SAP for Commodity Trading Optimize Commodity Pricing GET STARTED and Better Manage Risk Table of Contents

SAP for commodity trading Optimize commodity pricing GET STARTED and better manage risk Table of contents

Executive summary Table of contents Commodity Management enhancements Executive summary Potential Commodity Management benefits Commodity Management Moving to SAP Commodity Management: Interim states enhancements

Potential Commodity Different migration paths for different companies Management benefits

Looking ahead Moving to SAP Commodity Management: Interim states

About Deloitte Different migration paths for different companies

Looking ahead

About Deloitte

2 | SAP for commodity trading Executive summary

For commodity-driven companies, today’s market environment of narrow margins and volatility uncertainty makes the trading function more important than ever. Despite the Table of contents

increasing relevance of trading, a fully integrated Commodity Management solution Executive summary that can meet both the needs of traders and the enterprise has been elusive. Commodity Management enhancements Many companies use a niche commodity trading and In this report, we’ll take a closer look at SAP Commodity risk management (CTRM) system—or a collection of Management, including: Potential Commodity spreadsheets—to support trading. But the lack of • Enhancements new for SAP S/4HANA Management benefits integration between a company’s CTRM system and its • The high-level benefits companies can realize through Moving to SAP Commodity enterprise resource planning (ERP) system has long been these enhancements Management: Interim states an issue, leading to challenges in inventory management, • Making the move to SAP Commodity Management risk analysis, and tradebook to financial reconciliation. • Different migration paths for different companies Different migration paths for different companies With SAP S/4HANA, things have changed. The system’s new We hope the information in this report helps your company Commodity Management enhancements enable companies envision what’s possible as you consider your approach to Looking ahead to combine their CTRM and ERP functions to better manage integrating Commodity Management in your SAP S/4HANA their commodity trading business. This integration has journey. About Deloitte the potential to deliver significant benefits in the form of enhanced visibility, analysis, insight, and decision making.

3 | SAP for commodity trading Commodity Management enhancements

Traditionally, SAP has been a strong player in the trading organization back office, but lack of front and middle-office functionality kept it from full adoption as the Table of contents

trading solution for many organizations. With SAP S/4HANA, things have changed. Executive summary

The new Commodity Management delivers • Run advanced risk simulations and analysis Commodity Management enhancements enhancements that consolidate the front-, middle-, • Make informed commercial decisions based on and back-office functions onto a single solution. integrated dashboards that can be configured to specific Potential Commodity These capabilities complement traditional SAP strengths organizational needs Management benefits by adding: Credit risk management with the capability to: Moving to SAP Commodity Improved deal capture through Fiori—the new SAP • Provide an integrated view of credit exposures that Management: Interim states user interface—including: integrates forward position credit exposures with current • A streamlined screen for trade entry that’s configurable by accounts receivable Different migration paths for different companies the user and allows for flexible user entry • Manage credit exposure through efficient cash application • The ability to capture both physical and financial trades in as counterparties pay invoices Looking ahead one place • Integrate with treasury for a broad view of credit exposure • Complex formula pricing that can be created on the fly versus cash and collateral postings About Deloitte • Integration with common public exchanges These additions can potentially enable companies to take Market risk management that allows users to: full advantage of the logistics and back-office functionality • Model complex physical and financial forward curves that was already in place in the SAP system—creating an • Decompose both physical and financial forward positions integrated solution that can support today’s dynamic supply into discrete market exposures and trading organization (see figure 1).

4 | SAP for commodity trading Commodity Management enhancements (continued)

Figure 1: Commodity Management functionality introduced in SAP S/4 HANA

Table of contents

Executive summary

Commodity Management Deal enhancements Logistics Logistics Capture Deal Capture Potential Commodity Management benefits

Market Market Moving to SAP Commodity Actualization Actualization Risk Risk Management: Interim states

Different migration paths for different companies Credit Risk Settlement Credit Settlement Risk Looking ahead

Accounting Accounting About Deloitte

SAP ECC S/4HANA

5 | SAP for commodity trading Potential Commodity Management benefits

SAP S/4HANA gives companies the opportunity to effectively integrate trading and risk data with data across the enterprise, enabling new opportunities for Table of contents

analytics and insight development. Executive summary

As companies plan their move to the SAP S/4HANA • A centralized, scalable enterprise platform that’s Commodity Management enhancements platform, they should migrate supply and trading functions “futureproofed” to accommodate emerging capabilities, as a part of their overall enterprise roadmap. Some benefits such as artificial intelligence, predictive analytics, Potential Commodity of making this move include: robotic process automation, and blockchain Management benefits • True end-to-end visibility of the hydrocarbon value • Simplified infrastructure and system maintenance, chain, including: enabling the business to focus on value added Moving to SAP Commodity Management: Interim states --Transparency of inventories and their associated activities costs, market risks and opportunities created by an • Common master data that eliminates what formerly Different migration paths organization’s network of assets (e.g., refineries, pipeline took hours of work to sync and reconcile across trading for different companies capacity, terminals, storage) and forward transactions and SAP systems • A digital data core of enterprise commodity transactions, Looking ahead which enables high-quality analysis and insight generation • A “single source of truth” for trading data, reducing About Deloitte tradebook to financial reconciliation and providing a clear view of commercial performance

6 | SAP for commodity trading Potential Commodity Management benefits (continued)

SAP is more than just a replacement for a traditional CTRM The SAP digital boardroom system. For example, an embedded CTRM capability within To enable this powerful data analysis, SAP S/4HANA Table of contents a company’s enterprise technology platform provides the introduces the digital boardroom solution, which is a opportunity for analytics that can: flexible, cloud-based data analysis tool fully integrated Executive summary • Highlight the impact of market exposures on financial with SAP and its HANA database. results in near real time Commodity Management • Use market, trading, and asset data for on-demand Today’s trading organizations must respond immediately enhancements hydrocarbon value chain optimization to market conditions, which is why the SAP data in the Potential Commodity • Integrate trading results and forecasts into C-suite digital boardroom is available in near real time. Further, Management benefits enterprise reporting it has the ability to integrate non-SAP application data, extending the opportunity for analysis even further. Moving to SAP Commodity This new capability also introduces enterprise data into Management: Interim states supply and trading, providing analytic opportunities to: Users can configure this digital boardroom to visualize and • Use asset and operations data to predict market analyze trading data as well as key performance indicators Different migration paths constraints (KPIs). Those KPIs can include base information, such as for different companies • Update trading positions with near real-time operations market exposures, inventory, and profit and loss (P&L), as Looking ahead forecasts well as advanced metrics, such as P&L explained and at-risk

• Integrate credit and cash positions into deal analysis measures (e.g., cash flow at risk) (see figure 2). About Deloitte The bottom line? Analytics in the core of SAP enable companies to bring trading data into the enterprise and introduce enterprise data to supply and trading. And that can unlock exponential opportunities for insight and decision making.

7 | SAP for commodity trading Moving to SAP Commodity Management: Interim states (continued)

Figure 2: Digital Boardroom in SAP Analytics Cloud

Table of contents

Executive summary

Commodity Management enhancements

Potential Commodity Management benefits

Moving to SAP Commodity Management: Interim states

Different migration paths for different companies

Looking ahead

About Deloitte

8 | SAP for commodity trading Moving to SAP Commodity Management: Interim states

Because the trading business is core to business operations, the move to commodity management should be an evolutionary journey in lockstep with the Table of contents

larger enterprise road map. Executive summary

Interim production states can be used to bridge the Of course, each organization will have its own initial Commodity Management enhancements transition of trading operations to SAP as the organization’s state and this architecture should simply serve as a overall enterprise SAP solution matures. logical “starting point” for considering the interim states Potential Commodity that follow. Management benefits Let’s take a look at these interim states, keeping in mind that companies may use all, some, or none of them Main elements Moving to SAP Commodity depending on their specific circumstances and SAP • Legacy CTRM with accounts receivable/accounts payable/ Management: Interim states S/4HANA roadmap. general ledger interface to enable financial accounting • Applied cash interfaced from SAP to relieve credit in CTRM Different migration paths for different companies Initial state: Legacy CTRM with financial • Limited ability to reconcile SAP financial data with trading accounting integration and risk data in CTRM Looking ahead Snapshot Implications About Deloitte For this migration path, we assume that the organization • SAP holds only financial data begins with an existing CTRM application that interfaces • Legacy CTRM holds all transaction, pricing, volumetric, with SAP ERP Central Component (ECC) for accounts and risk data receivable, accounts payable, and general ledger • Counterparty credit risk for hydrocarbon customer in management (see figure 3). CTRM while other credit risk in SAP • Limited ability to integrate trading and financial data on a timely basis

9 | SAP for commodity trading Moving to SAP Commodity Management: Interim states (continued)

Figure 3: Application Architecture: Initial State

Table of contents

Legacy SAP Executive summary

Commodity Management Legacy CTRM(s) enhancements

Potential Commodity Deal Capture/ Risk Valuation & Scheduling/ AR/AP/GL Management benefits Pricing Analytics Logistics

Moving to SAP Commodity Applied Cash Management: Interim states Inventory Invoicing AR/AP/GL Management Different migration paths for different companies

Looking ahead Tickets/Actuals Market Prices Schedules/Nominations About Deloitte Financial Trades

External Scheduling Tools Market Prices Trading Exchanges (e.g. T4, Geometrix)

10 | SAP for commodity trading Moving to SAP Commodity Management: Interim states (continued)

Interim state 1: Add supply and trading business impact as the transition occurs. As more functionality migrates, reporting becomes richer and closer digital boardroom Table of contents to near real time. Snapshot Executive summary Because this tool can effectively incorporate SAP data with Figure 4 outlines the conceptual application landscape with the inclusion of the supply and trading digital boardroom. external system data, we recommend that organizations Commodity Management consider rolling out the digital boardroom as the first step on Main elements enhancements their journey to full-scale use of SAP Commodity Management. • Implement supply and trading digital boardroom for key Potential Commodity Potential benefits trading measures and metrics Management benefits Adding the supply and trading digital boardroom can provide • Efficiently integrate trading data and SAP financials data two main benefits to companies: while still using legacy applications to improve analysis Moving to SAP Commodity Management: Interim states • Enables analysis of commercial activities through and reconciliation • SAP data is near real time, while data from legacy CTRM is a broad data set. By harnessing the power of the Different migration paths HANA database, the digital boardroom provides the dependent on batch timing for different companies ability to efficiently combine and analyze the data from Implications Looking ahead legacy trading systems as well as SAP. It also allows the • No change in end-user system use organization to combine this data with enterprise SAP • Both commercial and back-office users use common data About Deloitte data, unlocking new analytics opportunities. As a result, via supply and trading digital boardroom analytics to companies can answer questions like, “How will a refinery analyze the business turnaround schedule adjustment affect my crude demand • Significant improvement in reporting capability across SAP and open positions?” Or “How will today’s trading results and legacy CTRM, including tradebook to financial affect the upcoming quarter’s financial results?” variance explanation • Establishes a common user interface as the underpinning technology migrates to SAP S/4HANA. Adding the digital boardroom as a first step smooths

11 | SAP for commodity trading Moving to SAP Commodity Management: Interim states (continued)

Figure 4: Application Architecture: Interim State 1 (Digital Boardroom)

Table of contents Supply & Trading Digital Boardroom Executive summary SAP S/4HANA Trading Inventory Mark to P&L Commodity Management Positions Levels Market enhancements

Legacy CTRM(s) Potential Commodity Management benefits

Deal Capture/ Risk Valuation & Scheduling/ AR/AP/GL Moving to SAP Commodity Pricing Analytics Logistics Management: Interim states

Applied Cash Different migration paths Inventory Invoicing AR/AP/GL for different companies Management

Looking ahead

About Deloitte Tickets/Actuals Market Prices Schedules/Nominations Financial Trades

External Scheduling Tools Market Prices Trading Exchanges (e.g. T4, Geometrix)

12 | SAP for commodity trading Moving to SAP Commodity Management: Interim states (continued)

Interim state 2: Move scheduling/logistics and inventory management Table of contents

Snapshot Executive summary In this interim state, the management of the physical barrel moves into the SAP application, improving the linkage of financial information with the underlying Commodity Management physical flow. enhancements

Potential benefits Potential Commodity Reporting through the supply and trading digital boardroom will now have near Management benefits real-time access to the latest quantity data in SAP (see figure 5). Moving to SAP Commodity Main elements Management: Interim states • Move scheduling/logistics and inventory management to SAP using trader scheduler workbench (TSW) Different migration paths for different companies • Temporary integrations for deal volume flow to SAP, transaction scheduling

actuals, and aggregate inventory back to CTRM to maintain risk reporting Looking ahead • Supply and trading digital boardroom reporting now includes near real-time volumetric data About Deloitte

Implications • SAP is master application for volumetric (e.g., movement/ inventory) and financial data • Legacy CTRM retains master transaction, pricing, and risk data

13 | SAP for commodity trading Moving to SAP Commodity Management: Interim states (continued)

Figure 5: Application Architecture: Interim State 2 (Scheduling, Logistics, Inventory Management)

Table of contents Supply & Trading Digital Boardroom Executive summary SAP S/4HANA Trading Mark to P&L Commodity Management Positions Market enhancements

Legacy CTRM(s) Deal Volumes to Schedule Potential Commodity Management benefits

Deal Capture/ Risk Valuation & Schedule Actuals Scheduling/ Inventory Moving to SAP Commodity Pricing Analytics Logistics Management Management: Interim states Aggregate Inventory Different migration paths Invoicing AR/AP/GL AR/AP/GL for different companies

Applied Cash Looking ahead

About Deloitte Schedules/ Tickets/ Market Prices Nominations Actuals Financial Trades

External Scheduling Tools Market Prices Trading Exchanges (e.g. T4, Geometrix)

14 | SAP for commodity trading Moving to SAP Commodity Management: Interim states (continued)

Interim state 3: Move deal capture/pricing and invoicing

Snapshot Table of contents In this interim state, the financial and physical market transactions and associated Executive summary pricing join the volumetric data in SAP.

Potential benefits Commodity Management enhancements Companies gain more of the value chain picture in SAP—as well as increased near real-time reporting in the supply and trading digital boardroom (see figure 6). Potential Commodity Management benefits Main elements

• Move deal capture/pricing and invoicing to SAP using Commodity Management Moving to SAP Commodity module Management: Interim states • Temporary integration of aggregate risk position for risk measurement and valuation • Supply and trading digital boardroom reporting now includes near real-time Different migration paths for different companies transaction and pricing data

Implications Looking ahead • SAP is now the master application for transaction, pricing, volumetric, and About Deloitte financial data • Legacy CTRM retains master for risk data • Lightweight, bolt-on risk tools may also be used at this point in lieu of the legacy CTRM risk module to enable early retirement of legacy CTRM

15 | SAP for commodity trading Moving to SAP Commodity Management: Interim states (continued)

Figure 6: Application Architecture: Interim State 3 (Deal Capture, Pricing, Invoicing)

Table of contents Supply & Trading Digital Boardroom Executive summary SAP S/4HANA Mark to P&L Commodity Management Market enhancements Deal Capture/ Pricing Legacy CTRM(s) Aggregate Risk Positions Potential Commodity Management benefits

Risk Valuation & Scheduling/ Inventory Moving to SAP Commodity Analytics Logistics Management Management: Interim states

Different migration paths Scheduling/ AR/AP/GL for different companies Logistics

Applied Cash Looking ahead

About Deloitte Schedules/ Tickets/ Market Prices Nominations Actuals Financial Trades

External Scheduling Tools Market Prices Trading Exchanges (e.g. T4, Geometrix)

16 | SAP for commodity trading Moving to SAP Commodity Management: Interim states (continued)

Final state: Full trading operations in SAP

Snapshot Table of contents In the final state, the risk management operations of the legacy CTRM move Executive summary to SAP. At this point, all legacy CTRM functions have migrated to SAP and the commodity life cycle is now fully embedded in the SAP application (see figure 7). Commodity Management enhancements Potential benefits

From a reporting standpoint, this means that supply and trading digital boardroom Potential Commodity information is near real time. It also offers the potential to further expand analytics Management benefits by connecting trading and risk data with other enterprise functions, such as finance, planning, and asset management. Moving to SAP Commodity Management: Interim states Main elements • Risk management functions moved to SAP using their risk management module Different migration paths for different companies • Legacy energy trade and risk management (ETRM) is no longer required

• Supply and trading digital boardroom reporting now includes transaction, pricing, Looking ahead volumetric, risk, and financial data in near real time About Deloitte Implications • Fully integrated trading operations in SAP • Legacy CTRM can be retired

17 | SAP for commodity trading Moving to SAP Commodity Management: Interim states (continued)

Figure 7: Application Architecture: Final State

Table of contents

Supply & Trading Digital Boardroom Executive summary SAP S/4HANA Commodity Management Deal Capture/ Risk Valuation & enhancements Pricing Analytics Legacy CTRM(s) Potential Commodity Management benefits

Scheduling/ Inventory Logistics Management Moving to SAP Commodity RETIRED Management: Interim states Scheduling/ Different migration paths AR/AP/GL Logistics for different companies

Looking ahead

About Deloitte Schedules/ Tickets/ Market Prices Nominations Actuals Financial Trades

External Scheduling Tools Market Prices Trading Exchanges (e.g. T4, Geometrix)

18 | SAP for commodity trading Different migration paths for different companies

While each company is different, we have defined high-level migration path guidelines for three types of organizations. These guidelines can be used to help you understand Table of contents

how to inject the Commodity Management capabilities into your road map to enable Executive summary you to reap the benefits as quickly as possible. Commodity Management enhancements 1. Companies with no CTRM system • The second tranche should be those commodities that Companies without a CTRM system have the opportunity already use an SAP supply chain module. The effort to Potential Commodity to perform a greenfield implementation of Commodity expand this capability into full trading and risk abilities Management benefits Management. Benefits can typically be realized quickly by is minimal. Moving to SAP Commodity integrating this functionality along with physical supply • The third tranche should be those commodities that are Management: Interim states chain modules. in an existing CTRM system. Different migration paths 2. Companies with a fragmented or partial 3. Companies with an integrated CTRM system for different companies CTRM system For these companies, the migration should typically take These organizations will need to determine an approach place from the back office forward. Starting with the Looking ahead that balances benefits and business impact. back office allows the organization to gradually assume components of an integrated commodity value chain at a About Deloitte • The first tranche of migrated activities should be the speed that complements business activities. functions/commodity exposures not currently captured in an existing CTRM system. These can provide direct As part of this migration, companies can use interim benefit and minimal impact to users. operational states to align with the speed of the overall SAP S/4HANA migration and business change adoption.

19 | SAP for commodity trading Looking ahead

As companies plan their journey to SAP S/4HANA, they must consider the role Commodity Management will play Table of contents in their future business. For the first time, organizations Executive summary can fully embed critical trading and risk functions within Commodity Management their core enterprise solution, linking the front, middle, enhancements and back office. Potential Commodity Management benefits An embedded CTRM capability within an enterprise technology platform creates the potential for operational efficiencies, such as automation and straight- Moving to SAP Commodity Management: Interim states through processing. What’s more, this integration can unlock exponential opportunity for analytics and insight generation—giving companies a competitive Different migration paths edge, now and for the future. for different companies

Looking ahead

About Deloitte

20 | SAP for commodity trading About Deloitte

We combine our deep trading and risk management experience with the Commodity Management Table of contents

capabilities of SAP S/4HANA to help clients realize Executive summary new business opportunities. Commodity Management enhancements • Deloitte has provided Commodity Trading and Risk Management (CTRM) services since 1996, executing engagements from trading strategy to system Potential Commodity design and implementation. Management benefits • In that time, we have completed more than 200 CTRM-related projects Moving to SAP Commodity across a broad range of industries. Management: Interim states • Further, the Deloitte global SAP capability spans more than 20 global delivery centers and has completed more than 200 SAP S/4HANA implementations. Different migration paths • We serve 97 percent of the Fortune 500 oil and gas companies, covering for different companies integrated oil and gas, exploration and production (E&P), refining, and Looking ahead fuel sales and marketing companies.

About Deloitte

21 | SAP for commodity trading Contacts

What can Commodity Management do for your business? Let’s talk.

Table of contents Tom Lochbichler Glenn Badgley Trent Gall Sam Stuckey Principal Partner Partner Senior manager Executive summary Deloitte & Touche LLP Deloitte LLP Deloitte LLP Deloitte & Touche LLP

[email protected] [email protected] [email protected] [email protected] Commodity Management +1 713 982 4330 +1 403 619 9453 +1 403 830 9016 +1 317 656 4344 enhancements

Rahul Chhatwal Jason Sokoloff Potential Commodity Management benefits Senior manager Senior manager

Deloitte Consulting LLP Deloitte Consulting LLP Moving to SAP Commodity [email protected] [email protected] Management: Interim states +1 215 789 6366 +1 415 783 5979 Different migration paths for different companies

Looking ahead

About Deloitte

22 | SAP for commodity trading Table of contents

Executive summary

Commodity Management enhancements

Potential Commodity Management benefits

Moving to SAP Commodity Management: Interim states

Different migration paths for different companies

Looking ahead This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or About Deloitte services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor.

Deloitte shall not be responsible for any loss sustained by any person who relies on this publication.

As used in this document, “Deloitte” means Deloitte & Touche LLP, a subsidiary of Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of our legal structure. Certain services may not be available to attest clients under the rules and regulations of public accounting.