PETRO--CANADA INTERNATIONAL ASSISTANCE CORPORATION AND THE WORLD BANK x1988 CHINA CONFERENCE PAPER 8 FINANCIAL CONTROLS, MONITORING AND EVALUATION BY: WJ,R, TVITSS VICE PRESIDENT) INFORMATION SYSTEMS AND CORPORATE DEVELOPMENT PETRO-CANADA R/CPO2/413 ABSTRACT OPERATIONAL PLANNING. AND CONTROL PROCESSES ARE CRITICAL ACTIVITIES WITHIN OIL AND GAS COMPANIES. THEY PROVIDE MANAGEMENT WITH AN OPPORTUNITY TO ENSURE THAT THE COMPANY IS FOLLOWING AN APPROPRIATE STRATEGY, THAT THE AVAILABLE RESOURCES ARE BEING UTILIZED EFFECTIVELY AND THAT THE EXPECTED RESULTS ARE BEING ACHIEVED, THEY ALSO PROVIDE AN OPPORTUNITY TO CORRECT FUTURE PERFORMANCE THROUGH EARLY RECOGNITION OF VARIANCES AND THEIR CAUSES. THESE BENEFITS ARE PARTICULARLY IMPORTANT GIVEN THE LONG LEAD-TIMES AND CAPITAL INTENSIVE NATURE OF THE INDUSTRY AND THE PROSPECTS FOR AN UNCERTAIN AND VOLATILE BUSINESS ENVIRONMENT. TO BE EFFECTIVE, OPERATIONAL PLANS MUST TRANSLATE STRATEGIC PLANS INTO PRACTICAL, SPECIFIC ACTIONS - PROGRAMS AND PROJECTS - WHICH WILL LEAD TO IHE ACHIEVEMENT OF OBJECTIVES, CONTROL MECHANISMS SHOULD BE DESIGNED TO FACILITATE CORRECTION OF FUTlURE RESULTS BY POINTING OUT NECESSARY ADJUSTMENTS IN ACTIVITIES AND PRACT.CES, SUCH MECHANISMS REQUIRE PERIODIC MEASUREMENT OF RELEVANT FACTORS, RELIABLE SOURCES OF INFORMATION AND PLANNING AND PERFORMANCE REPORTING SYSTEMS WHICH DIRECTLY INVOLVE THE MANAGERS W4HO ARE RESPONSIBLE FOR IMPLEMENTING THE PLANS, WHEN LINKED APPROPRIATELY TO THE ORGANIZATION AND OPERATING PHILOSOPHY OF THE COMPANY, OPERATIONAL PLANNING AND CONTROL PROCESSES CAN DRIVE ACCOUNTABILITY TO THE LEVEL OF INDIVIDUAL MANAGERS AND O2fAMNLZATIONAL GROUPS THROUlGHOU1T THE COMPANY. THIS WILL FACILITATE ORDERLY WORK PLANNING AND STEWARDSHIP OF RESULTS THAT WILL ENHANCE THE ACHIEVEMENT OF BUSINESS PLANS., THIS PAPER WILL DESCRIBE THE PLANNING AND CONTROL MECHANISMS UTILIZED BY PETRO-CANADA'S RESOURCES DIVISION, A LARGE, COMPLEX OIL AND GAS ENTERPRISE OPERATING PRIMARILY It1 CANADA, TO ILLUSTRATE THE BENEFITS OBTAINED FROM EFFECTIVE OPERATIONAL PLANN'ING ANlD CONTROL, R/CP02/413 WITHIN PETRO-CANADA, THE PLANNING AND CONTROL FUNCTIONS REFLECT THE NATURE OF THE BUSINESS AND THE ORGANIZATIONAL STRUCTURE, THERE IS A UNIQUE PLANNING PROCESS, WHICH, WHILE INTEGRATED WITH CORPORATE-WIDE PLANS AND PROCESSES, ADDRESSES ELEMENTS THAT ARE PARTICULAR TO THE UPSTREAM BUSINESS. THE PLANNING ROLES OF THE CORPORATE DEPARTMENTS AND OPERATING DIVISIONS ARE CLEAR AND WELL UNDERSTOOD. THE ANNUAL CONTROL BUDGET DRIVES ACCOUNTABILITY AND RESPONSIBILITY THROUGHOUT THE ORGANIZATION, IT IS STRUCTURED SO THAT MANAGEMENT CAN UNDERSTAND THE CAUSES OF \'ARIANCES FROM THE PLAN AND MAKE DECISIONS AS REQUIRED TO IMPROVE FUTUJRE PERFORMANCE. THERE IS A WELL ESTABLISHED AND UNDERSTOOD AUTHORITY AND APPROVAL PROCESS. THErE ARE LINKAGES BETWEEN THE PLANS AND THE WORK PLANS OF INDIVIDUAL EMPLOYEES. THIS ALLOWS INDIVIDUALS TO UNDERSTAND THEIR SPECIFIC ROLE IN THE ACHIEVEMENT OF THE EXPECTED RESULTS AND THE ABILITY OF MANAGEMENT TO LINK REWARDS WITH RESULTS. rI/CP02/413 1. INTRODUCTION THE TOPIC OF THIS PAPER, "FItNANCIAL CONTROLS, MONITORING AND EVALUATION", IS TIMELY GIVEN THE UNCERTAIN ENIVIRONMENT FACING THE OIL AND GAS INDUSTRY, DURING SUCH TIMES IT TS MORE IMPORTANT THAN EVER TO DEAL EFFECTIVELY WITH DAY-TO-DAY OPERATIOtNS AS THE LONGER-TERM CANNOT BE RELIED UPON TO BRING THE DESIRED RESULTS. THIS PAPER WILL DESCRIBE THE GENERAL PRINCIPLES WHICH ARE IMPORTANT IN THE DESIGN AND IMPLEMENTATION OF OPERATIONAL PLANNIMG AND CONTROL SYSTEMS. ISSUES SUCH AS THE LINKAGES BETW)EEN STRATEGIC AND OPERATIONAL PLANS, THE DESIGN OF CONTROL MECHANISMS AND INFORMATION SYSTEMS, AND RELATED ORGANIZATIONAL CONSIDERATIONS CONCERNING RESPONSIBILITY FOR BUSINESS MANAGEMENT AND ACCOUNTABILITY FOR RESULTS WILL BE DISCUSSED, THE OPERATIONAL PLANNING AND CONTROL PROCESSES USED BY PETRO-CANADA WILL BE DESCRIBED TO ILLUSTRATE THE BENEFITS OBTAINED FROM EFFECTIVE OPERATION OF THESE FUNCTIONS, 1N THTS REGARD PETRO-CANADA'S HISTORY, SCOPE OF OPERATIONS At-$- ORGANIZATION STRUCTURE WILL BE DISCUSSED, THE VARIOUS PLAN!N7UNG PROCESSES IN USE WILL BE REVIEIWED IN DEPTH AND A DESCRIPTION OF THE ROLES AND RESPONSIBILITIES OF THE PARTICIPANTS WILL BE PROVIDED. MANAGEMENIT CONTROL PRACTICES, CAPITAL SPENDING AUTHORITY LEVELS AND CONTROLS. AND THE COMPANY'S PERFORMANCE MANAGEMENT PROCESS WHICH LINKS EYPECTATIONS AND RESULTS WILL BF IDENTIFIED. rTINALLY, THE IMPLICATIONS OF DIVISIONAL RESIJLTS FOR FlINANCIAL TIlANAGEMENT AT THE CORPORATE LEVEL W'IILL BE DISCUSSED, R/CP02/ 413 2 2. PLANNING AND CONTROL IN OIL AND GAS ENTERPRISES A. PHILOSOPHY STRATEGIC AND OPERATIONAL PLANNING, AND THE SUBSEQUENT MONITORING AND CONTROL OF IMPLEMENTATION ACTIVITIES AND RESULTS, ARE CRITICAL ACTIVITIES WITHIN LARGE COMPLEX OIL AND GAS COMPANIES. THEY PROVIDE THE COMPANY'S MANAGEMENT WITH THE ASSURANCE THAT THE COMPANY IS MOVING IN AN APPROPRIATE DIRECTION, THAT THE AVAILABLE RESOURCES ARE BEING EfFECTIVELY UTILIZED, THAT THE EXPECTED RESULTS ARE BEING ACHIEVED AND OFFER AN OPPORTUNITY TO CORRECT FUTURE PERFORMANCE AS DEVIATIONS EMERGE, THERE ARE A NUMBER OF KEY STEPS IN THIS PROCESS: i) THE PREPARATION OF LONG-TERM STRATEGIC PLANS, WIHICH SET OUT THE BASIC DIRECTION OF THE ENTLERPRISE lN THE LIGHT OF OBJECTIVES, FINANCIAL CONSTRAINTS, THE ANTICIPATED BUSINESS ENVIRONMENT AND COMPETITIVE ACTIVITIES. ii) THE TRANSLATION OF THESE STRATEGTC PLANS INTO SHORTER TERM OPERATIONAL PLANS AND BUDGETS WHICH SPECIFY PROGRAMS AND PROJECTS TO BE UNDERTAKEN, EXPECTED RESULTS AND THE FACTORS OF PRODUCTION NECESSARY, Tr.) THE DEFINITION AND IMPLEMENTATION OF CONTROLS TO ENSURE THAT THE EXPECTED RESULTS ARE BEING ACHIEVED OR TO POINT OUT THE NEED FOR MODIFICATIONS IN ORDER TO IMPROVE PERFORMANCE. iv) THE CREATION OF LINKAGES BETWEEN THESE PLANS AND BUDGETS TO THE ACTIVITIES OF ORGANIZATIONAL GROUPS OF INDIVIDUAL EMPLOYEES THROUGH WORK PLANS AND PERFORMANCE MANAGEMENT PROCESSES, R/CPO2/413 3 v) THE COLLECTION AND PROVISION OF ADEOUATE INFORMATION TO MANAGERS THROUGHOUT THE COMPANY SO THAT THEY CAN DETERMINE W4HETHER EXPECTED PROGRESS IS BEING MADE OR WHETHER ADJUSTMENTS ARE REQUIRED. IN MOST COMPANIES, THE RESPONSIBILITY FOR BUSINESS RESULTS IS DECENTRALIZED TO LINE MANAGERS, ALTHOUGH THE EXTENT CAN VARY, IN SOME COMPANIES, THERE IS ESSENTIALLY COMPLETE DECENTRALIZATION WITH LINE MANAGERS RESPONSIBLE FOR ALL ASPECTS OF THEIR BUSINESSES AND WITH ONLY THE BAREST REPORTING OF SUMMARIZED RESULTS TO SENIOR CORPORATE M1ANAGEMENT. ', IN OTHERS, DECENTRALIZATION IS QUITE LIMITED, WITH THE LINE RESPONSIBLE FOR FUNCTIONAL OPERATIONS ONLY AND PLANNING, ANALYSIS AND CONTROL TIGHTLY HELD AT THE CORPORATE LEVEL. THE POINT IS THAT PLANNING AND CONTROL PROCESSES NEED TO BE CAREFULLY MATCHED TO THE PHILOSOPHY AND STRUCTURE OF THE COMPANY, FOR EXAMPLE, STRATEGIC PLANS ARE OFTEN DEVELOPED ON A CENTRALIZED BASIS ON BEHALF OF THE TOTAL COMPANY WHILE LINE MANAGERS MAY BE RESPONSIBLE FOR THE PREPARATION OF BUDGETS AND IMPLEMENTATTON OF PROJECTS, AMONG OTHER THINGS, THERE NEED TO BE PROCESS AND INFORMATION LINKAGES ESTABLISHED SO THAT BUDGETS ARE CONSISTENT WITH THE STRATEGIC PLANS, LINE M1ANAGERS ARE AWARE OF CORPORATE PERFORMANCE EXPECTATIONS AND THE RESIJLTS THAT THEIR ORGANIZATIONS ARE ACHIEVING, SIMILARLY SENIOR COMPANY MANAGERS NEED TO BE ANIARE OF T' CONTRIBUTION OF EACH OPERATING BUSINESS AND THE OVERALL Ctl'SOLIEATED RESULTS, COMPANIES WITHWDIFFERENT PLANNItNG AND CONTROL PHILOSOPHIES WOULD UTILIZE DIFFERENT STRUCTURES, CONTROL PROCESSES AND MEASURES AND REPORTING PROCEDURES THAT ARE APPROPRIATE TO THEIR NEEDS, R/CP02/413 I~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~L 4 B. STRATEGIC PLANNING STRATEGIC PLANNING IS PARTICULARLY IMPORTANT FOR OIL AND GAS COMPANIES BECAUSE OF THE LONG-LEAD TIMES AND LARGE INVESTMENTS ASSOCIATED WITH RESOURCE DEVELOPMENT, ALTHOUGH STRATEGIC PLANNING HAS BEEN DISCUSSED IN AN EARLIER PAPER, IT IS APPROPRIATE TO DESCRIBE THIS FUNCTION IN SUMMARY SO THAT IT CAN BE DISTINGUISHED FROM OPERATIONAL PLANNING, THE SUBJECT OF THIS PAPER, A COMPANY'S STRATEGIC PLAN NORMALLY SETS OUT THE DIRECTION OF THE CORPORATION, IT IS DEVELOPED BY SENIOR MANAGEMENT IN THE CONTEXT OF THE ANTICIPATED BUSINESS ENVIRONMENT, THE ACTIVITY OF CO*lPETITORS AND THE FINANCIAL AND OTHER CONSTRAINTS W!HICH ARE EXPECTED, THE STRATEGIC PLAN CONTAINS THE MISSION, GOALS AND OBJECTIVES FOR THE CORPORATION AS A WHOLE AND FOR KEY BUSINESS UPIITS, PERFORMANCE EXPECTATION'S FOR THE OVERALL CORPORATION AND FOR MAJOR BUSINESS SEGMENTS, THE PERFORMANCE EXPECTATIONS WILL VARY FOR THE DIFFERENT BUSINESSES AND THE LEVEL AT WHICH THEY AFFECT THE ORGANIZATION, FOR EXAMPLE, FINANCIAL PERFORMANCE MEASURES SUCH AS EARNINGS, CASH FLOW AND RATES OF RETURN WOULD CLEARLY BE IMPORTANT IFOR THE ENTIRE CORPORATION, FOR INDIVIDUAL BUSINESSES, HOWIEVER, THERE WOULD ALSO BE EMPHASIS ON OPERATING TARGETS, SUCH AS OIL AND rGPS RPESERVc-S, THE STRATEGIC PLAN ALSO SPECIFIES THE RESOURCES W-HICH THE CORPORATION IS PREPARED TO ALLOCATE TO ACHIEVE THE INDICATED PERFORtlANCE TARGETS, IN ADDITION TO CAPITAL, RESOURCES INCLUDE PEOPLE AND THE SERVICES GENERALLY AVAILABLE WITHIN THE COMPANY, STRATEGIC PLANS SHOULD IDENTIFY CONTINGENCY ACTIONS TO AVOID OVER-CO MIITMENT OF RESOURCES IF THE FUTURE ENVIRONMENT IS DIFFERENT THAN EXPECTED, SUCH PLANS SHOULD ALSO IDENTIFY THE KEY R/CP02/413 5 MILESTONES IN THE IMPLEMENTATION OF STRATEGIES AND PROGRESS SHOULD BE MONITORED ON A REGULAR BASIS, C.- OPERATIONAL PLANS AND BUDGETS SHORTER-TERM OPERATIONAL PLANS ARE THE VEHICLE BY WHICH THE STRATEGIC PLAN IS IMPLEMENTED, THEY CONTAIN SPECIFIC PLANS, PROGRAMS AND PROJECTS THAT ARE CONSISTENT WITH THE MISSIONS, GOALS AND OBJECTIVES, PERFORMANCE EXPECTATIONS AND RESOURCE ALLOCATIONS THAT ARE IN THE STRATEGIC PLAN. THE RESULTS THAT ARE SPECIFIED IN THE OPERATIONAL PLANS SHOULD UTILIZE KEY ASSUMPTIONS CONSISTENT WITH THOSE IN THE STRATEGIC PLAN. MANY COMPANIES UTILIZE AN ANNUAL CONTROL BUDGET FOP.. THTS PUJRPOSE. AT THE CORPORATE LEVEL, ITS PRIMARY FOCUS MAY BE ON FINANCIAL RESULTS - EARN!INGS AND CAPITAL INVESTMENTS, THE EARNINGS PROJECTION CAN BE ESTABLISHED BY CONSOLIDATING THE REVENUES, OPERATING COSTS AND OVERHEAD EXPENSES FOR THE V'ARTOUS PARTS OF THE COMPANY, CAPITAL SPENDING PLANS BY BUSINESS AND rlAJOR PROJECT ARE USUALLY HIGHLIGHTED, THE OPERATING BUSINESSES WOULD ALSO PREPARE OUTLOOKS FOR CRUDE OIL PRODUCTION, NATURAL GAS AND NATURAL GAS LIQUIDS SALES, REVENUE, EXPENSES, OPERATING COSTS AND CAPITAL INVESTMENTS, UNLIKE STRATEGIC PLANS, VIHICH ARE NORMALLY HIGHLY CENTRALIZED AND T nD-DOWN, CONTROL BUDGETS AND OTHER SHORT-TERM OTPERATIONAL PLANS ARE USUALLY PREPARED IN A BOTTOM-UP FASHION BY L-INE MANAGEMENT, THE DIRECT PARTICIPATION OF LINE DEPARTMENTS IS IMPORTANT FOR A NIUMBER OF REASONS, FIRSTLY, IT CONTRIBUTES TO THlE DEVELOPMENT OF BUDGETS WHICH ARE REALISTIC AND ATTAINABLE. SECONDLY, IT CREATES RESPONSIBILITY AND ACCOUNTABILITY BECAUSE LINE 'MANAGEMENT HAS ACTUALLY DEVELOPED THE PLAN, LINE MANAGEMENT IS RESPONSIBLE AND ACCOUNTABLE FOR BOTH THE PLAN AND THE OPERATING P,ESULTS, R/CP02/413 6 D, OPERATIONAL CONTROLS THE CONTROL BUDGET IS OFTEN THE PRIMARY MECHANISM USED FOR STEWARDSHIP THROUGHOUT THE CORPORATION, STEWARDSHIP IS THE REPORTING AND REVIEW PROCESS BY WHICH MANAGERS DEMONSTRATE THE RESULTS THEIR ORGANIZATIONS HAVE ACHIEVED, IN ACCORDANCE WITH DELEGATED RESPONSIBILITIES AND THE AGREED-UPON OBJECTIVES AND COMMITMENTS, REPORTS DESCRIBING THE ACTUAL RESULTS AND COMPARISONS TO THE CONTROL BUDGET ARE PREPARED, USUALLY THROUGH A CENTRAL ACCOUNTING SYSTEM. IT IS NECESSARY FOR VARIOUS LEVELS OF MANAGEMENT TO DECIDE WHICH SPECIFIC AREAS THEY MUST FOCUS ON TO) OBTAIN CONTROL AND TO ENSURE THAT THE APPROPRIATE INFORM,ATION IS AVAILABLE AT THE RIGHT TIME FOR THIS PURPOSE, FOR EXAM21PLE, AT THE LEVEL OF THE OVERALL COMPANY, EARNINGS, CASH FLOW, FINANCING AND CAPITAL INVESTMENTS WILL BE CRITICAL RESULTS, WHILE WITHIN AN INDIVIDUAL BUSINESS THERE WIILL ALSO BE A FOCiUS ON PHYSICAL RESULTS SUCH AS PRODUCTION VOLUMES, RESERVES, CAPITAL EXPENDITURE PROJECT CONTROLS AND OTHER FACTORS. THE PURPOSE OF THE CONTROL PROCESS IS TO ENABLE VARIOUS LEVELS OF MANAGEMENT TO UNDERSTAND THE EFFECTS OF THE IThPLEtlENTATION OF THEIR PLANS AND PROGRAMS AND THEIR SUCCESS RELATIVE TO PERFORMANCE EXPECTATIONS, THE QUESTIONS THAT MANAGEMENT ARE FUNDAMENTALLY ASKING ARE: DID WE DO WHAT WE SAID WE WERE GOING TOD DO? ARE THESE ACTIVITIES PRODUCING THE EXPECTED RESULT AND GENERATING THE REQUIRED CONTRIBUTION TO THE ACHIEVEMENT OF COMPANY PERFORMANCE? WHAT CAN WE DO TO IMPROVE FUTURE RESULTS? R/CP02/413 7 THE FOCUS OF THE CONTROL PROCESS SHOULD BE ON THE FUTURE, NOT THE PAST, ACTUAL RESULTS NEED TO BE COMPARED TO THOSE SPECIFIED IN THE BUDGET TO IDENTIFY AND UNDERSTAND VARIANCES, THE CAUSE OF THE VARIANCES MUST BE UNDERSTOOD IN ORDER TO ASCERTAIN WHETHER THERE ARE PROBLEMS THAT HAVE IMPLICATIONS FOR PLANNED PERFORMANCE IN THE BALANCE OF THE PERIOD, IN SUCH A CASE, IT IS EXPECTED THAT LINE MANAGEMENT IWILL UNDERTAKE CORRECTIVE ACTIONS TO IMPROVE FUTURE PERFORMANCE TO THE EXTENT POSSIBLE UNDER THE CIRCUMSTANCES, E, WORK PLANNING AND\PERFORMANCE MANAGEMENT THE CONTROL PROCESSES DESCRIBED ABOVE SHOULD PARALLEL THE PLANNING PROCESS IN ORDER TO CREATE A HIERARCHY OF ACCOUNTABILITIES THROUGHOUT THE ORGANIZATION. SENIOR CORPORATE MANAGEMENT ARE PRIMARILY RESPONSIBLE FOR THE STRATEGIC DIRECTION OF THE COMPANY, THROUGH THE CONTROL BUDGET, THE STRATEGIC PLAN IS DIRECTLY LINKED TO AND CONSISTENT WITH OPERATIONAL PLANS, LINE MANAGEMENT AT ALL LEVELS PARTICIPATES IN THE OPERATIONAL PLANNING PROCESS, ELEMENTS OF THE CONTROL BUDGET PLAN CAN BE CONVERTED TO SPECIFIC RESULTS THAT WILL BE ACHIEVED BY INDIVIDUALS OR GROUPS OF INDlVIDUALS INl THE ORGANIZATION IN THE UPCOMIING YEAR. THESE RESULTS CAN BE PYRAMlIDED UP FROM SPECIFIC ELEMIENTS OF COST MANAGEMENT TO THE OVERALL EARNINGS AND PROFITABILITY OF THE BiJSINESS. THIS PROCESS ALLOWS INDIVIDUAL OBJECTIVES AND WORK PLANS TO BE DEVELOPED, THROUGHOUT THE ORGANIZATION, THESE FORM THE FOUNDATION OF THE REPORTING AND STEWARDSHIP PROCESS, THE SPECIFIC FOCUS OF THESE WORK PLANS CAN BE TIED PRECISELY TO THE RESULTS PROMISED IN THE PLANS AND TO THE ACCOUNTABILITY OF THE INDIVIDUAL OR GROUJP INVOL VED. R/CP02/413 8 INDIVIDUALS CAN BE ENCOURAGED TO ACHIEVE THE DESIRED RESULTS BY BEING HELD ACCOUNTABLE FOR THEIR ACHIEVEMENT AND, IN TURN, BEING REWARDED THROUGH APPROPRIATE INCENTIVES, THE INCENTIVES CAN BE SHORT-TERM IN NATURE, SUCH AS ANNUAL SALARY INCREASES BASED ON AN INDIVIDUAL'S PERFORMANCE, OR THEY MAY BE LONGER TERM SUCH AS CONTRIBUTING TO THE PROMOTION OF THE INDIVIDUAL TO HIGHER LEVELS OF AUTHORITY AND RESPONSIBILITY. F, INFORMATION SYSTEMS TO SUPPORT PLANNING AND CONTROL MOST OIL AND GAS COMPANIES MAKE EXTENSIVE USE OF COMPUTERIZED INFORMATION SYSTEMS, IT IS CERTAINLY POSSIBLE TO USE SUCH SYSTEMS TO FULLY SUPPORT THE PLANNING AND CONTROL PROCESSES, THERE ARE A NUMBER OF KEY FACTORS THAT WILL ALLOW OPTIPlUM USE OF SYSTEMS IN THIS AREA: 1) RELEVANT DATA ACROSS THE CORPORATION MUST BE ORGANIZED IN A SYSTEMATIC WAY SO THAT IT CAN BE IDENTIFIED AND RETRIEVED EFFICIENTLY, SINGLE SOURCES OF DATA ARE PREFERRED, PARTICULARLY FOR FINANCIAL INFORMATION, 2) THE CREATION OF AN INTEGRATED SET OF PLANNING AND CONTROL SYSTEMS THAT ALLOW RELEVANT INFORMATION TO BE PREPARED AND DISSEMINATED IN A HIERARCHICAL FASHION CONSISTENT WITH THE ACCOUNTABILITY OF VARIOUS GROUPS AND INDIVIDUALS. 3) CONTROL MEASURES TO BE USED MUST BE IDENTIFIED AND APPLIED IN A CONSISTENT MANNER SO THAT THE NECESSARY INFORMATION CAN BE COLLECTED AND ANALYZED. 4) REPORT CONTENT AND FORMATS SHOULD BE DESIGNED TO PROVIDE THE NECESSARY CONTROLS TO MANAGEMENT AND SHOULD BE STANDARDIZED TO FACIL TTATE THEIR PREPARATION AND UNIFORM APPLICATION THROUGHOUT THE COMPANY, R/CP02/413 9 AS COMPUTER TECHNOLOGY CONTINUES TO ADVANCE, IT CAN BE ANTICIPATED THAT THERE ARE GOOD PROSPECTS FOR SYSTEMS TO MAKE PLANNING MQRE RELEVANT AND MORE ABLE TO REACT TO CHANGING ENVIRONMENTS IN THE OIL AND GAS BUSINESS-. WHILE THE FIRST. USES OF COMPUTING AIJTOMATED RECORD KEEPING, FINANCIAL AND ADMINISTRATIVE PROCESS, THE SYSTEMIZATION OF THESE BACK-OFFICE FUNCTIONS DID VERY LITTLE TO PROVIDE THE DATA NEEDED TO PLAN. THE DEVELOPMENT OF DECISION-SUPPORT APPLICATIONS, THE USE OF ON-LINE DATA AND ENHANCEMENTS IN THE CAPABILITY OF THE PERSONAL COMPUTER HAVE\GENERATED THE PLANNING SYSTEMS AND MODELS THAT ARE IN GENERAL USE TODAY. IN THE FUTURE, ONE CAN FORESEE THE APPLICATTON OF ARTTFICIAL INTELLIGENCE OR EXPERT SYSTEMS FOR SUCH THINGS AS IVIPROVED FORECASTS BASED ON CHANGING TRENDS, TO MAKE COMPANIES THE LOW COST PRODUCER IN THE UPSTREAM SECTORS OF THE BUSINESS AND TO INCREASE MiARKET SHARE IN NATURAL GAS SALES. G. ORGANIZATION STRUCTURE FOR PLANNTNG AND CONTROL ENTERPRISES WILL UTILIZE DIFFERENT ORGANIZATION STRUCTURES TO REFLECT THE SCOPE OF THEIR OPERATIONS, INTERNAL CAPABILITIES AND MANAGEMENT PREFERENCE, OFTEN THE DETERMINING FACTOR IN ESTABL.ISHING THE ORGANIZATION' STRUCTUJRE WILL BE THE COMPANY'S PHILOSOPHY CONCERNING THE DEGREE OF DECENTRALIZATION OF RESPONSIBILITY AND ACCOUNTABILITY FOR BUSINESS RESULTS TO LINE MANAGEMENT, IT IS CLEAR THAT THE ORGANIZATION OF LINE MANAGEMENT SHOULD BE ESTABLISHED TO MEET THE PERCEIVED NEEDS OF THE ENTERPRISE, THE PLANNING AND CONTROL FUNCTIONS SHOULD BE STRUCTURED SUBSEQUENTLY, IN A MANNER WHICH IS CONSISTENT 'WlITH AND DEPENDENT ON THE STRUCTURE OF LINE MANAGEMENT, R/CPO2I/413 10 IRRESPECTIVE OF OVERALL STRUCTURE SOME PLANNING AMD CONTROL FUNCTIONS MUST BE CENTRALIZED FOR INDEPENDENCE AND OBJECTIVITY OF INFORMATION OR BECAUSE THEY RELATE TO THE OVERALL CORPORATION'S POSITION RATHER THAN THAT OF A BUSINESS UNIT. STRATEGIC PLANNING, ACCOUtNTING, CORPORATE PERFORMANCE ANALYSIS, CORPORATE FINANCE AND SOME ASPECTS OF INFORMATIONl SYSTEMS FALL IN THIS CATEGORY. DEPENDING ON THE DEGREE OF DECENTRALIZATION OF THE COMPANY, A NUMBER OF OTHER FUNCTIONS RELATING TO EACH BUSINESS UNIT, SUCH AS STRATEGIC PLANNING, OPERATIONAL PLANNING AND PERFORMANCE ANALYSIS, CAN BE LOCATED WITHIN\THE LINE ORGANIZATIONS, THE IMPORTANT ELEMENT IS THAT THESE DECENTRALIZED PLANNING AND CONTROL ELEMENTS MUST BE LINKED WITH THE CENTRAL GROUPS ItN TERMS OF PROCESS, SOURCES OF INFORMATION, METHODS OF CONTROL AND STEWARDSHIP OF PERFORMANCE, 3. PETRO-CANADA HAVING DISCUSSED AN OVERALL PHILOSOPHY AND METHOD RELATED TO OPERATIONAL PLANNING AND CONTROL, THE NEXT SECTION OF THIS PAPER WILL REVIEW THE STRUCTURE AND SCOPE OF PETRO-CANADA'S OPERATIONS, THIS WILL FACILITATE THE LATER DETAILED DESCRIPTION OF PETRO-CANADA'S PLANNING AND CONTROL METHODS, A. ESTABLISHMENT AND EARLY HISTORY OF THE COMPANY PETRO-CANADA WAS INCORPORATED BY AN ACT OF THE PARLIAMENT OF CANADA ON JULY 30, 1975, THE CORPORATION WAS CREATED TO: EXPLORE FOR AND DEVELOP DEPOSITS OF HYDROCARBONS IN CANADA AND ELSEf'HERE: TO PRODUCE, TRANSPORT, REFINE, MARKET AND DISTRIBUTE HYDROCARBONS AND OTHER FUELS: AND TO NEGOTIATE-FOR AND ACQUIRE PETROLEU-1 AND PETROLEUM PROnUCTS FROM ABROAD TO ASSURE A CONTINUITY OF SUJPPLY FOR THE NEEDS OF CANADA. R/CP02/413 11 SUBSEQUENT TO THE FORMATION OF PETRO-CANADA CERTAIN ASSETS OF THE GOVERNMENT, INCLUDING ITS INTEREST IN THE SYNCRUDE OILSANDS MINING PROJECT WERE TRANSFERRED TO THE CORPORATION. THE COMPANY HAS GROWN SIGNIFICANTLY AS A RESULT OF THE ACQUISITION OF COMPLEMENTARY-ASSETS AND THE INVESTMENT OF OPERATING CASH FLOW AND, PRIOR TO 1984, GOVERNMENT EQUITY IN AN AGGRESSIVE EXPLORATION AND DEVELOPMENT PROGRAM. IN 1976, PETRO-CANADA ACQUIRED THE CANADIAN SUBSIDIARY OF THE ATLANTIC RICHFIELD COMPANY, WITH THIS ACQUISITION CAME PRODUCING OIL AND GAS PROPERTIES IN WESTERN CANADA, NATURAL GAS PROCESSING FACILITIES AND UNDEVELOPED OIL AND GAS PROPERTIES IN IWESTERN CANADA AND THE ARCTIC. IN 1978 PACIFIC PETROLEUMS LTD. WAS ACQUIRED. IN ADDITION TO PRODUCING OIL AND GAS PROPERTIES, LANDHOLDINGS IN BOTH CANADA AND OFFSHORE, AND A MAJOR NATURAL GAS LIQUIDS EXTRACTION PLANT, PETRO-CANADA ACQUIRED A REFINERY AND PETROLEUM PRODUCT DISTRIBUTION AND SALES FACILITIES IN WESTERN CANADA WHICH MARKED THE CORPORATION'S ENTRY INTO THE DOWNSTREAM. IN 1981 THE CORPORATION ACQUIRED PETROFINA CANADA LTD. WHILE ADDING FURTHER OIL AND GAS PRODUCTION AND ENHANCING THE CORPORATION'S HEAVY OIL AND OILSANDS POSITION, THE ACQUISITION ALSO ESTABLISHED A REFINING AND MARKETING POSITION IN CENTRAL AND EASTERN CANADA. PETRO-CANADA'S DOWNSTREAM BUSINESS WAS FURTHER EXPANDED WITH THE ACQUISITION OF BP REFINING AND MARKETING CANADA LIMITED IN 1983, MOST RECENTLY, IN 1985 THE CORPORATION PURCHASED THE REFINING, MARKETING AND DISTRIBUTION ASSETS OF GULF CANADA LIMITED LOCATED IN CENTRAL AND WESTERN CANADA. R/CP02/413 12 THE CORPORATION'S GROWTH THROUGH ACOUISITION HAS PROVIDED A NUMBER OF SIGNIFICANT CHALLENGES. ALTHOUGH THEY PARTICIPATED IN THE SAME INDUSTRIES, EACH OF THE COMPANIES HAD DIFFERENT WlAYS OF DOING BUSINESS WHICH HAVE SUBSEQUENTLY BEEN RATIONALIZED. THE SEVERAL DIFFERENT PLANNING AND CONTROL SYSTEMS HAVE BEEN INTEGRATED, TYPICALLY, THE COMPUTER HARDWARE AND SOFTWARE USED BY THE ACQUIRED COMPANIES WERE INCOMPATIBLE WITH THOSE OF OTHER ACOUISITIONS, CONSIDERABLE EFFORT AND EXPENSE HAS BEEN DEVOTED TO THE DEVELOPMENT OF SYSTEMS ARCHITECTURE WHICH IS BASED ON A SINGLE NATIONAL BUSINESS PRACTICE AND WHICH WILL CONTINUE TO MEET THE NEEDS OF THE COMPANY'S'OPERATIONS, B, PETRO-CANADA'S RELATIONSHIP W'ITH THE GOVERNMENT fDF CANADA PETRO-CANADA IS WHOLLY OW1NED BY THE GOVERNMENT OF CANADA. THE COMPANY IS ACCOUNTABLE FOR ITS PERFORMANCE TO THE M1INISTER OF ENERGY, MINES AND RESOURCES. THE CORPORATION IS REQUIRED TO SUBMIT A CORPORATE PLAN AND CAPITAL B1UDGET ANNUALLY FOR THE GOVERNMENIT'S APPROVAL, THE CORPORATE PLAN OUTLINES THE STRATEGIES AND PROJECTED RESULTS OF THE CORPORATION OVER THE NJEXT FIVE YEARS, ALSO CONTAINED IN THE CORPORATE PLAN IS THE FINANCING PLAN WHICH DETAILS HOW THE CORPORATIOU lIILL FINANCE ITS ACTIVITIES. THE CAPITAL BUDGET DETAILS ITS CAPITAL INVESTMENT PLANS FOR THE NEXT YEAR, A FIVE YEAR SUtThMARY OF CAPITAL COMMITMENTS COMPRISED OF THOSE CARRIED FORWARD FROM PREVIOUS YEARS AND THOSE RESULTING FROM THE NEXT YEAR'S CAPITAL BUDGET IS A KEY ELEMENT OF THIS DOCUMENT, WITHOUT APPROVAL OF THE CAPITAL BUDGET, THE CORPORATION DOES NOT HAVE THE AUTHORITY TO MAKE ANY CAPITAL INVESTMENTS OR DISBURSE ANY CAPITAL FUNDS, ALHOUGHn IiS TIME HORIZON IS ONLY ONE YEAR, THE CAPI7AL BUDGET IS OF SIGNIFICANCE TO THE CORPORATION AS IT ESTABLISHE'S AN OVERALL R/CP02/413 13 CAPITAL INVESTMENT CEILING, IF THE CORPORATION EXPECTS THAT ITS CAPITAL INVESTMENTS WILL EXCEED THE APPROVED LEVEL, IT MUST SEEK NEW AUTHORITY FROM THE GOVERNMENT, THEREFORE CAPITAL INVESTMENT PLANS MUST BE CAREFULLY DEVELOPED AND THE CORPORATION MUST CAREFULLY MONITOR CAPITAL SPENDING TO ENSURE THAT ACTUAL SPENDING DOES NOT EXCEED THE APPROVED LEVEL. THE CORPORATION IS NOT REQUIRED TO SUBMIT AN ANNUAL OPERATING PLAN, HOWEVER, THE FIRST YEAR OF THE CORPORATE PLAN ESTABLISHES THE FINANCIAL AND OPERATING TARGETS FOR THE YEAR. ON A QUARTERLY BASIS THE CORPORATION REPORTS TO THE GOVERNMENT THE ACTUAL OPERATING RESULTS TO-DATE AND THE OUTLOOK FOR THE BALANCE OF THE YEAR, ACTUAL RESULTS ARE COMPARED TO THOSE CONTAINED IN THE CONTROL BUDGET, PETRO-CANADA IS REQUIRED TO PRODUCE AN ANNUAL REPORT WHICH IS PRESENTED TO THE GOVERNMENT OF CANIADA, THE ANNUAL REPORT IS SIMILAR TO THOSE OF PUBLICLY HELD COMPANTES AND IS WIDELY DISTRIBUTED. IT IS AT LEAST EQUAL IN QUALITY AND INFORMATION CONTENT TO THOSE OF OTHIER MAJOR PUBLICLY HELD COMPANIES, THE PURPOSE OF THESE REPORTING RELATTIONSHIPS IS TO PERMIT APPROVAL OF THE CORPORATION'S OVERALL STRATEGIES, CAPITAL EXPENDITURE PLANS AND FINANCING PLANS BY VARIOIJS ELEMENTS OF THE GOVERNMENT, NORMAL BUSINESS TRANSACTIONS ARE THEN CARRIED OUT IN A MANNER SIMILAR TO PRIVATE-SECTOR CORPORATIONS, ESSENTIALLY WITHOUT INVOLVEMENET OF THE GOVERNMlENT, EXCEPT FOR CERTAIN ACTIVITIES, SUJCH AS tAJOR ACQUISITIONS AND FINANCING, THE GOVERNMENT THUS ACTS AS AN INVESTOR, RATHER THAN AS A MANAGEMENT BOARD CONTROLLING ROUTINE BUSINESS ACTIVITIES OF THE CORPORATION. R/CP02/413 14 C. PETRO-CANADA'S ORGANIZATION AND SCOPE OF OPERATIONS IN THIS OVERVIEW4 OF PETRO-CANADA'S OPERATIONS, 1986 DATA WILL BE USED AS THAT WAS THE MOST CURRENT FULL YEAR INFORMATION AVAILABLE WHEN THIS PAPER WAS WRITTEN. IN 1986 REVENUES FOR THE CORPORATION TOTALLED $5.2 BILLION CANADIAN. REVENUES FROM THE REFINING AND MARKETING BUSINESS COMPRISED ALMOST 90% OF THE TOTAL, AT THE END OF 1986, THE CORPORATION'S ASSETS WERE $8,1 BILLION CANADIAN, OF THIS TOTAL, $6.2 BILLION REPRESENTS PROPERTY, PLANT AND EQUIPMENT OF WHICH ABOIJT 2/3 IS ASSOCIATED WIITH THE EXPLORATION AND PRODUCTION BUSINESS, IN 1986 THE CORPORATION'S GROSS CAPITAL INVESTMENTS, NET OF ACQUISITIONS TOTALLED SOMlE $529 MILLION, CANADIAN. THE MAJORITY OF THESE INVESTMENTS, $319 MILLION CANADIANl, WERE MADE IN THE UPSTREAM BUSINESS. INTERNALLY GENERATED CASH FROM OPERATIONS WAS CLOSE TO $800 MILLION CANtADIAN IN 1986, AT THE END OF 1986, PETRO-CANADA EMPLOYED ABOUT 7740 PEOPLE. TliE BOARD OF DIRECTORS IS APPOINTED BY THE GOVERNMLENT OF CANADA, IT.IS MADE UP OF 15 MEMBERS INCLUDING THE CHIEF EXECUTIVE OFFICER AND THE CHIEF OPERATING OFFICER OF THE CORPORATION, THE BOARD OF DIRECTORS REVIEWS AND APPROVES THE CORPORATE PLAN AND CAPITAL BUDGET SUB'lITTED TO GOVERNMENT AND THE ONE YEAR CONTROL BUDGET WHICH WILL BE DISCUSSED IN MORE DETAIL LATER, IN ADDITION, THE CORPORATION'S POLICIES REQUIRE THAT INDIVIDUAL CAPITAL INVESTMENTS ABOVE A CERTAIN LEVEL BE APPROVED BY THE BOARD. OPERATING RESULTS ARE REVIEWIED WITH THE BOARD ON A REGULAR BASIS THROUGH THE YEAR, R/CPO2/I413 15 THE PRINCIPAL OPERATING SUBSIDIARY IS PETRO-CANADA INCORPORATED, IT IS DIVIDED INTO TWO OPERATING DIVISIONS, RESOURCES AND PRODUCTS, AND A CORPORATE SERVICES DIVISION, W,H. (BILL) HOPPER IS CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER, E.M, (ED) LAKUSTA IS PRESIDENT AND CHIEF OPERATING OFFICER, EACH OF THE OPERATING DIVISIONS IS HEADED BY A PRESIDENT, THE CORPORATE DIVISION IS LED BY AN EXECUTIVE VICE PRESIDENT, THE CHIEF EXECUTIVE OFFICER, CHIEF OPERATING OFFICER, OPERATING DIVISION PRESIDENTS AND EXECUTIVE VICE PRESIDENT MAKE UP THE CORPORATION'S MOST SENIOR MANAGEMENT COMMITTEE, THE EXECUTIVE COUNCIL, THE COUNCIL REVIEWS AND APPROVES THE CORPORATE PLAN, CAPITAL BUDGET AND ANNUAL CONTROL BUDGET, ITS APPROVAL OF INDIVIDUAL CAPITAL INVESTMENTS ABOVE A PRESCRIBED LEVEL IS REQUIRED, OPERATING RESULTS ARE REVIEWED REGULARLY WITH THE COUNCIL. THE COMPOSITION OF THE EXECUTIVE COUNCIL IS SIGNITFICANT BECAUSE OF THE REPRESENTATION FROM EACH OF THE THREE DIVISIONS AS WELL AS THE CHIEF EXECUTIVE OFFICER AND THE PRESIDENT AND CHIEF OPERATING OFFICER, IT IS THE FORUM FOR OPEN AND FRANK DISCUSSIONS AMONG THE MOST SENIOR EXECUTIVES OF THE CORPORATION AND DECISION MAKING AT THE HIGHEST LEVEL, PETRO-CANADA INTERNATIONAL ASSISTANCE CORPORATION (PCIAC) IS A W4HOLLY-OWNED SUBSIDIARY OF PETRO-CANADA, WITH ITS OWN BOARD OF DIRECTORS, AND IS FUNDED BY THE GOVERNMENT OF CANADA. PCIAC CARRIES OUT EXPLORATION AND DEVELOPMENT PROGRAMS IN DEVELOPING COUNTRIES UNDER AN OPERATING SERVICES CONTRACT WITH PETRO-CANADA. SINCE THE BALANCE OF THIS PAPER WILL FOCUS ON THE RESOURCES DIvISION, A FEEW COMMENTS SHOULD BE MADE ON THE PRODIJCTS DIVISION, THE CORPORATION'S REFINING AND MARKETING BUSINESS IS LARGE AND, AS R/CP02/413 16 INDICATED IN T-HE DISCUSSION ON REVENUES AND CASH FLOW, AN IMPORTANT PART OF THE OVERALL COMPANY, IM 1986 PETRO-CANADA'S REFINING CAPACITY AND THE VOLUME OF CRUDE OIL PROCESSED WERE 54 X 103 TONNES PER DAY AND 41 X 103 TONNES PER DAY RESPECTIVELY, SECOND IN THE CANADIAN INDUSTRY, THE CORPORATION'S RETAIL SALES OF GASOLINE, THROUGH OUTLETS USING THE PETRO-CANADA NAME, WERE THE LARGEST IN CANADA, TOTAL SALES OF REFI-NED PETROLEUM PRODUCTS WERE 37 X 103 TONNES PER DAY IN 1986, REPRESENTING ABOUT 20% OF THE CANADIAN MARKET, D. THE RESOURCES DIVISION PETRO-CANADA'S RESOURCES DIVISION EXPLORES FOR AND PRODUCFS HYDROCARBONS, IT ALSO MARKETS SOME OF TTS PRODUCTION, SPECIFICALLY NATURAL GAS, NATURAL GAS LIOIJIDS AND BY-PRODUCTS, TO THIRD PARTIES, THE CORPORATION'S LAND HOLDINGS AT THE END OF 1986 STOOD AT SOME ll x 106 HECTARES, ABOUT THREE QUARTERS OF THESE LANDHOLDINGS WIERE IN THE FRONTIERS-OFFSHORE AND IN THE ARCTIC REGION, CO,N'VENTIONAL LAND HOLDINGS IN WESTERN CANADA TOTAL SOME 2 X 106 HECTARES WHILE OIL SANDS ADD ABOUT ANOTHER 0.4 X 106 HECTARES, PETRO-CANADA'S PROVEN CRUDE OIL AND NATURAL GAS LIQUIDS (NGL) RESERVES TOTALLED SOME 81 X 106 TONNES AT YEAR END 1986. CONVENTIONAL CRUDE OIL AND NATURAL GAS LIQUID RESERVES STOOD AT 42 x 106 TONNES WHILE NON-CONVENTIONAL RESERVES, PRIMARILY OIL SANDS, WERE 38 X 106 TONNES. THE CORPORATION'S CRUDE OIL RESERVE LIFE INDEX WAS 16 YEARS AT THE END OF 1986, PETRO-CANADA'S NATURAL GAS RESERVES ARE LARGE AT ALMOST 99 X 109 CUBIC METRES WITH A RESERVE LIFE INDEX OF 23 YEAR.S, PETRO-CANADA HAS THE RIGHTS TO MORE OIL AND GAS OFF CANADA'S EAST COAST THAN ANY OTHER COMPANY, PETRO-CANADA HAS A 25 PERCENT R/CPO2/413 17 INTEREST IN THE LARGE HIBERNIA OILFIELD WHICH CONTAINS RESERVES OF 71 X 106 TONNES AND WHERE PLANS FOR DEVELOPMENT ARE WELL ADVANCED. IN 1987 A DECISION WAS MADE TO PRESS FORWARD TOIWARDS DEVELOPMENT OF ITS TERRA NOVA OILFIELD WHERE RECENT DELINEATION DRILLING WJOULD INDICATE RESERVES IN EXCESS OF 1 X 107 TONNES. PRODUCTION AT TERRA NOVA COULD.BEGIN IN THE EARLY 1990'S. THE VENTURE GAS FIELD OFF NOVA SCOTIA, WHERE PETRO-CANADA IS A 30 PERCENT PARTICIPANT AND WHICH CONTAINS MORE THAN 57 X 109 CUBIC METRES OF NATURAL GAS, COULD BE DEVELOPED TO SERVE MARKETS IN THE UNITED STATES. PETRO-CANADA HAS A 17 PERCENT INTEREST IN SYNCRUDE, THE WORLD'S LARGEST OILSANDS PLANT PRODUCING SYNTHETIC CRUDE OIL. THIS SINGLE FACILITY SUPPLIES 17 X 103 TONNES PER DAY, NEARLY 10 PERCENT OF THE OIL NOW PRODUCED IN CANADA, THE CORPORATION ALSO HAS A 50 PERCENT SHARE IN A COMMlERCIAL TN-SITU BITUMEN OPERATTON LOCATED AT IWOLF LAKE, ALBERTA CURRENTLY CAPABLE OF PRODUCING 1 X 10 TONNIES PER DAY. IN 1986 CRUDE OIL AND NGL PRODUCTION AVERAGED ABOUT 14 X 1Q3 TONNES PER DAY. THE MAJORITY OF THIS, 9 X 103 TONNES PER DAY CAME FROM CONVENTIONAL SOURCES. HOWEV'ER, 3,3 X 103 TONNES PER DAY OF SYNTHETIC CRUDE OIL WAS PRODUCED, NATURAL GAS PRODUCTION IN THE YEAR AVERAGED 12 X 103 CUBIC METRES PER DAY, THE CORPORATION HAS ABOUT 800 PRODUCING PROPERTIES AND OPERATES MORE THAN 70 OIL AND GAS PRODUCTION FACILITIES IN WESTERN CANADA. IT ALSO HAS INTERESTS IN SOME 60 PLANTS OPERATED BY OTHER FIRMS, IN 1986 THE CORPORATION DRILLED SOME NET 28 EXPLORATORY WIELLS AND NET 70 DEVELOPMENT WELLS IN NON-FRONTIER AREAS. THE CORPORATION'S CANADIAN EXPLORATION LANDHOLDINGS ARE GREATER THAN THOSE OF ITS INTEGRATED COMPETITORS. ITS OIL AND GAS PRODUCTION IN 1986 WAS SECOND ONLY TO THAT OF EXXON'S CANADIAN SUBSIDIARY AMONG INTEGRATED COMPANIES. PETRO-CANADA'S PROVED OIL AND GAS RESERVES AT THE END OF 1986 WERE GREATER THAN THOSE ITS INTEGRATED COMPETITORS EXCEPT FOR EXXON'S CANADIAN SUBSIDIARY,. R/CP02/413 18 PETRO-CANADA CONDUCTS EXPLORATION PROGRAMS IN OTHER COUNTRIES AND HAS AN INTEREST IN A PRODUCING OILFIELD OFFSHORE SPAIN. INTERNATIONAL EXPLORATION EXPENDITURES WERE $6 MILLION IN 1986, PETRO-CANADA'S INTEREST IN SPANISH PRODUCTION WAS 280 TONNES PER DAY IN 1986. E. RESOURCES DIVISION ORGANIZATION THE RESOURCES DIVISION IS ORGANIZED ON A FUNCTIONAL BASIS. FOUR MAJOR DEPARTMENTS EXIST, RESPONSIBLE, IN TURN, FOR EXPLORATION) PRODUCTION, MARKETING AND BUSINESS ANALYSIS, THE RESOURCES DIVISION IS HEADED BY A PRESIDENT WHO IS A MEMBER OF THE EXECUTIVE COUNCIL, EACH MAJOR DEPARTMENT IS HEADED BY A VICE PRESIDENT. THE DIVISION PRESIDENT AND THE HEADS OF EACH OF THE FOUR DEPARTMENTS MAKE UP THE RESOURCES MANAGEMENT COMMITTEE WHICH IS THE MOST SENIOR DECISION MAKING COMMITTEE WITHIN' THE DIVISION, SIMILAR TO THE EXECUTIVE COUNCIL, THIS COMMITTEE REV'IEWS AND APPROVES THE DIVISIONAL ELEMENTS OF THE CORPORATE PLAN, CAPITAL BUDGET AND CONTROL BUDGET, CAPITAL INVESTMENTS ABOVE A PRESCRIBED LEVEL AND THE OPERATING RESULTS OF THE DIVISION. IN TOTAL, THERE WERE 1284 EMPLOYEES IN THE RESOURCES DIVISION AT THE END OF 1986. THE EXPLORATION DEPARTMENT IS RESPONSIBLE FOR ALL EXPLORATION ACTIVITY UNDERTAKEN BY THE CORPORATION. AT THE END OF 1986 THERE WERE 243 PEOPLE IN THE EXPLORATION DEPARTMENT, CAPITAL INVESTMENTS MADE BY THE DEPARTMENT IN 1986 TOTALLED SOME $270 MILLION (CANADIAN), WITHIN EXPLORATION, THE CANADIAN EXPLORATION GROUP IS ORGANIZED ON BOTH A GEOGRAPHIC AND FUNCTIONAL BASIS. THERE ARE SEPARATE R/CPO2/'413 19 GEOLOGICAL AND GEOPHYSICAL GROUPS AS WELL AS THREE GROUPS RESPONSIBLoE FOR EXPLORATION ACTIVITIES IN THE WESTERPt CANADIAN SEDIMENTARY BASIN AND THE FRONTIERS, THE PRODUCTION DEPARTMENT IS RESPONSIBLE FOR THE DIVISION'S PRODUCTION OF CRUDE OIL, NATURAL GAS AtID NATURAL GAS LIQUIDS, AT THE END OF .1986 THERE WERE 853 PEOPLE DIVIDED INTO THREE GROUPS: OPERATIONS, ENGINEERING AND JOINT VENTURES, THE OPERATIONS GROUP IS RESPONSIBLE FOR PRODUCTION FROM COMPANY OPERATED FACILITIES, 'IT IS ORGANIZED INTO THREE GEOGRAPHIC REGIONS, CALLED DISTRICTS, EACH HEADED BY A DISTRICT MANAGER RESPONSIBLE FOR THE COMPANY OPERATED FACILITIES IN THAT AREA. THE OPERATIONS GROUP ALSO MANAGES ALL OF THE CORPORATION'S DRILLING ACTIVITY, PETRO-CANADA DOES NOT OWN OR OPERATE ANY CONVENTIONAL DRILLING EQUIPMENT ITSELF BUT CONTRACTS THE WORK OUT. THE ENGINEERING GROUP HAS PRIMARY RESPONSIBILITY FOR RESERVES AND PROVIDES RESERVOIR ENGINEERING SERVICES TO THE CORPORATION. IT INITIATES CAPITAL PROJECTS THAT WqILL ALLOW PRODUCTION 'OF OIL AND GAS RESERVES, THE JOINT VENTURES GROUP IS RESPONSIBLE FOR THE CORPGORATION'S INTERESTS IN PROPERTIES OPERATED BY THIRD PARTIES. INCLUDED ARE THE CORPORATION'S INTEREST IN THE SYNCRUDE AND W4OLF LAhKE PROJECTS. APPROXIMATELY 50% OF THE RESOURCES DIVISION'S MARGINS COME FROM PROPERTIES AND FACILITIES OPERATED BY OTHER COMPANIES. THE MARKETING DEPARTMENT MANAGES THE MARKETING OF NATUJRAL GAS AND NATURAL GAS LIQUIDS, THE CORPORATION'S CRUDE OIL PROTDUCTION IS MARKETED BY A GROUP WITHIN THE PRODUCTS DIVISION, CRxUDE OIL IS PURCHASED FROM THE RESOURCES DIVISION BY THE PRODUCTS DIVISION AT MARKET PRICES, THc BUSINESS ANALYSIS DEPARTMENT IS A STAFF FUNCTION W!HICH PROVIDES SUPPORT SERVICES FOR THE DIVISION. THE DEPARTMENT R/CPO2/ 413 20 ESTABLISHES AND MANAGES THE PLANNING AND CONTROL PROCESSES WITHIN THE RESOURCES DIVISION AND SUPPORTS THE LINE MANAGEMENT OF THE THREE OPERATING DEPARTMENTS IN BUDGETING, MONITORING AND CONTROLLING PARTICULARLY THE FINANCIAL ASPECTS OF THE BUSINESS. THE ORGANIZATION OF THE RESOURCES DIVISION HAS IMPLICATIONS FOR OPERATIONAL PLANNING AND CONTROL. ITS FUNCTIONAL NATURE REQUIRES THAT PLANNING AND CONTROL BE COORDINATED AND CAREFULLY MANAGED TO ENSURE THAT PLANS AND REPORTS ARE CONSOLIDATED ON A CONSISTENT BASIS. IT ALSO NECESSITATES EXTENSIVE COMMUNICATION AMONG THE MAJOR DEPARTMENTS AS ACTIONS TAKEN BY ONE WILL LIKELY AFFECT OTHERS. 4t, PLANNING AND CONTROL WITHIN PETRO-CANADA THE REMAINDER OF THIS PAPER WILL ADDRESS THE PLANNING AND CONTROL PROCESSES IN PETRO-CANADA, A. STRATEGIC AND OPERATIONAL PLANNING AS DESCRIBED EARLIER, PETRO-CANADA PREPARES A LONG-RANGE STRATEGIC PLAN ON AN ANNUAL BASIS, IT SETS OUT THE DIRECTION OF THE CORPORATION AND IDENTIFIES THE ANTICIPATED CAPITAt INVESTMENTS AND FINANCING ACTIVITIES OF THE CORPORATION. THE PROJECTIONS OF FINANCIAL PERFORMANCE ARE A CRITICAL ELEMENT OF THIS PLAN AND ARE RESPONSIVE TO THE OBJECTIVES AND PERFORMANCE EXPECTATIONS IDENTIFIED BY THE EXECUTIVE COUNCIL, THE STRATEGIC PLAN ALSO SPECIFIES THE RESOURCES ALLOCATED BY THE EXECUTIVE COUNCIL TO ACHIEVE THE INDICATED PERFORMANCE TARGETS, WITHIN PETRO-CANADA, A ONE-YEAR CONTROL BUDGET IS PREPARED ON AN ANNu'AL BASIS. THIS BUDGET IDENTIFIES THE SPECIFIC PLANS, PROGRAMS AND PROJECTS TO ACHIEVE THE EARNINGS FORECAST FOR THE NEXT YEAR, R/CP02/413 21 CAPITAL SPENDING BY DIVISION AND MAJOR PROJECTS ARE HIGHLIGHTED. ALL FINANCIAL PROJECTIONS IN THE CONTROL BUDGET ARE EXPECTED TO BE CONSISTENT WITH THOSE IN THE FIRST YEAR OF THE STRATEGIC PLAN, WHERE THERE ARE VARIANCES, THEY MUST BE RECONCILED BASED ON CHANGING CIRCUMSTANCES SUBSEQUENT TO THE PREPARATION OF THE STRATEGIC PLAN. IN THE CONTROL BUDGET, THERE ARE SEPARATE COMPONENTS FOR EACH OF THE OPERATING DIVISIONS, PREPARED BY LINE MANAGEMENT WITH THE ASSISTANCE OF DIVISIONAL PLANNERS, IN ADDITION TO PREPARING A STRATEGIC PLAN THE RESOURCES DIVISION HAS INSTITUTED AN ELEMENT TO THEIR OVERALL PLA4NING PROCESS UNIQUE TO THE REST OF THE CORPORATION, THIS ADDITIONAL PLANNING STEP IS REFERRED TO AS THE OPERATIONAL PLAN. IT HAS A THREE YEAR TIME HORIZON AND IS ESSENTIALLY A DERIVATIVE OF THE RESOURCES DIVISION'S CONTRIBUTION TO THE STRATEGIC PLAN. THE OPERATIONAL PLAN SPECIFIES PLANS, PROGRAMS AND PROJECTS THAT WILL RESULT IN THE ACHIEVEMENT OF THE PERFORMANCE EXPECTATIONS OF THE STRATEGIC PLAN,. THIS INTERMEDIATE STEP IN THE PLANNING PROCESS WAS DEVELOPED BECAUSE IT W'AS FELT THAT THE UPSTREAtl BUSINESS REQUIRED MORE THAN A ONE YEAR DETAILED PLAN, THE STRATEGIC PLAN WIAS FELT TO BE TOO GENERAL IN NATURE AND DID NOT ADDRESS THE ISSUE OF PRECISELY HOW THE RESULTS WOULD BE ACHIEVED, THE OPERATTONAL PLAN, WHICH IDENTIFIES SPECIFIC PLANS, PROJECTS AND PROGRArS WHICH WILL RESULT IN THE ACHIEVEMENT OF THE PERFORMANCE FORECAST IN THE STRATEGIC PLAN, WAS THEREFORE INTRODUCED TO HELP BRIDGE THE GAP BETWEEN THE LONG-RANGE PLAN AND CONTROL BUDGET, B. CORPORATE AND DIVISIONAL PLANNING RESPONSIBILITIES THE CORPORATE AND DIVISIONAL GROUPS HAVE DIFFERENT RESPONSIBILITIES IN THE PLANNING PROCESS. R/CP02/413 22 THE FINANCE DEPARTMENT, WHICH IS PART OF CORPORATE SERVICES, DETERMINES THE APPROPRIATE FINANCIAL STRUCTURE OF THE CORPORATION, PETRO-CANADA TARGETS TOWARDS ACHIEVING MEASURES OF FINANCIAL HEALTH - DEBT TO TOTAL CAPITAL, INTEREST COVERAGE (WHICH IS THE RATIO OF EARNINGS BEFORE TAXES AND BEFORE FINANCIAL CHARGES TO INTEREST EXPENSES), CASH FLOW TO DEBT AND EARNINGS GROWTH - THAT ARE CONSISTENIT WITH MAINTAINING HIGH QUALITY, SECURE DEBT INSTRUMENTS THAT ARE ATTRACTIVE TO LENDERS. THIS OBJECTIVE PLAYS A MAJOR ROLE IN DETERMINING THE CORPORATION'S FINANCIAL STRUCTIJRE. THE FINANCIAL TARGETS THEN ALLOW THE CORPORATION TO DETERMINE ITS FINANCIAL CAPACITY WHICH IS THE LEVEL OF CAPITAL INVESTMENT THAT CAN BE SUSTAINED WHILE ACHIEVING THE FINANCIAL PERFORMANCE TARGETS, FINANCIAL RESOURCES ARE THEN ALLOCATED TO THE DIVISIONS, THE TOTAL CAPITAL AVAILABLE TO THE CORPORATION, CONSISTENT WITH THE FINANCIAL TARGETS JUST DESCRIBED, IS DIVIDED BETWEEN THE RESOURCES, PRODUCTS AND CORPORATE DIVISIONS BASED ON THEIR NEEDS AND OPPORTUNITIES, THE EXECUTIVE COUNCIL ESTABLISHES THE PERFORMANCE EXPECTATIONS FOR THE OPERATING DIVISIONS, THESE EXPECTATIONS ARE BOTH FINANCIAL AND OPERATIONAL, THE FINANCIAL EXPECTATIONS IJSUALLY EMBRACE THE ENTIRE DIVISION AND FOCUS ON KEY PARAMETERS SUCH AS EARNINGS, RATE OF RETURN ON CAPITAL EMPLOYED, CASH FLOW ETC. THE OPERATIONAL TARGETS ARE ESTABLISHED IN CONSULTATION WITH THE OPERATINNG DIVISION AND CAN BE MUCH MORE SPECIFIC AND ADDRESS ISSUES SUCH AS RESERVES ADDITIONS, PRODUCTION VOLUMES, SHARE OF MARKET ETC, THE EXECUTIVE COUNCIL ALSO ESTABLISHES POLICY FOR THE OVERALL CORPORATION IN A NUMBER OF KEY AREAS INCLUDING, AMONG OTHER ITEMS, HUMAN RESOURCES ADMINISTRATION, SAFETY AND PROTECTION OF THE ENVIRONMENT, R/CP02/413 23 THE RESOURCES DIVISION THEN DEVELOPS ITS OPERATIONAL PLANS WHICH ARE CONSISTENT WITH THE FRAMEWORK PROVIDED BY THE EXECUTIVE COUNCIL. IT IS EXPECTED THAT THESE PLANS WILL DELIVER THE REQUIRED RESULTS AND WILL USE NO MORE THAN THE RESOURCES ALLOCATED, IT IS THE RESPONSIBILITY OF THE DIVISION TO DEVELOP THE SPECIFIC PROGRAMS AND PROJECTS THAT WILL PRODUCE THE DESIRED RESULTS AND UTILIZE THE ALLOCATED FINANCIAL ANID HUMAN RESOURCES, THE RESOURCES DIVISION HAS ESTABLISHED THE CONTROL MECHANISMS REQUIRED TO ENSURE THAT ITS PLANS ARE BEING IMPLEMENTED AND THAT THE DESIRED RESULTS ARE BEING OBTAINED, MANY OF THESE CONTROL MECHANISMS ARE COMPANY-WIDE (FOR EXAMPLE, ACCOUNTING CONTROLS), WHILE OTHERS ARE SPECIFIC TO DIVISIONS, DEPARTMENTS AND SMALLER GROUPS, THE RESOURCES DIVISION HAS THE RESPONSIBILITY OF PUTTING THE APPROPRIATE ORGANIZATIONAL STRUCTURE IN PLACE AND STAFFING IT WITH PEOPLE WITH THE RIGHT SKILLS AND KNOWLEDGE. ALTHOUGH PETRO-CANADA IS A CRO14N CORPORATION IT HAS A STRONG COMiMERCIAL ORIENTATION. ONE OF TTS KEY OBJECTIVES IS TO GENERATE AN ADEQUATE RATE OF RETURN FOR ITS SHAREHOLDER. IN ORDER TO EMPHASIZE THIS COMMERCIAL ORIENTATION THROUGHOUT THE ORGANIZATION THE CONTROL MEASURES FOCUS ON FINANCIAL RESULTS, AS WIILL BE SEEN LATER IN THE DISCUSSION, THERE IS AN EFFORT TO ESTABLISH DECENTRALIZED ACCOUNTABILITY TO VARIOUS LEVELS IN THE ORGANIZATION FOR PROFITS RATHER THAN SIMPLY PRODUCTION VOLUMES. C. THE RESOURCES DIVISION'S OPERATIONAL PLAN AND CONTROL BUDGET THIS SECTION WILL DESCRIBE HOW THE OPERATIONAL PLAN AND CONTROL BUDGET ARE DEVELOPED IN EACH OF THE FUNCTIONAL AREAS: EXPLORATION, PRODUCTION, AND MARKETING, AND THE ROLE OF BUSINESS ANALYSIS IN THAT PROCESS, R/CP02/I413 4 IT WILL BE RECALLED THAT THE OPERATIONAL PLAN IS A THREE-YEAR DETAILED OUTLOOK FOR THE RESOURCES DIVISION, PROJECTING FINANCIAL RESULTS AND IDENTIFYING SPECIFIC PLANS AND PROGRAMS TO ACHIEVE THEM, THIS PLAN IS PREPARED IN THE LINE DEPARTMENTS - MARKETING, PRODUCTION AND EXPLORATION - UNDER THE COORDINATION OF BUSINESS ANALYSIS. WITHIN THE LINE ORGANIZATIONS, IT IS STILL A TOP-DOWIR APPROACH BUT WITH INPUT FROM SEVERAL LEVELS OF MANAGEMENT. THE PROCESS BY WHICH THE OPERATIONAL PLAN IS DEVELOPED IS COORDINATED BY BUSINESS ANALYSIS. INFORMATION REQUIREMENTS AND THE TIMETABLE FOR ITS DEVELOPMENT ARE SPECIFIED BY THIS GROUP, BUSINESS ANALYSIS HAS DEVELOPED SEVERAL COMPUTER SYSTEMlS TO ASSIST IN THE COMPILATION AND ANALYSIS OF PLANNING INFORMATION. THESE SYSTEMS HAVE BEEN DESIGNED SPECIFICALLY FOR THE RESOUJRCE DIVISION'S PLANNING NEEDS AND PROCESS, THESE SYSTEMS (ISE, AS A BASE, HISTORICAL DATA ON INDIVIDUAL PROPERTIES. THEY ARE EXTRAPOLATED AND VARIOUS JUDGEMENT TECHNIQUES APPLIED TO FORECAST OPERATING RESULTS AND REQUIRED CAPITAL INPUTS, THE JUDGEMENT OF LINE MANAGERS FORMS THE MOST VALUABLE INPUT TO THESE FORECASTS. FROM THIS THREE-YEAR OPERATIONAL PLAN, COMES A FAIRLY GOOD IDEA OF HOW THE UPCOMING BUDGET YEAR WILL UNFOLD, THIS INFORMATION IS CIRCULATED TO LINE MANAGERS THROUGHOUT THE RESOURCES DIVISION AN1D FORMS A FRAMEWORK FOR DEVELOPING THE ONE-YEAR CONTROL BUDGET, HO4,EVER, THE CONTROL BUDGET IS A BOTTOM-UP APPROACH. AN ANALYSES IS. UNDERTAKEN OF EACH INDIVIDUAL PROPERTY, OR GROUPS OF PROPERTIES, USING COMPUTER BASED TECHNIQUES, AND THE PRICE, VOLUME AND BUSINESS ENVIRONMENT DATA FROM THE OPERATIONAL PLAN, EACH AREA SUPERINTENDENT AND HIS SUPERVISORS PROJECT REVENUES, ROYALTIES AND OPERATING COSTS TO DETERMINE THE PROJECTED OPERATING MARGINS, OPERATING MARGIN IS THE AMlOUINT OF PROQFTT LEFT FOR THE PRODUCER AFTER THE DEDUCTION FROM REVENUES OF FIELD OPERATING COSTS AND GOVERNMENT ROYALTIES, R/CP02/413 25 RESOURCES EMPLOYS A MATRIX-TYPE ORGANIZATION TO FACILITATE THE PROCESS. PEOPLE WHO ARE ORGANIZATIONALLY PART OF THE BUSINESS ANALYSIS DEPARTMENT ARE PHYSICALLY LOCATED AT THE PRODUCTION FACILITIES MANAGED AND STAFFED BY THE PRODUCTION DEPARTMENT. THEY PARTICIPATE IN THE DEVELOPMENT OF THE FINANCIAL AND VOLUMETRIC ELEMENTS OF THE.CONTROL BUDGET FOR PROPERTIES THAT ARE PART OF THAT FACILITY, THEY PROVIDE SUPPORT FUNCTIONS RIGHT IN THE FIELD AND REPORT OPERATING RESULTS. THERE ARE ALSO COORDINATORS WITHIN THE BlUSINESS ANALYSIS DEPARTMENT SPECIFICALLY ASSIGNED TO EXPLORATION AND MARKETING. THESE COORDINATORS WORK WITH THE LINE DEPARTMENTS IN THE DEVELOPMENT OF THEIR CONTROL BUDGETS AND THE REPORTING OF ACTUAL RESULTS. i) EXPLORATION THE EXPLORATION DEPARTMENT DEVELOPS ITS CONTROL BUDGET BASED ON THE CORPORATE STRATEGIES AND DIRECTIONS SET OUT BY THE EXECUTIVE COUNCIL, THE PRIMARY PERFORMANCE MEASURE FOR THE EXPLORATION DEPARTMENT IS RESERVE ADDITIONS. TYPICALLY THERE IS A SPECIFIC TARGET THAT RELATES TO PRODUCTION, I.E. REPLACE 100% OF CRUDE OIL PRODUCTION IN A GIVEN PERIOD, THE DEVELOPMENT OF THE EXPLORATION CONTROL BUDGET IS RELATIVELY STRAIGHTFORWARD, HAVING RECEIVED ITS FINANCIAL AND HUMAN RESOURCES DIRECTION FROM THE EXECUTIVE COUNCIL, IT THEN PLANS THE USE OF THESE RESOURCES BY LOOKING AT VARIOUS EXPLORATION PLAYS IN WESTERN CANADA, OFFSHORE CANADA AND INTERNATIONAL AREAS, MANAGERS PRESENT A LISTING OF PLAYS THAT ARE EVALUATED, SORTED AND ADJUSTED TO MATCH THE FINANCIAL AND HUMAN RESOURCES ALLOCATED. THE CONTROL BUDGET IS SPECIFIC AS TO THE LOCATIONS AND NUMBERS OF WELLS TO BE DRILLED, THE ASSOCIATED COSTS AND THE VOLUME OF OIL AND GAS TO BE FOUND, THIS INFORMATION IS PASSED TO THOSE R/CP02/413 26 RESPONSIBLE FOR MANAGING THE CORPORATION'S DRILLING PROGRAM TO ENSURE THAT IT IS REFLECTED IN THEIR WORK PLAN. JI) PRODUCTION IN ORDER TO EXPLAIN THE CONTROL BUDGET PROCESS IN THE PRODUCTION DEPARTMENT IT IS NECESSARY TO GO BACK TO THE ORGANIZATION CHART. THE JOINT VENTURES GROUP MANAGES THOSE PROPERTIES WHICH ARE OPERATED BY OTHER COMPANIES BUT IN WHICH PETRO-CANADA HAS AN INTEREST, IT IS THE RESPONSIBILITY OF THE OPERATOR TO DEVELOP AND PROVIDE OPERATING PLANS TO THE OTHER OWNERS, THESE PLANS CONTAIN PROPERTY BY PROPERTY PRODUCTION VOLUME AND OPERATTCIG COST INFORMATION, THEY ALSO CONTAIN CAPITAL INVESTMENIT INTENFTIONS SO THAT THE CORPORATION CAN ANTICIPATE THE FUNDS THAT WILL BE REOUIRED AT NON-COMPANY OPERATED FACILITIES, THESE OPERATING PLANS ARE REVIEWED FOR REASONABLENESS IN THE CONTEXT OF PAST EXPERIENCE AND PLANNED ACTIVITY AND INTEGRATED INTO THE OVERALL BUDGET, THE ENGINEERING GROUP WITHIN THE PRODUCTION DEPARTMENTT IS RESPONSIBLE FOR OIL AND GAS RESERVES, THIS GROUP IS CO'iMPRISED LARGELY OF RESERVOIR AND PRODUCTION ENGINEERS WHO DEVELOP PLANS AND PROGRAMS FOR THOSE PROPERTIES OPERATED BY PETRO-CANAD;A, THESE PLAN!S AND PROGRAMS ARE VERY SPECIFIC AND INCLUDE ITEMS SUCH AS WELL WORK OVERS, INFILL DRILLING. PROCESSING FACILITIES, TIE-INS AND DEPLETION STRATEGIES. THE CAPITAL AND OTHER COSTS ASSOCIATED WITH THESE PLAINS AND PROGRAMS ARE ESTIMATED AND BECOME PART OF THE BUDGET. THE ENGINEERING GROUP ALSO DETERMINES THE VOLUMETRIC PROD'.UCTION CAPABILITY OF EACH OF THE PROPERTIES OPERATED BY PETRO--CANADA, THESE ESTIMATES ARE BASED ON HISTORICAL DATA AND REFLECT THE EFFECTS nF THF COMP1ITTED PLANS AND PROGRAMS, R/CP02/413 27 THE OPERATIONS GROUP IS RESPONSIBLE FOR THE MANAGEMENT OF THE PRODUCING PROPERTIES OPERATED BY PETRO-CANADA, THEIR KEY FOCUS IS ON OPERATING MARGIN, PRODUCTION VOLUME AND OPERATING COSTS. THE OPERATIONS GROUP IS ORGANIZED INTO THREE GEOGRAPHIC AREAS, CALLED DISTRICTS, EACH HEADED BY A DISTRICT MANAGER. REPORTING TO THE DISTRICT MANAGERS ARE ABOUT TEN FIELD SUPERINTENDENTS WHO, IN TURN, HAVE ABOUT 25 FIELD SUPERVISORS REPORTING TO THEt1. EACH FIELD SUPERVISOR IS RESPONSIBLE FOR A NUMBER OF COMPANY OPERATED PRODUCTION FACILITIES, TO CONSTRUCT THE CONTROL BUDGET, EACH FIELD SUPERVISOR DEVELOPS A PROPERTY-BY-PROPERTY FORECAST OF OPERATING MARGIIN BASED ON THE PRODUCTION VOLUME PROVIDED BY ENGINEERING, UNIT REVENUE FORECASTS PROVIDED BY BUSINESS ANALYSIS AND OPERATING COSTS WHICH ARE DEVELOPED BY THE FIELD SUPERVISOR, THE FIRST STEP IS TO ASCERTAIN THE OPERATING COSTS ASSOCIATED WITH MAINTAINING THE PROPERTY'S LEVEL OF PRODUCTION, SUBJECT TO ANY NATURAL DECLINE BEING EXPERIENCED, AT THIS STAGE, PRODUCTION ENHANCEMENTS SUCH AS WELL WORK OVERS CAPITAL PROJECTS ARE EXCLUDED. THIS IS REFERRED TO AS THE "BASE" PLAN, THE NEXT STEP IS TO LAYER ON TOP OF THE BASE THOSE ACTIONS THAT WOULD ADD PRODUCTION AND THEREFORE TNCREASE BOTH OPERATING MARGINS AND COSTS, THESE PROPERTY-BY-PROPERTY COSTS. BASE AND IcNCREMENTAL, ARE THEN AGGREGATED AT THE PRODUCTION SUPERVISOR LEVEL, AT THIS POINT, A PRELIM11INARY SCREENING OF THE OPTIONAL COST ELEMENTS - NOW CALLED "DECISION PACKAGES" - IS COMPLETED. THE KEY DECISION CRITERION IS THE MARGIN-TO-EXPENSE RATIO; THAT IS, THE RELATIONSHIP BETWEEN THE INCREMENTAL MARGIN GENERATED AS A RESULT OF THE COST INCURRED AND THE COST ITSELF. LARGER RATIOS INDICATE MORE ATTRACTIVE OPPORTUNITIES. THE BASE COSTS AND DECISION PACKAGES ARE MOVED UP TO THE FIELD SUPERVISOR LEVEL WHERE THEY ARE AGAIN AGGREGATED AND SCREENED, FROM THE THREE DISTRICTS R/CP02/413 28 THE CONTROL BUDGET IS THEN BROUGHT FORW4ARD AND AGGREGATED ACROSS WESTERN CANADA, iii) MARKETING THE MARKETING DEPARTMENT IN THE RESOURCES DIVISION IS RESPONSIBLE FOR THE MARKETING OF NATURAL GAS AND NATURAL GAS LIOUIDS, PRICE ESTJMATES ARE PROVIDED BY THE CORPORATE SERVICES DIVISION, THE FIELD OFFICES ESTIMATE THE COMPANY'S ABILITY TO SUPPLY GAS BY COMPARING PRODUCTION CAPABILITIES AND CONTRACT VO~LUMES. THE LOWER OF PRODUCTION CAPABILITIES AND CONTRACT VOLUMES IS TAKEN AS THE COMPANY'S SUPPLY OF GAS TO PURCHASERS, THE MARKETING DEPARTMENT ESTIMATES THE GAS DEMAMUD BY SHIPPERS. THESE ARE INTERMEDIATE BUYERS WHO BUY GAS ON LORNG TERM CONTRACT FOR SUBSEQUENT RESALE. AFTER THE DEMAND BY SHLPPERS HAS BEEN SATISFIED, EXCESS GAS SUPPLY MAY BE SOLD DIRECTLi,a' TO END USERS OR LOCAL DISTRIBUTION COMPANIES, THE MARKETING D)EPARTMENT IS RESPONSIBLE FOR IDENTIFYING THESE DIRECT SALES OPPORTUNITIES. IN ADDITION, THE MARKETING DEPARTMlENT ALSO ESTIMATES THE REVENUE THAT ACCRUE TO THE COMPANY AFTER OPERATING COSTS. OPERATING COSTS ARE ESTIMATED BY THE FIELD OFFICES, FIELD NGL PRODUCTION ESTIMATES ARE PROVIDED BY THE PRODUCTION DEPARTMENT BASED ON THEIR FORECAST OF CRUDE OIL AND NATURAL GAS PRODUCTION, PRODUCTION OF NGL'S FROM THE TWO STRADDLE PLANTS IS BASED ON NATURAL GAS DEMAND ESTIMATES DEVELOPED 1l4THIN MARKETING, BASED ON THE VOLUME, REVENUE AND OPERATING COST EMTIMATES FROM THE MARKETING DEPARTMENT, THE FIELD OFFICES AND TPlE PRODUCTION DEPARTMENT, THE BUSINESS DEPARTMENT CALCULATES TOTAL REVENUES, ROYALTIES AND MARGINS, THE MARKETING DEPARTMENMT'S BUDGET IS COMPRISED OF MARGINS, VOLUMES, AND OPERATING COSTS, R/CP02/413 29 iv) CONSOLIDATION THE CONTROL BUDGET DEVELOPED IN THE OPERATING DEPARTMENTS ARE THEN CONSOLIDATED BY BUSINESS ANALYSIS TO DESCRIBE THE OVERALL PERFORMANCE OF THE RESOURCES BUSINESS. THIS CONSOLIDATION IS POSSIBLE -BECAUSE.BUSINESS ANALYSIS HAS SPECIFIED, IN CONSIDERABLE DETAIL, THE WAY THAT THE CONTROL BUDGET AND THE INFORMATTON CONTENT ARE TO BE FORMATTED, THEY HAVE ENSURED THAT CONSISTENT DEFINITIONS OF FACTORS SUCH AS MARGINS, COSTS ETC. HAVE BEEN UTILIZED. AT THIS POINT THE FUNCTIONAL NATURE OF RESOURCES' ORGANIZATION DISAPPEARS. FOR EXAMPLE, THE PRESIDENT OF THE RESOURCES DIVISION AND HIS MANAGEMENT COMMITTEE ARE NOT CONCERNED WITH JUST THE PERFORMANCE OF THE OPERATIONS GROUP WITHIN PRODUCTION DFPARTrIENT BUT RATHER, AMONG OTHER THINGS, WITH PETRO-CANADA'S OVERALL INTEREST IN THE PRODUCTION VOLUME, MARGIN AND OPERATING COSTS OF CONVENTIONAL CRUDE OIL WHICH NOW INCLUDES VOLUMES FROM NON-COMPANY OPERATED FACILITIES. THE CONTROL BUDGET HAS NOW BECOME A VEHICLE FOR THE MANAGEMENT OF THE ENTIRE DIVISION. AT THE LOWER LEVELS IN THE ORGANIZATION THERE ARE VOLUME, MARGIN AND OPERATING COST TARGETS ON A PROPERTY-BY-PROPERTY BASIS. AT HIGHER LEVELS IN THE ORGANIZATION THE INFORMATION BECOMES AGGREGATED INTO AN OVERALL BUSINESS RESl3LT FOR PERFORMANCE MONITORING AND DECISION riAKING. D. CONTROL THIS SECTION OF THE PAPER WILL REVIEW CONTROL PROCESSES IN PETRO-CANADA'S RESOURCES DIVISION. AS MENTIONED PREVIOUSLY, THE CONTROL BUDGET IS THE PRIMARY STEWARDSHIP VEHICLE THROUGHOUT THE CORPORATION. THE RESOURCES DIVISION STEWARDS TO ITS CONTROL BUDGET, NOT ITS OPERATIONAL PLAN. R/CP02/413 30 REPORTS DESCRIBING THE ACTUAL RESULTS THAT ARE COMPARED TO THE CONTROL BUDGET ARE GENERATED BY THE CORPORATE ACCOUNTING SYSTEM. THESE RESULTS ARE PROVIDED BY CONTROLLERS DEPARTMENT IN THE CORPORATE SERVICES DIVISION, TO THE BUSINESS SERVICES GROUPS IN THE BUSINESS ANALYSIS DEPARTMENT, BUSINESS ANALYSIS PROVIDES A SERVICE TO LINE MANAGEMENT, WHO ARE RESPONSIBLE FOR THE CONTROL PROCESSES WITHIN THE DIVISION, BY COORDINATING THE PREPARATION OF REPORTS AND COMPLETING CERTAIN ANALYSIS, THE PURPOSE OF THE CONTROL PROCESSES WITHIN THE RESOURCES DIVISION IS TO ENABLE MANAGEMENJT TO UNDERSTAND WHETHER ITS PLANS AND PROGRAM1S ARE BEING IMPLEMENTED ACCORDING TO PROJECTIONS AND WHETHER THEY ARE MAKING THE DESIRED CONTRIBUTION TO OVERALL RESULTS, THE FOCUS OF THE CONTROL PROCESS IS CLEARLY ON THE FUTURE. WHERE THE EXPECTED RESULTS ARE NOT BEING ACHIEVED, MODIFICATIONS AND CORRECTIONS MUST BE DEVELOPED TO IMPROVE PERFORMANCE AS MUCH AS POSSIBLE UNDER THE CIRCUMSTANCES, BECAUSE THE CONTROL PROCESS IN THE RESOURCES DIVISION PARALLELS THE PLANNING PROCESS, IT ALLOWS STEWARDSHIP OF RESULTS THROUGHOUT THE ORGANIZATION CONSISTENT WITH THE ACCOUNTABILITIES OF VARIOUS ORGANIZATIONAL, GROUPS, FIELD SUPERVISORS REVIEW PRODUCTION VOLUMES, MARGINS AND OPERATING COSTS ON A MONTHLY BASIS WITH AREA SUPERVISORS, AREA SUPERVISORS REVIEW THE SAME ELEMENTS FOR A LARGER GEOGRAPHTC AREA WITH THEIR DISTRICT MANAGERS, SIMILARLY, DISTRICT MANAGERS REVIEWI THE SAME ITEMS FOR EACH DISTRICT WITH THE VICE PRESIDENT AND GENERAL MANAGER OF OPERATIONS, THE PRODUCTION ENGINEERS ARE HELD ACCOUNTABLE FOR PROGRAM IMPLEMENTATION AND CAPITAL EXPENDITURES, MARKETING IS ACCOUNTABLE FOR NATURAL GAS SALES VOLUMlES AND MARGINS AS WELL AS NIGL SALES VOLUMES AND MARGINS, R/CP02/413 31 WHILE ACTUAL RESULTS ARE REVIEWED RELATIVE TO THE CONTROL BUDGET WITHIN EACH DEPARTMENT THEY AGAIN LOSE THEIR FUNCTIONAL BASIS WHEN BUSINESS ANALYSIS SUMMARIZES FOR THE DIVISIONAL MANAGEMENT COMMITTEE. USING INFORMATION FROM THE GENERAL LEDGER, BUSINESS ANALYSIS FOCUSES ON DIVISIONAL FARNINGS, THE RESU!LTS ARE REPRESENTED AS ACTUAL FOR THE MONTH RELATIVE TO THE CONTROL BUDGET AND ACTUAL YEAR-TO-DATE RELATIVE TO THE CONTROL BUDGET, OPERATING MARGINS FOR CONVENTIONAL CRUDE OIL, NATURAL GAS, NGL'S, SULPHUR, SYNCRUDE, WOLF LAKE, INTERNATIONAL AND OTHER ARE REPORTED. GENERAL AND ADMINISTRATIVE EXPENSES, NON-CASH EXPENSES AND TAXES ARE REFLECTED TO GENERATE A NET EARNINGS POSITION. PRODUCTION BY PRODUCT AND BY SOURCE IS REVIEWED: . CONVENTIONAL OI L, NATURAL GAS, WOLF LAKE, SYNCRUDE, NGL AND INTERNATIONAL, UNIT PRICES ARE EXAMINED RELATIVE TO ASSUMPTIONS USED IN THE CONTROL BUDGET. CAPITAL EXPENDITURES ARE REVIEWED IN SOME DETAIL ON AN EXPLORATION AND PRODUCTION BASIS. EVERY QUARTER THERE IS A MAJOR REVIEW OF ACTUIAL PERFORMANCE TO-DATE RELATIVE TO THE CONTROL BUDGET AND THE !OUTLOOK FOR THE FULL YEAR, E, CAPITAL EXPENDITURE CON'TROLS THERE IS A RELATED BUT DISTINCT FUNCTION RELATING TO CAPITAL AND IT CENTRES AROUND A DOCUMENT KNOWN AS AN "AUTHORIZATION FOR EXPENDITURE" (AFE), THE POLICIES AND PROCEDURES AROUND THE AFE PROCESS ARE QUITE COMPLEX AND INVOLVED BUT THE FUNDAMENTALS ARE FAIRLY STRAIGHTFORWARD. ALL CAPITAL EXPENDITURE PROPOSALS REQUIRE AN AFE, THE AMOUNT OF CAPITAL INVOLVED DETERMINES THE LEVEL OF APPROVALS THAT ARE R/CP02/413 32 REQUIRED BEFORE COMMITMENTS TO INVEST CAN BE MADE, ONCE THE AFE HAS BEEN APPROVED THE AUTHORITIES TO INCUR EXPENDITURES TO IMPLEMENT THE PROJECT ARE CONSIDERABLY HIGHER. AFTER AN AFE HAS BEEN APPROVED IT IS ENTERED INTO A COMPUTER SYSTEM AND IDENTIFIED BY A CODE NUMBER. ALL EXPENDITURES RELATED TO AN AFE ARE CHARGED TO IT. STATUS REPORTS CAN BE PRODUCED ON A REGULAR OR AD HOC BASIS TO IDENTIFY ACTUAL OR POTENTIAL OVERRUNS TO THE APPROVED AFE, THERE ARE POLICIES VIHICH OUTLINE WHEN AN AFE MUST BE REVISED OR AMENDED AND THE APPROVALS REQUIRED. SPECIFIC PROJECTS ARE CAREFULLY MANAGED AND CONTROLLED. THE INDIVIDUAL, OR GROUP OF INDIVIDUALS, RESPONSIBLE FOR IMPLEMENTATION ESTABLISHES A PLAN FOR THE PROJECT. FLOW CHARTS AN'D TIME LINES ARE DEVELOPED TO MONITOR THE PROGRESS OF ItMiPLEMENTATION. KEY MILESTONES IN THE COMPLETION OF THE PROJECT ARE IDENTIFIED AND THEIR ACHIEVEMENT NOTED, CAREFUL ASSESSMENT IS CONTINUALLY MADE OF THE PROGRESS OF IMPLEMENTATION. THE PERCENTAGE OF THE PROJECT COMPLETED AT ANY POINT IN TIME IS MONITORED, METHODS ARE ESTABLISHED TO MEASURE PRODUCTIVITY, QUALITY OF MATERIALS AND CONSTRUCTION AND SUPPLIER PERFORMANCE. THE SUCCESS OF CAPITAL EXPENDITURE PROJECTS SHOULD BE AUDITED IN A SYSTEPlATIC WAY AFTER PROJECTS HAVE BEEN IMPLEMEMTED. TYPICALLY, SUCH POST-AUDITS ARE CARRIED OUT BY THE CORPORATE SERVICES DIVISION ON BEHALF OF THE RESOURCES DIVTSION FOR SELECTED, REPRESENTATIVE PROJECTS TO DETERMINE IF THE EXPECTED FINANCIAL BENEFITS HAVE BEEN REALIZED AND IF THE IMPLEMENTATION OF THE PROJECT WAS WELL-MANAGED, KEY BUSINESS ASSUMPTIONS ARE COMPARED TO ACTUAL CONDITIONS, CONSTRUCTION COSTS ARE COMPARED TO THE APPROVAL ESTIMATE, THE PHYSICAL CAPABILITY OF THE FACILITY IS TESTED AND PROJECT CONTROL TECHNIQUES ARE EXAMINED. THE INTENT OF THESE REVIEVIS IS TO DETERMINE IF THERE ARE ANY WEAKNESSES IN PROJECT PLANNING, APPROVAL OR CONTROL MECHANISMS THAT SHOULD BE CORRECTED SO THAT FIJTURE CAPITAL INVESTMlENTS ARE MANAGED MORE EFFECTIVELY, R/CP02/413 33 F. EXPLORATION FINDING COSTS THE EXPLORATION DEPARTMENT IS ACCOUNTABLE FOR RESERVE ADDITIONS, THE PROCESS BY WHICH EXPLORATION DEVELOPS ITS PLANNED PROGRAM AND CONTROL BUDGET WAS DESCRIBED EARLIER IN SECTION 4.C(1), THE ACTUAL DRILLING PROGRAM IMPLEMENTED BY EXPLORATION TENDS TO BE INFLUENCED BY EXTERNAL FACTORS AND CAN BE VERY DYNAMIC, DRILLING CAN DIFFER FROM PLANNED TARGETS, LEVELS AND AREAS BECAUSE OF EXPLORATION RESULTS BY OTHER COMPANIES, THE EMERGENCE OF NEW PLAYS, JOINT VENTURE OPPORTUNITIES TO INCREASE OR REDUCE THE COMIPANY'S INTEREST IN PARTICULAR AREAS, CHANGES IN BUSINESS CONDITIONS (OIL AND GAS PRICES, GOVERNMENT FISCAL TERM,S, TECHNOLOGY) AND MANY OTHER POSSIBLE REASONS, BECAUSE OF THE FLEXIBLE NATURE OF EXPLORATION DEPARTMENT PLANNING, IT CAN BE DIFFICULT TO MAINTAIN EFFECTIVE CONTROL OVER ACTTVITTES, OF COURSE, EXPLORATION DOES PARTICIPATE FULLY IN THE CONTROL PROCESSES. PERTAINING TO GENERAL AND ADMINISTRATIVE COSTS AND CAPITAL EXPENDITURES, DRILLING RESULTS ARE CAREFULLY MONITORED AND INTERPRETED IMMEDIATELY UPON COMPLETION OF DRILLING AND TESTING OF INDIVIDUAL WELLS, THIS ALLOWS EXPLORATION TO DETERMINE WHETHER ADDITIONAL WELLS ARE NECESSARY TO DELINEATE A FIELD AND TO PLAN PRODUCTION FACILITIES. IT ALSO ALLOWS DECISIONS TO BE MADE ABOUT POSSIBLE CHANGES IN THE COMPANY'S INTEREST IN A PARTICULAR PLAY, XT MAY ALSO LEAD TO REASSESSMENT OF PREVTOUS INTERPRETATIONS OF RESIJLTS IN OTHER WELLS WITH SIMILAR GEOLOGY OR OTHER CHARACTERISTICS, THE FINDING COSTS OF NEW RESERVES ARE A CRITICAL COMPETITIVE FACTOR FOR OIL AND GAS COMPANIES. THESE COSTS ARE DETERMINED RETROSPECTIVELY BY COMPARING FULLY-APPRECIATED RESERVES FROM EXPLORATION ACTIVITIES TO THE FULL COSTS OF DISCOVERING THESE RESERVES AND ARE USUALLY DEVELOPED SEPARATELY FOR EXPLORATTON DIRECTED TOWARD OIL AND GAS, BECAUSE OF THE MATURE OF EXPLORATION R/CP02/ 413 34 IT IS APPROPRIATE TO CALCULATE FINDING COSTS IN RELATION TO AN OVERALL PROGRAM, SAY EACH YEAR, RATHER THAN IN RELATION TO INDIVIDUAL WELLS. AS A RESULT, FINDING COSTS CAtNNOT BE USED AS A DAY-TO-DAY CONTROL MECHANISM IN EXPLORATION, HOWEVER, IF FINDING COSTS DEVIATE MUCH FROM THE HISTORICAL TREND WITHIN A COMPANY OR ARE SIGNIFICANTLY GREATER OVER A PERIOD OF TIME THAN INDUSTRY AVERAGE RESULTS, IT MAY BE AN INDICATION OF SERIOUS PROBLEMS IN THE PLANNING OR EXECUTION OF THE EXPLORATION PROGRAM, IMPROVEMENTS IN TECHNOLOGY, CHANGES IN THE LAND BASE OR PREDOMINANT PLAYS, BETTER COST CONTROL, IMPROVED INFORMATION ON HISTORICAL EXPLORATION IN THE BASIN OR ANY ONE OF A NUMBER OF OTHER AREAS MAY NEED ATTENTION, IN SUCH A SITUATION, PROLONGED EXPERIENCE OF RELATIVELY HIGH FINDING COSTS WILL RESULT IN SERIOUS COMlPETITIVE DISADVANTAGE FOR THE COMPANY. NOT ONLY WILL THE COST OF SUPPLY BE HIGHER THAN OTHER COMPANIES BUT, SINCE THE AM1OUNT OF MONEY SPENT ON EXPLORATION IS USUALLY BASED ON A TARGET FOR RESERVES REPLACEMENT, THE COMPANY WILL EXPERIENCE A DECREASE IN ITS EXPECTED RESERVE LEVELS, CONVERSELY FINDING COSTS LESS THAN INDUSTRY EXPERIENCE CAN BE A SOURCE OF MAJOR COMPETITIVE ADVANTAGE IF USED TO OBTAIN ADDITIONAL TECHNICAL AND MARKET LEVERAGE, G. WORK PLANNING AND PERFORMANCE MANAGEMENT PETRO-CANADA UTILIZES A SYSTEM IN WHICH INDIVIDUALS AND ORGANIZATIONAL GROUPS PREPARE ANNUAL WORK PLANS WHICH IDENITIFY OBJECTIVES, KEY RESPONSIBILITIES AND SPECIFIC RESULTS FOR THE UPCOMING YEAR, THESE WORK PLANS ARE INTENDED TO BE CONSISTENT WITH THE COMMITMENTS MADE BY THE DIVISION IN THE CONTROL BUDGET. IN OTHER WORDS,. WHEN CASCADED UPWARD TO REPRESENT THE OVERALL ACTIVITIES OF THE DI\VISION, THE INDIVJDUAL WORK PLANS ADD UP TO THE DESIRED RESULT. R/CP02/413 35 THIS IS POSSIBLE BECAUSE LINE MANAGEMENT AT ALL LEVELS HAS PART[CIPATED IN THE PLANNING PROCESS AND IS EXPECTED TO REPORT ITS RESULTS ON A REGULAR BASIS, CLEARLY, THE CONITROL BUDGET CAN BE TRANSLATED INTO THE SPECIFIC RESULTS THAT INDIVIDUALS MUST ACHIEVE IF THE OVERALL PLAN IS TO BE MET, THESE SPECIFIC RESULTS SHOULD BE COMPLETELY CONSISTENT WITH THE INPUTS TO THE BUDGET MADE BY THE ORGANIZATION AND WITH THE RESPONSIBILITIES DELEGATED TO INDIVIDUAL POSITIONS, THIS MANAGEMENT-BY-OBJECTIVES PROCESS, IN WHICH INDIVIDUAL POSITIONS ARE MEASUREP BY THEIR QUANTIFIABLE CONTRIBUTION TO RESULTS, PROVIDES A VERY EFFECTIVE MEANS OF DECENTRALIZING RESPONSIBILITY THROUGHOUT A LARGE ORGANIZATION AND YET MAINTAINING CONTROL OVER THE OVERALL DIRECTION AND AGGREGATED RESULTS OF THE CORPORATION, IT ALSO FACILITATES STEWARDSHIP, THEE DESIGN OF INFORMATION SYSTEMS, INDIVIDUAL PERFORMANCE APPRAISAL AND THE SELECTION OF THE BEST CANDIDATES FOR PROMOTIONAL OPP-JRTUNITIES, 5, CORPORATE FINANCIAL MANAGEMENT MANAGEMENT OF THE CORPORATION'S FINANCIAL AFFAIRS IS A CENTRALIZED FUNCTION PROVIDED IN THE CORPORATE SERVICES DIVISTON. THIS IS APPROPRIATE BECAUSE THE ACTUAL OPERATING RESULTS OF THE OPERATING DIVISIONS AND THE CASH REQUIREMENTS OF THE CORPORATE SERVICES DIVISION HAVE SIGNIFICANT IMPLICATIONS FOR THE OVERALL CORPORATION, THE COMPANY'S SOURCES OF FUNDS - INTERNAL CASH FLOWS AND PROCEEDS FROM EXTERNAL FINANCING - AND USES OF FUNDS - CAPITAL EXPENDITURES, WORKING CAPITAL REQUIREMENTS AND FINANCIAL SERVICING OBLIGATIONS - MUST BE BALANCED ON AN ONGOING BASIS TO ENSURE THAT ADEQUATE CASH IS AVAILABLE AND THAT THE APPROPRIATE CAPITAL STRUCTURE CAN BE PLANNED AND MAINTAINED, THE FINANCIAL MANAGEMENT FUNCTION BEGINS WITH THE ESTABLISHMENT OF FINANCIAL POLICY AND OBJECTIVES, THIS INCLUDES THE DETERMINATION R/CP02/413 36 OF AN APPROPRIATE FINANCIAL STRUCTURE, FINANCIAL PERFORMANCE REQUIREMENTS THAT MEET COMMERCIAL STANDARDS AND ACCEPTABLE FINANCING VEHICLES AND PRACTICES. PETRO-CANADA TARGETS A SPECIFIC PERCENTAGE OF DEBT IN ITS CAPITAL STRUCTURE THAT IS CONSISTENT WITH THE COMPANY'S CASH FLOW, THE BUSINESS AND FINANCIAL RISK ASSOCIATED WITH ITS OPERATIONS AND REASONABLE ACCESS TO AND COST OF EXTERNAL FINANCING. ALTHOUGH PETRO-CANADA, BECAUSE OF ITS GOVERNMENT OWNERSHIP, WOULD BE ABLE TO DRAW UPON CANADA'S SOVEREIGN CREDIT, IT IS FELT THAT THE USE OF PRUDENT COMMERCIAL STANDARDS MAKES GOOD SENSE, ATTAINMENT OF THE CAPITAL STRUCTURE TARGET REQUIRES ACHIEVEMENT OF CERTAIN LEVELS OF FINANCIAL PERFORMANCE, PARTICULLARLY EARNINGS AND CASH FLOW, THESE REQUIREMENTS HELP DETERMINE THE PERFORMANCE EXPECTATIONS THAT UNDERLIE THE STRATEGIC AND OPERATIONAL PLANS DESCRIBED EARLIER, IN THE LIGHT OF THE FINANCIAL PROJECTIONS THAT RESULT, THE FINANCIAL CAPACITY IS SPECIFIED AND EFFECTIVELY ACTS AS A CEILING ON PETRO-CANADA'S ABILITY TO TiAKE CAPITAL EXPENDITURES, ALL OF THESE FACTORS ALLOW A FINANCING PLAN TO BE ESTABLISHED THAT IS BASED ON THE PROJECTED SOURCES AND USES OF FLUNDS, THE DESIRED FINANCIAL STRUCTURE AND USE OF THE MOST ATTRACTIVE FINANCING INSTRUMENTS AND MARKETS, CONSIDERATIONS IN THE LATTER DECISION INCLUDE ACCESS TO CAPITAL, INTEREST RATES, TE1RM, REPAYMENT PROVISIONS AND MANAGEMENT OF FOREIGN CURRENCY RISKS. ONGOING RELATIONSHIPS WITH FINANCIAL INSTITUTIONS ARE MAINTAINED TO FACILITATE THE IMPLEMENTATION OF FINANCING PLANS. FINANCING PLANS OF THIS NATURE FORM PART OF PETRO-CANADA'S STRATEGIC PLAN AND THE CONTROL BUDGET, ARRANGEMENTS ARE ALSO MADE FOR SHORT-TERM BORRO1WING, WHERE NECESSARY, TO COVER CHANGES IN CASH POSITION THAT MAY BE RELATED TO THE TIM1NG OF CASH FLOWlS OR CAPITAL EXPENDITURES, CHANGES IN WORKING CAPITAL REQUIREMENTS OR UNANTICIPATED CHANGES IN BUSINESS CONDITIONS. R/CP02/413 37 IT IS IMPERATIVE THAT THE CORPORATE FINANCIAL FUNCTION BE AWARE OF HOW THE CORPORATION IS PERFORMING, RELATIVE TO THE CONTROL BIJDGET, AND OF THE POSSIBILITY OF SIGNIFICANT CHANGES TO ESTABLISHED TRENDS, THIS WILL PERMIT EFFECTIVE MANAGEMENT OF CASH IN THE SHORT-TERM AND OPTIMUM USE OF LONIG-TERM FINANCIAL INSTRUMENTS. FOR EXAMPLE, IF THE CORPORATION'S CASH POSITION IS EXPECTED TO BE GREATER THAN DEPICTED IN THE CONTROL BUDGET, SURPLUSES CAN BE INVESTED, ALTERNATIVELY, IT MIGHT BE NECESSARY TO CHANGE THE TIMING, SIZE OR NATURE OF A PLANNED LONG-TERM FINANCING ISSUE EITHER BECAUSE OF FINANCIAL MARKET CONDITIONS, CHANGES IN CORPORATE PERFORMANCEXOR THE EMERGENCE OF NEW INVESTMENT OPPORTUNITIES, THE CORPORATE FINANCE FUNCTION CAN ALSO BE HELPFUL IN ANALYZING BUSINESS PERFORMANCE AND IDENTIFYING THE CA!JSES OF VARIANCES FROM BUDGETED LEVELS, IT CAN BE SEEN THAT FINANCIAL MANAGEMENT IS INTEGRALLY LINKED TO THE OPERATIONAL PLANNING AND CONTROL FUNCTIONS DESCRIBED EARLIER, FINANCIAL MANAGEMENT OBJECTIVES HELP DEFINE SOME OF THE FRAMEWORK WITHIN WHICH OPERATIONAL PLANS ARE DEVELOPED, ACTUAL OPERATING RESULTS MAY INFLUENCE SPECIFIC FINANCING REQUIREMENTS. EFFECTIVE CONTROL OF CAPITAL REQUIRES ONGOING KNOWLEDGE OF BUSINESS PERFORMANCE, FINANCIAL ANALYSIS CAN HELP LINE MANAGERS CORRECT DEVIATIONS IN BUSINESS PERFORMANCE, ACCORDINGLY, PLANNING PROCESSES, CONTROL MECHANISMS, INFORMATION SYSTEMS AND PERFORMANCE REVIEW PROCESSES MUST PROVIDE FOR THE APPROPRIATE LINKAGES BETIWEEN THE FINANCE AND THE LINE, 6, SUMMARY PLANNING AND CONTROL FUNCTIONS IN PETRO-CANADA REFLECT THE NATURE OF THE BUSINESS AND THE ORGANIZATIONAL STRUCTURE ADOPTED FOR LINE MANAGEMENT, THERE IS A UNIQUE PLANNING PROCESS WITHIN THE R/CPO2I/413 38 RESOURCES DIVISION, WHICH, WHILE INTEGRATED WITH THE CORPORATE-WIDE PLANS AND PROCESSES, ADDRESSES ELEMENTS THAT ARE PARTICULAR TO THE UPSTREAM BUSINESS. THE PLANNING ROLES OF THE CORPORATE DEPARTMENTS AND OPERATItNG DIVISIONS ARE CLEAR AND WELL UNDERSTOOD, THE CONTROL BUDGET DRIVES ACCOUNTABILITY AND RESPONSIBILITY THROUGHOUT THE ORGANIZATION, IT IS STRUCTURED SO THAT MANAGEMENT CAN UNDERSTAND THE CAUSES OF VARIANCES FROM THE PLAN AND MAKE DECISIONS AS REQUIRED TO IMPROVE FUTURE PERFORMANCE, THERE IS A WELL ESTABLISHED AND UNDERSTOOD AUTHORITY AND APPROVAL PROCESS, THERE ARE LINKAGES BETWEEN THE PLANS AND THE WORK PLANS OF INDIVIDUAL EMPLOYEES. THIS ALLOWS INDIVIDUALS TO UNDERSTAND THEIR SPECIFIC ROLE IN THE ACHIEVEMENT OF THE EXPECTED RESULTS AND THE ABILITY OF MANAGEMENT TO LINK REWARDS WITH RESULTS, THE CORPORATE FINANCE FUNCTION MUST BE INTEGRALLY INVOLVED IN OPERATIONAL PLANNING AND CONTROL PROCESSES BECAUSE OF THE IMPORTANCE OF EFFECTIVELY MANAGING CASH AND EXTERNAL FINANCING INSTRUMENTS, R/CP02/ 413 OPERATIONAL PLANNING AND CONTROL DISCUSSION OUTLINE INTRODUCTION ° PLANNING AND CONTROL PRINCIPLES ° PETRO-CANADA'S HISTORY, SCOPE AND ORGANIZATION ° OPERATIONAL PLANNING AND CONTROL WITHIN PETRO-CANADA PLANNING PROCESSES OPERATIONAL PLANNING CONTROL - WORK PLANNING AND PERFORMANCE MANAGEMENT FINANCIAL MANAGEMENT PLANNING PROCESSES BUSINESS ENVIRONMENT COMlPETITIVE A-CTIVITY STRATEGIC PLANNING MISSION/GOALS/OBJECTIVES PERFORMANCE EXPECTATIONOS RESOURCE ALLOCATION OPERATIONAL PLANNING PROGRAMS/PROJECTS BUDGETS RESULTS CONTROL MECHANISMS AND STEWARDSHIP CONTROL BUDGET - PLANS/PROGRAMS - RESOURCE REQUIREMENTS -PROJECTED FINANCIAL RESULTS ______ _______ REVIEWS IMPLEMENTATION - ADJUSTMENTS TO CORRECT RESULTS TO PLAN - FORWARD-LOOKING - DECENTRALIZED RESPONSIBILITY STEWARDSH I P - ACtUAL RLROURCE REQUIREMENTS k - ~~~- ACTUAL FINANICIAL RESULTS - PROGRAMIPROJECTED MILESTONES - BUSINESS ENVIRONMENT/COMPETITOR -ACTIVITIES/GOVERNMENT POLICY *1 WORK PLANNING AND PERFORMANCE MANAGEMENT OPERATIONAL PLANS WORK PLANS PERFORMANCE MANAGEMENT INFORMATION SYSTEMS FOR PLANNING AtID CONTROL PLANS AND BUDGETS DATA BUSINESS ADMINISTRATION . CONTROL , COMPUTER ACTIVITIES MEASJRES SYSTEMS AND A _ MANAGEMENT \___/___.___°_ AUTOMATED REPORTS RESULTS DECISION- A _____ _ SUPPORT APPI TCATIONS ° NETWORKED REPORTING PERSONAL AND COMIPUTERS STEWARDSHIP P A L. ORGANIZATION FOR PLANNING AN) CONTROL o LINE MANAGEMENT STRUCTURE ° BUSINESS REQUIREMENTS o DECENTRALIZATION OF RESPONSIBILITY o PLANNING AND CONTROL STRUCTURE o CENTRALIZED FUNCTIONS - STRATEGIC PLANNING - ACCOUNTING AND PERFORMANCE ANALYSIS - INFORMATION SYSTEMS - FINANCIAL MANAGEMENT o DECENTRALIZED FUNCTIONS - OPERATIONAL PLANNING - PERFORMANCE MANAGEMENT OPERATIONAL PLANNING AND CONTROL HISTORY OF PETRO-CANADA PETRO-CANADA WAS CREATED BY GOVERNMENT OF CQNADA IN 1975 - IS A CROWN CORPORATION OWNED BY GOVERNMENT GROWN THROUGH CAPITAL INVESTMENT AND ACQUISITION - 1976 ATLANTIC RICHFIELD - UPSTREAM - 1978 PACIFIC PETROLEUM - UPSTREAM/DOWNSTREAM - 1981 PETROFINA CANADA UPSTREAM/DOWNSTREAM - 1983 BP REFINING AND - DOWINSTREAM MARKETING CANADA - 1985 GULF CANADA (SOME REFINING - DOWNSTREAM AND MARKETING ASSETS) INTERNAL CAPITAL INVESTMENTS HAVE BEEN ABOUT $1000 MILLION/YEAR PRIOR TO 1986 PETRO-CANADA'S RELATIONSHIP WITH THE GOVERNMENT OF CANADA -CORPORATE PLAN_ CAPITAL BUDGET I,___-_-__ APPROVALS GOVERNMENIT PETRO-CANADA OF < ~OWNERSIlP CANADA QUARTERLY OPERATING REPORTS ..._ __ . ANNlUAL _ REPORT GENERAL PUBLIC PETRO-CANADA'S SCOPE OF OPERATIONS REVENUES ($MM CDN) 5172 TOTAL ASSETS ($MM) 8139 CAPITAL EXPENDITURES ($MM) 529 ACQUISITION EXPENDITURE ($MM) 301 INTERNALLY GENERATED CASH ($MM) 800 NUMBER OF EMPLOYEES 7740 PETRO-CANADA 'S ORGANIZATION STRUCTURE BOARD OF DIRECTORS j _~~~~~~~~~~~~~~~~ PETRO-CANADA PETRO-CANADA I NTERNAT IONAL _ ASS I STANCE CORPORATION PETRO-CANADA INC. PETRO-CANADA PETRO-CANADA RESOURCES PRODUCTS RESOURCES DIVISION'S SCOPE OF OPERATIONS CANADIAN EXPLORATION PROVED OIL ANJD GAS RESERVEO - 1986 ,4 LANDHOLDINGS - 1986 i o0 (flILLION TONNES) (0ILLION NET HECTARES) 0 ~~~~~~~~~~~~~~~~~~~ja 6-a-( ;4 80~ ~ ~ ~~i . Nir,S/zR .?50 -- °I C C / , /2s) 8 12 {as~~~~k,, S7X8A COA'AA DA 6 ,|gf 4/tG /o00 : IiL~~ - L', f -' - Pcz1 G18@(1 sso 7'eaco 7sso a r OIL AND GAS PRODUCTION - 1986 (THOUSAND TONNES PER DAY) 1<~~~~~~~~ _ A/4JA rll-A l ("' I 0; /, tv4r ,r'0 tcr g// 7*D2h,_ , PC I 7 -- ORGANIZATION OF THE RESOURCES DIVISION PRESIDENT AND CHIEF OPERATING OFFICER DIVISION PRES IDENT EXPLORATION PRODUCTION MARKETING BUSINESS ANALYSS CANADIAN JOINT | SUPPORT EXPLORATIN VENTURES GAS SERVICES ~EPLdNAt1ON NATURAL 6iAS BUSINESS SERVICES AND LIIJJDS ANALYSIS LAND1 OPERATIONS J INTERNATIONAL EXPLORATIO DISTR ICT MANAGERS PLANNING HIERARCHY IN THE RESOlJRCES DIVISION STRATEGIC PLAN - OPERATIONAL PLAN CONTROL BUDGET PLANNING RESPONSIBILITIES CORPORATE SERVICES DIVISION RESOUiRCES- DIVISION EXTERNAL BUSINESS CONDITIONS ° FINANCIAL STRUCTURE 0 OPERATIONAL PLAN/CONTROL BUDGET ° FINANCIAL CAPACITY 0 PROGRAMS AND PROJECTS ° RESOURCE ALLOCATIONS CONTROLS - OPERATIONAL o PERFORMANCE EXPECTATIONS MFINANCIAL -MILESTONES O POLICY - SAFETY On.ANIZATION - ENVIRONMENT - EMPLOYEE RELATIONS - OTHER CONTROLS PREPARATION OF RESOURCES DIVISION OPERATIONAL PLAN AND CONTROL BUDGET ° OPERATIONAL PlIAN PROVIDES DETAILED THREE-YEAR OUTLOOK TOP-DOWIN APPROACH BUT WIDESPREAD INPUT FROM,LINE MANAGEMENT FINANCTAL RESULTS, PLANS AND PROGRAMS o CONTROL BUDGET IS DERIVED FROM OPERATIONAL PlIAN BOTTOM-UP APPROACH AGGREGATE REVENUES, COSTS AND MARGINS ON PROPERTY-BY-PROPERTY BASIS e BUSINESS ANALYSIS COORDINATES PROCESS - SPECIFIES PLANNING SCHEDULE AND INFORMATION REQUI REMENTS - COMPUTERIZED PLANNING SYSTEMS UTILIZED - MATRIX ORGANIZATION FOR FIELD SUPPORT AND CENTRALIZED ANALYSIS - CONSOLIDATES FUNCTIONAL RESULTS TO LEVEL OF OVERALL BUSINESS DEVELOPMENT OF THE EXPLORATION CONTROL BIJDGET PLANS/PROGRAMS - LAND - GEOPHYSICAL/ , GEOLOGICAL PERFORMANCE DRILLING EXPECTATIONS - RESERVE RESiJI TS ADDITIONS RESERVE ADDTTITNS FINDING COSTS RESOURCE REQUIREMENTS ; | _ CAPITAL PEOPLE - TECHNOL OGY A DEVELOPMENT OF THE CONTROL BUDGET FOR PRODUCTION PRODUCT I ON IDISTRICT MANAGER (3 JFVELD SUPERINTENDENT (1) FIELD SUPERVISOR (_5I |F JEI-D SIlPERVISOREnN (?.10 ORGANIZATION OF THE RESOURCES DIVISION PRESIDENT AND CHIEF OPERATING OFFICER EXLOI PVISION C A JPRES I DENT S EXPLORATION PRODUCTIEON NARKEAL G BUSINESS LAND ___ANALYSIS CANADIAN JO NT NAALRAL SUPPORT EXPLORATION VENTURES GAS SERVICES EXPLORATION 'RING NATURAL GAS NAUS ESS SERVI CES AND L Inu ns A NALYSIS l AND_ . INTRNATIONAL| . I_I EXPLORATION1 DITRC | MANAG,ERS| OPERATIONAL PLANNING AND CONTROI.. CURRENT MONT)] YEAR-TO-DATE TOTAL YEAR CONTROL CONTROL LATEST CONTROL ACTUAL BiJDGET ACTUAL 9BUDGET ESTIiATE BUDrET OPERATING MARGINS CONVENTIONAL CRUDE OIL tNATURAL GAS NATURAL GAS LIOUIDS SULPHUR SYNCRUDE WIOLF LAKE INTERNATIONAL OTHER TOTAL OPERATING MARGIN GENERAL AND ADMINISTRATIVE EXPENSE FUNDS FLOW FROM OPERATIONS DEPRECIATION AND DEPLETION AND AMORTIZATION EARNINGS BEFORE INCOME TAXES INCOME TAXES NET EARNINGS CAPITAL EXPENDITIJRE CONTROLS CAPITAL INVESTMENTS CURRENT MIONTH YEAR-TO-DATE TOTAL YEAR CONTROL CONTROL CONTROL ACTUAL BUDGET ACTUAL BUDGET , ESTIMATE BUDGET EXPLORAT ION PRODUCTION MARKETING CAPITAL EXPENDITURE PLANNING AND CONTROLS IDENTIFICATION AND ANALYSIS OF INVESTMENT OPPORTUNITIES ° . APPROVAL OF INVESTMENT PROPOSAL ° PROJECT IMPLEMENTATION ° POST-AUDIT OF INVESTMENT SUCCESS APPROVAL OF CAPITAL EXPENDITURES CAPITAL APPROVAL EXPENDITURE LIMITS AUTHORIZATION LIMITS BOARD OF OVER $5,000,000 DIRECTORS CHAIRMAN AND UP TO $5,000,000 CHIEF EXECIJTIVE NO LIMIT OFFICER UP TO $4,000,000 PRESIDENT AND tiO LMtl!T CHIEF OPERAT ING OFFICER UP TO $3,000,000 DIVISIONAL NO LIMIT PRES IDENlT DEPARTMENT VICE PRESIDENT MANAGER CONTROL OF EXPLORATION ° BUDGET AND PROGRAM BASED ON REQUIREMENTS FOR RESERVE REPLACEMENT - IMPLEMENTATION IS DYNAMIC ° COST AND CAPITAL EXPENDITURE CONTROLS. ° INTERPRETATION OF INDIVIDUAL WELLS ° FINDING COSTS ARE A CRITICAL COMPETITIVE FACTOR - FULLY APPRECIATED RESERVES - PROGRAM RESULTS - SEPARATE TARGETED 7LL AND GAS RESULTS FINDING COST INCREASES FROM HISTORICAL TREND OR INDUSTRY AVERAGES SHOULD LEAD TO CHANGES IN EXPLORATION PRACTICES WORK PLANNING AND PERFORMANCE MANAGEMENT INDIVIDUALS AND ORGANIZATIONAL GROUPS PREPARE ANNUAL WORK PLANS OBJECTIVES KEY RESPONSIBILITIES SPECIFIC RESULTS ° REPRESENTS DECENTRALIZATION OF RESPONSIBTIITY FOR COnTROL- BUDGET COMM!TrIENTS O PERMITS MANAGEMENT OF PERFORMANCE QIJANTITATIVE MEASUREMENT OF RESUJLTS REGULAR REVIEWS INDIVIDUAL PERFORMANCE APPRAISAL OVERALL BUSINESS RESULTS