Oil Accounting

Oil Accounting&

Gross Refinery Margin

Presented By:Prashant Gaurav (49)Medhavi Mayur Pandey (50)Dev Datta (51)

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Oil Accounting• In case of Oil Companies inventory

accounts for about 30-40% of the total assets of the company.

• Inventories are defined as assets held for sale in the ordinary course of business or in the process of production for such sale or in the form of materials or supplies to be consumed in the production process or in rendering of services. 2

Classification of inventoriesa) Raw Materialsb) Intermediate Stock or Work–In–Progress;c) Finished Good Stock

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Accounting for Inventories• The objective of accounting for goods in

inventories is the matching of appropriate costs against revenues in order that there may be a proper determination of realized income.

• The cost of inventory is calculated on First–In–First–Out (FIFO) basis, Average cost basis, LIFO basis and Specific Identification basis. 5

Valuation Criterion

A. Raw Material : Crude Oil– Crude oil is valued at ‘Actual Cost’ or

‘Replacement Cost’ whichever is lower.

– The term ‘Replacement Cost’ of crude refers to the prevailing price of same type of crude in the market at the time of finalization of annual accounts, in order to determine the change in the cost of crude with respect to the balance sheet date.

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– The term ‘Net Realizable Value’ refers to the estimated realization from the sale of products produced from the crude oil in stock as at the valuation date.

The Actual Cost comprises the following:– In case of indigenous crude oil, the total costs

involved in bringing the crude oil to their present location or condition. It shall include all payments made for purchase of crude oil to oil supplying companies, transportation costs if any, cess, ocean freight, insurance, etc. in case of offshore crude oil; and

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– In case of imported crude oil, shall include all costs incurred in the course of import of crude oil up to the point of storage or processing which shall comprise FOB, Marine freight, Marine Insurance, Wharfage and other landing charges, Customs Duty, Transportation costs and Entry Tax if applicable.

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First In First Out Basis• ABC Oil Company makes the following purchases:

1. Crude Oil on 2/2/07 for $10

2. Crude Oil on 2/15/07 for $15

3. Crude Oil on 2/25/07 for $20• ABC Oil Company sells petroleum products on

2/28/07 for $90. What would be the balance of ending inventory and cost of goods sold for the month ended Feb. 07, assuming the company used the FIFO cost flow assumptions? Assume a Tax rate of 30%. 10

“First-In-First-Out (FIFO)”

Purchase on 2/2/07 for $10

Purchase on 2/15/07 for $15

Purchase on 2/25/07for $20

ABC Oil CompanyIncome StatementFor the Month of Feb. 2007 Sales $ 90 Cost of goods sold 0 Gross profit 90 Expenses: Administrative 14 Selling 12 Interest 7 Total expenses 33 Income before tax 57 Taxes 17 Net Income $ 40

Inventory

Balance = $ 45

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Purchase on 2/2/07 for $10

Purchase on 2/15/07 for $15

Purchase on 2/25/07 for $20

Inventory Balance = $ 35

ABC Oil CompanyIncome StatementFor the Month of Feb. 2007 Sales $ 90 Cost of goods sold 10 Gross profit 80 Expenses: Administrative 14 Selling 12 Interest 7 Total expenses 33 Income before tax 47 Taxes 14 Net Income $ 33

First In First Out Basis

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Valuation CriterionB. Intermediate Stock

– The valuation of such goods is done as follows:• ‘Actual Cost plus Conversion costs’ or ‘Net

Realizable Value’ whichever is lower.– The actual cost of such stock may, thus, be

calculated by arriving at the value of Equivalent Crude used in such stock after considering the proportion of relevant losses.

– Similarly, the proportion of all relevant conversion costs involved is added to the total cost. 13

Valuation CriterionC. Finished Goods

– In the case of Refining Companies, the Refinery Transfer Price (RTP) is determined under the concept of Import Parity Price (IPP). Such a price is based on the landed cost of the product at the nearest refinery port (plus transportation cost, if any) for the import of such product. This adjusted price is referred to as ‘Ex-Refinery Price’ and is inclusive of refining margin.

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Gross Refinery Margin• GRM is the difference between crude oil

price and total value of petroleum products produced by the refinery.

• Suppose a refinery has purchased crude at $ 140 per barrel and have realized $ 155 barrel on sale of petrol, diesel, ATF, Kerosene, LPG and Naphtha etc., hence, in this case GRM is at $ 15 per barrel.

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Factors Affecting GRM• Cost of sourcing crude oil• Demand – Supply mismatch of the products• The duty structure for crude & petroleum

products • Crude Mix(API & Sulfur) processed in the

refinery• Refinery Complexity i.e. Nelson Complexity • Fuel & Losses incurred in the production

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Global Refining Margins• High refining margins in the last 3 years due

to– Tight Balance of refining capacity & demand for

refined products– High demand for light & middle distillates – Limited availability of complex refining capacity

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Player wise GRM FY06 FY07 FY08

RIL 10.8 12.4 15.8

HPCL 2.9 4.2 5.98

IOCL 4.6 4.2 9.02

BPCL 1.6 3.6 4.58

$ per bbl

$ pe

r bbl

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Indian Refining Margins• Strong profitability of Indian refining

companies is driven by– Strong export– Import Parity Pricing of domestic sales– Higher Nelson Complexity Index– Better Product Mix

• GRM’s expected to stay robust with high crude prices and global demand-supply forecasts.

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India – Refining Capacity• India will have surplus refining capacity

with export potential of ≈40 mmtpa in 2007 and going up to ≈100 mmtpa in 2012

• Optimal timing of capacities to capture the prevailing high GRMs

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Factors affecting GRM in future• Slowdown in global economic growth from

5.3% in 2006 to 4.2% (2007 -2015)• Gas Substitution in developing economies• Reduction in light-heavy crude differential

– Moderation in crude prices– Additional capacities coming on stream that

have flexibility to process heavy/sour crude– Nature of new oil discoveries in the future

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Thank You

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