounting methods followed by the
Company, expenditure is booked to various activities viz. survey, exploratory drilling and
development drilling and budget is presented in terms of these activities, besides capital
expenditure. The process of activity cost build up is done at each asset / basin by accepting
the allocation cost from various services within the work centre and transfer of cost from one
work centre to another to depict the activities in the geographical location where the physical
activities are accounted as per requirement.




                                                                                            24
Figure 2. Depicts the flow of information and the functions/ personnel involved in
the exercise of budgetary control.




                                                                      Board of Dierctors




                                                                Project Appraisal Committee




                                                                     Executive Committee




                                                                      Corporate Budget




                                                                Regional Budget Coordinator




Locational Budget Coordinator   Locational Budget Coordinator   Locational Budget Coordinator   Locational Budget Coordinator   Locational Budget Coordinator
            (Asset)                        (Basins)                        (Plants)                      (Institutes)                       (JV’s)




       Director (Asset)                Director (Basin)                Director (Plant)




     Functional Heads                Functional Heads                 Functional Heads               Functional Heads                Functional Heads




                                     Locational Budget Coordinator
                                               (Services)




                                             Service Heads




                                             Section Head




                                                                Figure 2




                                                                                                                                                        25
         The budget exercise is initiated with the preparation of physical targets which is the
responsibility of asset, basins and plants in consultation with the service heads. Physical
targets once approved by the respective directors are then forwarded to the CBC for review,
consolidation and inclusion in the budget agenda to be presented to the Board of Directors
(BoD).

         The next step is compilation of the financial budget, the information for which flows
from assets/ basins/ plants at location level, gets compiled at the regional level and finally
gets consolidated by the CBC.

         To begin with, financial data with regard to service cost comes from section heads of
each service type to the Location Budget Coordinators (LBC) of services, duly approved by
the Head of Services. The LBC of Services compiles the budgets prepared by each section
head and allocates the service cost to the respective asset/ basin/ plant based on inputs/
allocation criteria (such as number of hours/ rig days) received from section heads of each
service type. These allocations are then forwarded to the respective functional heads of
assets/ basins/ plants. The functional heads of assets/ basins/ plants assess the financial
budget for each activity corresponding to the physical targets. On completion of assessment,
they forward the budgets to their LBCs.

         The respective LBCs review these budgets for consistency, accuracy and prudence
and forward them to the Regional Budget Coordinator (RBC) for compilation at regional
level. The RBCs compile the budgets received from assets, basins and plants and assess the
accuracy and correctness of data received. The RBC may seek clarifications from the
functional heads on a case to case basis. After approval of RBCs, the budgets are forwarded
to CBC.

         The CBC reviews the financial budget during which it may seek clarifications from
functional heads. On finalization of budget, CBC prepares a budget agenda and forwards it to
the Project Appraisal Committee (PAC) and Executive Committee (EC) for approval. These
committees review the budget and make recommendations to the BoD. The BoD after
considering the recommendations approves the budget. The approved budget is then
forwarded to each location for uploading to SAP.

         The item wise budget, duly adjusted to the overall approved budget, is loaded to SAP
by each LBC. Monitoring the budgets is then the primary responsibility of the function head.
The secondary responsibility of budget monitoring lies with the LBCs, RBCs and the CBC.



                                                                                            26
Budget timelines

       The preparation of budgets is completed as per the CRC structure i.e. separately for
assets, basins, services, institutes, regional offices and subsequently for the company as a
whole. Budget comprises of three different components:

          Revised Estimates (RE) for the current year;

          Budget Estimates (BE) for the subsequent year;

          Commitment Budget Estimates (CBE) for the year following the subsequent year.

       The preparation of RE, BE and CBE is in three stages and is required to be completed
within the timelines given below

                                                                                   Time
       Stage            Activity              Description of activity
                                                                                 schedule

      Stage 1     Determination of       Determination of physical targets      15th June of
                  physical targets                                                 each
                                                                                 financial
                                                                                   year

      Stage 2     Formulation of         Formulation of activity-wise           15th June of
                  activity-wise          indicative financial outlays              each
                  indicative financial                                           financial
                  outlays                                                          year
                  corresponding to
                                         Examination of activity outlays by     30th June of
                  approved physical
                                         CBC, and communication of                 each
                  targets
                                         indicative financial outlays to         financial
                                         virtual corporates                        year

      Stage 3     Determination of       Determination of financial outlays     20th July of
                  financial outlays      based on approved indicative              each
                  based on approved      financial outlays                       financial
                  indicative financial                                             year
                  outlays
                                         Presentation of draft budget           14th August


                                                                                               27
                                                           Time
Stage   Activity        Description of activity
                                                         schedule

                   proposals by CBC to the EC             of each
                                                          financial
                                                            year

                   Submission of budget proposals
                                                        31st August
                   by virtual corporate based on EC’s
                                                          of each
                   approval
                                                          financial
                                                            year

                   Submission of budget agenda by           15th
                   CBC for consideration of PAC         September of
                   and BoD                                  each
                                                          financial
                                                            year




                                                                       28
                            BUDGET FORMULATION

PROCESS NARRATIVES & FLOWCHARTS

        CBC has been the nodal agency for coordinating and finalizing the budget for work
centers. Each year a detailed circular is issued by the CBC which provides guidelines for
preparation of budget. The circular is distributed to the asset managers, basin managers, plant
managers, chief of services, chief of corporate functions, heads of PSCs, JVs, Head BD – JV,
heads of regional offices, heads of Institutes, and heads of finance of assets/ basins/ regional
offices/ institutes/ plants/services/JVs/BD. CBC representatives visit work centers to discuss
and finalize the item-wise budget for the work centers as all the information and justifications
are available at the work centers only.

        The budget process has been aligned with the CRC structure, wherein the virtual
corporate (i.e. assets/ basins/ plants/ institutes/JVs) are given flexibility to determine line
item-wise budget requirement, in their own areas of responsibility, within the overall
allocations given by the CBC. CBC finalizes overall allocations to work centers on the basis
of their level of activities, cost per unit of activities and escalations for increase in input costs.
Increased powers for expenditure sanction and re-appropriation of funds is delegated to key
executives at the work centers.

        To facilitate the budget process, budget software was developed internally in the year
2002 for determining activity wise outlays from the line item-wise natural-head budget data.
After approval by the BoD, the budget is submitted to the GOI and Planning Commission as
part of the annual plan.

        Detailed process on budget formulation has been covered in subsequent paras in this
chapter.




                                                                                                   29
        Detailed guidelines for preparation of financial outlays


1) Budget to be kept at consuming work centres

        Budgets are prepared at the work centres where budget is utilized/ consumed rather
than at work centres where payments are made, as budgets are prepared and monitored in
terms of cost of activities and profitability of the virtual corporate.

        In case of centralized procurement cases, budget provision is kept at the consuming
work centres. The consuming work centres forward indents along with the sanction orders to
the central procurement agency for procurement. With the implementation of CRC structure,
budget is prepared and monitored in terms of cost of activities and profitability of the virtual
corporate. Unless the budget provision is kept at the consuming centres, true profitability and
cost of activities for the virtual corporate does not emerge.

        For detailed guidelines on SAP facility to upload budget at one work centre while
actual utilization/ Logistics Invoice Verification (LIV) being done at other work centres
against funds of the budget holder

2) Concurrence and administrative approval at pre-budget stage

        Concurrence needs to be obtained prior to including significant scheme capital and
capital expenditure in the proposed budgets. With the implementation of the system of
financial concurrence and fund allocation in SAP through system of PR release, PRs for all
scheme capital and major capital procurements of significant value are created in the system
in time and be concurred/ released by finance after due examination/ justification before
incorporating the same in budget proposals. While according concurrence, cost benefit
analysis is executed. Necessary action to obtain the financial concurrence may be initiated in
advance so that there is adequate time for the finance officers to vet the proposals and have
them included in the budget



3) Provision created for cases at conceptual stage

        Provision for certain cases at conceptual stage can be created only for a partial value
to the extent it is expected to be executed, so that these do not remain unbudgeted. This aids



                                                                                             30
in prevention of over budgeting as some of these cases may not be executed. This is
applicable mainly to schemes and major capital acquisitions/ up gradations/ refurbishments.



4) Consumption based budget

        To plan activity wise financial outlays accurately, consumption of stores and spares is
considered rather than procurement of the same, as procurement budget is derived from
planned consumption for the targeted level of activities. Accordingly, the work centres
updated the details of opening stock, planned consumption and the planned closing stock
(considering buffer stock, maxima-minima level, etc as per policy) in the budget software.
Based on this input, the procurement budget is prepared automatically by the system using
the following formula:

5) Planned Closing Stock             Plus Planned Consumption Minus Opening
Stock

        The consumption figures are used for determining activity wise outlays and budgeted
costs. The difference between procurement and consumption is reflected as inventory
variation, which is shown as working capital change. It is ensured that inventory levels are
not very high.

        In case of contractual payments anticipated utilisation of services in the respective
budget periods are updated in the consumption column. The requirement of contractual
services is planned precisely after considering the realistic requirement so that it does not
impact cost of the activity.



6) Procurement budget

        Budget is utilized in the year when material is received/ services are utilised and not
at the stage of creation of PO or opening of letter of credit. Funds are assigned/ committed at
the stage of issue of supply order/contract from the budget of the respective FYs in which
delivery of the material/utilisation of services is due as per contract terms. Actual utilization
takes place at the stage of LIV which happens at the stage of receipt of material/ utilisation of
services.




                                                                                              31
        In the event that substantial amount of funds are provided in the RE towards items
which are at conceptual stage or expenditure which is yet to be sanctioned, and such items
remain unutilised at the end of the year, then not only such items have to be carried forward
to the next year but also result into adverse comments from the GOI.

        Therefore, it is essential that while keeping budget provision, lead time in creation of
PR, its release at various stages including financial concurrence and expenditure sanction,
time taken in tendering process, issue of supply order and delivery schedule are taken into
account and budget be kept in the respective budget years during which material is expected
to be received/ services are to be utilised. Also, it is ensured that delivery date in the PR is
kept realistic after taking into account the time involved for completing various stages of
processing (specially for the PRs which are likely to mature at the fag end of the FY), so that
under utilisation of budget and throw forward of open commitments is avoided.

        The planning of procurement process targets deliveries to take place latest by third
quarter of the budget year. If the deliveries are likely to spill into the fourth quarter, then the
procurement process targets deliveries in the first quarter of the next FY. Thus, the chances
of under utilisation due to uncertainties of the procurement process is reduced and shortage of
funds in BE period due to carry forward of immature supply orders of previous years shall be
avoided.

        Procurement cases can be initiated against the budget provided in BE / CBE after the
approval of budget by the BoD.

Note:

        In case of import procurements, currency rates as specified in the annual budget
circular issued by the CBC are considered.



7) Budgeting for non-procurement cases

        Budget utilisation for non procurement items like manpower costs and other charges
is mapped with the accrual principle in SAP i.e. budget is utilised at the time of incurring
expenditure and liability is provided in accounts even though actual payment may not have
been made. Accordingly, budget provisions for such items are made commensurate to the
expenses which are likely to be incurred in the respective FY.




                                                                                                32
8) Schematisation of the budget

    Capital budget summarises expenditure on plan capital items by classifying the same into
following schemes:

   BoD approved schemes;

   Other schemes relating to oil & gas production and processing;

   Major acquisition programmes;

   Major refurbishment/ up-gradation of equipments;

   Infocom initiatives;

   R&D schemes and equipments;

   Major buildings & civil works; and

   JVs


    To facilitate preparation of the capital budget, specific scheme codes are created in the
budget software so that the scheme details can be aggregated from the root level. Scheme
code master along with section cost centre master is created centrally at the respective
location by the LBC.


9) Replacement capital

          Replacement capital forms part of non-plan capital and is included in the operational
budget as per corporate policy. These are items in the nature of revamp of production
installations/ facilities, pipeline replacement projects, etc which are chargeable to profit &
loss account as per accounting policy.



10) Commitment budget estimates

          Provision for long lead procurements and contracts including long term supply orders
where delivery of materials or utilization of services is expected in the year next to the
subsequent year and beyond is included in commitment budget estimates. LSTK projects
which are likely to be executed in the commitment budget year are also included in
commitment budget.



                                                                                            33
As the commitment budget involves fund requirement for the commitment budget year and
beyond, year wise break up of commitment budget is prepared in the specified format.



11) Budget for carry forward items

       In cases where POs have been placed and material has not been received, re-
appropriation of budget is done in the budgetary estimates for the current year. However, re-
appropriation of budget is done only between plan to plan and non-plan to non-plan only. The
carry forward cases are shown separately in the budget software.

Cases where POs remain open till the end of the FY, and deliveries are not received; the POs
get carry forwarded automatically to the next FY through a central process in the fourth week
of April each year. In all such cases, the POs consume the free budget from the budget
estimate of the current year. However, in some of the commitment items where sufficient free
budget (unassigned budget) is not available, the available budget becomes negative and the
system stops further processing of purchase orders in respect for such commitment items
with negative available budget. Accordingly, all work centres review such cases and make
funds available through re-appropriation of funds from other commitment items where funds
are available.

       Cases wherever LIV has been done even though actual payment has not been made or
wherever down payment against procurement cases has been created in the system, the
budget is considered as utilized. In these cases, budget is not carried forward in revised
estimates for the current year.

       Cases where LIV could not be completed in the previous FY or where down
payments against specific commitment items of the purchase orders were not created are
reflected in revised estimates for the current year as carry forward budget.



12) Changes in rates of custom duties, excise duties and service tax

GOI announces certain changes in customs duties/excise duties/service tax through the yearly
Finance Bill. Accordingly, while determining budget requirements for procurement &
services, revised rates of custom duty/excise/service tax are considered for fund requirement




                                                                                            34
13) Reduction in non-plan expenditure

        Non-plan expenditure is directly charged off to profit & loss account and thus affects
the profitability of the company. Hence, increase in non plan expenditure takes place only if
supported by an increase in physical activity for work over operations, maintenance,
revamping and replacements.



14) Budget drivers

Guiding factors for allocation of budget resources are:

   Budgeted cost of activities;

   Inventory; and

   Profitability.



15) Budgeted cost of activities

        Budgeted per unit cost of activities is the main budget driver for allocation of budget
resources. Accordingly, virtual corporates compare the budgeted cost of activities vis-à-vis
actual cost of activities during last two years and in case budgeted cost of activities is
increasing with reference to last years’ actual utilization, the reasons of the same is analysed
in detail and budget provisions should be moderated to bring down the budgeted cost of
activities within the reasonable limits with reference to previous year’s actual utilization.
After each round of moderations, the stage 1 to 6 of the cost allocation cycles in the budget
software are re-run to arrive at the revised budgeted cost of activities.

            To facilitate the workings of budgeted cost of activities the budget software has an
additional module for deriving the budgeted cost of activities. Detailed guidelines for
working out the budgeted cost of activities are given in Para 2.1.6 below.

16) Inventory

            Inventory management is essential to optimise level of inventory holding and
carrying cost. While preparing/ approving item-wise budgets for stores and spares, the
available items in stock is considered To meet this objective, the budget software provides
additional fields for updating planned consumption of stores and spares items. Opening and


                                                                                             35
closing inventory as per buffer stock requirements/ corporation policy is to be updated in
respective fields and the system automatically determines the procurement budget for each
line item. Budget head-wise summary report variation projected in the budget. The guiding
principle is to optimise the investment in inventory and also attempts should be made to
reduce the level of non-moving/ slow moving inventory. All work centres ensure that there is
no addition to slow moving/ non moving inventory.

17) Profitability

       While framing the budget estimates it is considered that not only the physical targets
set in the MoU are to be achieved but the financial parameters of gross margin, net profit /
capital employed and net profit/ net worth indicated therein are also to be achieved.
Profitability of the asset/basin assumes greater importance, rather than the cash outflow. The
assets/basins are therefore expected to prepare Budgeted Profit Margin and Contribution and
emphasise achievement of overall efficiency/productivity and cost effectiveness in all its
operations.




                                                                                           36
               BUDGETING PROCESS IN DETAIL


Determination of physical targets


       The physical targets are framed by the assets and basins in consultation with the
respective heads of Services in line with the overall corporate objective, MoU targets and five
year plan projections. The physical targets form the basis for budget, annual plan and are
submitted to the Planning Commission.



               Process flowchart

                          Physical targets compiled by
                            assets managers/ basin
                                   managers



                           Meeting held with heads of
                            Services to finalise the
                                physical targets



                             Compilation of finalised
                                                            Formats PHY1 till PHY7
                            physical targets in formats
                                specified by CBC



                           Concerned directors review
                          and approve physical targets




                            Approved physical targets
                               forwarded to CBC



                            CBC reviews the physical
                          targets received from assets/
                                basins and ask for
                             clarifications if required


                          Separate note is prepared for
                           major deviations on case to    Separate note for deviations
                          case basis and forwarded to
                                      CBC


                          CBC consolidates the physical
                           target formats received from
                                   assets/ basins




                                                                                            37
                                      Process flowchart


Assets/basins/plants/ services/             When commitment item wise
  institutes/ JV’s commence                budget is complete, manpower
 compilation of commitment                   cost & other charges are
        item-wise budget                       compiled by the LBC


Commitment item wise budge                 Head – F&A section approves
  is prepared in an MS Excel                 the agreed upon changes
  spreadsheet by designated                along with manpower costs &
officer in each Service location                   other charges


Services section compiles the               LBC incorporates approved
  physical data to facilitate              changes to the budget in MS           MS Excel spreadsheet
 allocation of service cost to             Excel spreadsheet and in the
        assets/ basins                           budget software


 RE, BE & CBE are forwarded                LBC allocates costs allocable
to the service heads for review             to another service section &
     & approval along with                 allocates the directly allocable
          justifications                      costs to virtual corporates


     Head, Service location                  Head, Service location &
forwards approved commitme-                     Head- F&A section
nt item-wise budget & physical               approve the consolidated
data to LBC & Service location             commitment item-wise budget


Commitment item-wise budget                 Approved commitment item-
  is uploaded in the budget                wise budget in hard copy form
 software by the designated                and data files are forwarded to
  officer in Service location               the RBC & virtual corporates


    LBC performs reviewing                  LBCs of assets incorporate
activities on reciept of data file,          allocations received from
commitment item-wise budget                  Services and finalise the
 & physical data in hard copy              commitment item-wise budget


LBC consolidates commitment                    Commitment item-wise
                                                                              Specified formats (FIN 1 – FIN
  item-wise data MS Excel                     budgets are approved by
                                                                                            15
 spreadsheets are received                   heads of virtual corporates
    from different sections                    and forwarded to RBCs


   Commitment item-wise                    RBC consolidates commitment
                                                                                 Consolidated budget at
    budgets in MS Excel                       item-wise budget for each
                                                                                     regional level
spreadsheets consolidated &                 location in budget software &
segregated natural head-wise                    MS Excel spreadsheet


   Meeting is held between
                                            Approved commitment item-
  service heads, designated
                                           wise budgets are forwarded to
  officers, LBC & Head F&A
                                           CBC in MS Excel spreadsheet
 section to discuss variations



                                                          A




                                                                                                               38
               A




Budget for JV’s (non-operated
and operated) prepared by the
        respective JV



Budget for JVs consolidated at
 regional level and forwarded
            to CBC



 CBC consolidates the budget
                                   Consolidated budget at
  proposals from all regions/
                                      company level
locations and prepares a draft
       budget proposal



CBC forwards the draft budget
     proposal to the EC



      EC reviews, makes
   recommendations & then
 forwards budget proposal to
           the CBC


  CBC obtains approval of
 Director Finance & forwards
the financial outlays to virtual
          corporates.


   Virtual corporates revise
     budget proposals in
     accordance with the
   recommendations of EC



Revised budget proposals are
    submitted to the CBC




  CBC finalizes the budget
                                      Budget agenda
   agenda & submits it for
  approval of PAC & BoD




Approved budgets forwarded
                                     Approved budgets
  to virtual corporates for
     uploading in SAP




                                                            39
                 Budget for interest bearing personnel advances


       Interest bearing personnel advances refers to advances given by the company to
eligible employees to facilitate them to incur personal expenditure. These can be given for
purposes such as house building, purchase of four-wheelers or two-wheelers. However,
advances given for purchase of desktop computers and laptops is non-interest bearing.



       The RBC is responsible for assessing requirement for such advances on a quarterly
basis for the respective region, on the basis of information obtained from PCS and HR
section. This requirement is intimated to the CBC, which reviews the requirement and
approves/ allocates funds to each region.




                                                                                        40
                                     Process flowchart

  Receipt of requirement for
funds by RBC from PCS and
        HR section




 Review of fund requirement
        by the RBC




Fund requirement is forwarded
           to CBC




CBC deliberates over the fund
requirement and approves the
       fund requirement



Subsequently, CBC allocates
  funds to locations to the
     respective regions



   Funds are utilized at the
  locations at the respective
            regions




 Monthly report prepared by     Monthly report
RBC for monitoring purposes




The monthly report forwarded
  to Head, F&A section for
    review and approval


  In cases where additional
funds are required , then the
same are budgeted for in the
     subsequent quarter




                                                         41
EXECUTION/ OPERATION OF APPROVED BUDGET

         The execution/ operation of approved budgets are through the interface of Funds
Management (FM) module and Investment Management (IM) module in SAP. These
modules contain monetary balances and budgets for fund centres (in FM module) and
projects (in IM module) respectively. The fund centre contains budgets at the CI level while
the projects have budgets at work break down structure (WBS) level. Projects/ schemes
uploaded and rolled up in IM module is also uploaded in FM module under one fund centre
for the purpose of fund management. Thus, every time a PO is released fund availability is
automatically checked by the system in FM as well as in IM.



Budget structure in SAP
         The budget structure in FM module is aligned to the CRC structure as defined in the
Finance (FI) module in SAP. The FM module interfaces with the FI module and checks for
fund availability in the respective commitment through the mapping of CIs with the GL
codes.



Procedure for creating new fund centre and new commitment item:

         For creating a new fund centre and new commitment item, a request is forwarded to
the CBC with relevant justification by the user/ LBC. On review and approval by the CBC,
the request is forwarded to the designated officer in ICE team for creating the fund centre/
commitment item in SAP. Once created, the same is intimated to the user/ LBC and the CBC.

         Once the approved overall budget is obtained from CBC, the LBC of each location is
responsible for uploading the commitment item-wise budget within the overall approved limit
in SAP. Loading of approved budget is done to facilitate year-wise capturing of committed
POs.



Budget for schemes in Investment Management module

         The IM module is a module used for management of LSTK projects which include
projects/ schemes such as erection of platforms, development of fields, installation of large
facilities, development of plant, etc. These projects are long term projects in the range of one


                                                                                             42
to three years or more. LSTK projects need not necessarily be large projects monetarily but
may be of high strategic importance. Approval of these projects is either obtained from the
respective asset head or the BoD and subsequently from the GOI, depending on the nature
and value of the project. The IM module facilitates review of associated actual costs vis-à-vis
budgeted costs at WBS level, status and progress of the projects. Fund centres are created
according to the existing CRC structure (use T -code IM23 for obtaining the structure/ IM
hierarchy from SAP). For instance, there are separate fund centres for surface teams at Assets
that are involved in activities such as enhancement of facilities, constructions etc and separate
fund centres for sub-surface teams that are involved in well services, reservoir activities etc.

       The budget for all projects/ schemes is rolled up at the IM Position ID level i.e. at
respective work centre/ asset level. The assets give details of cost calculations of the related
activities pertaining to the respective projects/ schemes, after which approvals are obtained
from competent authority. The approved plan is then converted to budget at various IM
position ID level. Further, the budget is distributed to various projects within an IM position
ID level after which the budgets are available for utilisation. Budgets in IM get utilised when
a service entry sheet (SES) is made in SAP. For detailed process on creation of service entry



Uploading of token budget

       Commitment item wise budget prepared within overall budget duly approved by the
BoD is termed as the token budget. The budget values are uploaded to the relevant fund
centre in FM module by the LBC.

       Next, an appropriation request (AR) is created by the Project Coordinator (PC)/
Project Engineer (PE) to capture the token budget. At this stage a new variant is created to
capture these values. This variant is not required to be assigned to any plan version since it is
used mainly for information purposes only. The budget values entered here are the same as in
FM.



Release of PRs in finance and fund availability checking mechanism in SAP

       Designated officers in F & A review the PR at the time of PR release and check for
fund availability using SAP report ZFIFMREP7. In case of exigencies, PR can be approved
by the designated officers in F & A even if budget is not available. However, in such cases,


                                                                                               43
the indenter arranges for the budget before PO release. (For detailed process of re-
appropriation, refer Para 2.2.4.10 mentioned below). Non-availability of budget in the
system can not be a constraint for creating PR in the system.

Out of the various critical elements in a PR, there are four elements which impact fund
management and therefore require close scrutiny by the LBC at the PR release stage. These
are detailed below:

a)   Plant: Plants pertaining to the respective business area are allowed. Multiple line items
     can be indicated for fund utilization from fund centers of different business area /
     company code.

b)   Fund centre: Relevant fund centre is indicated. Multiple line items can be indicated
     for different fund centre within the same business area.

c)   Account assignment category: With regard to account assignment
     category the following is ensured:

        Field should be blank for procurement of material / capital items except for purchase
         of medicine / stationary.

        Assign K for contractual payment and procurement of medicine and stationery with
         relevant GL / commitment items.

        Assign A and ensure the asset number for installation and commissioning of assets is
         indicated (accounted as contractual payments).

        Assign P for projects and ensure WBS elements for the contractual payments only if
         the item of contractual payment is in nature of Capital Work In Progress (CWIP).

     Based on material code, capital census code relevant commitment items / GL is derived.
Procurement budget control for all stores / spares / capital items is at the inventory level only.
Material consumption accounts do not have any budgetary control. Only for contractual
services procurement budget control exists at consumption accounts.

     CI:      CIs not relevant for budgeting, like MCON_STORE, MCON_SPARE,
OUTSIDE_FM etc. are being allowed. Fund centre together with GL account determines the
commitment item from which budget is consumed.




                                                                                               44
Delivery date in PR important for fixing the budget period

       Delivery date needs to be considered by the designated officer in F & A section at the
time of PR release, as the fund allocation happens on the basis of delivery dates. PR’s is
created in the relevant fiscal year only, since PR gets reflected in the FM module for the year
in which the PR delivery date falls.

       For example in case the PR is made before 31st March and the PR delivery date is
after 31st March the budget of next year will get used. Thus, in case of LSTK contracts or
rate contracts or any other contracts which are expected to be executed in a span of more than
one year, the concerned work centre breaks the PO year wise and the load necessary budget
in the relevant future years on the basis of PR.



Importance of using correct commitment item for proper booking of
expenditure

       The booking of expenses is made for the particular commitment item only. For
example, if cars have been hired for transportation, then expenses is booked under the
respective commitment item only.



Funds commitment process for non - procurement cases

With respect to the funds commitment process for non-procurement cases, sufficient
earmarked funds are required to be created. Earmarked funds can be created by the respective
LBCs on need basis.

       There is a provision in the system whereby budget can be loaded at one work centre
and actual utilization of the budget can happen at other work centers against the funds of the
budget holder. Examples of such cases are centralized offshore survey contracts of Mumbai,
central procurement cases of Head quarters, expenses incurred by one location on behalf of
another location, etc. In such cases though the PO is raised centrally the budget provision and
actual utilization/ LIV happens at the location where material is received/ services are
utilized. System facilitates fund management in such cases through generation of inter unit
transactions (IUT).




                                                                                            45
Budget utilization at LIV/ down payment stage

       Budget utilization for procurement of materials and services takes place at the LIV/
down payment stage. Unless LIV is done or down payment against the supply order is
created in the system, budget is not utilized and is considered as carry forward budget which
consumes funds from subsequent year’s budget. Hence, during closing of accounts, it is
ensured that wherever materials have been received/ services have been utilized before the
end of the FY, LIV is completed.



Budget supplement
       Budget supplements are used to add funding to existing budgets. This can be done
only once during the year align the previously budgeted amount (BE) with the RE. The
supplement is for the additive amount only, when posted, the cumulative fund totals (original
budget plus supplements) are reflected in the system.

    The LBC can add supplement to the respective fund centre and commitment item by
executing the T–code FR21. Supplement can also be done via batch mode using the T–code
ZFISR. Before executing these T-codes the LBC ensures that the following information is
available:

      Fund;
      FC;
      Commitment item; and
      Budget supplement amount.



Budget transfer

       Budget transfer can take place when funds are transferred from one asset/ basin/
service to another asset/ basin/ service. The LBC of the transferor asset/ basin/ service
executes the T–code FR 50 for transferring funds only after obtaining the authorized
document for transfer of funds. On executing the T-code the fund totals in the transferor
asset/ basin/ service get reduced and are then reflected in the fund totals of the transferee
asset/ basin/ service. Before executing the T-code the LBC ensures the availability of the
following information:


                                                                                          46
      Budget subtype;
      Fiscal year;
      Fund centre;
      Commitment item; and
      Amount for each item.



Budget return

       Budget return procedure is used to return or reduce a previously budgeted amount.
This can be done only once during the year align the previously budgeted amount (BE) with
the RE. The LBC executes T–code FR29 for return of funds. Before executing the T-code the
LBC ensures the availability of the following information:

      Budget subtype;
      Fiscal year;
      Fund centre;
      Commitment item; and
        Amount of budget return.



Re-appropriation of funds

       Re-appropriation of funds can take place at the time of PR release stage the
concurring officer approves the PR subject to availability of funds. At that stage, it is the
indenter’s responsibility to make funds available before the PO release for which a
requisition is made to the LBC. The requisition duly authorised by the Head of the indenting
section clearly specifies the following:

   Amount of fund requirement;

   Commitment item against which funds are required; and

   Commitment items (giving three to four options) from which funds can be re-
    appropriated.

       Based on the above information the LBC re-appropriates funds, considering that re-
appropriation can take place within commitment items under plan budget and within


                                                                                          47
commitment items under non-plan budget. However, re-appropriation of funds from one
commitment item in plan budget to another commitment item in non-plan budget and vice
versa is not allowed.



Process for negative release of funds

       Once funds start getting utilised against approved budgets in the system on LIV/
down payment, at times the available budget becomes negative due to insufficiency of funds.
The system stops further processing of PO’s in respect for such commitment items with
negative available budget.

       For centralised PO cases which can not be created because of insufficient budget the
negative (over) posting of utilization is done through earmarked funds. This can be authorised
only by the attached Finance officer in Corporate MM and can be posted using T-code
FMW1. Once the negative utilisation of budget is posted the available budget increases and
the PO can then be further processed.

       Monthly report of negative (over) earmarked fund is generated by designated officer
in Finance of Head MM and is circulated to respective work centres. Respective projects
initiate action to ensure that necessary budget re appropriations are posted. The negative
earmarking of funds are monitored and removed from the system by designated officer in
Finance, Corporate MM using T-code FMW2. Removal of negative earmarking of funds can
be done only after necessary re-appropriations have been made.

       Year end processes in SAP in Funds Management and Investment Management modules

A-Year end processes in SAP for Funds Management module




Closing of all earmarked funds

       All earmarked funds are closed centrally in the FM module using the T-code
FMRE_SERLK immediately after FY close. If there is a request for revalidating the
earmarked funds, LBC issue new earmarked funds. This activity is done immediately after
closing of the current fiscal year.




                                                                                           48
Provisions for new earmarked funds

       New earmarked funds are furnished in the current year. This is done by the respective
LBC on a need basis.



Uploading of approved budget

       Follow up with MM section and/or indenters for old POs/ PR’s. In cases of open PO’s
and PR’s, PR/PO wise details of all ongoing cases are down loaded from the system and
reviewed with reference to status of case, lag in delivery schedules, if any.

       All LBCs follow-up with MM section and/or indenters for old PO’s i.e. PO’s that are
due for more than six months at the end of each fiscal year. The T-code ME2M is used to
open the list of old PO’s. The report can be generated for a range of work centres and
commitment items. The list can be generated in such a way that POs are ordered as per
specific delivery dates. This exercise also includes cases where only a small quantity of the
PO has not been received. In such cases the MM officer or indenter can cancel such PO’s on
a case to case basis.

       Similarly, existing PRs, which have not matured into supply orders, are required to be
reviewed. If required, action is taken by the indenter for closure/ amendment in delivery dates
to release the funds blocked.

       The follow up activity is done at FY close as well as throughout the year by the
respective LBCs.



       Follow up with Pre-Audit section /MM section to ensure that LIVs are processed
LBC’s follow up with Pre-Audit/ MM section to ensure that LIV is done to the maximum
extent possible against all down payments made against respective PO’s before end of
current fiscal year Deletion of all parked FI documents consuming budget Carry forward of
commitments on account of all open Pos Reconstruction of distributed and assigned values
The T – codes FM9P and FMBV are executed for both the current fiscal year as well as the
subsequent fiscal year. This exercise is done centrally immediately after the carry-forward
exercise is completed.




                                                                                            49
       Removal of budget deficits from the system         The report S_ALR_87012621 is
generated to view the budget deficits. LBCs remove budget deficits from fund centres by
making the required budget transfer postings using the T–code FR14. This exercise is done
by the respective LBC’s immediately after FY close.



Year end processes in SAP for Investment Management module

       The IM program structure is copied from the current fiscal year to the subsequent
fiscal year by the LBC Carry forward of commitment items i.e. outstanding PR’s or PO’s is
executed. The current IM program structure is subsequently locked by the LBC.The
assignments are locked to the current IM structure by the project coordinator (PC), LBC and
the CBC




                                                                                        50
                       BUDGET MONITORING


       Utilization of the budget as per plan is monitored by the BoD and the GOI on a
periodic basis through submission of the quarterly reports, namely, statement of actual
expenditure against central plan outlay and statement of plan expenditure, on a monthly
basis. Monitoring of the budget is done with the aim of having 100% planned budget
utilization. Variations between both physical and financial parameters in the budget and
actual utilization are reviewed and required corrective actions are taken after obtaining
required clarifications from the virtual corporate.

       Virtual corporate review variations between budgeted targets and actual utilization,
and progress of ongoing projects on a quarterly basis on budget utilization is prepared on a
quarterly basis recommending corrective actions to be taken and detailing the reasons for
variations as per format specified by the CBC.

       A monthly expenditure report, monthly sales expenditure report and monthly sales
receipts report is prepared by each LBC and forwarded to the RBC for consolidation at
regional level.




                                                                                         51
                        RESEARCH METHODOLOGY

Following in order to complete project report on budget on O.N.G.C. Ltd., methodology has
been adopted.

       The very first step I have taken is that I have collected all the accounts which are
required for analysis after that I have extracted the things out of accounts, which are needed
for Budget analysis. (e.g. Current assets etc.)

       There are two main types of data collection i.e.

      Primary data
      Secondary data



PRIMARY DATA

       It means collection of information for the first time. In order to collect such type of
information questioner, ie.e. to be constructed and information is collected from the
respondent. In my project report budget analysis in ONGC Ltd., the primary data collection is
not used since it is based on secondary date already available.




SECONDARY DATA

       Secondary data are information, which has already been collected by others. In order
to carry out my project successful I have relied on the secondary data already available.

Source of secondary data

      Annual report ofONGC Ltd.
      Monthly publication of ONGC i.e. corporation finance.
      ONGC Ltd website : www.ongcindia.com
      Library of ONGC at KDMIPE



1. Research Design             : Exploratory Research

2. Data Collection Method      : Secondary Data Collection Method


                                                                                                 52
3. Operational Area of Study : Frontier Basin, ONGC

4. Data Processing Method   : By calculating the utilization ratios of capital and revenue

                                                   (actual target)*100%




                                                                                             53
                         BUDGET DATA ANALYSIS


       Oil & Natural Gas Corporation Ltd is a Government of India undertaking as
previously stated and hence the preparation of budget is synchronized with the 5 year plans
prepared by the government and further budget targets decided with the approval from the
ministry of Petroleum and Gas. Presently the annual budgets are prepared in accordance with
the 11th five year plan from 2007-2012.

ONGC has set 3% higher budget in this plan than the previous one.




       The budget is prepared as explained in the process for planned or capital expenditure
(Capex) and non-planned or operating expenditure (Opex) at every level.

       The Capex and Opex budget outlays for past few years are tabled on next page




                                                                                         54
PLAN OUTLAYS (CAPEX)

                                                              Figure in Crore

Description                       Actual             Actual                 BE      RE             BE

                                  05-06              06-07                  07-08   07-08          08-09

SURVEY                            1498               1992                   2516    2387           2593

EXPL.                             2390               2325                   3114    2951           3715
DRILLING

DEV. DRILLING                     1875               1898                   3102    3111           3837

R&D                               108                86                     148     186            194

CAPITAL                           4003               5496                   6399    7238           6824

JV’S                              820                1263                   1506    1406           1212

PLAN-ONGC                         10694              13060                  16785   17279          18374

INTEGRATION                       727                245                    1102    1067           964
PROJECTS

TOTAL                             11421              13305                  17887   18346          19338




             T OT A L P L A N OUT L A Y (C A P E X ) R s .
                             In C rore
 25000
                                                      18346
 20000
 15000                   13305                                      19338
                                            17887
 10000                                                                                    TO TA L P L A N
             11421
  5000                                                                                    O UTL A Y (C A P E X)
     0                                                                                    R s . In C rore
                                                          )
                              )



                                            )
            6)




                                                                        )
                         07




                                                      08
                                        08




                                                                   09
            -0




                                                     7-
                         6-



                                       7-




                                                                   8-
       05


                      l( 0




                                                 (0
                                   (0




                                                               (0
       l(




                                  BE



                                                RE
                     a




                                                              BE
     a


                  tu
  tu


                 Ac
 Ac




                                                                                                                  55
        It can be seen from the graph that there is a jump In the actual utilization of budget in
07-08 in comparison to 05-06 & 06-07. This goes on to show a consistent increase in the
activity. However if we look at the actual utilization of 07-08 then its lesser than RE.It
produces a case in point of lock up of funds due to certain expected expenditures. There is a
cushion of Rs 695 crores, but looking at the size of the company, a headroom of this extent is
unavoidable.




NON-PLAN OUTLAYS (OPEX)

                                        Figure in Crore

 Description                 Actual       Actual      BE          RE         BE

                             05-06        06-07       07-08       07-08      08-09

 OPEX                        7232         8501        8984        9256       9060

 JV’s –OPEX                  328          425         380         450        470

 STAT. LEVIES                9979         12256       11768       12453      12755

 INTEREST PYT.               47           22          13          11         10

 CORPORATE TAX               7406         8027        7467        6967       6937

 DIVIDEND                    7317         7643        6585        7313       7526

 LOAN REPAYMENT              897          37          43          36         16

 WORKING CAPITAL 481                      6692        266         -2322      1306
 CHANGES

 ADV.                  TO 4259            -2418       4004        4000       4000
 SUBSIDIARIES

 TOTAL NON PLAN              37945        41185       39510       38163      42080




                                                                                              56
                           T OT A L NON P L A N
                       OUT L A Y (OP E X )R s .In C rore
     43000
     42000                41185
     41000                                                             42080
     40000                                           38163
     39000                             39510
     38000                                                                               TO TA L NO N P L A N
     37000     37945
     36000                                                                               O UTL A Y (O P E X)R s
     35000
                                                                                         .In C rore
               )



                           )




                                                        )
                                          )




                                                                      )
               06



                           07




                                                     08
                                       08




                                                                  09
             5-



                         6-




                                                   7-
                                     7-




                                                                 8-
          (0



                     (0




                                                (0
                                  (0




                                                             (0
                    AL



                                BE



                                              RE



                                                            BE
       AL


                TU
     TU


               AC
  AC




          The graph clearly depicts that the non plan activity is not consistent and is varying as
per the requirement of the corresponding planned outlays. Therefore we can draw a
conclusion that the plan budget and the non planned budget need to be made in proper
harmony with each other and there needs to be a better coordination between the two.

Trend in Planned and Non Planned Budget

Utilisation Trend

PLAN EXPENDITURE

                                                        Figure in crore

Particulars               2002-03             2003-4         2004-05           2005-06      2006-07       2007-08

BE                        7408                10308          10000             10487        14354         17887

RE                        7142                10625          10850             12736        16522         18346

ACTUAL                    6063                6852           10681             11421        13305         17651

ACTUAL          OVER 82%                      66%            107%              109%         93%           98%
BE (%)

ACTUAL          OVER 85%                      64%            98%               90%          81%           96%
RE (%)




                                                                                                                    57
                                                        PLAN BE


  20000
                                                                                       17887
  15000                                                                    14354
  10000                              10308         10000      10487                                   PLAN BE
                       7408
   5000
         0
               2002-03        2003-4     2004-05 2005-06           2006-07        2007-08




                                                      PLAN ACTUAL


  20000
  18000                                                                               17651
  16000
  14000                                                                   13305
  12000                                                       11421
  10000                                            10681                                            PLAN ACTUAL
   8000
                                     6852
   6000                6063
   4000
   2000
      0
               2002-03        2003-4     2004-05 2005-06 2006-07 2007-08




                                                   PLAN ACTUAL OVER BE (%)


  120%
                                            107%       109%
  100%                                                                       98%
                                                                  93%
   80%            82%
                               66%
   60%                                                                                      PLAN ACTUAL OVER BE (%)
   40%

   20%

    0%
             2002-03    2003-4       2004-05   2005-06      2006-07     2007-08




             The graphs above show that the plan BE and plan actual have been rising with more
or less a consistent rate signifying a growth in the activities of the company.However it
being a plan expenditure, it could have been more precise.




                                                                                                                      58
                                                 RE


  20000
                                                                                      18346
                                                                         16522
  15000
                                                            12736
  10000                        10625        10850                                             RE
                 7142
   5000

      0
            2002-03      2003-4        2004-05      2005-06         2006-07      2007-08




                               PLAN ACTUAL


  20000
  18000                                             17651
  16000
  14000
                                            13305
  12000
                              10681 11421
  10000                                                        PLAN ACTUAL
   8000
                      6852
   6000        6063
   4000
   2000
      0
           2002- 2003- 2004- 2005- 2006- 2007-
            03     4    05    06    07    08




                              PLAN ACTUAL OVER RE (%)


  120%

  100%                         98%                      96%
               85%                      90%
   80%                                           81%
                        64%                                           PLAN ACTUAL OVER
   60%
                                                                      RE (%)
   40%

   20%

    0%
           2002- 2003-4 2004- 2005- 2006- 2007-
            03           05    06    07    08




          If we compare the percentage utilisation of BE and RE, then the actual utilisation
seem consistent in both the cases except that in the year 2004-05.Thus here the vision of the
budget makers can be deemed fine and in consonance with the overall objectives of the



                                                                                                   59
firm.This so ,because the utilisation ratios in most of the cases are quite high i.e more than
90%, signifying proper allocation and near to optimum utilization of funds.Thus it can be said
that the budget makers and controlers have been successful in striking a proper balance
between an efficient control mechanism and smooth functioning.

NON-PLAN EXPENDITURE

                                                   Figure in Crore

 Particulars                 2002-03              2003-4        2004-05   2005-06   2006-   2007-
                                                                                    07      08


 BE                          6564                 5738          6696      6875      8323    8984
 RE                          5840                 6312          6428      7653      8619    9256
 ACTUAL                      7115                 5880          7136      7668      9260    9863


 ACTUAL OVER 108%                                 102%          107%      112%      111%    110%
 BE (%)
 ACTUAL OVER 122%                                 93%           111%      100%      107%    106%
 RE (%)



                              NON PLAN BE


  10000
                                                8984
   8000                                  8323
               6564          6696 6875
   6000               5738
                                                         NON PLAN BE
   4000
   2000
      0
          200 200 200 200 200 200
          2-03 3-4 4-05 5-06 6-07 7-08




                                                                                             60
                              NON PLAN RE


  10000
   9000                                           9256
                                           8619
   8000                             7653
   7000
                         6428
   6000        5840 6312
   5000                                                    NON PLAN RE
   4000
   3000
   2000
   1000
      0
           200 200      200 200 200 200
           2-03 3-4     4-05 5-06 6-07 7-08




                     NON PLAN ACTUAL OVER BE (%)


  114%
  112%                             112%
                                          111%
  110%                                           110%
  108%        108%
                            107%
  106%                                                   NON PLAN
                                                         ACTUAL OVER
  104%                                                   BE (%)
  102%               102%
  100%
   98%
   96%
          2002- 2003- 2004- 2005- 2006- 2007-
           03     4    05    06    07    08



                      NON PLAN ACTUAL OVER RE (%)


  140%
  120%         122%
                             111%           107% 106%
  100%                              100%
                      93%
   80%                                                     NON PLAN
                                                           ACTUAL OVER
   60%                                                     RE (%)
   40%
   20%
    0%
          2002- 2003- 2004- 2005- 2006- 2007-
           03     4    05    06    07    08




The corroboration of the aforesaid points regarding the under sanctioning of opex outlays
can be seen here.It can be suggested that it would be more appropriate if a portion of the
planned expenditure is diverted towards the non planned expenditure to maintain a optimum
balance of liquidity in both the areas.




                                                                                       61
FRONTIER BASIN WHOLE BUDGET

 CAPITAL PROCUREMENT (TARGET)

 YEAR                                              2002-     2003-      2004-    2005-    2006-   2007-
                                                   03        04         05       06       07      08

 BUDGETED ESTIMATE (BE) (Rs)                       24.88     13.27      17.22    37.2     12.94   12.12

 REVISED ESTIMATE (RE) (Rs)                        7.5       5.07       9.32     3.56     22.68   31.1


     40                   37.2
     35                               31.1
     30 24.88
                                22.68
     25       13.27 17.22
     20                                                             B UD G E TE D
                             12.94 12.12                            E S TIMA TE (B E ) (R s )
     15                9.32
     10    7.5   5.07       3.56                                    R E V IS E D E S TIMA TE
      5                                                             (R E ) (R s )
      0
           3

                    4

                             5

                                      6

                                               7

                                                         8
        -0

                -0

                         -0

                                    -0

                                           -0

                                                    -0
     02

               03

                        04

                                 05

                                          06

                                                   07
   20

           20

                    20

                               20

                                      20

                                               20




        It can be learned from the graph above that there is quite a large shift in outlays when
the budget is revised.This could have been because of major shift in plans in the region or due
to underachievement in the previous year or optimism in the coming year.

 REVENUE EXPENDITURE (TARGET)

 YEAR                   2002-03                 2003-04               2004-     2005-     2006-   2007-08
                                                                      05        06        07

 BE (Rs)                90.63                   91.77                 62.76     44.58     81.9    116.44

 RE (Rs)                85.6                    68.9                  61.67     71.78     86.16   78.2




                                                                                                       62
  140
                                                                         116.44
  120      90.63
                      91.77                                  81.9
  100         85.6                                              86.16
                                  62.76                                       78.2
   80                     68.9                       71.78
                                        61.67                                                 BE
   60                                           44.58                                         (R s )
                                                                                              RE
   40
                                                                                              (R s )
   20
       0
            2002-03   2003-04    2004-05        2005-06      2006-07     2007-08



The revenue targets are not subjected to much changes negatively except that in the year
2007-08.

 EXPENDITURE (ACTUAL)

 YEAR                                    2002-03                 2003-04      2004- 2005-               2006-   2007-
                                                                              05          06            07      08

 CAPITAL (Rs)                            4.66                    4.16         4.96        3.18          8.22    28.57

 REVENUE (Rs)                            41.71                   37.24        35.9        46            41.13   66.27


                                                                    66.27
  70
  60
  50                                            46
            41.71                                        41.13
                      37.24      35.9
  40
                                                                 28.57             C A P ITA L (R s )
  30
  20                                                                               R E V E NUE
                                     8.22
  10 4.66    4.16    4.96    3.18                                                  (R s )
   0
      2002-03 2003-04 2004-05 2005-06 2006-07 2007-08



           The actual utilization data gives correct view of the scenario and helps in plugging
lacunas and making the budgeting system more effective.If we study the above graphs and
tables then it becomes clearly evident that in both the cases,whether its capital expenditure or
revenue expenditure,there have been major deviations in actual figures even over the revised
estimates.




                                                                                                                 63
                                       FINDINGS



It is observed that the budget utilization is good only for some few cases:

          Capital utilisation for BE & RE for the year 2007-08
          Revenue realised for BE for the year 2005-06



       During my course of training in the Company, the Revised Estimate of 2008-09 and
Budget Estimate of 2009-10 was under preparation and approval.

       The total financial outlay of RE (2008-09) is Rs 269.54 crore and that of BE (2009-
10) is Rs 283.96 crore. But the RE for 2007-08 was Rs.109.3 crore. Since the subsequent year
budget is high it requires close controlling and monitoring to achieve 90% of its estimation.




                                                                                                64
                              RECOMMENDATIONS



1) Proper review of monthly and quarterly budgets-It has been witnessed that the
actual targets achieved year on year basis ,vary widely from the budgeted estimates and
revised estimates. In lieu of this anomaly ,it can be said that the month and quarter wise
physical targets breakups and corresponding budget allocations need to be fixed with a clear
vision and proper planning.




2) Use of SAP-Budget is meant more for controlling than for meeting financial needs as
and when they arise. Therefore proper control mechanism needs to be installed which can
minimize deviations in practicality. The budget software presently being used at ONGC just
fixes the initial outlays and targets. These targets are then fed into the SAP software in order
to monitor the achieved progress. This creates duplicity in the budget preparation. Hence a
better option would be to channelize the whole process of budget preparation and operation
through SAP only as this software provides lesser room for deviations and hence better
monitoring.

3) More realistic preparation of Budgeted estimates-The Budgeted estimates
that are prepared for the next year allocations need to made on more realistic assumption
through proper forecasting of the future market trends and availability of R&D and
technology during the period for which the estimates are being made.

4)Accountability of the fund centre-Much of the underachievement of physical
targets in a given year are due to the late release or stacked up funds at various fund
centres.thus for faster achievement of targets smooth flow of funds is required which can
only be implemented when the various fund centre are held accountable.




5)Greater autonomy of the organization-the overall budget of ONGC is prepared
while bearing in mind the terms of MoU that the company has signed with the GoI.This in a
way paralyses the organization while fixing the annual targets and corresponding allocations.
This restricts the vision of the company to stipulated targets and further reallocation or


                                                                                             65
cancellation of funds becomes more complicated and also makes it more bureaucratic.
Though government monitoring        and reporting is necessary but required freedom for
performance should be given.

6) Proper monitoring of all services- In order to have micro monitoring in place,
proper supervision of each services can be helpful. The overall achievement
,overachievement or underachievement records of the organization help ,but if proper
achievement has to be monitored then performance of each service type needs to be done.

7)Focus on OPEX expenditures –Mostly the long term budgeting plans get executed
without much delays or hassles as range of time of their execution is suitable to minor
adjustments if and when required. However variances in OPEX budget actually creates
problems. Thus in order to minimize the overall variation ,OPEX should be scrutinized ,so
that annual targets are achieved.

8) Better response towards market volatility-The recent spate of fluctuating crude
oil prices indicate that expecting a hundred percent accuracy in line with the estimates is
harsh on the company. However if predetermined response system is in place then market
volatility won’t remain a deterrent and the company would be better prepared to achieve its
projected aggressive guidance.




                                                                                          66
                                   CONCLUSIONS



       It can be concluded that the utilisation is poor with respect to BE and RE. It should
be more than 90% in case of realistic budget. And it was realisable only for few cases.




       The subsequent year budget being more optimistic, it requires a close controlling and
monitoring to achieve 90% of the target.




       Hence, more focus is required for controlling of budget for maximum utilisation of
plan budget in terms of financial as well as physical budgets.




                                                                                               67

				
DOCUMENT INFO
Shared By:
Categories:
Tags: Prelude, ONGC
Stats:
views:23
posted:4/26/2012
language:Latin
pages:67
Description: Oil & Natural Gas Corporation Limited (ONGC) is an India Public Sector Petroleum Company.