Oil Accounting

&
Gross Refinery Margin

Presented By:
Prashant Gaurav (49)
Medhavi Mayur Pandey (50)1
Dev Datta (51)
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 inventories
a) Raw Materials
b) 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)”
Inventory ABC Oil Company
Income Statement
Balance = $ 45 For the Month of Feb. 2007

Sales $ 90
Purchase on Cost of goods sold 0
2/25/07for $20 Gross profit 90
Expenses:
Administrative 14
Purchase on Selling 12
2/15/07 for $15 Interest 7
Total expenses 33
Income before tax 57
Purchase on Taxes 17
2/2/07 for $10 Net Income $ 40
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 First In First Out Basis
Inventory ABC Oil Company
Income Statement
Balance = $ 35 For the Month of Feb. 2007

Sales $ 90
Purchase on Cost of goods sold 10
2/25/07 for $20 Gross profit 80
Expenses:
Administrative 14
Purchase on Selling 12
2/15/07 for $15 Interest 7
Total expenses 33
Income before tax 47
Purchase on Taxes 14
2/2/07 for $10 Net Income $ 33
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Valuation Criterion
B. 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 Criterion
C. 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. 15
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
process 16
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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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 $ per bbl
Player wise GRM FY06 FY07 FY08
RIL 10.8 12.4 15.8
HPCL 2.9 4.2 5.98
$ per bbl
IOCL 4.6 4.2 9.02
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BPCL 1.6 3.6 4.58
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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