20999tg Oilgas downstreamIA

Technical Guide on Internal Audit
in Oil & Gas Refining &

Marketing (Downstream) Enterprises
DISCLAIMER:
The views expressed in this Technical Guide are those of author(s). The
Institute of Chartered Accountants of India may not necessarily subscribe
to the views expressed by the author(s).
Internal Audit Standards Board
The Institute of Chartered Accountants of India
(Set up by an Act of Parliament)
New Delhi
The Institute of Chartered Accountants of India
All rights reserved. No part of this publication may be reproduced,
stored in a retrieval system, or transmitted, in any form, or by any
means, electronic mechanical, photocopying, recording, or otherwise,
without prior permission, in writing, from the publisher.
Edition : January, 2013
Committee/Department : Internal Audit Standards Board
E-mail : cia@icai.org
Website : www.icai.org/ www.internalaudit.icai.org
Price : ` 150/- (including CD)
ISBN No. : 978-81-88437-93-1
Published by : The Publication Department on behalf of
the Institute of Chartered Accountants of
India, ICAI Bhawan, Post Box No. 7100,
Indraprastha Marg, New Delhi - 110 002.
Printed by : Sahitya Bhawan Publications, Hospital
Road, Agra - 282 003.
February/2013/1,000 Copies
Foreword
The oil and gas industry is risky, wildly expensive and critical to every person on
the planet. It fuels nearly every other industry in the world, from agriculture to
information technology. Growing energy demand of India and necessity to service
that to ensure economic growth is not compromised, presents opportunities in
the complete value chain of oil and gas sector. This trend of rising demand for
petroleum products coupled with the concentration of petroleum reserves in few
geographical areas, amongst other factors, pose challenges as well as
opportunities for the petroleum refining industry as a whole.
Chartered accountants can play a significant role in the oil and gas sector which
faces unique physical and financial challenges. In 2007, the Internal Audit
Standards Board had issued Technical Guide on Internal Audit in Oil and Gas
Refining and Marketing (Downstream) Enterprises which briefly dealt with basic
operations undertaken in a refining and marketing (downstream) oil and gas
company and the detailed procedures to be undertaken by the internal auditor in
respect of each areas. I am happy to note that the Internal Audit Standards
Board is bringing out this revised 2013 edition which includes latest updates in
the oil and gas sector of the country. This updated publication would surely help
the members to understand entire spectrum of operational, conceptual and
practical issues related to internal audit in this sector.
I am sure that this Technical Guide would be help our members to learn and
sharpen their skills in this sector and thereby be more professionally competent.
January 2, 2013 CA. Jaydeep Narendra Shah
New Delhi President, ICAI
Preface
The petroleum sector plays a vital role in the economic growth of the country as
every economy is largely dependent on petroleum products for its day-to-day
activities. With economic growth and modernization, the demand for petroleum
products has been on the rise and is expected to rise further, thereby putting
pressure on exploration and production of crude oil and refining and marketing
of petroleum products. This makes it essential that oil and gas companies have
proper internal controls in place to ensure that maximum output is achieved
through these valuable natural resources.
Considering the importance of this industry, the Internal Audit Standards Board
of the Institute had in 2007 issued Technical Guide on Internal Audit in Oil &
Gas Refining & Marketing (Downstream) Enterprises. The objective of the
Technical Guide was to provide to the members an overview of the basic
operations undertaken in a refining and marketing (downstream) oil and gas
company and the detailed internal audit procedures in respect of all the major
areas. This revised edition has been brought out to include recent changes that
have taken place in the oil and gas sector of the country. In the revised edition,
additions have been made regarding changes in Oil industry structure in India,
Liquified Petroleum Gas, Natural Gas, Pipelines and its Accounting, Enterprise
Resource Planning, Cost Accounting Records (Petroleum Industry) Rules, 2011,
Service tax, Oil accounting calculations and certain new terms have also been
added in the glossary. Further, the scheme of chapters remains the same as
earlier edition and has been divided into seven main chapters introduction,
technical aspects involved in refining and marketing, internal audit of refining
activities, internal audit of marketing activities, internal audit of special areas,
cost audit and information systems audit.
At this juncture, I am grateful to CA. M. Ravi Bala Subrahmanyam, who had
authored the earlier edition of the Guide also, for making updations and bringing
out this revised edition of the Guide.
I wish to thank CA. Jaydeep N. Shah, President and CA. Subodh Kumar Agrawal,
Vice President for their continuous support and encouragement to the initiatives
of the Board. I must also thank my colleagues from the Council at the Internal
Audit Standards Board, viz., , CA. Rajendra Kumar P., Vice-Chairman, IASB,
CA. Amarjit Chopra, CA. Shiwaji B. Zaware, CA. Ravi Holani, CA. Anuj Goyal,
vi
CA. Nilesh Vikamsey, CA. Atul C. Bheda, CA. Charanjot Singh Nanda,
CA. Pankaj Tyagee, CA. G. Ramaswamy, CA. J. Venkateswarlu, CA. Abhijit
Bandyopadhyay, CA. S. Santhanakrishnan, Shri Prithvi Haldea, Smt. Usha
Narayanan, Shri Gautam Guha, Shri Manoj Kumar and Shri Sidharth Birla for
their vision and support. I also wish to place on record my gratitude for the co-
opted members on the Board viz., CA. Porus Doctor, CA. Masani Hormuzd
Bhadur, CA. Ghia Tarun Jamnadas, CA. Deepjee A Singhal, CA. Nitin Alshi,
CA. Narendra Aneja and CA. Guru Prasad M and special Invitee, CA. Sumit
Behl and CA. Sanjay Arora for their invaluable guidance as also their dedication
and support to the various initiatives of the Board. I also wish to express my
thanks to CA. Jyoti Singh, Secretary, Internal Audit Standards Board and
CA. Arti Bansal, Sr. Executive Officer in giving final shape to the Technical
Guide.
I am sure that this revised Technical Guide would find a warm acceptance
among the members and other interested readers, like its earlier edition.
January 8, 2013 CA. Rajkumar S. Adukia
Mumbai Chairman
Internal Audit Standards Board
vii
Abbreviations
APM Administrated Pricing Mechanism
ASTM American Society for Testing and Materials
ATF Aviation Turbine Fuel
ATU Amine Treatment Unit.
BBU Bitumen Blowing Unit
BIS Bureau of Indian Standards
BPCL Bharat Petroleum Corporation Limited
BRPL Bongaigon Refineries & Petrochemicals Limited
BTU British Thermal Unit
CIF Cost, Insurance and Freight
CPCL Chennai Petroleum Corporation Limited
CST Central Sales Tax
CVD Countervailing Duties
DCS Digital Control System
DGH Directorate General of Hydrocarbons
E & P Exploration and Production
EIL Engineers India Limited
ERP Enterprises Resource Planning
FDZ Free Delivery Zone
FO Furnace Oil
viii
FOB Free On Board
GAIL Gas Authority Of India Limited
GDP Gross Domestic Product
GNP Gross National Product
GOHDS Gas Oil Hydro De-sulphurisation Unit.
GOI Government of India
GSPC Gujrat State Petroleum Corporation Limited
HOEC Hindustan Oil Exploration Company Limited
HPCL Hindustan Petroleum Corporation Limited
HRD Human Resources Development
HSD High Speed Diesel Oil
IBP IBP Co. Limited
IIP Indian Institute of Petroleum
ILP Industry Logistic Plan
IOCL Indian Oil Corporation Limited
IPP Important Purity Price
IQCM Industry Quality Control Manual
JVC Joint Venture Company
KL Kiloliter
KM Kilometer
KRL Kochi Refineries Limited
LDO Light Diesel Oil
LOBS Lube Oil Base Stock
ix
LPG Liquefied Petroleum Gas
LSHS Low Sulphur heavy Stock
MDPM Market Determined Pricing Mechanism
MI Main Installation
MMT Million Metric Tonnes
MMTPA Million Metric Tonnes Per Annum
MOP and NG Ministry Of Petroleum and Natural Gas
MRPL Mangalore Refineries & Petrochemicals Limited
MS Motor Spirit
NDNE No-Domestic Non-Essential
NOC National Oil Company
NSU Naphtha Splitter Unit
OCC Oil Coordination Committee
OCRC Oil Cost Review Committee
OEB Oil Economics Budget
OIDB Oil Industry Development Board
OIL Oil India Limited
OISD Oil industry Safety Directorate
ONGC Oil and Natural Gas Corporation Limited
OPC Oil Pricing Committee
OPEC Organization of Petroleum Exporting Countries
OPRC Oil Prices Review Committee
PCRA Petroleum Conservation Research Association
x
POL Petroleum, Oil and Lubricants
PPAC Petroleum Planning and Analysis Cell
PSA Pressure Swing Absorption
PSF Price Stabilization fund
PSU Public Sector undertaking
R & D Research and Development
RIL Reliance Industries Limited
ROI Return on Investment
RON Research Octane Number
RPO (RO) Retail Pump Outlet
RR Railway Receipt
RSP Retail Selling Price
RTD Round Trip Distance
SKO Superior Kerosene Oil
SRU Sulphur Recovery Unit
ST Sales Tax
SWS Sour Water Stripper Unit
TAIPP Tariff Adjusted Import Parity Price
TMT Thousand Metric Tonnes
TOP Tap Off Point
TPP Trade Purity Pricing
VBU Visbreaker unit
WTO World Trade Organisation
xi
Glossary
Additive A chemical added to oil, gasoline, or other products to
enhance certain characteristics or to give them other
desirable properties.
Alkylation A chemical conversion process to form gasoline from
lighter fractions using catalysts like sulphuric and
hydrofluoric acids.
American Petroleum Founded in 1919, is the first oil trade association to
Institute (APIs) include all branches of the pertroleum industry.
Aromatics A class of organic compounds, related to hydrocarbons,
which is used to raise the octane quality of gasoline.
API Gravity A means used by the petroleum industry to express the
density of petroleum liquids.
Barrel A unit of volume equal to 42 US gallons.
Basin A synclinal structure in the sub-surface, once the bed of
a pre-historic sea. Basins, composed of sedimentary
rock, are regarded as good prospects for oil exploration.
Bitumen Any of various mixtures of hydrocarbons together with
their non-metallic derivatives, asphalts and tars.
Black Oil A term denoting residue oil. Oil used in ships boilers or
in large heating or generating plants; bunker oil.
Blending The process of mixing two or more oils having different
properties to obtain a lubricating oil of intermediate or
desired properties. Certain classes of lube oils are
blended to a specified viscosity. Other products, notably
gasoline(s), are also blended to obtain desired properties.
Block An area of land made up of a number of contiguous
leaseholds large enough to drill an exploratory well.
xii
Bottom Sample A spot sample taken from the product at the bottom of
the tank.
Celibration The process or procedure of determining the exact
volume capacity.
Calibration Tables Developed by recognised industry methods that
represent volumes in each tank according to the liquid
level measured in the tank. The tables are with linear
measurements (for example feet, inches, meters,
centimetres) to obtain calibrated volumes (for example
litres, cubic meters of cubic feet).
Catalyst A substance that hastens or retards a chemical reaction
without undergoing a chemical change itself during the
process.
Cat Cracker A large refinery vessel for processing reduced crude oil,
naphtha, or other intermediates in the presence of a
catalyst.
Condensate Liquid hydrocarbons produced with natural gas are
separated from the gas by cooling and various other
means. Condensate generally has API gravity of 50
degrees to 120 degrees and is water white, straw, or
bluish in colour.
Corrosion The eating away of metal by chemical action or an
electrochemical action. The rusting and pitting of
pipelines, steel tanks, and other metal structures caused
by a complex electrochemical action.
Cracking The refining process of breaking down the larger, heavier,
and more complex hydrocarbon molecules into simpler
and lighter molecules. Cracking is accomplished by the
application of heat and pressure and, in certain advanced
techniques, by the use of a catalytic agent. Cracking is
an effective process for increasing the yield of gasoline
from crude oil.
Crude Oil Oil as it comes from the well; unrefined petroleum.
xiii
Cut A petroleum fraction; a product such as gasoline or
naphtha distilled from crude oil.
Datum Point The point from which all measurement for the calibration
of the tank are related.
Datum Plate A level metal plate located directly under the reference
gauge point to provide a fixed contact surface from which
liquid depth measurement can be made.
Demurrage The charge incurred by the shipper for detaining a vessel,
freight car, or truck.
Density The density of homogeneous substance is the ratio of
its mass to volume. The density varies as the temperature
changes and it is a usually expressed as the mass pet
unit volume at specified temperature.
Deposit An accumulation of oil or gas capable of being produced
commercially.
Diesel fuel A fuel made of the light gas-oil range of refinery products.
Diesel fuel and furnace oil are virtually the same product.
Self-ignition is an important property of diesel fuel, as
the diesel engine has no spark plugs; the fuel is ignited
by the heat of compression within the engines cylinders.
Dip A term used to designate either the depth of liquid in a
storage tank or the taking of measurement of such liquid
level.
Distillate Liquid hydrocarbons, usually water-white or pale straw
colour and of high API gravity (above 60 degrees),
recovered from wet gas by a separator that condenses
the liquid out of the gas stream.
Distillation The refining process of separating crude oil components
by heating and subsequent condensing of the fractions
by cooling.
Distillation A tall, cylindrical vessel at a refinery or
Column fractionating plant where liquid hydrocarbon feedstocks
xiv
are separated into component fractions, rare gases, and
liquid products of progressively lower gravity and higher
viscosity.
Downstream Downstream are the operations after production of crude
oil, i.e. refining and marketing.
Exploration The search for oil and gas, including surveying,
geological studies, geo-physical surveying, coring and
drilling of wildcat wells.
Ex-bond Imported products kept in the customs bonded
warehouse by executing INTO bond bill of entry, shall
be discharged on payment of appropriate customs duty
through Ex bond bill of entry.
Feedstock The raw or semi-finished material that is processed in a
refinery or other processing plant.
Flare Gas Gaseous hydrocarbons discharged from safety relief
valves on process units in a refinery or chemical plant.
Should a unit go down from an electrical or cooling
water failure, making it necessary to dump a batch of
liquid feed or product, the flare stack is equipped to
handle such an emergency. If it were impossible to dump
both gases and liquids in an emergency, the plant
personnel and the operating units would be in danger.
With the recovery equipment larger plants are installing
flare gases as well as the dumped process fluid are
recovered. The gases are used as fuel; the liquids are
reprocessed.
Flash Point The temperature at which a given substance will ignite.
Floating Storage A large, converted, permanently moored oil tanker that
holds production from offshore wells for transfer to
seagoing oil transport vessels or to lighters for transport
to shore stations.
Fluid Catalystic A large refinery for processing reduced crude,
Cracking Unit naphtha, or other intermediates in the presence
xv
(FCCU) of a catalyst. Catalytic cracking is regarded as the
successor to thermal cracking as it produces less gas
and volatile material; it provides a motor spirit of 10 to
15 octane numbers higher than that of thermally cracked
product. The process is also more effective in producing
isoparaffins and aromatics that are of high antiknock
value.
Fractionator A tall, cylindrical refining vessel where liquid feedstocks
are separated into various components or fractions.
Free Delivery Each strategic point i.e. Depot/ Installation/
Zone (FDZ) Refining is having a zone with a radius of 19.5 km i.e.
one way on all directions, called free delivery zone.
Whenever the loaded tank lorry leaves the depot/
installation/refining to a retail outlet the vehicle on its
way travels through this zone during its upward journey
and re-enters this zone on its return after the delivery of
the product. Therefore, the round trip distance of this
zone works out to 39 kms known as FDZ.
Fuel Oil Any liquid or lequifieble petroleum product burned for
the generation of heat in a furnace or for the generation
of power in an engine, exclusive of oils with a flash
point below 100 degree F.
Furnace Oil Heating oil; light gas oil that can be used as diesel fuel
and for residential heating.
Gas Any fluid, combustible or noncombustible, which is
produced in a natural state from the earth and which
maintains a gaseous or rarefied state at ordinary
temperature and pressure conditions.
Gas Condensate Liquid hydrocarbons present in the casing head gas
that condense upon being brought to the surface;
formerly distillate, now condensate.
Gasoil/ A refined fraction of crude oil somewhat
Gasoline heavier than kerosene, often used as diesel fuel. Motor
gasoline is a blend of different cuts or fractions in the
gasoline range.
xvi
Gauge Hatch The opening on the top of tank through which gauging
and sampling operations are carried out.
Gauging The process of measuring the height of liquid in storage
tank usually using a weighted graduated steel tap and
bob.
Heavy Ends In refinery parlance, heavy ends are the heavier fractions
of refined oil- fuel oil, lubes, paraffin, and asphalt-
remaining after the lighter fractions have been distilled
off.
Hexane A hydrocarbon fraction of the paraffin series. At ordinary
atmospheric conditions hexane is a liquid, but often
occurs in small amounts of natural gas.
Hydro Carbons Organic chemical compounds of hydrogen and carbon
atoms. There are a vast number of these compounds,
and they form the basis of all petroleum products. They
may exist as gases, liquids or solids.
Hydro Cracking A refining process for converting middle boiling or
residual material to high octane gasoline, reformer charge
stock, jet fuel, and/ or high grade fuel oil. Hydrocracking
is an efficient, relatively low temperature process using
hydrogen and catalyst. The process is considered by
some refiners as a supplement to the basic catalytic
cracking process.
Hydrodesulphu- A process to reduce the sulphur content in
risation products by converting sulphur compounds to hydrogen
sulphide which is then removed.
Hydrogen An odorous and noxious compound of sulphur
Sulphide (H
2
S) found in sour gas.
Import Parity Landed cost of a product at a given port
Price location based on specified supply location outside India.
Integrated Oil A company engaged in all phases of the oil
Company business i.e. exploration, production, transportation,
xvii
refining, and marketing; a company that handles its own
oil from wellhead to gasoline pump.
INTO Bond On import of the products, the products are being kept
in customs bonded premises under INTO bond bill of
entry executed with customs authorities ie; products are
being kept in the customs warehouse without payment
of import duties
Jet Fuel A specially refined grade of kerosene used in jet-
propulsion engines.
Joint Venture Business or enterprise entered into two or more partners.
Usually the partner with the largest interest in the venture
will be the operator.
Kerosene Kerosene cut from the distillation of crude oil, not treated
or doctor tested to improve odour and colour.
Light Crude Crude oil that flows freely at atmospheric temperatures
and has an API gravity in the high 30s and 40s, a light
coloured crude oil.
Light Ends The more volatile products of petroleum refining, e.g.
butane, propane, gasoline.
Liquefied Natural Natural Gas that has been liquefied by severe
Gas (LNG) cooling (-160 degrees C) for the purpose of shipment
and storage in high pressure cryogenic tanks. To
transform the liquid to a usable gas, the pressure is
reduced and the liquid is warmed.
Liquefied Butane, propane and other light ends
Petroleum Gas separated from natural gasoline or crude oil
(LPG) by fractionation or other processes. At atmospheric
pressure, liquefied petroleum gases revert to the gaseous
state LPG.
Liquid Petroleum components that are liquid at normal
Hydrocarbons temperatures and atmospheric pressure.
Manifest A document issued by a shipper covering oil or products
to be transported by truck.
xviii
Methane A colorless, odorless flammable gas (CH
4
). Methane is
the main constituent of natural gas, which is produced
as free gas, and also associated with crude oil as it
comes from the well. The simplest saturated
hydrocarbon.
Methanol Methyl alcohol; a colourless, flammable liquid derived
from methane (natural gas).
Methyl Tertiary An additive used in unleaded gasoline to improve
Butyl Ether the octane quality. One of the important oxygenates
(MTBE) for use in reformulating gasoline to reduce noxious
emissions.
Metric Ton A unit of weight equal to 1,000 Kilograms.
Middle Distillates The term applied to hydrocarbons in the so- called middle
range of refinery distillation, e.g., kerosene, light diesel
oil, heating oil, and heavy diesel oil.
Middle Sample A spot sample obtained at the midpoint of the middle of
the bank contents.
Round Trip Round trip distance is the distance from the
Distance (RTD) depot/ installation /refinery to the retail outlet and back.
Gross RTD is the combination of round trip distance of
FDZ and the round trip distance of beyond FDZ.
Motor Octane The measures of a gasolines antiknock
Number qualities, whether or not it will knock or ping in an engine
with a given compression ratio. Motor octane number of
a gasoline is determined by test engines run under
simulated conditions of load and speed.
Motor Spirit A highly volatile fraction in petroleum refining, an
ingredient of motor gasoline, commonly referred to as
petrol.
Multibuoy A tanker loading facility with five or seven mooring
Mooring System buoys to which the vessel is moored as it takes on
cargo or bunkers from submerged hoses that are lifted
xix
from the sea bottom. Submarine pipelines connect the
pipeline-end manifold to the shore.
Naphtha A volatile, colour less liquid obtained from petroleum
distillation used as solvent in the manufacture of paint
and as dry-cleaning fluid.
Natural Gas Gaseous forms of petroleum consisting of mixtures of
hydrocarbons gases and vapours, the more important
of which are methane, ethane, propane, butane, pentane,
and hexane; gas produced from a gas well.
Octane Number A measure of Gasolines propensity to ignite under
compression. The higher the octane number the less
flammable a gasoline is.
Organisation for Member countries are Australia, Austria, Belgium,
Economic Canada, Denmark, Finland, France, Germany, Greece,
Cooperation and Iceland, Republic of Ireland, Italy, Japan, Netherlands,
Development New Zealand, Norway, Portugal, Spain, Sweden,
(OECD) Switzerland, Turkey, the United Kingdom and the United
States of America.
Off-specification Refined product that does not mect normal quality
Product requirements and therefore require special handling and
restraint to assure separation from specification products.
Olefins Class of unsaturated puraffin hydrocarbons recovered
from crude oil. Typical examples include: butane,
ethylene and propylene.
Organisation of Oil producing and exporting countries in Middle east,
Petroleum Exporting Africa and south America that have organized for the
Countries (OPEC) purpose of negotiating with oil companies on matters of
oil production, prices, and future concession rights. OPEC
in 1984 had 13 members: Algeria, Ecuador, Gabon,
Indonesia, Iraq, Iran, Libya, Kuwait, Nigeria, Qatar, Saudi
Arabia, the United Arab Emirates and Venezuela. The
oraganisation was created in November 1960.
xx
Oxides Mineral compounds characterized by the linkage of
oxygen with one or more metallic elements such as
Cuprite, CU
2
O or Spinel, MgAl
2
O
4
.
Oxygenates Additives for motor gasoline to promote cleaner burning
in the engine and thus reducing polluting emissions,
unburned hydrocarbons, and carbon monoxide. An oil
industry term employed to describe a blending
component capable of rapidly increasing the oxygen
content of motor car fuels.
Petrochemicals Chemicals derived from petroleum; feed stocks for the
manufacture of variety of plastics and synthetic rubber.
Petroleum In its broadest sense, the term embraces the whole
spectrum of hydrocarbons-gaseous, liquid, and solid. In
the popular sense, petroleum means crude oil.
Pour Point The temperature at which a liquid ceases to flow or at
which it congeals.
Pressure The amount of force exerted on a unit of area by a fluid.
Propane A petroleum fraction; a hydrocarbon, gaseous at ordinary
atmospheric conditions, but readily converted to a liquid.
When in a liquid state, propane must be stored in a
highpressure metal container. Propane is odourless,
colourless, and highly volatile. It is used as a household
fuel beyond the gas mains.
Reference Height The distance from the bank bottom and/or datum plate
to the established reference point or mark.
Refinery A modern refinery is a large plant of many diverse
processes. A refinery receives its charge stock, or crude
oil, from the field via pipeline or from a tanker if the
plant is located on a waterway. By processes that include
heating, fractionating, pressure, vacuum, reheating in
the presence of catalysts, and washing with acids. The
crude is divided into hundreds of components: from exotic
light gases to volatile liquids down through gasoline,
xxi
naphtha, kerosene, gas oils, and light and heavy
lubricating oil stocks to heavy bunker fuel, residue oil,
and finally petroleum coke, the bottom of the barrel.
Reforming The use of heat and catalysts to effect the
Process rearrangement of certain hydrocarbon molecules without
altering their composition appreciably; the conversion of
low-octane gasoline fractions into higher octane stocks
suitable for blending into finished gasoline; also the
conversion of naphtha to obtain volatile product of higher
octane number.
Reid Vapour A measure of volatility of a fuel, its ability to
Pressure vaporize. Reid vapour pressure, the specific designation,
is named after the man who designed the test apparatus
for measuring vapour pressure.
Retail Outlet Point of sale of petroleum products, primarily MS and
HSD, for use as fuel for road transportation, commonly
referred to as petrol pump.
Retail Sales (RON) Sales through retail outlets. (Research Octane Number).
A measure of a gasolines antiknock quality determined
by tests made on engines running under moderate
conditions of speed and load.
Sedimentary An extensive area (often covering thousands
Basin of square miles) where substantial amounts of un-
metamorphosed sediments occur. Most sedimentary
basins are geologically depressed areas (shaped like a
basin). The sediment is thickest in the interior and tends
to thin out at the edges. There are many kinds of such
basins, but it is in these formations that all the oil
produced throughout the world has been found.
Single-buoy An offshore floating platform (20 to 35 feet in
Mooring System diameter) connected to pipelines from the shore for
loading or unloading tankers. The SBM system is
anchored in deep water, thus permitting large tankers to
offload or lift cargo in areas where it is impractical to
xxii
build a loading jetty or the close-in water is too shallow
for deep-draft vessels.
Sludge Deposits in fuel tanks and caused by presence of wax,
sand, scale, asphaltenes, tar, water etc.
Sour Crude Crude oil containing heavy sulphur and having a bad
odour.
Specification Term referring to the properties of given crude oil or
petroleum product, which are specified since they often
vary widely even within the same grade of product.
Specific Gravity Weight of a particle, substance or chemical solution in
relation to an equal volume of water at 15 deg C.
Strategic Crude oil/ petroleum products stored as a fuel
Reserves reserve in the event of a national emergency or a
prolonged oil embargo by foreign suppliers.
Straight-Run Refers to a petroleum product produced by the primary
distillation of crude oil, free of cracked components.
Stream A stream whether oil, gas, or product-is what is being
pumped through a pipeline, moved from one process
unit to another.
Sweet Crude Crude oil containing very little sulphur and having a
good odour.
Tail Gas Residue gas from a sulphur-recovery unit; any gas from
a processing unit treated as residue.
Tank Farm A group of large riveted or welded tanks for storage of
crude oil or product. Large tank farms cover several
square miles.
Tap off Point The place at which petroleum products carried by a
cross country pipeline are drawn off into storage tanks
for distribution therefrom by various modes.
Top Sample A spot sample obtained at the top of the tank contents.
xxiii
Trade Parity Price It is weighted average of the import parity and export
parity prices in ratio of 80:20.
Turnkey A contract in which a contractor agrees to furnish
Contract all materials and labour and do all that is required to
complete a well in a workmanlike manner. When on
production, he delivers it to the owner ready to turn the
key and start the oil running into the lease tank, all for
an amount specified in the contract.
Ullage The reserve space in a storage tank between the top of
the oil and the top of the tank. This space or ullage
allows for expansion of the oil when it warms up fromthe
sun or artificial heating.
Upstream Pertaining to exploration and production of crude and
natural gas.
Vis-Breaking A light thermal cracking process carried out on a fuel oil
during the refining process to reduce product viscosity
without blending.
Viscosity Measure of the internal friction or resistance of oil to
flow. As the temperature of oil is increased, its viscosity
decreases and it is therefore able to flow more readily.
Volatile A volatile substance is one that is capable of being
evaporated or changed to vapour at relatively low
temperature.
Forword ................................................................................................... iii
Preface ..................................................................................................... v
Abbreviations ........................................................................................ vii
Glossary .................................................................................................. xi
Chapter 1: Introduction ...................................................................... 13
Chapter 2: Technical Aspects of Refining and Marketing
Activities......................................................................... 424
Refining..................................................................................................... 4
Cost of Refining........................................................................................ 5
Technical Parameters in Refining Activity ................................................ 6
Marketing Process .................................................................................. 12
Technical Parameters in Marketing Activity........................................... 17
Chapter 3: Internal Audit of Refining Activities........................... 2543
Crude ...................................................................................................... 26
Internal Audit of Crude............................................................................ 27
Verification of Other Aspects in Refining............................................... 31
Internal Audit of Operations................................................................... 40
Chapter 4: Internal Audit of Marketing Activities ........................ 4466
Purchases.............................................................................................. 44
Quantity Determination.......................................................................... 44
Types of Inter Company Transactions................................................... 45
Product Accounting................................................................................ 47
Sales Accounting................................................................................... 49
Collection Accounting ............................................................................ 55
Stock Accounting................................................................................... 60
Contents
Chapter 5: Internal Audit of Special Areas ................................ 67137
Refinery................................................................................................... 67
Marketing Activity.................................................................................... 73
Liquefied Petroleum Gas (LPG) ............................................................. 87
Natural Gas........................................................................................... 109
Enterprise Resource Planning (ERP) ................................................... 121
Regulatory Authorities........................................................................... 129
Carbon Credits...................................................................................... 132
Chapter 6: Cost Audit ................................................................. 138139
Chapter 7: Information Systems Audit ...................................... 140-141
Information System Security................................................................. 140
Types of Information System Audit ..................................................................141
Appendix A: Refinery Block Diagram............................................... 142
Appendix B: Refinery Block Diagram............................................... 143
Appendix C: Types of Products Produced from Crude Oil ............ 144
Introduction
1.1 The petroleum sector plays a vital role in the economic growth of the
country as every economy is largely dependent on petroleum products for
its day-to-day activities. Out of the total energy mix of oil, natural gas, coal,
hydroelectric and nuclear/ others, the petroleum component occupies a major
share. The demand for the petroleum products is increasing year by year
thereby putting pressure on exploration and production of crude oil and
refining and marketing of petroleum products. The increasing trend in the
population and growth in the individual consumption has multiplied the
demand for petroleum products manifolds. With economic growth and
modernisation, the demand for petroleum products has been on the rise and
is expected to rise further.
1.2 Petroleum has emerged as the worlds most useful source of energy
and a vital commodity in international market. The use of crude oil as a
source of energy started around 1890 only. Till early forties, demand of
petroleum products was low but with worldwide growth of industry there was
a sudden shift in favour of petroleum as energy source as compared to
coal. Major expansion and development in automobile industry also took
place during this period. Oil dominated as a source of energy for
transportation, electricity generation, etc. It also becomes essential as a
petrochemical feed stock.
1.3 India is one of the countries, which have the highest growth rate in
the consumption of petroleum products. The countrys indigenous production
of crude oil is, however, not sufficient to meet the overall demand for
petroleum products, consequently, the country is heavily dependent on import
of crude oil. Production/ import of crude oil, refining and marketing of
petroleum products (with the exception of lubricants to a certain extent) was
till recently done only by the Public Sector Undertakings (PSUs). A noticeable
change has, however, taken place in the petroleum sector over the last
couple of years, for example, oil fields have been offered for exploration to
foreign/ Indian companies in the private sector, private sector has been
allowed to set up refineries, import of a number of products has been
decontrolled, parallel marketing of LPG under free pricing has also been
allowed to the private sector. As the demand for petroleum products is
growing, the extent to which the same is being met out of indigenous
production is declining and only about 30 per cent of the oil and gas demand
Chapter 1
2
TG on Internal Audit in Oil & Gas Refining & Marketing (Downstream) Enterprises
is likely to be met out of indigenous production. Consequently, the increased
level of import of crude oil has serious repercussions on the countrys balance
of payment position and energy security, particularly in the background of
increasing oil prices in the international markets.
1.4 The Oil sector is founded on two major activities, one, exploration
and production (E and P) and two, refining, distribution and marketing.
Whereas exploration and production of crude oil and gas is an upstream
activity, refining, distribution and marketing are classified as downstream
activities. Exploration and Production encompasses discovery and production
of oil and gas by undertaking geological and geophysical surveys like remote
sensing, airborne magnetic and field gravity surveys to identify the principal
areas of adequate sediment cover, seismic surveys, drilling exploratory well,
economic evaluation of the project, entering into agreements with the state,
formulation of field development and production plan, decommission of
the well.
1.5 Refining activity, involves receiving the crude through pipelines/
coastal tankers from the indigenous/ imported destination, for refining the
crude into different products at different temperature on the basis of demand/
requirement of respective product. Refining is an important activity since
the crude, which was produced has to be refined into different products for
the final use of products by the consumers. India can perhaps claim to have
established one of the earliest refineries in the world.
1.6 Marketing activity involves the process of receiving the finished
products or refined crude oil products, through pipeline, costal tankers, rail
wagons and tank trucks for storing the products in the Installation/ Terminal/
Depot for onward distribution to final consumers.
1.7 In India, the operations of petroleum companies can be grouped into:
(i) Exploration and Production
(ii) Refining and Marketing
(iii) Pure Refining
(iv) Pure Marketing.
The following diagram brings out the oil industrys structure in India, the
major players in the various upstream and downstream activities as on
July 1, 2012.
3

Industry Structure
Natural Gas & Pipelines Exploration & Production
Public Sector
ONGC
OIL
Gas Distribution
GAIL
Private Sector (Reliance,
HOEC, Shell, BG, Cairn
etc.)
LNG Projects
(Shell Petronet
LNG, BG, IOC, etc.
Pipelines
IOCL
BPCL
HPCL
Petronet India
GAIL
Refining & Marketing
Refining & Marketing
Public Sector
ONGC
IOCL
HPCL
IBP*@$
MRPL***
NRL**
CPCL*
BRPL*
KRL#
Private Sector
Reliance
Essar
Shell @
* Majority stake acquired by IOCL
** Majority stake acquired by BPCL
*** Majority stake acquired by ONGC
@ Exclusive Marketing Company
$ Being merged with IOCL
# Fully merged with BPCL
1.8 This Technical Guide provides an insight with regard to:
(i) Refining and marketing activities
(ii) Internal audit for refining and marketing activities.
The Guide will be useful to the readers in ascertaining various technical
aspects and internal audit requirements of a downstream oil company. Since
the size, functioning and nature of activities may vary from one company to
another, the Guide cannot cover all the intricacies that might be involved in
all practical situations. The various aspects/ principles enunciated in this
Guide,might, therefore, require appropriate modification/ adjustments
depending on size, function and nature of activities of a company under
audit. The Technical Guide therefore does not touch upon internal audit of
other aspects such as payroll, finance, etc., which are more or less common
in all types of industries.
Introduction
Note:
Chapter 2
Technical Aspects of Refining and
Marketing Activities
Refining
2.1 Crude petroleum oil is a complex mixture of alkaline hydrocarbons
with water, salt and earth particles. Hence, before it can be used for specific
purposes, it has to purified or refined. The process of separating the crude
petroleum oil into more useful fractions is called refining.
2.2 Petroleum refining is a continuous process industry wherein several
products carrying different boiling points and molecular compositions are
produced from crude oil. The refinery units comprise of the Distillation Unit,
Secondary processing Unit like Lube stock, FCCU, hydro finishing units for
fuels, Diesel Hydro De-sulphurisation Units, Sulphur Units, Petrochemical
feed stock Units, Wax Unit etc., with associated facilities offshore and
utilities. The refining of crude oil is done by process of fractional distillation.
In other words, petroleum is separated into its constituents by the process
of fractional distillation. The refining of petroleum into different components
is based on fact that the different components of crude oil have different
boiling point range.
2.3 The crude petroleum oil is heated to a temperature of about 400
degree Centigrade in a furnace and the vapours thus formed are passed
into a tall fractionating column from near its bottom. As the mixture of hot
vapours rises in the column, it starts getting cooled gradually. Due to this,
the vapours of the higher boiling fractions of petroleum condense first in the
lower part of the tower, whereas the vapours of the low boiling fractions rise
up into the tower and condense later. In this way, the fraction of petroleum
having highest boiling point range is collected in the lowest part of the
fractionating tower whereas the fraction having lowest boiling point range is
collected in the top-most part of the tower. The gases, which do not liquefy,
are taken out from the top of the fractionating column. The fractional
distillation is continued until the crude oil is separated into five or six
hydrocarbon fractions, each fraction having different boiling point over a
different range of temperature. In this way, the fractions having different
boiling ranges are collected separately. The residual oil or liquid residue,
which does not vaporise under these conditions, is collected and subjected
to further fractional distillation by heating above 400o C to get more useful
fractions. The various fractions obtained by the fractional distillation of crude
petroleum oil are petroleum gas, gasoline or petrol, kerosene oil, diesel oil,
fuel oil, lubricating oil, paraffin wax and asphalt. The three fractions -
lubricating oil, paraffin wax and asphalt - are obtained by the further
fractionation of residual oil which collects at the bottom of the fractionating
column. APPENDIX A contains a diagrammatic representation of the basic
refining process.
2.4 Each fraction obtained from petroleum after refining is not a single
compound but a simpler mixture of compounds. The various fractions of
petroleum differ in the number of carbon atoms in their molecules. The
various fractions of products obtained by the fractional distillation of petroleum
will differ in their molecular compositions and boiling point ranges.
APPENDIX B shows details of refinery block diagram with various refining
units. The core issues involved in processing the crude include:
(a) Improving the yield of the distillates;
(b) Producing high value products;
(c) Optimising the energy consumption;
(d) Minimising the loss of hydrocarbons;
(e) Environmental management issues; and
(f) Product quality issues.
Cost of Refining
2.5 The cost of refining consists of the following elements:
A. Delivered cost of crude oil This includes expenditure incurred in
respect of:
(i) cost of crude;
Technical Aspects of Refining and Marketing Activities
6
(ii) transportation of crude to refineries;
(iii) marine/ transit insurance;
(iv) ocean loss/ pipeline loss;
(v) wharfage;
(vi) other landing charges;
(vii) customs duty or excise duty;
(viii) auxiliary duty; and
(ix) other levies.
B. Refining cost This includes expenditure incurred in respect of:
(i) Chemicals and catalysts;
(ii) Consumables;
(iii) Utilities like water and power;
(iv) Salaries and wages;
(v) Overheads;
(vi) Repair and maintenance;
(vii) Depreciation;
(viii) Finance charges on working capital; and
(ix) Normal production loss.
Technical Parameters in Refining Activity
2.6 The technical parameters in the refining activity comprise the following:
Types of crude;
Oil Industry Safety Directorate (OISD) norms;
Explosives Norms Petroleum Act, 1934 and Rules;
7
Pollution control norms;
Petroleum products and their usage; and
Quality control.
Types of Crude
2.7 There are three types of crude namely:
Sweet;
Sour; and
Heavy crude.
Processing of sweet crude involves lesser complications while producing
the finished petroleum products as compared to processing of sour and
heavy crudes. The refining configuration is built to take care of processing
any type of crude. Sour and heavy crudes are cheap but require superior
metallurgy and treatment. Pre and Post treatment of sour and heavy crude
and precuts leads to higher capital and operation costs. The finished
petroleum products obtained as a result of processing of the crude can be
classified as:
(a) Light distillates;
(b) Middle distillates; and
(c) Heavy ends/ distillates.
2.8 Light distillates are high value products consisting of LPG, Naphtha
and Petrol. Middle distillates have lesser product value than light distillates,
and consist of Kerosene, ATF, HSD and LDO. Heavy distillates are lesser
value products as compared to light and middle distillates, and consist of
FO, LSHS, HHS, lube oils and Bitumen. The trend world over is towards
higher conversion of crude into light and middle distillates to obtain 85 per
cent and balance of 15 per cent for heavy distillates/ ends. The consumption
mix in India is tilted in favour of middle distillates as shown below.
8
POL Consumption Mix
Middle
52%
Heavy
18%
Light
30%
Out of total the consumption of petroleum products, middle distillates account
for 52 percent consumption, light distillates account for 30 percent and
Heavy ends/ distillates accounts for 18 percent.
Oil Industry Safety Directorate (OISD) Norms
2.9 Hydro-carbon processing and handling plants are inherently
hazardous. Large and complex plants present substantial risk potential. The
industry over the years has learnt lessons from fires and explosions and
mishaps and also updates plant safety norms on a regular basis. The norms
lay down minimum requirements of layouts within the plant boundary for
petroleum refining, oil/ gas production and processing plants, LPG filling
plants and other petroleum storage installations/ depots including inter
distances between facilities and their relative locations. The facilities too
are constructed as per the layout and distance norms laid down by OISD.
Explosive Norms
The Petroleum Act, 1934
2.10 The activities relating to import, transport, storage, production, refining
and blending of petroleum are to be in compliance with the provisions of the
Petroleum Act, 1934, which extends to the whole of India. Petroleum means
any liquid hydro-carbon or mixture of hydro-carbons and any inflammable
mixture (liquid, viscous or solid) containing any liquid hydro-carbon. The Act
classifies petroleum products in the following classes:
Class A - Flash Point < 23 C
Class B - Flash Point >= 23 C < 65 C
Class C - Flash Point >= 65 C < 93 C
9
The Act deals with control over petroleum, testing of petroleum, penalties
and procedure.
The PetroleumRules 1976
2.11 The Petroleum Rules, 1976 came into force with effect from August
1, 1976 and deal with the procedures to be followed for import, transport,
storage, electric installation licences, refining and blending of petroleum
and testing. The Rules also contain general provisions on restriction, delivery
and despatch of petroleum, approval of containers for storage, prevention of
escape of petroleum, prohibition on employment of children and intoxicated
person, prohibition of smoking, fires, and special precautions against accident
and payment of fees, etc.
Gas Cylinders Rules 1981
2.12 These Rules deal with provisions relating to filling, possession, import
and transport of cylinders, valves, safety devices, etc., for use in LPG.
Pollution Control Norms
2.13 The oil industry needs to comply with the pollution control norms
while discharging effluents into water bodies, air and earth etc. Emissions to
atmosphere become a problem especially while processing sour and heavy
crudes and burning high sulphur fuels. The main legislation relating to
environment protection includes:
(i) Water (Prevention and Control of Pollution) Act, 1974
(ii) Water (Prevention and Control of Pollution) Cess Act, 1977
(iii) Air (Prevention and Control of Pollution) Act, 1977
(iv) Environment (Protection) Act, 1986
(v) Forest (Conservation) Act, 1980
(vi) Wildlife (Protection) Act, 1972
(vii) Motor Vehicles Act and Rules, 1989.
10
Petroleum Products and Their Usage
2.14 The petroleum products generated from the refining process normally
have the following use:
Petroleum gas is used as fuel as such or in the form of liquefied petroleum
gas. Petroleum gas is also used in the production of carbon black (needed
in the tyre industry) and of hydrogen (needed in the fertilizer industry) and
also used in the manufacture of gasoline (petrol) by the process of
polymerization. LPG is also used for cooking.
Gasoline or Petrol is used as a fuel in motor cars, scooters, motor cycles,
and other light vehicles. Petrol is also used as a solvent for dry cleaning of
clothes and for making petrol gas.
Kerosene oil is used as household oil, as an illuminant in hurricane or
petromax lamps, also used for making oil gas. A special grade of kerosene
oil is used as aviation fuel in aero planes.
Diesel oil is used as a fuel for heavier vehicles like buses, trucks, railway
engines and ships. It is also used to run water pumps required for irrigation
in fields and in diesel generators to produce electricity on small scale.
Furnace oil is used in industries to heat boilers and furnaces. Fuel oil is a
better fuel than coal because fuel oil burns completely and does not leave
any residue.
Lubricating oil is used for lubricating machinery to reduce the friction and
wear and tear of the same under severe operating conditions. It is used for
both industrial and automotive applications.
Paraffin wax is used for making candles, Vaseline, ointments, wax paper,
toilet goods and grease.
Asphalt/ Bitumen is a black sticky substance used for making road surfaces
and the final residue of petroleum.
Light Diesel Oil is used for slow speed diesel engines in agriculture/marine
industrial sectors. Also as a fuel in certain specialised industrial applications.
Low Sulphur Heavy Stock is used as fuel for industrial boilers and furnaces
as well as feed stock in manufacture of fertilizers.
11
Grease is a semisolid product of dispersion of thickening agent in liquid
lubricant.
Naphtha is used as feed stock for manufacture of fertilizer, Petrochemicals
and power generation.
Mineral Turpentine Oil used as solvent for textile printing, dry cleaning,
polish and insecticides.
Raw Petroleum Coke (RPC) is bottom of the barrel product of refinery.
This is a solid product. There are two distinctive grades of RPC viz.
Calcination or Green RPC and Fuel Grade or Pet coke. Calcination Grade
RPC (CPC) is used for production of Anodes for the Aluminium Industry.
Fuel Grade Pet coke is used primarily by Cement Plants.Petroleum Coke
(Pet Coke) has high heat capacity.RPC is a by-product of the oil refining
process and is derived from the distillation of petroleum crude in delayed
cokers.CPC is used in the Aluminium, Graphite Electrode, Steel, Titanium
Dioxide and other carbon consuming industries. Pet coke mainly used in
industrial sector.
APPENDIX C shows the types of products produced from crude oil.
Quality Control
2.15 The quality of petroleum, oil and lubricants (POL product) is controlled
keeping in view the requirements of the end users and is in conformity with
the BIS specifications. The Ministry of Environment, BIS and other agencies
of Petroleum Ministry such as Indian Institute of Petroleum (IIP), Centre for
High Technology (CHT) are jointly developing standards for products.
2.16 There is world wide concern about environmental pollution caused
by emissions from automobiles. These emissions contain lead and benzene
which are carcinogenic and adversely affect the health of the people. Sulphur
and Suspended Particulate Matter (SPM) from diesel vehicles cause
breathing problems such as asthma. Specifications of MS and HSD also
have undergone changes and more stringent pollution control norms in the
form of Bharat II, Bharat III and Bharat IV (like Euro II, and Euro III and Euro
IV) are in place. Meeting these norms involve huge investment especially
for those companies in the oil industry which processes sour and heavy
crudes.
12
DOWNSTREAM SUPPLY CHAIN
Refinery terminals
Inland / Tap Off
Terminals
Depots
Port Terminals
Customers
Retail Outlets
2.17 The quality control measures begin at the refinery itself at the time of
transfer of product from the refinery to the TOP of the marketing company
or loading of the tanker directly from the refinery to another port location.
The concerned refinery provides its report confirming that the product in the
tank for which transfer is proposed meets the quality specifications. Quality
control labs are also set up at the refinery, TOPs, depots, port installations
etc., to ensure that the products conform to the required specifications.
Marketing Process
2.18 Petroleum products being mostly liquid in nature require special
facilities for storage, transportation and distribution. Most of these are volatile
in nature and require special care in handling delivery. Marketing and
distribution of the products is done by oil companies normally through a
large network of storage and distribution facilities as given below:
2.19 Marketing of petroleum products demands finer marketing skills in as
much as the market leader is company, which can make products available
to consumers in the most efficient manner at all times at right price, in right
quantity, of right quality and at the right place. The marketing image can
only be enhanced by extending excellent customer service and ensuring
consumer/ public satisfaction. Further, market share can be improved vis--
vis that of others by being pro-active and meeting customers needs.
2.20 The marketing and distribution activity in an oil company normally
falls under the following heads:
(i) Installation: This consists of storage tanks and product handling
13
facilities for receipt of products from port and/ or refineries for onward
despatch to direct customers in bulk and inland depots.
(ii) Distribution: This consists of depots and transportation facilities for
onward movement of products to retail outlets and direct customers.
(iii) Administration: For efficient management of the all India network of
installations, depots, LPG bottling plants, etc., oil companies have
head office, regional and divisional offices.
(iv) Air Field Stations: Oil companies have infrastructure at the airfield
stations consisting of storage tanks, hydrants, pipelines, hoses etc.,
for fuelling aircraft.
(v) Retail Pump Outlets: This is the last link in the distribution and the oil
companies have dedicated dealer network for retailing MS and HSD.
(vi) LPG Filling: Bulk LPG imported or from the refineries is bottled at the
LPG bottling plants before being marketed to the domestic and
industrial customers.
(vii) Lube Blending plant (LBP): Base oil from Refinery is blended with
Additives to manufacture Lubricants and Greases. Blended Lubricants
and Greases are filled in Packed containers/pouches.
(viii) Small Can filling Plant (SCFP): Here Blending activity do not take
place. However Blended Lubricants and Greases are filled in small
capacity containers/pouches
Transportation
2.21 Transportation cost plays a vital role in determining the final selling
prices for the consumers. The various modes used for transportation of
petroleum and crude to consumers include coastal tankers, river barges,
multi-product cross country pipelines, branch pipelines, railway wagons, road
tank-trucks, etc. Crude oil is transported to the refineries either by tankers
or by pipelines. The product from the refinery/ port installation are moved by
rail, road, pipeline and coastal vessels. The centers of consumption and
production and the points of import of petroleum could be at places separated
by hundreds of miles. Surplus products at a location also need to be
transported to areas facing deficit. Refineries could be anywhere in between
the consumption and production centers. With the economics of refinery
14
location determining the exact position, crude has to be transported from
production centers or points of import to the refineries and refined petroleum
products have to be transported from refineries or points of import to the
consumption centers.
2.22 All modes of transportation of petroleum products complement each
other and form essential components of the logistics system. For bulk
transportation of petroleum products, pipelines are the most energy efficient,
convenient and preferred mode of transportation. With deregulation, the oil
companies and shippers have multiple options in selecting the mode of
transportation and there is an increased emphasis on quality and reliability
of service.
Market Intelligence
2.23 It may appear that oil companies are operating in the sellers market,
the fact is that oil companies engaged in marketing gives rise to a healthy
competition among the companies. Collecting market information is a critical
factor for sustaining and improving operational efficiency. Being well informed
also helps in knowing the pulse of the market, which would in turn, help in
taking pro-active decisions and also in anticipating events before the actual
occurrence and taking corrective action before the events become a part of
history. The market intelligence can also be acquired by systematic and
timely collection and collation of some important facts about various markets
such as:
(i) Geographic details of area with number of States, districts, cities/
towns, talukas and villages.
(ii) Population of various districts, talukas/ villages, main occupation of
the people and important crops/ agricultural seasons.
(iii) Vehicular population and important fleet operators, workshops and
garage.
(iv) Road map showing important roads, such as national highway, state
highway, MDR (Major District Roads) and village roads and their
starting and terminalling points and also showing depots/ terminals/
ROs.
15
(v) Road, rail, airline connection and road development, present and
future.
(vi) Competitors activities/ strength.
(vii) Industrial developments, number of major and minor industries and
their locations, existing and expected/projected industries.
(viii) Agricultural developments minor and major irrigation projects, World
Bank sponsored schemes.
(ix) Infrastructure and other development of the area, housing as well as
commercial.
(x) Master plans for improvement in cities/ talukas.
(xi) Government set up, important and concerned Ministers, Deputy
Commissioner, Collectors, Police officials, PWD Engineers, Fire Force
Officers, pertaining to each district.
Strategic Reserves
2.24 The marketing/ refining companies have to maintain strategic reserves
of petroleum products in the country since an oil supply crisis can disrupt
the economic life of the country. It is therefore desirable to have a buffer to
cope with the difficulties and manage the crisis should it reach a critical
stage. However, before this stage is reached, it is desirable to intervene in
the course of the crisis, for as supplies begin to dry up, there is a risk of
speculation which fuels price increase and, to a certain extent, the crisis
itself. It, therefore, makes good economic sense to have a means of defusing
the crisis by off-loading the reserve stocks on the market before the crisis
develops. Further, this buffer itself is a powerful deterrent for those who
might be tempted to unleash a supply crisis.
Sharing Arrangements
2.25 Memorandums of Understanding (MoUs) are a common feature in
the oil industry, wherein one oil company enters into an MoU for sharing
product supply, storage facilities with other oil companies which have product
availability and infrastructure at a given place. As one company cannot
have its own source of supply and infrastructure throughout the country, this
16
type of arrangement is necessary for oil companies for effective utilisation
of their product and facilities.
Product Sharing Arrangements
2.26 MS, HSD, SKO and LPG are mass consumption products. Each
marketing company has created extensive retail network to satisfy the
consumers needs. In case of LPG, customers are enrolled by each company
in all demand centres and the product requirement is met out of the
production of the nearest refinery and/ or out of imports.
Sharing of Other Infrastructure Facilities
2.27 It is difficult for a single oil company to have all the facilities throughout
its marketing network for storing and distribution of products. It is, therefore,
a normal practice in the oil industry to utilise the facilities of other company
at the place where it does not have one and in turn lend its own facilities
where the other company does not have such facilities.
Sharing of Product Pipelines
2.28 The product pipelines are natural monopolies. The pipelines are
shared by industry to protect consumer interests. This results in avoiding
wasteful use of resources of the country, by cutting the need to build a
second parallel pipeline one to the existing one.
Sharing of Port Facilities
2.29 Like sharing of pipelines, the port facilities are also shared by the
Industry.
Supply to Remote Areas
2.30 There are several parts of our country which are remotely located
and do not consume enough volumes of petroleum products to warrant
setting up of storage and distribution facilities. Marketing companies due to
socio-economic reasons are required to supply petroleum products to these
areas even at losses.
17
Technical Parameters in the Marketing Activity
2.31 The technical parameters involved in the marketing activity undertaken
by the oil companies comprise:
(i) Facilities - Storage tanks, under ground (UG) tanks/ above ground
(AG) tanks, pipelines, products pump house/ loading pump house,
fire fighting system like water and foam
(ii) OISD Norms
(iii) Petroleum Act and Rules Explosive norms
(iv) Pollution control
(v) Quality control
(vi) ISO requirements
(vii) Marketing guidelines
(viii) Transport discipline guidelines
(ix) Types of markets
(x) Types of distribution channels.
Facilities
2.32 The important factors to be noted in respect of the facilities of the oil
companies include:
(a) Product Storage Tanks The crude and petroleum products at the
refineries/ terminals/ depots are stored in bulk in suitably calibrated
storage tanks of capacity, which is related to the throughput of the
location. The storage tanks are invariably installed above the ground
level and are constructed on sand bed/ concrete foundation. These
tanks are vertical, cylindrical in shape and either have a fixed cone
roof or a floating roof. The floating roof tanks are installed to control
the product losses due to evaporation. At times, the underground
tanks of suitable capacity are also used for storage of petroleum
products at depots. Apart from this, special types of tanks are also
installed for specific uses.
18
(b) Inlet and Outlet pipelines - The inlet and outlet pipes are provided to
the tanks to facilitate receipt and withdrawal of products. These lines
are provided at the bottom of the tank to avoid splashing of the
products at the time of receipt and ensure maximum withdrawal of
product. The delivery lines invariably have pumps to guide operations.
Receipt lines are also provided with pump wherever necessary.
(c) Rail Wagon/ Tank Truck Filling Sheds - Bulk of supplies to depots/
customers are effected by rail wagon/ tank truck. Each refinery/ depot/
installation are provided with rail wagon/ tank truck filling sheds to
facilitate loading of tank trucks/ rail wagon. The number of bays
provided at the rail wagon/ tank truck filling shed is commensurate
with the daily/seasonal peak volumes handled at the refinery/
installation/ depot. Rail wagon/ tank truck filling bay is connected to
the tanks by pipeline of requisite diameter.
(d) Observance of safety regulations As mentioned earlier, the
petroleum products are classified according to their closed cup flash
point as follows:
Class A Liquids which have a flash point below 23C.
Class B Liquids which have flash point of 23C or above but
below 65C.
Class C Liquids which have flash point of 65Cor above but
below 93C Unclassified liquids have a flash point of 93C and above.
Thus, depending on the class of petroleum products, which is required
to be stored in the tank, the fabrication of the tank is carried out and
required safety regulations are observed at the installation/terminal,
while installing these tanks.
(e) Product pump house/ Loading pump house - This consists of pipeline
from storage tanks, together with pumps for each products for loading
the product into Tank Wagon and Tank Truck.
(f) Fire fighting systems- consists of water pipelines, pump house, fire
engines, water storage, foam storage for controlling and putting off
any fire hazards.
19
Oil Industry Safety Directorate (OISD) Norms
2.33 (Please refer paragraph 2.9 for details).
Petroleum Act and Rules - Explosives Norms, Petroleum
Rules, 1976 and Gas Cylinder Rules, 1981
2.34 (Please refer paragraphs 2.10 to 2.12 for details).
Pollution Control Norms
2.35 (Please refer paragraph 2.13 for details).
Quality Control
2.36 The petroleum products marketed by the oil Industry conform to the
Indian Standard Specifications which is followed as a marketing specification
for each product. The concerned refinery provides its report confirming that
the product in the tank for which transfer is proposed meets the specifications.
Thereafter, required quality control measures are taken at all stages, i.e.,
receipt of product at TOPs through pipelines, through rail wagon, through
tank trucks etc. Required procedures are followed to ensure quality control
checks at various stages till the product is finally delivered to the consumer.
For this purpose, quality control labs are set up at the refinery, TOPs,
depots, port installations etc., to ensure that the products conform to the
required specifications. Mobile laboratories are also set up to check the
quality of the products while it is in transit from the supply location to the
premises of the consumer (in case of delivered supplies). The mobile
laboratories are also established for checking the quality of the product
being dispensed from the Retail Outlet.
2.37 Product quality and specifications conform to the Industry Quality
Control Manual. Petroleum products are received, stored and delivered at
the Installation/ Depot as per the quality control manual for non-aviation
products. The responsibility of ensuring proper quality control in various
terminals/ installations and depots etc., rests with Operations Department of
the respective oil company.
Motor Spirit and High Speed Diesel Order, 1990
2.38 In exercise of powers conferred by Section 3 of Essential Commodities
Act 1955, the Central Government has passed this Order. The Order extends
20
to the whole of India and its objective is to prevent malpractices in the
supply and distribution of MS and HSD. For the purpose of the Order,
adulteration, pilferage, stock variation, unauthorised exchange, unauthorised
purchase and unauthorised sale are considered as acts of omission and
commission in respect of Motor Spirit and High Speed Diesel.
ISO Requirements
2.39 The main requirements for getting ISO 9002 certification on the
performances and working of a marketing terminal/ depot/ tap-off/ retail
outlet with a total commitment on quality of services render to customers is
driven by the following goals:
a) To maintain internationally benchmarked Quality Management and
Environment Management system.
b) To maintain growth in marketing of products.
c) To train all employees for products knowledge, right attitude and
customer satisfaction and loyalty for improving image of the company.
d) To organize oil conservation and quality awareness programs at
regular intervals.
e) To train employees and dealers for overall management and dealers
staff in customer service as well as to launch new products and
schemes developed by the company.
2.40 The ISO certifying agency normally looks at the following aspects
before certifying that the particular marketing terminal/ depots/ tap-off point/
retail outlet meets ISO 9002 requirements:
(i) Specifications as to the responsibilities and authority of personnel as
they apply to quality.
(ii) Structures of the quality system, the various levels of documentation
used and the indented use of each level of documentation.
(iii) Whether the customer requirements are understood and reviewed
prior to processing orders.
(iv) Whether design control is ensured.
21
(v) The control information that affects quality by ensuring whether the
relevant documents, both internal and external, are reviewed and
approved by authorized personnel prior to release, and whether all
relevant personnel have access to pertinent issues and whether
revisions receive the same level of authorization as the originals.
(vi) Whether the company has established and maintained a system for
ensuring that purchased items and services conform to specific
requirements.
(vii) Whether it is ensured that all customer supplied material and services
are verified, stored and maintained.
(viii) Whether the company has established and maintained a system for
identifying the product by suitable means.
(ix) Whether the company has established and maintained a system for
ensuring that activities are carried out under controlled conditions.
(x) Whether the company has established and maintained a system for
the inspection and testing, to ensure compliance with customer
requirements.
(xi) Whether the company has established and maintained a system to
control, calibrate and maintain inspection, measuring and test
equipments.
(xii) Whether the company has implemented and maintained a system for
indicating the inspection status of goods.
(xiii) Whether the company has ensured that goods or services containing
any non conformity to specification are promptly identified, documented
and auctioned in accordance with company procedure.
(xiv) Whether the company has established and maintained a system for
implementing corrective and preventive action to eliminate the causes
of actual or potential non conformity.
(xv) Whether the company has implemented and maintained a system for
the handling, storage, packaging, preservation and delivery.
(xvi) Whether the company has established and maintained a system for
22
identification, collection, indexing, filing, storage and disposition of
quality records.
(xvii) Whether the company has established and maintained a system for
planning and implementing internal quality audits.
(xviii) Whether the companies has established and maintained a system for
identifying training needs and provide for the training to all personnel
performing activities affecting quality.
(xix) Whether the company has established a servicing system.
(xx) Whether the company has established and maintained a system for
applying statistical techniques a basis for the assurance and Control
of Quality.
2.41 The above requirements have to be complied with, by the Marketing
terminal/ depot/ tap-off off point/ retail outlet as it pertain to the area of
operations, for getting ISO 9002 Certification.
Marketing Discipline Guidelines (MDGs)
2.42 The Marketing Discipline Guidelines are formulated by the Ministry of
Petroleum and Natural Gas and all the marketing activities of the oil
companies are governed by these Guidelines. The basic objective of the
Marketing Discipline Guidelines is to protect the ultimate customers interests,
so that they get the full value for their money in terms of correct price,
quantity and quality. The Guidelines deal with the following:
I. Handling of MS/HSD/SKO at the oil companys storage point such as
depots, terminals and installations.
II. Handling of products at retail outlets by dealers.
III. Maintenance of company equipment at retail outlets.
IV. Inspection of retail outlets/SKO dealerships.
V. Prevention of adulteration at retail outlets - checks/actions to be taken.
VI. Prevention of malpractices/irregularities at retail outlets.
VII. Prevention of malpractices/irregularities at SKO/LDO dealerships.
23
Transport Discipline Guidelines
2.43 The purpose of these guidelines is to ensure that:
a. petroleum products are delivered in tank trucks in accordance with
quality control manual for non aviation products as per specifications;
b. petroleum products are transported and delivered to dealers/
customers and other storage points in good condition confirming to
the specification; and
c. a well defined system of checks exists at various stages of handling
of petroleum products.
Under the transport agreement with the company the transporter are
responsible for offering fit tank lorry to carry petroleum products and
transporting/ delivering the same in good condition, as per specifications to
the dealers/ customers, other storage points and are held accountable for
any malpractice/ adulteration enroute.
Types of Markets
Retail Market Classification
2.44 This is mainly to identify the class of market in which an outlet has
been set up.
A Class Market Metropolitan cities and other cities having a population
over 8 lakh as per the 2001 census.
B Class Market Cities having a population below 8 lakh as per the 2001
census excluding North Eastern States, Himachal Pradesh, Jammu and
Kashmir and Uttarakhand.
C Class Market All other towns/ cities not covered under A, B and E
markets excluding locations on National/ State Highways.
D Class Market Retail outlets on National/ State Highways.
E Class Market Remote areas not covered by National/ State Highways
and pockets of consumptions having no retail outlet within 10 KMs radius
and to cater to the requirements of the agriculturalists etc., in the remote
areas i.e., areas which are not on National/ State Highways, North Eastern
24
States, Himachal Pradesh, Jammu and Kashmir, Lakshadweep and
Uttarakhand.
Types of Distribution Channels
2.45 There are two channels of marketing in selling of petroleum products,
one, retail and second, direct. The retail channel comprises the following
three:
(a) Retail outlets for MS, HSD, Lubricants, Greases. Under the category,
the following types of retail outlets are further identified:
A site which are Company owned and company controlled.
B site which are Dealer owned and company controlled.
C site which are Dealer owned and Dealer controlled.
(b) Utility pumps for HSD.
(c) Agency for Kerosene, LDO, Lubricants/ Greases.
25
Chapter 3
Internal Audit of Refining Activities
3.1 The objective of internal auditing is to assist members of management
at all levels in the effective discharge of their responsibilities by furnishing
them with analysis, constructive appraisals, recommendations and pertinent
comments concerning the activities reviewed.
3.2 Management is a process by which the affairs of an enterprise are
conducted in such a manner that its goals and objectives are attained through
optimum utilization of all available resources, within the legal, social,
economic and environmental constraints. To achieve optimum utilization of
resources, the management should determine the goals and objectives of
the concern, quantify them to the extent possible, develop major policies
and plans, implement them and exercise control over such implementation.
The internal auditor should constantly review each of the aforesaid managerial
functions. Hence, the scope of internal audit covers the following:
Appraising the reliability and integrity of financial and operating
information by evaluating the means developed by management to
identify, classify, measure and report such information.
Appraising the systems, management has established to ensure
compliance with policies, plans, procedures, laws and regulations
that could have a significant impact on operations and reports.
Appraising the means, management has established to safeguard
assets, and, as appropriate, verifying the existence of such assets.
economical and efficient use of resources.
results are consistent with established objectives/ goals and operations
or programs are carried out as planned.
26
Crude
3.3 Crude is the main input for producing refined petroleum products.
Crude purchase may be indigenous or imported. The significant elements of
the cost of the crude purchase includes the cost of crude, freight, customs
duty, demurrage, wharfage or the port trust dues, ocean loss, other taxes
and duties, insurance, etc.
Cost of Crude
3.4 It includes the price paid for indigenous/ imported crude. FOB cost of
imported crude is paid according to the rates as per Term/ Spot contract
with the supplier. The FOB cost of indigenous crude is paid at the rates at
par with international crude prices.
Freight
3.5 Crude is generally transported through oil tankers of shipping
companies and the freight is payable according to the terms of the contract
of affreightment signed and entered into with the shipping companies.
Customs Duty
3.6 Customs Duty is paid on imported crude at the prescribed tariff rate.
In case there is bonded storage facility, duty is payable only at the time of
removal of crude oil for processing/ refining.
Demurrage
3.7 Demurrage refers to the compensation payable by the Refinery to
the shipping company in case of any delay in unloading crude from the
vessel, over and above the lay time as stipulated in the contract of
affreightment. The holder of the Bill of Lading is required to pay demurrage
at the agreed rate to the owner of the vessel.
Wharfage (Port Trust Dues)
3.8 Wharfage on crude, both imported and indigenous unloaded at the
port location, is payable as per respective Port Trust rate.
Ocean Loss
3.9 This is applicable for both imported and indigenous crude. If ocean
27
loss in a voyage is more than the prescribed limit, a claim is lodged with the
shipping company for the ocean loss.
Other Taxes and Duties
3.10 Cess, royalty and sales tax, if any, is payable on indigenous crude.
Insurance
3.11 Insurance is arranged with insurance companies for an open insurance
cover for crude oil shipments while in transit from foreign load points or
coastal loading points till the crude oil is actually discharged at the refinery.
Internal Audit of Crude
Cost of Crude
3.12 In respect of cost of crude, the internal auditor would verify:
(i) Whether the crude purchase of imported/ indigenous crude is
calculated as per the crude purchase agreement.
(ii) Whether the quantity received as per the crude intake certificate
corresponds with the surveyors report.
(iii) Whether in case the difference in the quantity loaded at the port of
loading and the quantity received at the destination port is more than
the specified limit, claim for transit loss (Ocean loss) is made with
carrier as per the terms of the Chartered Party agreement.
(iv) Whether the comparison of the on board quantity at the destination
port with actual shore receipt has been made to ascertain the
difference as a percentage of the Bill of Lading quantity. If the
percentage so calculated is more than the specified limit, whether
the carried quantity, if any, has been discharged in the next voyage
or recovered from the carrier.
(v) Whether the carrier has preferred protest notes with the supplier of
the crude for huge difference between the gross Bill of Lading quantity
and load port onboard quantity.
(vi) Whether the difference is claimed from the supplier in case the supplier
accepts the protest note.
28
(vii) The Entry Tax, handling and survey charges and their accounting.
(viii) Whether in case of imported crude, payment is made for net Bill of
Lading quantity.
(ix) Whether there is an adequate system of monitoring the due dates for
payment of crude purchase whether the same is functioning properly.
(x) Whether the payment of cost of imported/ indigenous crude is made
within due dates.
(xi) Whether correct exchange rate has been adopted while utilising the
buyers credit.
(xii) Whether correct exchange rate have been adopted for imported crude.
Freight
3.13 In respect of freight, the internal auditor would:
(i) Examine the arrangements as regards transportation of crude based
on terms of the purchase contract like FOB, Cand F, Time Chartered
Vessel to verify whether the payment of freight made to shipping
company is as per the contract of agreement signed and entered.
(ii) Verify whether overage benefit in freight has been availed.
(iii) Verify whether lighterage dues have been properly computed for C
and F vessels and Chartered Vessels.
(iv) Verify whether the dead weight freight paid is as per terms of
agreement.
(v) Verify computation of address commission and commission payable
to private/ Government agencies.
(vi) Verify whether the payment is made within stipulated time.
(vii) Verify whether the exchange rate adopted for calculation of freight is
as per the chartered party agreement for the Voyage.
(viii) Verify whether provision for liability has been made for the amount
due at the end of financial year.
29
(ix) Verify accounting treatment for the above in annual account closing.
Insurance
3.14 While auditing the insurance aspect, the internal auditor would:
(i) Verify whether the provisional tanker details are intimated to the
insurance company before the actual loading takes place as per the
terms of the marine open declaration policy.
(ii) Verify the calculation of insurance premium with regard to the FOB
quantity, freight and insurance and rate of insurance.
(iii) Verify whether the insurance certificate is received for each Voyage.
(iv) Verify whether the provisional amount deposited with the insurance
company is adjusted against the final payment towards the Voyage
and the balance is carried forward for adjustment in the subsequent
payments.
(v) Verify whether sufficient balance is maintained with the insurance
company to ensure that the crude in transit is always covered.
(vi) Verify that appropriate policies to be covered for employees
mediclaim, group accident cover; public liability cover and transit
cover for incoming and outgoing cargos.
(vii) Verify whether any no-claim bonus in case of nil claim, has been
accrued and if so, whether claimed in time. This is generally applicable
in case of mega risk policies, since basic amount deductible in the
policy claim is kept substantially high; hence the number of claim
would normally be few or nil.
Customs Duty
3.15 While verifying customs duty, the internal auditor would verify whether:
(i) Assessable value on the basis of which customs duty is paid has
been calculated with regard to FOB cost, insurance, freight and landing
charges.
(ii) The rate of exchange notified by the customs authorities as on the
30
date of filing of INTO Bond, is adopted for calculation of assessable
value.
(iii) The actual cost of crude paid is considered at the time of finalization
of customs duty payments.
(iv) The payment is made as per the customs duty rates applicable as on
the date when the Ex-Bond is filed with the customs authorities.
(v) The payment is made for crude processed on the basis of FIFO
assumption.
(vi) The sum of the quantity drawn for production as per the Ex-Bond
filed on the various dates is equal to the quantity as per the crude
intake certificate for each shipment.
(vii) Proper distinction is made between indigenous crude and imported
crude, as customs duty is applicable only for imported crude.
(viii) A periodic reconciliation of Current Account with Customs as per
the current account monthly statement given by customs authority
and general ledger is done.
Demurrage
3.16 In respect of demurrage, the internal auditor would need to verify:
(i) The exchange rate adopted for payment of demurrage is as per the
chartered party agreement.
(ii) The reasons and the calculation of excess hours for which demurrage
payment is made from the shipping documents given by the carrier.
(iii) Whether the payment is withheld if the carrier makes the claim after
the stipulated period, as per the Chartered Party agreement.
Wharfage
3.17 In respect of wharfage, the internal auditor would verify whether:
(i) The wharfage is paid for the gross quantity of crude discharged by
the tanker as shown in the crude intake certificate.
31
(ii) The rate is paid as per terms of MOU with port trust.
(iii) The provisional amount deposited with port trust is adjusted against
the final payment for each vessel.
(iv) A periodic reconciliation of current account with port trust as per the
current account monthly statements and general ledger is done.
Clearing Agents and Surveyors
3.18 Clearing agents are appointed to co-ordinate the process of
compliance with the port trust and customs formalities. Surveyors prepare
the survey report giving details of quantity of crude oil received, based on
which the payment is effected. In this respect, the internal auditor would
need to verify whether the payment made to clearing agents and surveyors
are as per the terms of the contract and also whether the contract is renewed
on expiry.
Crude Oil Ledger
3.19 Oil companies also maintain Crude Oil ledger showing the details of
receipt of crude oil tanker wise and all components of crude cost. The
internal auditor would need to verify the following information in the Ledger:
(i) Whether the cost is maintained separately for imported and indigenous
crude.
(ii) Whether all the components of cost of crude like FOB cost, freight,
customs duty, insurance, wharfage is entered properly.
(iii) Whether the throughput as shown in COL is the same as the
throughput shown in the monthly production statement.
(iv) Whether the COL is maintained on FIFO basis.
Verification of other Aspects in Refining
3.20 In addition to the above aspects, the refining process involves certain
other significant processes/ aspects which need to be subjected to internal
audit. These aspects include:
(i) Licencing.
32
(ii) Raw water facility.
(iii) Bitumen drum fabrication
(iv) Bitumen plant operation.
(v) Oil movement and storage.
(vi) Captive power plant activities.
(vii) Maintenance.
(viii) Shut down activities.
(ix) Energy consumption.
(x) Laboratories.
(xi) Operations.
3.21 The internal auditors procedures for verification of these aspects are
discussed in the following paragraphs.
Licensing
3.22 The internal auditor would need to verify the validity of the following
licences:
(i) Waste heat recovery boilers and fired boilers of captive power plant
(ii) Explosive licences under Petroleum Act and Rules and Gas cylinder
rules and SMPV rules.
(iii) DGCA approval to store ATF under category D and E.
(iv) Pollution Control Board Licence for air-consent, water consent,
hazardous waste management licence.
(v) For tanks under legal metrology.
(vi) For storage of petroleum products.
(vii) Factory licence including approval of plant.
(viii) Weighbridge licence including plant approval.
33
(ix) State sales tax registration and renewal.
Raw Water Facility
3.23 Broadly, following need to be seen by the internal auditor in respect
of raw water facility.
(i) Whether the required levies like right of way, insurance charges, raw
water cess etc., have been paid.
(ii) Whether the water pumped at the facility and water received at the
refinery is being periodically monitored.
(iii) Where the raw water facility is shared with other organisations,
whether the water pumping costs and fixed costs that are required to
be shared with hinterland organisations are being shared fully and
recovered.
Bitumen Drum Fabrication
3.24 In respect of bitumen drum fabrication, the internal auditor would
need to verify the following:
(i) The related contract and the bank guarantees.
(ii) Whether the fabricator has been issued steel coils beyond the bank
guarantee limits.
(iii) Any additional costs reimbursed to the fabricator and whether the
same are as per the contract.
(iv) Whether the insurance cover available at shop floor of the fabricator
is sufficient to protect clients interest.
(v) Whether the fabricator keeps stocks other than that of client. If so,
how the distinction is being maintained physically.
(vi) The results of physical verification of steel coils at fabricator and
recovery action for shortage.
(vii) The records for defective drums and lids and their replacement.
(viii) Whether the fabricator is giving the correct number of drums for the
34
coils supplied. If not, whether he has made good the shortage, else
recovery made from him.
(ix) Whether there are any product losses due to drum leakage and if so,
whether recovery action has been taken.
Bitumen Plant Operation
3.25 Bitumen is a category of organic liquids that are highly viscous, black,
sticky and wholly soluble in carbon disulfide. Asphalt and tar are the most
common forms of Bitumen. Bitumen in the form of asphalt is obtained by
fractional distillation of crude oil. Bitumen being the heaviest and being the
fraction with high boiling point, it appears as the bottom- most fraction.
Bitumen is primarily used for paving roads. Its other uses are for the general
water proofing products, including in the production of roofing felt and for
sealing flat roofs. In a Bitumen plant, manufacture of Bitumen takes place
as also filling of the Bitumen into drums for dispatch and sale. The internal
auditor would need to verify the following aspects of bitumen plant operation:
(i) Capacity utilisation, whether the same has been optimised.
(ii) Fuel/ electricity etc. consumed vis-a-vis norms.
(iii) Efficiency of operation as per the managements laid down norms.
(iv) Idle time and reasons therefor.
(v) Consumption of chemicals/ catalysts with laid down norms.
(vi) Production planning vs. actual execution.
(vii) Matching of production schedule with sales
(viii) Reasons for off-spec production and remedial measures taken.
(ix) Where there is manufacturers guarantees are in place, verify whether the
guaranteed outputs/ consumption etc., are matched.
Oil Movement and Storage
3.26 This activity is an offsite management facility, which deals with:
(i) Entire stock accounting of crude oil.
35
(ii) Analysing the stock loss on crude oil.
(iii) Payment of statutory levies on crude oil.
(iv) Verification of calibration of storage tanks.
(v) Stock accounting of refined petroleum products.
(vi) Payment of statutory levies on finished products.
(vii) Sludge generation and disposal there off.
(viii) Verifying fuel loss accounting.
(ix) Verifying the actual production with the budgeted production.
(x) Filing of returns of excise and customs duty with statutory authorities.
3.27 In respect of the oil movement and storage, the internal auditor would
need to undertake the following procedures:
(i) Verify water drainage from crude tank/ other tanks production losses.
(ii) Verify operation Loss (other than fuel and loss).
(iii) Verify crude receipts.
(iv) Analyse ocean loss loading losses, transit losses, and unloading
losses.
(v) Verify surveyors gauging for tanks.
(vi) Verify production planning crude composition Vs yield composition
and RTP Vs demand forecast.
(vii) Verify calibration chart of tankages and their validity.
(viii) Verify flow meter reading vis--vis tank gauges for receipt/ despatches.
(ix) Verify slop generation (dry-wet slop).
(x) Verify sludge generation/ disposal record of sludge generation (in
storage tanks).
(xi) Verify list of contaminated products received/ treatment.
36
(xii) Verify PLT losses dispatch Vs receipt.
(xiii) Verify dormant tanks loss (Refer RG1 and AR3As).
(xiv) Verify inter tank transfer losses.
(xv) Verify operation loss (export) from these tanks (loaded Vs received
at ship).
(xvi) Verify gauge tickets for serial no., signatures, dips in dip register,
corrections, and cancellation.
(xvii) Verify fuel and loss accounting.
3.28 Additionally, following aspects of the production planning are also
required to be verified by internal audit:
(i) Dip Stock Statement.
(ii) Production Report-internal format.
(iii) Daily deviation report.
Captive Power Plant (CPP) Activities
3.29 Captive power plant provides uninterrupted power and steam supply
for running the pumps, compressors and other equipments. For meeting any
emergency, alternative source of power supply from outside is also lined
up. Super heated and saturated steam at various pressures is also supplied
for process units and offsite area from this system. Steam is used for heating,
striping in columns, atomisation of fuel oil before burning in furnace, fire
fighting, driving steam turbines and power operation. A steam turbine is a
mechanical device that extracts thermal energy from pressurized steam and
converts it into useful mechanical work. A Turbo generator is a Turbine
directly connected to an electric generator for generation of electric power.
Steam powered Turbo generators provide a majority of worlds electricity
and are also used by steam powered.
3.30 The procedures for internal audit of CPP activities would include:
(i) Verification of capacity utilisation, whether optimized.
(ii) Verification of fuel/ electricity etc., consumed vis-a-vis norms.
37
(iii) Verifying the efficiency of operation as per the Managements laid
down norms.
(iv) Verifying the idle time and reasons therefore.
(v) Verifying production planning Vs actual execution.
(vi) Where there is manufacturers guarantees are in place, verifying
whether the guaranteed outputs/ consumption etc., are matched.
Maintenance
3.31 In a refinery there is an increased emphasis on sustaining high level
of throughput and low level of down time. To achieve this it is necessary
that the plant and equipment be maintained in good working order. Successful
maintenance operations assist in maximizing efficiency and postponing or
reducing future Capital expenditure. Maintenance can be preventive
maintenance or corrective maintenance. The preventive maintenance refers
to the efforts to avoid damages/ breakdown prior to the any noted damage
or brake down. The corrective maintenance refers to efforts torectify a
breakdown or imminent breakdown of equipment in the Refinery.
3.32 The scope of internal audit in respect of the maintenance activity
includes verification of:
(i) Schedule of preventive maintenance.
(ii) History cards of equipments due date for maintenance.
(iii) Segregation of equipments as per naturecritical/ non-critical.
(iv) Monthly performance of rotating equipment.
(v) Maintenance suggested by inspection department.
(vi) Recommendations by annual internal safety audit vis--vis compliance
thereof.
(vii) Completion time Vs planned time.
(viii) Actual cost Vs planned cost.
(ix) Actual job done Vs planned scope.
38
(x) Utilisation of cranes/ compressors idling time.
(xi) Idle equipment.
(xii) Budget Vs actual expenses.
Shutdown Activities
3.33 The throughput of major Refinery units declines as the catalyst
becomes spent and the corrosion resulting from heat and minerals reduces
product flows. Production overtime is closely monitored and plans are set to
Turnaround or Shutdown and Overhaul a unit. This requires a major
effort on the part of the Refinery and has significant financial impacts in
terms of both cost and short term loss of revenue. In a turnaround or
shutdown and overhaul, the units are completely overhauled. Pumps are
replaced, trays are repaired or replaced, and, in catalytic units, the catalyst
is refurbished and replaced and all corrosion is removed. Major turnarounds
or shutdowns are required to be performed on an annual or bi-annual basis.
3.34 Internal audit of the shut down activities involves verification/ analysis
of the following aspects:
(i) Periodicity of shutdown.
(ii) Recommendations made by inspection for turn around vis--vis
compliance.
(iii) Unit-wise planned shut down duration vis--vis actual period and
reasons for variations.
(iv) Unit-wise records maintained during shutdown.
(v) List of POs placed by maintenance for shutdown work.
(vi) Utilisation of procured items as well as surplus generation.
(vii) Local cash purchases in turnaround.
(viii) Crane hiring Vs crane utilization at garage.
(ix) Price for items purchased during shutdown vis--vis price for regular
purchase.
(x) Material received after shutdown.
39
(xi) Budget Vs actual expenditure.
(xii) Creation of fixed assets.
Energy Consumption (Encon)
3.35 Every refinery consumes fuel/ energy while refining the crude oil into
refined products. Energy efficient processors/ equipment such as furnaces,
pumps, exchanges are to be examined and monitored for optimum
consumption of fuel/ energy. Continuous updation of energy consumption
techniques for efficient utilization of fuel/energy is required.
3.36 The internal auditors procedures in respect of audit of Encon include:
(i) Verification of the records maintained for consumption of the fuels.
(ii) Verification of the consumption of the fuel vis--vis the pattern and
the reasons for higher consumption and remedy therefore.
(iii) Verification of the reasons for the unidentified losses/ gains.
(iv) Examining the abnormal variation in case of higher fuel and loss.
(v) Verifying the envisaged benefits of the upcoming ENCON projects.
(vi) Verifying the benefits of the completed ENCON projects.
Laboratories
3.37 After the crude oil is refined into the finished products and the products
are taken to the product tanks, samples of the finished products are sent to
the laboratory for testing. Once the product meets the quality specification
as per BIS or customer requirement, then the certificate of quality is issued
by the laboratory. Thereafter, the product is dispatched to market.
3.38 The following is an illustrative set of procedures for the internal audit
of laboratories:
(i) Verify quality control testing as per specifications/ cancelled/ revised
test reports.
(ii) Verify time taken to release test reports.
(iii) Verify treatment to off-spec batches.
40
(iv) Verify monthly MIS/ statutory reports.
(v) Verify whether the activities of R and D centre are in line with the
proposal.
(vi) Verify utilisation of all the equipment/ facilities.
(vii) Verify idle facilities/ equipment.
Internal Audit of Operations
3.39 Internal audit of the operations covers the following aspects of the
refinery:
(i) Crude distillation unit.
(ii) Hydrocracker unit.
(iii) Hydrogen unit.
(iv) Gas oil hydro-desulphisation unit.
(v) Visbreaker unit.
(vi) Sulphur recovery unit.
(vii) Consumption of chemicals and catalysts.
Crude Distillation Unit
3.40 This unit is used for distillation of crude oil which is carried out in the
column and Gas oil, Kerosene and Heavy Naphtha are withdrawn as side
draw-offs. The unit is based on the principle of fractional distillation as
discussed earlier in the publication. Crude oil is separated into fractions by
fraction distillation. The fractioning column is cooler at the top than at the
bottom so the vapours can condense more easily while moving up the
column. The heavier fractions that emerge from the bottom of the fractionating
column are often broken up (cracked) to make more useful products.
Hydrocracker Unit
3.41 The purpose of Hydrocracker unit is to crack (split) crude oil into
different types of products at different ranges of temperature. Hydrocracking
41
is a catalytic cracking (splitting) process. The products of this process are
saturated hydro carbons. Major products from hydro cracking are Jet Fuel,
Diesel, relatively high octane rating gasoline fractions and LPG. All these
products have a very low content of sulphur and contaminants.
Hydrogen Unit
3.42 The need of Hydrogen is increasing day by day for treating the
products like Petrol (Motor Spirit), HSD, fuel oils and feeds for FCC (Fuel
Catalytic Cracking) and other plants for bringing down the sulphur. The
purpose of Hydrogen plant is to produce Hydrogen for meeting the
requirement of various Hydro treatment process of crude oil. The feed for
Hydrogen plant is Refinery fuel gas, saturated LPG, Natural Gas and light
Naphtha.
Gas Oil Hydro-Desulphurisation Unit
3.43 The purpose of the unit is to remove Sulphur and Nitrogen, convert
olefins/ aromatics
1
to saturated compounds; and remove contaminants like
oxygenates and organometallic compounds. This unit is used for the
production of extra low sulphur diesel with a sulphur content of less than
0.25 per cent, which results in positive environmental protection in the control
of automotive emissions.
Visbreaker Unit
3.44 It is an operation that converts high viscosity Petroleum stocks to
lower viscosity Petroleum stocks suitable as heavy fuel oil. Viscosity is a
measure of resistance to flow and is an important parameter for desalting. It
is also highly dependant on temperature. Higher viscosity crude needs high
temperature for effective desalting. There is a limit for temperature in de-
salters operation. Viscosity is an important property for lube oils because it
gives the lubricating property to the oil. This is required to prevent wear and
tear in the moving parts of a machine on occurrence of metal to metal
contact. For fuel oils, it gives flow properties which are needed for pump
selection for transporting. The process of removing salts from crude oil is
called desalting. These salts cause severe corrosion in crude refining units.
The de-salters are designed for removal of 99 percent salt in crude oil. De-
1 Olefins/ Aromatics are unsaturated Hydrocarbons.
42
salters remove salts, sludge and mud from crude to avoid corrosion and
fouling in exchangers columns and down stream equipment.
3.45 A visbreaker is a chemical plant where thermal cracking in a furnace
reactor (at high temperature) is used to transform heavy Hydro carbons
(e.g., vacuum distillation residue) into lighter hydro carbons (LPG, Gasoline).
Heavy hydro carbons are generally used as fuel oil in chemical plants. The
product of the visbreaker has lower viscosity.
Sulphur Recovery Unit
3.46 Sulphur is a mixture of Sourness and Sweetness of crude, sweet
grades have less than 0.5 per cent of Sulphur whereas sour grades will
have greater than 0.5 per cent of Sulphur. Sulphur, besides being corrosive
to the fuel systems, is a pollutant to the air and affects life. Global efforts
are being made to minimize the sulphur content in Petrol, High Speed Diesel
and fuel oils. The objective of Sulphur recovery unit is to convert Hydrogen
Sulphide (H
2
S) into elemental Sulphur. Sulphur recovery is required because
of increasing demand for environmental friendly fuels, increased use of
High Sulphur and heavier crudes in future as also tightening of emission of
standards by government/ regulatory bodies.
3.47 Internal auditors procedures in respect of the crude distillation unit,
hydrocracker unit, hydrogen unit, gas oil hydro-desulphisation unit, vis breaker
unit and sulphur recovery unit are more or less similar and include:
(i) Verifying whether there is optimum capacity utilisation.
(ii) Verifying fuel/electricity etc. consumption vis-a-vis norms.
(iii) Verifying efficiency of operations as per the Managements laid down
norms.
(iv) Verifying idle time and reasons therefore.
(v) Verifying consumption of chemicals/ catalysts with laid down norms.
(vi) Reviewing production planning Vs actual execution.
(vii) reviewing production schedule vis a vis sales
43
(viii) Examining reasons for off-spec production and remedial measures
taken.
Where there are manufacturers guarantees in place, the internal auditor
would verify whether the guaranteed outputs/ consumption etc., are matched.
Consumption of Chemicals and Catalyst
3.48 During the refining process of crude oil, various chemicals and
catalysts are used. The purpose of chemicals is mainly to improve the
quality of products so as to meet the desired specifications. Catalysts are
used in various reformers and other secondary processing facilities. A catalyst
is the substance that is introduced into the refining process, which initiates
a chemical reaction that cracks (splits) the crude oil molecules into its
components. Catalysts used in the refinery process are usually various metals
including precious metals.
3.49 In respect of the consumption of chemicals and catalysts, the internal
auditor would normally verify the following:
(i) Inventory of chemical/ catalyst.
(ii) Slow moving chemicals and verify their shelf lives.
(iii) Status of temporary items/ regular items/obsolete items.
(iv) Disposal of obsolete items.
(v) Procurement of chemical/ catalyst Vs consumption.
(vi) Issue Vs consumption.
(vii) Consumption versus budget and consumption versus norms.
(viii) Excess consumption of chemical catalyst.
(ix) Catalyst replacement activity and disposal process of spent catalyst.
(x) New catalyst procurement activity vis--vis the performance criteria
adopted and the guarantees obtained.
44
Chapter 4
Internal Audit of Marketing Activities
Purchases
4.1 Marketing companies purchase the refined products from imports,
own refinery/other marketing companies for the storage and distribution of
products to the ultimate consumers. The purchase accounting between the
Oil Companies is termed as Inter Oil Company transaction/ product exchange,
which includes not only purchase of products, but also rendering storage
assistance, by one company to another company. The product exchange,
storage assistance and other hospitality arrangements are entered into
between oil companies with a view to eliminate the avoidable cross-haul of
products and reducing the strain in the transportation network and as well
as to bring down the distribution cost.
Quantity Determination
4.2 Quantity delivered by the refinery is determined in terms of KL at 15
degree centigrade by converting the dip reading into volume by using valid
calibration charts issued by the CPWD. Where the products are to be billed
in MT basis, the volume is to be converted into MT quantity by using the
ASTM tables by duly applying the volume reduction factor and density.
Oil Accounting Calculations
Purchase Transactions: Billing and Settlement is done at KL 15 deg C or
MT as case may be.
Product/Sale accounting is maintained in selling unit i.e. at KL at
Natural temperature or MT as case may be.
For the purpose of custody transfer of bulk petroleum oils, volumes
and densities are stated at a fixed temperature or base temperature.
Sixties degree fahernhities (60 deg F) is used as base temperature
worldwide. Volumes metered at temperatures other than base value
are adjusted to base value by factor developed and tabulated in
45
petroleum measurement tables. These tables are expected to apply
to crude petroleum regardless of source and to all normally liquid
petroleum products derived therefrom.
If a quantity of oil is subjected to a change in temperature, its volume
will increase as the temperature rises or decrease as the temperature
falls. The volume change is proportional to the thermal coefficient of
expansion of liquid, which varies with density (API gravity) and
temperature. The correction factor of the effect of the temperature
and pressure on a volume of liquid (CTPL) is called volume correction
factor (VCF). The function of this correction factor is to adjust volume
of liquid at observed temperature to its volume at a standard
temperature. The most common standard temperature is 60 deg F or
15 deg C.
According to ASTM (American society for testing materials) are based on
the procedure where a volume measured at given temperature is calculated
to a volume at a standard temperature using volumetric correction. This
corrected value is called standard volume. The mass of the product is
obtained by multiplying the standard volume by the product density at
standard temperature.
ASTM Tables: The correction factors are available in the following ASTM
tables.
Table 53 A: Correction of observed densities to density at 15 deg C of crude
oils
Table 54 A : Correction of volumes to 15 deg C against Density at 15 deg c
for crude oils.
Table 53 B: Correction of observed densities to density at 15 deg C of
Products.
Table 54 B: Correction of volumes to 15 deg C against Density at 15 deg c
for products.
Types of Inter Company Transactions
4.3 The inter oil company transactions (sourcing of products) among
marketing oil companies normally take the following forms:
46
Outright purchase/ sales.
Hospitality assistance.
Safe keeping assistance.
Loan transaction.
Decantation of Tank wagons.
Outright Purchase/ Sale
4.4 These transactions take place at the industry locations viz., refinery
supply points, pipeline tap off points and marketing companys terminals put
up near a refinery. The produce is transferred from the seller to the buyer
company, ordinarily, by means such as tank wagon (TW), tank trucks (TT),
tank to tank transfer through pipelines, tanker or barge. It is also important
for the internal auditor to understand that where such outright purchase
takes place at the refinery, the costs involved in such transactions at the
refinery include the refinery transfer point (RTP) or the import parity price
(IPP), the excise duty, inland freight upto inland refinery from the nearest
port, terminalling charges and other applicable taxes and statutory dues. If,
however, the purchase takes place at a point other than the refinery then
the freight upto the depot/ tap off or installation point from nearest port as
well as the inventory carrying costs would also be included in the cost as
mentioned afore.
Hospitality Assistance
4.5 Hospitality arrangement envisages extending storage assistance by
the company owning the facilities to another company who may or may not
have storage facilities at that location. The hospitality assistance involves
costs in terms of terminalling charges and the stock loss as per norms.
Safe Keeping Assistance
4.6 Safe keeping assistance can be rendered by a marketing oil company
to another marketing oil company at negotiated terms at the assisting
companys storage location at the port or upcountry installation. It can also
be extended at depot location where assisted companys own storage
facilities are inadequate to handle additional volume. Safe keeping assistance
47
also involves costs in terms of terminalling charges as well as stock loss as
per norms.
Loan Transactions
4.7 Such transactions are entered into on spot basis to tide over the
emergent situations of product shortage or slippage of the arrival of TT and
TW. All loan transactions are repayable by the borrowing company from out
of the subsequent purchases by it.
Decantation of Tank Wagon
4.8 At times, tank wagon originally consigned to up-country location of a
marketing oil company might be diverted or wrongly placed at the siding of
other marketing companies or their bulk customers. Industry has in place a
procedure to trace these transactions and to find out the original dispatch
details. On ascertaining the original information of dispatches, the settlement
of accounts between marketing oil companies is effected. Valuation of product
decanted is based on the source of the product for TAIPP and destination
for excise duty/ sales tax, freight and terminalling charges. Quantity received
at the decanting location should be as per dispatch quantity. All transit
losses should be borne by the decanting company. There should not be any
under recovery for the original consignee company on any account.
Product Accounting
4.9 All product accountings are done at 15OC. For products pumped in
the local pipelines, accounting thereof is based on the following factors:
(i) The actual quantities pumped from the mother tanks, in case of
marketing terminals of one oil marketing company to Marketing
terminals of other oil marketing companies.
(ii) The actual quantity received in Marketing terminals tanks of one oil
marketing company from the Refinery tanks of other oil marketing
companies.
(iii) Actual quantity pumped from the Refinery tank of one oil marketing
company to Refinery tanks of other oil marketing companies.
(iv) In case of coastal movement, the billable quantity is determined on
the basis of quantity of products delivered as measured in the shore
48
storage tanks at the loading location. In case of import of product, all
import related cost, including ocean losses, is normally shared in the
ratio of quantity received by each party.
(v) Products directly purchased and moved on account of purchasing
party through cross country pipeline, quantity pumped in pipeline on
account ofPurchasing company will be delivered at destination.
Settlements
4.10 Inter oil company transactions take place reciprocally (i.e., purchase
and sale of petroleum products takes place between the marketing oil
companies at different locations simultaneously). Hence, to avoid multi- point
settlement work, a centralised net settlement system has been established
by the oil industry. These centralized settlements take place every month.
Local Sales tax payable on sales/ purchase transaction, if any, is paid by
the assisted company to assisting company on the due date of payment as
per the applicable sales tax law. Monthly settlements among the companies
are based only on Joint Certificates (JCs). Separate JCs are prepared for
the current month and for prior period transactions. Based on the JCs,
monthly billings for all elements of price, duty, freight, taxes and other
charges are exchanged and final settlement thereof effected. Payment for
the terminalling charges is made on a monthly basis on receipt of the claims
from an oil marketing company. Cost of coastal tanker movements including
ocean losses and other associated costs incurred as per ILP are shared by
the oil marketing companies. It should be, however, noted that in case of oil
companies marketing their own refined products, the above purchase
accounting would not apply.
4.11 The internal auditor needs to verify the following aspects of purchase
accounting:
(i) The type of inter company transaction made.
(ii) Whether the elements of purchases are recorded as per the type of
inter company transactions.
(iii) Whether the product accounting are done as per paragraph 4.09.
(iv) Whether the quantity billed is as per the joint certificate
49
(v) Whether TAIPP price as prevalent at the time of despatch has been
charged.
(vi) Whether Excise Duty at prevailing rate as on the date of despatch
has been charged.
(vii) Whether relevant Railway Freight/ Siding/ Coastal Freight/ Pipeline
Freight has been paid.
(viii) Whether relevant inventory holding charges/installation charges are
paid as per the MoU with other companies.
(ix) Whether the product despatched from the loading base has been
received at the receiving location and look into the same if not
received.
(x) Whether other amounts paid are in line with MoU between the
Companies.
(xi) Whether the payments are made as per payment terms specified in
the MoU between the companies.
Sales Accounting
4.12 After producing different products from crude, the Refinery undertakes
sale of products through the marketing companies/ units or directly to the
customers. The sales may take place in the form of Sales to marketing
companies/ units in respect of mass consumption products like MS, HSD,
SKO (D), LPG (D), ATF, in line with marketing arrangement and also other
petroleum products or direct sale by refinery in respect of LDO, FO, LSHS,
Naphtha, LPG (B), Base Oil (for Lube manufacturing), Wax, Bitumen, Hexane,
Propylene, Hydrogen and other industrial petroleum products. The transfer
of product takes place by way of coastal tanker, pipeline, rail wagon, tank
lorries and trucks.
4.13 A Product Outturn Certificate (POC) is the basis of preparation of
invoice for sale of petroleum products. This certificate indicates opening
and closing dip measurement of oil and water, temperature, density, volume
correction factor and gross oil, free water, net oil at observed temperature,
net oil at 15OC in volume and weight and quantity of oil transferred worked
out after applying volume correction factor.
50
4.14 Sales are affected through a supply distribution network comprising
of installation, despatch unit, depots, LPG bottling plant, from where the
products are sold to dealers, distributors as well as direct consumers.
Products are sold either directly to the consumers or through a network of
dealers. In case of bulk purchasers, deliveries are affected through pipeline
or through other modes of transport. In case of MS and HSD the sales are
affected through Retail Pump Outlet (RPO), which are either operated by
dealers appointed by the Company or by the companies themselves. The
prices chargeable to Retail Outlet Dealer/ Direct Consumer are intimated to
respective Depots/ Installation on a regular basis and as and when there is
a change in the prices. The sales invoice package is installed at the Depot/
Installation for raising the invoices and receiving the payments thereof. The
sales invoice is raised from the supplying location like Depot/ Installation
and payments are collected at the location itself. In case of sales to dealers,
the payment is against supply of products. In other words, the sales are on
Cash and Carry basis. Since the amount is collected immediately on sale
of products, there are no debtors in this case. However, Government
consumers and certain major consumers are extended credit facilities.
Types of Sales
4.15 Sale of finished petroleum products falls into two categories retail
and industrial/ direct consumers. The following table gives the details of
product, type of sale, type/ mode of payment:
Product
MS
HSD
SKO
SKO (I)
Type of Sale
Retail/ Credit
RetailIndustrial/
Direct Customers
PDS
Industrial/ Direct
Customers
Type/ Mode Of Payment
Advance Payment/ Payment
against Supply / Extension of
credit
against Supply/ Advance
Payment/ Payment Against
Supply/Extension of Credit.
against Supply
against supply/Extension of
Credit.
Remarks
For sales through
Retail Pump Outlets
only.
This kerosene is
doped with Blue Dye
for PDS
51
Payment Modes: Payments are received by way of 1. Cheque, 2. Demand
draft/Pay order, 3. RTGS (Real time Gross settlement), 4. NEFT (National
Electronic Fund transfer) and 5.Internet transfers.
4.16 The internal auditors procedures with regard to the sales accounting
would include:
(a) Verifying the type of sales affected, whether cash or credit and Retail
or Direct Customer.
(b) Verifying that the appropriate price is charged to each customer/
dealer, as applicable to them depending on the delivery point.
(c) Verifying, in case of credit sales, that proper approval has been
given by the competent authority, as per Credit Policy, after
appropriately evaluating the credit worthiness of the Customer/ Dealer.
(d) Verifying that price change, whenever it occurs, is properly billed to
Customer/ Dealers and accounted for.
Product Type of Sale Type/ Mode Of Payment Remarks
LDO/FO/
Naphtha/
LSHS/
Bitumen
LPG
LPG
ATF
Other Heavy
Crude of
Petroleum
Products
Base Oil
Industrial/ Direct
Customers
Domestic
Industrial/ Direct
Customers
Aviation Sector
Industrial/
DirectCustomers
Industrial/
DirectCustomers
against supply/ Extension of
credit
Advance payment/Payment
against supply
Advance payment/ Payment
credit
Advance payment/ Payment
credit
Advance payment/ payment
against supply / Extension of
credit.
Advance payment/ payment
credit.
52
(e) Verifying that each Customer/ Dealer is paying the invoice amount
through such mode of payment (as approved by the competent
authority).
(f) Verifying the age-wise analysis of debtors on regular basis.
(g) Verifying that the discounts/ rebates charged to customers/ dealers
are as per the rates approved by the competent authority, as
applicable to each customer/ dealer or category of customers/ dealers.
(h) Verifying that short-payments are received from the customers/ dealers
within a reasonable time.
(i) Whether a periodic report of customer dues, invoice wise taken and
analysed for overdue payment.
(j) Whether periodic reconciliation of customer balances is done.
(k) Whether balance confirmations are obtained from customers.
(l) Verifying that outstanding dues are collected as per due dates and in
case of collection beyond due dates, interest and penalty, in case
the sales contract so provides, are collected.
(m) Verifying that the appropriate sales tax rates are applied and
necessary concession forms in respect of Sales Tax are collected.
(n) Verifying that appropriate concessional excise duty rates are applied
and the necessary concessional forms in respect of Excise Duty
collected.
4.17 In respect of the export sales, the internal auditor would need to
verify the following:
Advance Licenses/ Duty drawback and utilisation of same.
Duty free replenishment certificates.
Liabilities provided and the end of the accounting year towards the
above.
Sales Tax
4.18 Sales Tax is paid to respective State authorities on or before the due
53
date on the basis of tax register generated on a monthly basis. The monthly
returns are filed along with the payment made every month. In addition, an
annual return is also filed before the prescribed dates. Yearly assessment is
taken up immediately after the close of the yearly account and completed at
the earliest.
4.19 In respect of the sales tax, the procedures of the internal auditor
would include verification of the following:
(i) Whether the monthly turnover as per the books reconciles with the
turnover as per monthly sales tax return.
(ii) Whether sales tax return is filed with sales tax authorities within due
dates.
(iii) Whether the approval of competent authority has been taken for
charging concessional sales tax to customers.
(iv) Whether the concessional forms are filed with sales tax authorities
along with monthly returns.
(v) Whether the applicable taxes are charged to customers
(vi) Whether the revision in tax rates are applied from the due date.
(vii) Whether in addition to monthly returns, annual returns are filed with
sales tax authorities.
(viii) that in the case of any disputes in sales tax demanded by tax
authorities, whether necessary appeal is filed with Appellate Authority
and are shown as Contingent Liabilities.
Value Added Tax (VAT)
4.20 The Value Added Tax (VAT) concept has been adopted by all the
States Sales Authorities The concept of Value Added Tax is that at each
stage of sale of goods/ products, the subject goods/ products will be taxed
at the applicable VAT rate. The reseller of the goods will be entitled to get a
set off of the tax paid on purchase of goods against the sales tax payable
on resale of goods. With the introduction of VAT, multiplicity of taxes levied
by State Sales Tax Authorities like Turn over tax, surcharge on sales tax,
additional surcharge are abolished.
54
4.21 In respect of VAT, the internal auditor would examine the following
aspects:
(i) That VAT registration has been applied and obtained the registration
number.
(ii) That Input Tax Credit has been availed in case of purchase of
products/ goods which are eligible for Input Tax Credit.
(iii) The list of products/ goods which are eligible for Input Tax Credit.
(iv) That Tax payer Identification Number (TIN) has been shown in all
invoices.
(v) That Returns to be filed monthly/ quarterly as specified in the State
VAT Act/ Rules are complied with.
(vi) That VAT rates are applied at applicable rates
(vii) That the VAT payable on sale of goods are paid after set off of the
Input Tax on purchases of goods and paid to authorities as per due
dates.
(viii) That Self Assessment returns are filed as per the VAT Act.
(ix) Whether there is any demand for tax/ penalty from VAT authorities
for non payment of VAT tax with in due dates and for non filing of
returns with in due dates.
Excise Duty
4.22 Excise Duty becomes due as soon as manufacture of a product is
completed. Accordingly, after refining of crude oil is completed, duty has to
be paid on all products at the applicable rates. The duty is charged at the
time of removal of products from refinery. While verifying the excise duty,
the internal auditor would need to verify:
(i) Whether excise returns are filed with department within the stipulated
time as per the Act.
(ii) Whether the Cenvat credit available for a particular month is set off
against excise duty payable, to arrive at the balance amount payable
to excise department.
55
(iii) The action taken in case of show cause notices received from the
excise department.
(iv) Whether the product list is periodically filed with Excise department
as and when there are changes in the same.
(v) Whether there are instances where the excise duty is collected from
the customers but the same has not been remitted to excise
authorities.
(vi) Whether there is any disputable duty demanded by the excise
authorities, if yes, then whether in that case appeal is filed with the
appellate authorities and are shown as Contingent Liability.
(vii) Whether there is a list maintained classifying various items as
cenvatable or non-cenvatable so as to facilitate availing of Cenvat
credit
(viii) Whether the documents received are properly maintained in Cenvat
Section to facilitate preference of claims and for further reference.
(ix) The accounting of Cenvat claims, including the details of total Cenvat
claimed, utilized and expunged and balances to be claimed.
(x) Whether there is any time delay in preference of Cenvat claims.
(xi) Whether RG23 Part C is prepared as required under Statute and the
same is submitted to central excise before the due date for the
respective month.
Collection Accounting
4.23 Operations of an oil company are normally spread out throughout the
length and breadth of the country, treasury activities being centralised at
the corporate head quarters. As such, the sales proceeds are remitted to
the head office, from all the selling points. Most of the major payments are
handled at the head office. Consequently, the process of collection of funds
at the up-country locations (Depots, Installation, LPG Bottling Plants) and
its subsequent movement to head office assumes considerable importance.
It normally covers all the operations from the time the sale is affected till the
monies are received and used. It commences from the point the instruments
56
are lodged at the up-country locations and it covers the movement of the
funds and ends with the ultimate use at head office. Collections are generally
in the form of demand draft, pay order, cheques, electronic transfers, etc.
4.24 The internal auditor, while carrying out internal audit of the collection
accounting aspect would need to look into the following:
a) Whether the payment instruments are deposited in the designated
bank on a daily basis at the product supply point.
b) Whether the designated bank transfers the amount deposited on a
daily basis, to the Main Collection Account at the Head/ Corporate
Office, as per the agreement with the respective banks.
c) Whether the bank charges collected by the bank are as per the
agreement.
d) Whether in case of delay of transfer of funds, the banks are paying
interest for the delayed transfer, as per the agreement.
e) Whether all the bank statements are received as on a regular basis.
f) Whether monthly reconciliation of all the bank accounts is being done
to find out the missing credits to be given by banks.
g) The correspondence with the banks for getting missing credits.
h) The control measures adopted over the dishonoured instruments and
subsequent receipt of amount together with interest and penalty.
i) Age-wise analysis of amounts not credited by the bank.
Sales Tax
4.25 Sales tax collected on sale of products are paid to the respective
State authorities on monthly basis depending on due dates of respective tax
authorities. The payment of sales tax is based on the sale tax summary
obtained on monthly basis from sales accounting. The internal auditors
procedures in this regard would be similar to those in paragraph 4.19.
57
Value Added Tax (VAT)
4.26 The concept of VAT and the internal auditors procedures in that
regard has been discussed in paragraphs 4.20 and 4.21.
Excise Duty
4.27 Excise duty is payable on the products only when the products
received from the refinery are under bonded movements. In other words,
duty is payable when the refinery transfers the products to marketing terminal/
installation/ depot under Bond without payment of duty.
4.28 The areas to be covered by the internal auditor in this regard include:
(a) Verifying whether duties have been paid at the applicable rates.
(b) Verifying whether assessable values have been properly ascertained.
(c) Verifying whether duties have been debited to PLA Register on the
due date only i.e., 5th of the following month for the previous month
removals.
(d) Verifying whether RG1 Register is kept up to date with all the
information.
(e) Verifying whether re-warehousing of AR3As for bonded movements
have been done within permissible time limit.
(f) Verifying that monthly returns are filed in time.
(g) Verifying that the condonable limit of storage/handling/in transit losses
as per Excise Act have been availed, were applicable.
(h) Verifying whether all the show-cause notices have been replied within
a reasonable time and proper action taken thereon.
(i) Verifying issue of invoices subjectable to cenvat.
(j) verifying the availment of cenvat on raw materials, base oils and
additives (for Lube Plants).
(k) Verifying that in case demand raised by authorities is not accepted,
appeals have been filed with appellate authorities and shown as
contingent liability.
58
Service Tax
4.29 Service tax is levied on the services rendered by a person. The
person who collects the service tax has to remit the tax to Government of
India within the due dates specified for remittance.
Service tax is administered by Central Indirect taxes department i.e. Excise
department.
Registration: A person providing taxable service is liable to pay service tax
in terms of Section 68. Every person who is liable to pay service tax has to
apply for Registration with Superintendent of Central Excise.
In the oil industry, oil companies are liable to pay the service tax on the
services rendered by them mainly collection of SSLF (Service Station Licence
Fees) from Retail outlet dealers. SSLF are collected by oil companies towards
provision of Pumps and tanks to the Retail Outlet.
Another service rendered by oil companies is collection of Terminalling
Charged from other oil companies. Terminalling charges are collected for
handling of petroleum products on behalf of other oil companies.
Oil companies are liable to collect service tax on SSLF and Terminalling
charges and pay to service tax department on due dates.
Oil companies are incurring service tax on the services provided to them by
service providers.
Service tax rules provides for taking the input tax credit of service tax paid
on the services received and same may be adjusted against the payment of
service tax paid on output services or against the payment of excise duty.
Where one unit of a company has paid service tax on the services received
at the respective location and the unit is not able to adjust the input service
tax paid against the output tax as the unit is not rendering output service
which is liable to service tax. In that case the unit can distribute the service
tax paid on the services received to another unit of the company where that
unit is paying service tax on the output service rendered or paying excise
duty on manufacture of goods.
59
In the above case input service tax distributor (ISD) has to get register
himself register for ISD registration and distribute the input service tax to
another unit.
Internal Audit of Transactions
1. To verify that the all units of company has to be registered itself with
service tax Department wherever applicable
2. To verify that the service taxes are paid within due dates as per the
act
3. To verify that returns as per the act are filed in time.
4. To verify whether the units have incurred interest, for late payment of
service tax.
5. To verify whether the units have availed input service tax credit
6. To verify whether ISD registration has been obtained for distribution
of input service tax credit to other units where it can be availed
7. To verify, in case where one unit is unable to avail the input service
tax credit, whether it is passed on to the unit where it can be availed.
Customs Duty
4.30 Customs duty is payable when finished products are imported, for
example, in case of shortage and also in case of shut down of refinery for
maintenance.
4.31 The internal auditors procedures in this regard would include:
(a) Verifying INTO Bond BOE-Rate declaration quantity.
(b) Verifying certification by surveyors/ CE authorities receipts.
(c) Verifying payment of duty (ex-bond) Vs actual clearance delay and
impact.
(d) Verifying holding of customs product over a year in bond and filing
for codonation, where required.
60
(e) Verifying final BOE (scrutinised by authorities).
(f) Verifying removal of Customs Product Vs Duty Payment.
(g) Verifying the terms and conditions of the contract with the clearing
and forwarding agents, if any.
(h) Verifying the ocean losses analysis and claim status.
(i) Verifying review of other payments to Port, Customs, etc.
(j) Verifying that where in case demand raised by authorities are not
accepted, appeals are filed with appellate authorities and are shown
as Contingent Liability.
(k) Verifying the extent of duty paid stocks held and funds blocked over
and above consumption requirement.
Stock Accounting
4.32 A sound stock accounting system enables timely preparation of
Balance Sheet and Profit and Loss Account, submission of accurate monthly
statements in a timely manner to bank(s) for hypothecation of goods where
necessary, submission of accurate monthly returns in a timely manner to
insurance company under Declaration Policy, accurate assessment of
adventitious gains/ losses on account of changes in ex- Refinery price/
Excise Duty/ Freight, follow up of consignment in transit and prefer timely
claim on Railways/ Transport contractors, maintenance of records as
stipulated by the Excise authorities, and last, but not the least, managerial
control for optimizing profit.
4.33 Since the sales are affected from Depot/ Terminal, all the products
are stored at the storage tanks kept at Depot/ Terminal. Stock Accounting is
done separately for Bonded and Duty paid stocks, Bulk and Packed stocks
and products and packages. Each stock location maintains stock records
giving details of:
(a) Opening stock.
(b) Receipts, Transfers, purchases local and imported.
(c) Operating gains/ transit gains.
61
(d) Inter tank product movement receipts.
(e) Total of receipts side.
(f) Sales.
(g) Transfers to other locations/ other companies.
(h) Inter tank product movement issues.
(i) Transit loss/ Operating loss/ Accident and other losses.
(j) Own issues, issues for manufacturing/ blending/ samples.
(k) Total of issues.
(l) Closing stock.
Each location sends the monthly summary of the stock report to the regional/
head office for the ultimate accounting of the stocks.
Physical Verification of Stocks
4.34 Physical stock of crude and finished petroleum products is calculated
by taking dip measurement of each tank. The measurement of dip is referred
to calibration chart of each tank to find out the volume of the product. The
calibration chart, which is certified by CPWD contains the details of volume
of the products corresponding to dip measurement. The quantity ascertained
by physical measurement is verified with books stock to find out actual loss/
gain on daily basis.
Product Losses/ Gains
4.35 The petroleum products are highly volatile products and susceptible
to losses during transit, storage and handling and also due to variation in
temperature. Transit losses or gains occur during transportation of products
by way of pipelines, coastal tankers, tank wagons, by road (by tank lorries).
The losses are minimal in case of transit through pipelines. Operating or
handling losses/ gains occur when the storage tanks are operated for
deliveries/ cleaning. During storage of products in tanks, loss/gain may
arise due to evaporation/ temperature variation.
62
Valuation of Stocks
4.36 Stocks are valued at cost or net realisable value, whichever is lower.
The cost is determined as under:
At Refinery:
Crude oil valuation: It is valued by comparing the Actual cost and the
replacement cost, considering the realisable value. The methodology is
summarised below:
When replacement cost of crude oil is more than the actual cost valuation of
crude oil, Valuation done at actual cost.
Where replacement cost of crude oil is less than the actual cost valuation is
to done on the following basis.
If the realisable value (of products to be generated out of the crude in stock)
is more than the cost of crude oil, valuation to be done at actual cost.
If the realisable value is less than the cost of crude oil, valuation to be done
at replacement actual cost.
The actual landed cost crude oil inventory (including crude oil in transit)
shall be worked out on weighted average basis.
Intermediate stock or work in process: It is valued at lower of its cost or
realisable value.
Finished goods: They are valued at cost determined on weighted average
basis or net realisable value, whichever is lower. Cost of finished products
internally produced is determined on crude stock reckoned on weighted
average basis and processing cost.
At Marketing Locations
Finished products valuation: They are valued at cost determined on FIFO
basis or Net realisable value (NRV) whichever is lower.
Cost includes IPP/RTP +excise/customs duty+ freight, Wharfage and port
charges + Terminalling charges paid on purchases+ taxes/Octroi paid on
purchases + filling charges.
63
Computation of NRV: Applicable selling price (including subsidy in case of
SKO/LPG) for respective Products minus(-) Discounts/ freight under recovery
and irrecoverable taxes.
Lubricants/Greases: at Manufacturing cost i.e. Actual cost of production
for individual grades of lubricants/ greases, the freight element, the actual
blending cost, the actual packing cost and excise duty.
Base oil: At weighted average purchase cost
Additives: At weighted average purchase cost
Products for own use samples /costs:
At port locations: IPP/RTP + excise/customs duty + Terminalling charges
At Terminals/Depot: IPP/RTP + excise/customs duty + Terminalling charges
+ Freight for location.
Recovery of Losses
4.37 During the transportation of products from the Refinery to Installation/
Depot, if the transit losses are more than the normal percentage of loss, the
same is normally recovered from the transporters like Coastal Tankers,
Railways and Tank Lorry Contractors.
4.38 While examining the stock accounting aspect of the oil company, the
internal auditor would look into the following areas:
(i) Whether stock reports are received from the Supply/ Distribution
locations on daily/ weekly/ fortnightly/ monthly basis, as the case
may be.
(ii) Whether various stocks are valued as per elements discussed above.
(iii) Whether the stock/ product dispatched by the supply locations are
received at receiving locations.
(iv) Whether stocks are physically verified on a periodical basis.
(v) Whether in case of movement of product by coastal tankers, tank
wagon and tank trucks that stock in transit at the end of each month
are subsequently received by the receiving locations.
64
(vi) Whether stocks/ products are valued as per the Accounting Standard
(AS) 2, Valuation of Inventories, issued by ICAI.
(vii) Whether various stock losses discussed above are within the normal
norms of losses.
(viii) Whether stocks at all locations are adequately insured.
(ix) Whether monthly stock declarations are filed with the insurance
company in order to avail stock declaration policy, thereby reducing
the quantum of premium.
(x) Whether losses to be recovered from various transporters like coastal
tanks, railways and tank truck contractors are received on a regular
basis.
(xi) Whether an age-wise analysis of stock held, particularly lubricants
and greases are periodically done.
(xii) Whether slow moving and obsolete stocks/ products are identified
and properly accounted for.
Railway Claims
4.39 Railways are an economic, convenient and reliable mode of
transportation of petroleum products. The oil industry, therefore, normally
uses tank wagons provided by the Indian Railways for transporting its bulk
products. These tank wagons are calibrated by the Oil Industry on behalf of
Central Tank Wagon Calibration Committee. Sometimes, tank wagons loaded
at the loading location do not reach the receiving location due to various
reasons. The consignor oil company can raise a claim in respect of credit
for the products decanted wrongly by other Oil Company/ Railways or the
value of the product for non-receipt of such wagon within a reasonable time.
If any wagon is not received for more than a month, all efforts should be
made to trace the wagon and to obtain necessary product credit or lodge
claim on Railways for compensation as the case may be. Following are
some of the situations under which claims are normally lodged with Railways:
Interception: The product tank wagon, mostly with HSD, is intercepted
by loco foremen of Railway for Railways consumption at any of the
stations enroute to the destination station. Although the Railways
have got the consumer supply arrangement with oil companies, yet
65
at times, some of their locations likely to become dry due to delay in
receipt of wagons despatched on Railways account and the loco
foremen may decide to pull out few wagons from the rack of wagons
moving on the line and decant into their storage tanks.
Non-Delivery: If any of the tank wagon in a rack is not received
beyond three months and the same is not traceable, then a Partial
Delivery certificate is obtained from the destination station for non-
delivery of the tank wagons and claim lodged with Railways for
compensation for the value of products contained in the wagons non-
delivered.
Short Receipt : Short receipt of the products arise due to:
Leakage of products due to defective/ tampered/ missing seals.
Transshipment of products enroute from the original tank wagons
into some other tank wagons due to the original tank wagon
becoming defective and declared sick.
Rail accidents and while salavaging the products from the
wagons met with an accident and transshipped into some other
wagon or tank truck for transportation to the nearest depot
location.
Excess Freight: Some times the freight charged are paid in excess
due to application of wrong rate. Necessary documents with claim
are lodged with Railways for refund of excess freight.
4.40 Notice for claim for compensation in respect of all claims is required
to be lodged with the Railways within six months from the date of booking or
date of the Railway Receipt. The claims lodged after six months period are
declared as Time Barred claims. The following documents need to be
furnished to the Regional Railways Officer for lodging the claim notice:
Copy of Railway Receipt.
Loading/ Despatch Advice or Challan.
Joint Dip Measurement and Shortage certificate issued by the
Railways in case of Short Delivery claim.
66
Partial Delivery or Non-delivery Certificate.
Transhipment Certificate, if any.
Laboratory Certificate, if any tests have been conducted.
4.40 For verifying the claims raised against the Railways, the internal
auditor should:
(a) Verify that stocks are reconciled on a periodical basis i.e., weekly,
fortnightly and monthly basis to find out the non-receipt of products
at receiving locations, after a reasonable time.
(b) Verify that the claims lodged with railways are covered under any
one or more of the situations mentioned above.
(c) Verify that efforts are made to trace the non-receipt of products and
obtaining necessary product credit or lodge claim on the Railways for
compensation, as the case may be.
(d) Verify that claims are lodged to the jurisdiction of respective Railway
Zones.
(e) Verify that claims are lodged with the Railways within six months
from the date of loading or date of Railway Receipt, failing which the
claims would become time barred.
(f) Verify that claims are made in prescribed form separately since claim
forms for non-delivery and claims for short receipt differ.
(g) Verify the MIS maintained for recovery of claims.
(h) Verify the necessary accounting entries made while loading the claim
and after receipt of claim.
(i) Verify that all the necessary documents required for lodging claim
notice are filed with the Railways.
(j) Verify the age-wise analysis of Railway claims.
67
Chapter 5
Internal Audit of Special Areas
5.1 Operations in the oil refining and marketing companies are vast,
comprising numerous and extremely complex processes. Effective internal
audit in such companies requires an in depth technical knowledge of these
processes. It is also necessary for the internal auditor to understand and
devote specific attention to certain special areas in such companies, which
have a lasting impact on the effective and efficient functioning of the
company. The areas requiring special attention in the refinery are (i) standard
and throughput production patter; (ii) fuel consumption and loss; (iii)
optimization of product mix; (iv) apportionment of joint costs; and (v) oil
accounts. The aspects of marketing needing special attention of the internal
auditor include (i) pricing of products; (ii) installation or terminals; and (iii)
transportation. The following paragraphs provide a brief insight into internal
audit of these critical areas.
Refinery
Standard Throughput and Production Pattern
5.2 The fixing of standard throughput and standard product pattern of
each refinery is important as it is at this level of throughput that the refinery
gets full compensation for the cost incurred and capital investment. Any
refinery processing less than the standard refinery throughput is likely to
incur loss whereas a refinery processing more than the standard refinery
throughput will get an extra margin. The internal auditors procedures with
regard to internal audit of standard throughput and production pattern would
include verification of the following aspects:
(a) Whether the standard throughput level has been fixed.
(b) Whether a standard product pattern of the refinery is defined.
(c) Whether the refinery achieves the standard throughput to get full
compensation for the fixed cost and capital investment.
68
(d) Whether the refinery achieves more than 100 percent of the standard
throughput to get more margins.
(e) Whether the actual yield is commensurate with the expected yield.
(f) The trend of production in the last few years Vs ILP (Industry Logistic
Plan).
(g) ILP Vs actual upliftment.
(h) Gross Refinery Margin (GRM).
Fuel Consumption and Loss
5.3 Some crude oil is consumed as fuel and lost in the process of refining.
The ceiling fixed for fuel consumption and loss in refineries is generally
high, higher than even the actual figures. Thus, there is no deterrent against
fixing higher percentage of fuel consumption and loss. Since both these
factors ultimately reduce the net availability of crude oil for refining, they
should be minimised with reference to a given pattern of production to
achieve the maximum efficiency.
5.4 Internal audit of fuel consumption involves verification of the following
aspects:
(a) Whether ceilings are fixed for fuel and loss are comparable with
other refineries of similar nature.
(b) Whether the actual loss is not more than the ceiling fixed.
(c) Whether the quantum of consumption of crude oil as a fuel in the
refining process is pre-defined.
(d) Whether the actual consumption of crude oil as a fuel is not more
than the ceiling fixed so that the net availability of crude oil for refining
is maximised.
Optimisation of Product Mix
5.5 The next aspect in oil and gas refining companies requiring special
attention of the internal auditors is the optimisation of the product mix. The
optimisation of the product mix is an operational parameter with fine tuning
of temperature controls and cut points being used to produce excess quantity
69
of one product over another. The degree of automation in controls and the
experience of control technicians would determine the operational efficiency
on the product mix front. In addition to flexibility in determining the product
mix, the ability to process various kinds of crude helps in exploiting the
trading differentials between various grades of crude.
5.6 The internal auditors procedures for examining the aspects related
to optimisation of product mix include:
(a) Verifying that there exists an operational parameter for fine tuning of
temperature controls for production of a product to a desired extent.
(b) Verifying the automation in controls and experience of control
technicians to determine the operational efficiency on product mix
front.
(c) Verifying the flexibility in determining the product mix to maximise
the efficiency and profitability.
(d) Verifying the facility of processing of various grades of crude.
(e) Verifying that the various utilities like water, steam, or power are
optimally used.
Apportionment of Joint Cost
5.7 The total cost of production of refinery is required to be allocated to
individual products on a reasonable basis to determine the cost of production
of each product. In petroleum refining the numerous units like distilling
units, cracking units, alkylation and polymerisation plant are involved. Each
of these units produces intermediate product streams, which require extensive
reprocessing, heating and blending. The effect of these processing and
successive stages multiplies the difficulty in allocating the joint cost of raw
materials and processing charges to the refined products with any degree of
reasonable accuracy. Even assuming that with difficulty the cost of different
products can be worked out from the joint and common costs, the end
results may not be in tune with market preferences for different petroleum
products and their prevalent prices. Strict application of conventional process
costing method will result in low cost for high value products, such as MS,
Naphtha and ATF and comparatively higher cost for low value products,
such as FO and bitumen.
70
5.8 Since all the final products come from the same raw material, the
final products can be termed as joint products. Joint products may be defined
as products which are by very nature of production process cannot be
produced separately, and which have equal economic importance. The basic
problem in respect of joint products is that of apportionment of the cost
incurred upto the point of split off. Since all the processes are very complex
and interlinked, it is very difficult to have any accurate method of
apportionment and allocation of cost. Apportionment and allocation, is
therefore, done by employing various joint costing methods available viz.,
Physical measurement.
Selling prices a separation point or after further processing.
Marginal cost technique.
Working back from sales to an estimated cost.
5.9 Normally, apportionment of joint cost to the final products by physical
measurement or, alternatively, by selling prices at separation point, is adopted
as method(s) for allocation of cost since the production of petroleum products
involves various processes and produced from various types of crude, making
it difficult to find out the number of processes a particular product undergoes
before it is finally separated. In other words, till a particular products meets
its specification, it has to go through several processes repeatedly which
makes it difficult to find out the actual number of processes undergone and
computation of cost thereof under process costing techniques.
5.10 Examination of the joint costs requires verification of the fact that:
(a) All refining costs are collected and collated.
(b) Apportionment of joint costs is done to know the cost of production of
each product.
(c) The methods used for allocation of joint costs can reasonably
determine the cost of each product.
Oil Accounts
5.11 This department is responsible for consolidation of dip readings in
the Daily Dip Statement (DDS) based on dip memos, preparation of Daily
71
Transfer Sheet (DTS), Daily Production Statement (DPS), Excise returns,
Crude Intake certificate, Product Outturn Certificate (POCs), Product Intake
Certificate (PICs) and calculation of loss percentage based on information
from technical services department and co-ordination with clearing agents
for filing of INTO and EX bond with Customs authorities.
5.12 Internal auditors procedures for verifying the oil accounts, normally
include:
(i) Verifying whether the POCs are prepared correctly based on the dip
readings.
(ii) Verifying whether the details of production and calculation of fuel and
loss are proper.
(iii) Verifying whether the reconciliation of opening of stock of crude
processed, crude received and closing stock of crude is properly
done.
(iv) Verifying whether the details of production/ inter-tank transfer/
despatch as per the Daily Transfer Sheet (DTS) for the day matches
with the difference between the closing dip as per the Daily Dip
Statement (DDS) of the previous day with the closing dip as per the
DDS for the day.
(v) Examining the reconciliation of the closing and opening dip with the quantity
of receipt/ despatch as per the dip memos received from the pump
house i.e., whether the quantity of increase or decrease as per the dip
memo is equal to the quantity of increase or decrease as shown in the dip
statements/ DTS.
(vi) Verifying whether the product-wise total of dispatches for a day as
per the POC is equal to the dispatch as shown in the DTS for the
day.
(vii) Verifying whether the dip readings as per the automatic radar gauging
system are comparable with the dip readings as per the dip memo.
(viii) Verifying whether the despatches as shown in the DTS are equal to
the dispatch as shown in the Daily Production Statement (DPS).
72
(ix) verifying whether the following details as recorded in the dip memos
and the POC are the same:
(a) Tank number.
(b) Product description.
(c) Batch number.
(d) AR3A number.
(e) Installation to which the product is despatched.
(f) Pumping time start time and stop time.
(g) Gross opening and closing dips of product and water level.
(h) Temperature etc.
(x) Verifying whether the details of production, dispatch and receipt as
shown in the excise return RT-12, AR3A forms, are in agreement
with DTS, DPS and POC.
(xi) Verifying whether there is any movement of product/ crude from tanks
designated for maintenance.
(xii) Verifying whether the dip memos are maintained in the order of the
serial number.
(xiii) Verifying whether in case of alterations of dip memos, they are
cancelled and new dip memos prepared and the cancelled dip memos
retained.
(xiv) Verifying whether supplementary POCs are prepared in case of
alterations of POCs.
(xv) Verifying whether the actual production (total throughput and products
produced) is comparable with the budgeted production estimates as
given by Production Planning Department.
73
Marketing Activity
Pricing of Products
5.13 Selling prices are fixed with reference to nearest source of supply.
The products are moved from refinery in a regulated manner so as to ensure
that the customers get the product at the most economical cost, i.e., from
the nearest source of supply by cheapest practical mode of transport. The
product movement from refineries to customers as well as the mode of
transports commonly employed is given below:
Refinery
Pipelines / Bunkers
Main Installations
Railways / Tank Trucks Tank
Trucks
Tank Trucks
Dispensing Pumps

Retail Outlets
Depots
Customers
Tank
Trucks
Pricing Area
5.14 There are various refineries in the country refining the product to
meet the petroleum products requirement. The supplies to the ultimate
consumers have to be from nearest port attached to the refinery/ inland
refineries by demarcating specific boundaries for each port refinery/ inland
refineries. Bulk products are moved from nearest refinery attached to a port,
in a regulated manner so as to ensure that the customers get the product at
the most economical cost i.e., from the nearest source of supply by the
cheapest practical mode of transport. All the port refineries/ inland refineries
are known as Primary Pricing Points. The oil industry computes the final
74
selling prices to be charged to the consumers taking into consideration the
nearest primary pricing point (Port)/ secondary pricing point (inland location),
irrespective of the actual source of supply. The general guiding principle for
the above is that the price to the consumer should be cheapest from the
pricing base. It may be noted here that for deciding the pricing base for
retail outlet, the various alternate sources of supplies are considered. The
price to consumer should be the cheapest being the guiding principle, the
freight economics from various pricing points is considered for working out
the RPO price.
Selling Prices
5.15 The selling prices of petroleum products MS, HSD consist of the
following elements:
(a) Ex-refinery gate price/ Refinery Transfer Price (RTP)/ Import Parity
Price (IPP).
(b) Marketing cost plus margin.
(c) Siding and shunting charges at MI.
(d) Rail/ pipeline freight.
(e) Siding and shunting charges at Depot.
(f) State Specific Cost.
(g) RPO charges/ RPO surcharges.
(h) Excise duty.
(i) FDZ delivery charges (at the rate of Rupees per kilo litre).
(j) Delivery charges beyond FDZ (at the rate of Rupees per kilo litre per
kilo metre).
(k) Toll taxes.
(l) Sales tax as applicable.
(m) Dealers commission.
75
(n) Shrinkage allowance (in case of high altitude markets).
(o) Rounding off differential.
5.16 The ceiling selling prices of petroleum products SKO Public
Distribution System consist of the following elements:
Price (IPP).
(g) Excise duty.
(h) Toll taxes.
(i) Sales tax as applicable.
(j) Transportation costs.
(k) Wholesalers commission.
(l) Retailers commission.
(m) Rounding off differential.
5.17 The prices for other products comprise the following elements of
cost:
Price (IPP).
76
(g) Excise duty.
(h) Local Levies and Sales Tax.
5.18 The pricing of petroleum products like MS, HSD, SKO (D), LPG (D),
ATF upto 31st March, 2002, used to be fixed by the Oil Co-ordination
Committee (OCC) under Ministry of Petroleum and Natural Gas under
Administrative Pricing Mechanism (APM), thereby the margin per KL of these
products was fixed by OCC and other elements of sale price/purchase cost
were surrendered/ claimed to/ from the Pool Account operated by OCC. The
oil companies had to follow the price fixed by OCC and they had no role to
play in price fixation. However, with effect from April 1, 2002, the prices are
being fixed by oil companies on Industry basis and margin per KL fluctuates
according to changes in international crude price.
5.19 The pricing of petroleum products like FO, LSHS, LDO, Naphtha are
fixed by the Industry since April 1, 1998. The prices charged in these cases
by the oil companies may differ ultimately when they finally sell to direct/
industrial customers depending on the discounts/ rebates given by individual
oil company. The techniques of marginal costing are applied in case of
these products if supply of product is more than demand. The price of
lubricants/ greases was also decontrolled from November 1993. The prices
of these products are fixed by individual oil companies on their own. The
marginal costing concepts are equally applied in pricing of lubricants as well
for industrial sector.
5.20 The procedures of the internal auditor for examining the aspects
related to pricing would include verifying:
(i) That fixation of port-based prices is based on agreed norms.
(ii) That the prices fixed for various retail outlets are with special reference
to cheapest source of supply.
(iii) Analysing the international price movement of crude.
(iv) That products are sourced from the most economic supply source.
77
(v) That appropriate excise duty rates are charged in RSP and
incorporated the changes wherever there is revision of excise duty.
(vi) That appropriate sales tax rates are charged in RSP and incorporated
the changes wherever there is revision of sales tax rates.
(vii) That appropriate distances to the retail outlets from the supply location
are determined for the fixing up the selling prices for each outlet.
(viii) That round trip distances are updated wherever there is change in
the source of supply.
(ix) That the pricing of outlet has been determined based on the set
guidelines.
(x) That all local taxes like octroi/ toll tax have been included wherever
applicable
(xi) Whether price revisions have been implemented/ communicated on time
and correctly.
(xii) That in case of any new depot, the depot rate built-up is as per the
prescribed guideline.
(xiii) That the consumer rates are determined as per the guidelines.
Installations/ Terminals
5.21 Installations/ Terminals consist of storage tanks and product handling
facilities for receipt of products from port and/ or refineries for onward
despatch to direct customers in bulk and inland depots.
5.22 The internal audit procedures in this regard comprise verifying that:
(i) All the facilities are utilised to the optimum extent.
(ii) There are no idle assets.
(iii) The product is received into the tanks as per the invoice raised by
the supplying company.
(iv) All the excise formalities are complied with in case of bonded location
for storage and distribution of products.
78
(v) Daily physical stock dips are taken and calculations of stocks are as
per the calibration chart of each tank.
(vi) The product tanks are calibrated and calibration charts are certified
by the CPWD.
(vii) The receipt losses, storage/ handling and transit losses are kept to
the minimum extent possible.
(viii) Applicable changes like rent, electricity are collected from the
companies, as per agreement, to which the space is provided for.
(ix) The safety norms are complied.
(x) All the fire fighting facilities are available and monthly fire drills are
carried out.
(xi) All quality control tests required as per industry quality control manual
are carried out.
(xii) All the MIS, accounting returns are sent to Head Office on regular
basis.
(xiii) Adequate security arrangements are available.
(xiv) All the assets and product stocks are adequately insured.
(xv) Appropriate controls are exercised over the contaminated products
and its accounting thereof.
(xvi) All the statutory licences/ approval required for the location are
obtained.
(xvii) The operating cost/ profitability as a cost centre and profit centre.
(xviii) Demurrage is paid for delay intake of product from the coastal tankers.
(xix) Short receipt of product in respect of coastal tankers is claimed from
the shippers.
(xx) Tankage hiring facility, if applicable, including the terms of hiring,
product losses in transit and settlement etc.
79
Depots
5.23 A depot normally consists of storage tanks and product handling
facilities for receipt of products for onward despatch and transportation
facilities for onward movement of products to retail outlets and direct
customers.
5.24 The internal audit of a depot ordinarily comprises the following
procedures:
a) Verifying all the points mentioned in paragraph 5.22 except points
xviii and xix.
b) Verifying whether demurrage charges are paid to Railways (for delayed
decantation of product from wagon or (for delayed filling of product
into the wagon.
c) Verifying that in case of short receipts of product through rail wagon,
a certificate to that effect has been received to lodge claim with
Railways.
d) Verifying that product shortage in case of tank lorry receipts are fully
recovered from the transport contractors.
Tap Off Points (TOP)
5.25 Internal audit of tap off points involves the same procedures as
mentioned in paragraph 5.22 except points xviii and xix.
Taluka Kerosene Depot
5.26 Taluka Kerosene Depot is a depot for storing Kerosene for delivery
to Public Distribution System. Needless to say that such depots hold an
important place in the economy and society as a whole. The internal auditor
therefore needs to pay special attention to audit of such depots.
5.27 The internal auditors procedures for carrying out audit of taluka
kerosene depots involve verifying:
a) The validity of agreement/ renewal of agreement
b) The payments are made to contractors as per terms of agreement.
c) Control over manual records maintained.
80
d) Utilisation of facilities at the location.
e) That all the assets and product stocks are adequately insured.
f) That the product tanks are calibrated and calibration charts are
certified by CPWD.
g) That all the statutory licences/ approval required for the location are
obtained.
Aviation Service Facilities
5.28 Oil companies normally also have infrastructure at the airfield stations
consisting of storage tanks, hydrants, pipelines, hoses etc., for fuelling
aircrafts. Internal audit of aviation service facilities involves examining:
a) The agreements entered into various airlines for fuelling of product.
b) Whether invoices are raised and payments received are, as per
agreements.
c) Whether appropriate prices are charged to respective airlines.
d) Whether the applicable sales tax rates are charged to respective
airlines.
e) Whether all the excise formalities and related records are maintained
in case the location is bonded warehouse.
f) Whether the product tanks are calibrated and calibration charts are
certified by CPWD.
g) Whether physical stocks dips are taken on daily basis and reasons
for variation in stocks, if any, are appropriately recorded.
h) Whether all the safety norms are adhered to.
i) Whether all the assets and product stocks are adequately insured.
j) Whether all the facilities are optimally utilised.
k) The operating cost and profitability as a cost centre and profit centre.
81
Lube Depot
5.29 The lube depot stores blended lubricants and greases for automotives
and industrial needs. The internal auditors procedures for auditing the lube
depots would differ from one product to another. Illustrative procedures for
the products are discussed below:
Base Oil
a) Verifying the receipt of base oil with respect to invoice received or
bill of lading received.
b) Verifying the base oil AR3A quantities Vs pipeline receipts ex- refinery.
c) Verifying the control on loss of the product received.
d) Examining the mode of payment for imported cargo.
e) Verifying whether daily physical dips of all the tanks are taken and
reasons for variation, if any, appropriately recorded.
Chemicals and Additives
a) Verifying the receipt of chemical and additives vs indent pattern.
b) Verifying the stock holding vs actual utilization, slow and surplus
stocks.
c) Verifying the shortages in receipts and recoveries control.
Containers
a) Verifying the indents on fabricators Vs purchase order quantity and
terms.
b) Verifying the execution of call ups by the fabricator and time delay in
execution.
c) Verifying the receipt confirmation and inspection reports of the same.
d) Verifying the control over rejects and receipts without GRNs.
82
Cartons, Packing Materials and Consumables
a) Verifying the indents on suppliers Vs Purchase Order quantity and
terms.
b) Verifying the quality testing and sample test reports.
c) Verifying the control over damages in cartons and control over
wastage.
d) Verifying the inventory control system at the blending plant.
e) Verifying the accounting and treatment of rejected materials.
Blending/ Production
a) Verifying the adequacy of control in production process.
b) Verifying the utilisation of materials and consumption pattern.
c) Verifying quantity mix ratios Vs actual mix ratio on test check basis.
d) Verifying the production plan and market demands/ indents.
e) Verifying the filling Vs empty drums/ containers.
f) Verifying the accounting of the finished goods.
g) Verifying utilisation of blending facilities idling assets and unutilised
facilities.
Repacking/ Small Fillings
a) Verifying the agreements/ Purchase Order with re-packers for small
filling.
b) Verifying control over the finished product stocks sent to small packs
and receipt of filled packs thereof.
Transportation
5.30 Transportation cost plays a vital role in determining the final selling
prices for the consumers. Crude oil is transported to the refineries either by
coastal tankers or by pipelines. All modes of transportation of petroleum
83
products complement each other and form the essential components of the
logistic system. For bulk transportation of petroleum products, pipelines are
the most energy efficient, convenient and most preferred mode of
transportation. Efficient and economic transportation of petroleum products
to the consumption centers is a major challenge. In order to ascertain the
source of supply to a particular area, it is vital to examine and ensure that
there will not be any price disparity in the neighbouring areas of each pricing
area boundaries therefore; the equivalent cost norm plays a vital role in
demarcating economic supply zone. Different supply zones of each port or
inland refineries are thus demarcated on the basis of equivalent cost of one
of the major product.
5.31 The principle of distribution is to plan and execute the movement of
petroleum products from the refineries/ main ports to various distribution
centres in a systematic and organized manner. The bulk petroleum products
are required to be moved by one or more of the following mode of
transportation:
Coastal Tankers/ Barges
5.32 These are used for carrying petroleum products from port refineries
to port terminals. At the receiving location, an oil jetty is available for
discharging the tanker through a pipeline, which runs from the oil jetty to the
terminal. The discharge of the product is carried out with the help of high
capacity pumps. The internal auditors procedures with regard to coastal
tankers involve:
a) Verifying whether the payments to shippers are done as per the
agreement/contract with them.
b) Verifying whether the quantity base on which charges have been
levied is correct.
c) Verifying that if the coastal tanker cost is being reimbursed to any
other oil company then whether it is as per agreement.
d) Checking whether the parcel sizes are as per assumed parcel size.
e) Verifying whether the lay time is as per agreed terms
f) Examining whether the demurrage claims is as per agreed terms
84
g) Verifying whether the detention, exceptions, lay time is as per agreed
terms
h) Verifying the charter hire, bunker cost and port charges
i) Verifying wharfage, survey fees, agency fees etc.
j) Verifying insurance payments
k) Examining the idling cost of vessels
l) Verifying whether the ocean is prorated as per final receipt quantity
Pipelines
5.33 Some of the mainland installations are connected through a pipeline
from the refinery to the installation. Such installations are called Pipeline
Terminals. In case of long pipeline running through the mainland, receiving,
storing and distribution facilities are set up at suitable locations enroute.
These are called Tap-off points since product is tapped off here from the
main pipeline. Internal audit procedures for examining the transportation
through pipelines involve:
Verifying whether the contract of agreement for transportation of
products has been entered to with owner of pipelines.
Verifying whether the freights is paid as per the agreed terms of the
contract.
verifying whether there are any transit losses
Tank Wagons
5.34 By far the most common mode of product movement to inland depot
locations is through railway tank wagon. For receiving the product through
tank wagons, each depot is provided with a siding of suitable capacity and
the products are discharged through a pipeline, which runs from the railway
siding to the depot tank. The procedures employed for internal audit of
transportation by means of railways include the following:
Verifying whether the payments are released as per due dates agreed
in the agreement with the Railways.
85
Verifying whether the payment is released as per the amount
mentioned in the Railway Receipts (RR).
Verifying whether the freight charged and calculations in RR is in line
with railway tariff table rates.
Verifying whether appropriate tariff rates are applied as per the railway
tariff table i.e., if a particular consignment is eligible for charging on
train load rates, wagon load rates are not charged.
Verifying whether freight paid on behalf of other marketing companies
are recovered within the due dates agreed.
Verifying whether in case there is excess payment of freight due to
application of wrong rates, the necessary refund claims are submitted
within reasonable time.
Verifying whether in case there is excess payment of freight due to
short receipt of product, the necessary refund claims are submitted
within reasonable time.
Verifying whether demurrage charges are paid to railway for delayed
decantation of product or delayed loading of the product into the
wagon.
Tank Trucks
5.35 Tank trucks are used extensively in transporting products from a
source to the last point of sale i.e., retail outlets/ customer premises. Internal
audit of transportation by means of tank trucks/ lorries involves examination
of the following aspects:
Whether transport contractors are selected as per approved policy.
Whether the transport agreement/ contract has been entered into
with contractor.
Whether the security deposit payable as per the contract agreement
has been received.
Whether the approved tank lorry vehicle as mentioned in the contract
agreement has been used to deliver the products.
86
Whether the contractor complies with transport discipline guidelines,
during transportation of the products.
Whether the rate and amount claimed is as per the contract and is
within the contract validity period.
Whether the payment is released after getting acknowledgement copy
of the goods received.
Whether the RTD kilometers claimed by the contractor tallies with
approved RTD kilometers from that particular location.
Whether the shortages certified by tank driver have been recovered
from transportation bill.
Whether the payments are released only to the approved list of tank
lorry vehicles maintained.
Whether the master data of each approved tank lorry is maintained.
Whether the black listed tank lorries have been removed from the
approved list of tank lorries.
Whether the payments released for quantities claimed by the
contractors tallies with actual sales made.
Whether the provision for liability has been provided in case of
amounts payable to contractor, at the time of closing of books of
accounts.
Fleet Cards
5.36 Oil marking companies have started issuing Fleet Cards to the Fleet
Owners/ Operators to facilitate cashless purchase of Petrol, Diesel and
Lubes from the selected Retail Outlets. The Fleet Cards provide the following
features to the Fleet Owners/ Operators:
a) Flexible Prepaid and credit option
b) Fuelling at select quality and quantity assured outlets on all major
highways and halting points
c) Single/ multiple cards loading at all participating retail outlets.
87
d) Attractive rewards program
e) Free personal accident insurance cover for fleet owners, drivers, co
drivers and helpers.
f) Free vehicle tracking facility through web site.
g) Option for real time truck tracking at subsidized cost
h) Each fleet owner is issued a fleet card for every vehicle enrolled. The
card is assigned a unique Personal Identification Number (PIN). The
card also bears the name of fleet owner, vehicle registration number,
Card number and card validity date.
5.37 The internal audit procedures of in respect of the fleet cards comprise:
a) Examining the policy of fleet card program
b) Verifying whether the eligible fleet owners are given cards as per the
policy.
c) Verifying whether the amount paid in advance by the fleet owners
are accounted for properly in the books and booking of sales is done
on a daily basis based on the up-liftment of Petrol, Diesel and Lubes.
d) Verifying whether the card swiping machines are working properly.
e) Verifying whether the reward points are given to fleet owners as per
entitlement in relation to the up-liftment of Petrol, Diesel and Lubes.
f) Verifying the periodic account statement of each fleet card.
Liquified Petroleum Gas (LPG)
5.38 Liquefied Petroleum Gas (LPG) is one of the joint products which is
produced during refining of crude oil or produced along with drilling operation
of natural gas / crude oil. It consists of Hydrocarbons namely propane and
Butane. LPG is highly inflammable and is stored in high pressure storage
vessels. Clean burning, all purpose, and readily available, portable and
efficient fuel. LP gas at normal temperature and pressure is a gas. It
changes to a liquid when subjected to modest pressure or cooling. The
reason LP gas is liquefied is to make it easy and efficient to transport and
store.
88
LPG is highly inflammable. LPG is odourless, color less and is heavier than
air. Ehtyle Mercaptan is added as odouriser for detection of any leak. LPG
as per IS: 4576 is being marketed in India.
Varieties of LPG bought and sold include mixes that are primarily propane
(C
3
H
8
), primarily butane (C
4
H
10
) and, most commonly, mixes including both
propane and butane, depending on the season, in winter more propane, in
summer more butane.
Uses of LPG
5.39 LPG is one of the safest, economical, eco friendly healthy cooking
fuels for all. LPG is being used a cooking fuels in most urban and semi
urban households. The rural population is also increasingly using it.
Besides domestic usage, LPG is often used as an efficient source of energy
in various industrial and commercial applications. Some of the important
areas where LPG is used extensively are:
Usage Sector Applications
Metal cutting Provides stable high temperature required for
the purpose. Also provides clean cuts.
Kiln and Furnaces Used In incinerators, crematoriums, ceramic and
brick kilns, For heat treatment etc.
Process Industries Extensively used in Glass, automobile and textile
industries for glass blowing, paint drying/ surface
coating and singing activities. Also used by
Electronics industry involved in TV picture tube
manufacturing etc.
Fabrication Used for providing homogeneous temperature
bath required for melting operations with lead,
sulphur and carbon free burning ensuring high
quality of production specification
Poultry Used for used in Poultry rearing with accurate
temperature controls
89
Aerosol Used as an propellant in aerosol cartridges
Industrial processing Used for instant and controlled drying processes
right from curing of fibre glass to tea leaves
drying and dry roasting of nuts
Radiant Heating Used for heating purposes both in homes and
industrial and commercial complexes
Generators Used as a clean eco friendly fuel for running the
generators even in the closed premises
Hotels and Cook Used for all possible cooking skills from boiling,
Houses stewing, simmering, baking, grilling and roasting
to braising
Vulnerability of LPG
5.40 LPG is a flammable gas which has the potential to create a hazard.
Therefore it is important that the properties and safe handling of LPG are
understood and applied in the domestic and commercial/industrial situations.
LPG is stored under pressure. The gas will leak from any joint or connection
which is not sealed properly. LPG is heavier than air. Any significant leak
will move downwards and stay on the ground. It will accumulate in any low-
lying area such as depressions in the ground, drains or pits.
Since LPG is stored in two phases, liquid and gaseous, there is potential for
either a liquid leak or a gas leak. If the leak is a gas leak it may not be seen
(because LPG is colourless), except where the leak is of sufficient size to
be seen shimmering in the air. When a liquid leak occurs, the gas release
will be seen as a patch of ice around the area of the leak, or as a jet of
white liquid. This white appearance is due to the cooling effect created by
the rapid expansion of the LPG liquid into a gas. The condensing atmospheric
moisture makes the leak visible. In concentrated amounts and in uncontrolled
conditions, LPG has the potential to create a fire or an explosion.
To overcome the above vulnerability the oil companies take necessary
precautions for safe handling of LPG in respect of storage, transportation
and filling of LPG in cylinders.
90
Storage
5.41 LPG will evaporate at normal temperatures and pressures and is
supplied in pressurized steel cylinders. They are typically filled to between
80% and 85% of their capacity to allow for thermal expansion of the contained
liquid. The ratio between the volumes of the vaporized gas and the liquefied
gas varies depending on composition, pressure, and temperature, but is
typically around 250:1. The pressure at which LPG becomes liquid, called
its vapour pressure LPG is heavier than air, and thus will flow along floors
and tend to settle in low spots, such as basements. This can cause ignition
or suffocation hazards if not dealt with.
Large amounts of LPG can be stored in bulk cylinders and can be buried
underground. Since LPG turns gaseous under ambient temperature and
pressure, it must be stored in special pressure vessels. If the containers are
cylindrical and horizontal, they are referred to as cigars or bullets, whereas
circular ones are spheres.
LPG is composed primarily of propane and butane, while natural gas is
composed of the lighter methane and ethane. LPG, vaporized and at
atmospheric pressure, has a higher calorific value (94 MJ/m
3
equivalent to
26.1kWh/m) than natural gas (methane) (38 MJ/m
3
equivalent to 10.6 kWh/
m
3
), which means that LPG cannot simply be substituted for natural gas.
The LPG produced is Bulk in nature and is stored in Sphere or Bullets
above / below ground at the production Location. The Sphere or Bullet is
made by using Mild steel plates which will confirm to norms of Oil Industry
Safety Directorate (OISD) which relates to safety aspects with regard to
Storage and Handling of LPG. Packed LPG is stored cylinders having capacity
of 5 kg, 14.2 kg, 19kg and 47.5 kg.
Gas processing is a source of approx. 60% of LPG produced. Crude Oil
processing is a source of approx 40% of LP Gas produced. World prices of
LPG in general move in line with crude oil prices although as with most
commodities it does have its own supply and demand parameters which are
a critical determination of price. Saudi Arabia is the world largest producer
of LPG and Saudi Aramco contact price (CP) as a world maker price upon
which exports and domestic sales to wholesaler (makers) are negotiated.
91
Transportation
5.42 Bulk LPG is transported through a coastal tanker, pipeline, and rail
wagon or tank lorry to a Bottling Plant or to Industrial customer for industrial
use. In case of Packed LPG used for cooking and heating, it is transported
in cylinders having capacity of 5 kg, 14.2 kg, 19kg and 47.5 kg in a Lorry to
the Distributor premises. From the Distributor premises the cylinders are
transported to customer premises in a small lorry or Tricycle.
Filling/Bottling of Bulk LPG
5.43 The Bulk LPG for filling into cylinders is moved to a Bottling Plant by
pipeline, and rail wagon or tank lorry. The product received by Tank wagon/
Tank lorry is decanted and through Pipeline from Decanting bay, is again
stored Sphere or Bullets above / below ground.
At Bottling Plant the Bulk LPG will be drawn from the Storage tanks through
a pipeline and fill the LPG into various sizes of Cylinders depending upon
the demand of respective size of cylinders.
For putting up of Bottling Plant all statutory requirements should be complied
with as given in para 2.31 of page no. 20 of the publication and Gas
cylinders rules 1981.
5.44 The facilities created at a Bottling Plant are:
(i) Decanting Bay for Decanting the Bulk LPG received by Tank wagon/
Tank Lorry
(ii) Storage tanks for Bulk LPG,
(iii) Pipelines from Decantation bay to Storage tanks
(iv) Pipelines from storage tank to Filling Points.
(v) Filling Shed for filling the Bulk LPG into various sizes of Cylinders.
(vi) Filling points in filling shed
(vii) Conveyer chains for movement of Empty/ Filled cylinders.
(viii) Carrousel Filling Systems, Filling Heads (cylinder filling machines)
and Ejection Systems
92
(ix) Check Weighing Systems
LeakTestingBaths
ManualLeakDetectors
WeightCorrectionMachines
(x) SealApplicationSystems
ThermosealingMachine
WashingSystems
(xi) ElectricalEquipment
FireandGasAlarmSystems
ProductionDataManagement Systems
(xii) Water and fire fighting systems
(xiii) Valve Opener and Closer systems
(xiv) Valve Orientation Machine
The above facilities are common to all Bottling Plants and are Capital in
Nature and are capitalised.
Marketing and Distribution
5.45 The LPG is sold by way of Bulk quantity and Packed quantity. The
sale of Bulk LPG is done to Industrial customers or customers who require
LPG in large quantities. The sale of Packed LPG is done to House hold
sector (Domestic) and Hotel industry(commercial). The type of sales made
are Packed domestic LPG (5 kg and 14.2 kg), packed commercial (19 kg
and 47.5 kg) and Bulk (in MTs).
The cylinders used for packed LPG should comply with the requirements of
LPG cylinders act.
The Packed Domestic LPG is distributed to the customers through Distributors
network. The packed commercial LPG is distributed either directly to
93
customers or through Distributors network. The Bulk LPG is distributed
directly to customers.
The distributors are appointed by the company based on the laid down
criteria for selection of distributors depending upon the requirement for
appointment for a particular location at a Place.
Facilities created/ required at Distributors Premises are as under:
(a) Godown for storing Cylinders
(b) Admin office cum showroom
(c) Delivery Vehicles for Distribution of cylinders to customers
(d) Manpower for carrying out work
Godown licence from CCOE (Chief Controller of Explosives) for storing of
cylinders and Comprehensive Insurance Policy including third party insurance
should be taken.
The distributors will be compensated by way of commission (Rs. /cylinder)
for the total no. of cylinders sold in a month.
For getting refilled cylinders, customers would register a request with
respective Distributor and filled cylinders will be supplied to customers
accordingly.
Corpus Fund will be provided by the company for working capital to the
distributor in respect of packed cylinders distribution. Working capital is
given for construction of showroom/Godown and for initial load of 306 filled
cylinders. This is given to SC/ST category of Distributors. The distributors
will be required to repay the loan along with the interest in terms of EMI as
per provisions of MOPNG.
Retail counter is a facility created at the Bottling plant to distribute the
Domestic 14.2 kg packed cylinders to the customers directly without routing
through the appointed Distributors.
Auto LPG for vehicles is distributed through Retail outlet Network.
94
Distributor gets packed cylinders of 5kgs, 14.2 Kgs, 19 Kgs and 47.5 kg
from Bottling plant on submission of payment.
Functions of Distributors
(a) Issue (Single / Double cylinders) Subscription voucher (SV)) to
customers who are allotted LPG connection by the company against
payment of Deposit towards Cylinders and pressure regulators
(b) Issue Transfer voucher (TV) to customers who have shifted their
residence to some other place.
(c) Issue Termination voucher (TV) to customers who have surrendered
the LPG connection.
(d) Replacement of defective PRs(Pressure Regulator) with new PRs
provided by the company, as free replacement to the customers.
(e) Return the empty cylinders received from customers to the Bottling
plants for getting the LPG filled cylinders
(f) Submit the reconciliation of LPG Deposit amount received for the
new connections issued and deposit amount returned to Transferred/
terminated connections.
(g) Submit EMR (Equipment Movement Report) reconciliation for the
cylinders and pressure regulators
(h) Indemnifying the company for shortages cylinders and pressure
regulators.
There are Marketing Discipline Guide lines (MDG) which are to be followed
by the distributors while marketing and distribution of LPG filled cylinders.
Those who violate the implementation of MDG guide lines are liable for
fines, penalties and suspension of distributorship.
Accounting of LPG Transactions
5.46 Capitalisation of Facilities Created at Bottling Plants
The Facilities created as mentioned under Bottling Plant should be
capitalised.
95
Internal Internal Audit of Transactions
1. To verify that the assets are capitalised as per classification of assets
2. To verify that the assets installed are approved by the competent
authority as per DOA.
3. To verify that necessary capital budget provision is available.
4. To verify that the assets are put into use and there are no idle assets.
5. To verify that the depreciation rates are charged as applicable to
each category of assets and in case the plant is working mire than on
shift extra shift depreciation has been charged.
6. To verify that the assets which are idling are shifted to needy location
or disposed of in case not needed.
7. To verify that the assets are adequately insured.
Production/ Purchase of Bulk LPG
5.47 The main source of receipt of Bulk LPG is from production of own
refinery or purchases from other refineries or through Imports. The quantity
of measurement is in MTs (metric tonne). The Purchase cost of bulk LPG
includes IPP (Import Parity Price)/RTP (Refinery Transfer Price) +excise/
customs duty+ freight + Terminalling charges paid on purchases+ taxes paid
on purchases.
(i) To verify whether the product is received from own refineries/other
Refineries/imports.
(ii) To verify whether the elements of Purchase cost as mentioned above
are accounted element wise in the books of accounts.
(iii) To verify whether the quantity billed is as per Joint certificate of
selling and purchasing company.
(iv) To verify whether IPP/RTP price as prevalent at the time of despatch
has been charged
96
(v) To verify whether Excise/Customs duty has been charged at the
applicable rates
(vi) To verify whether Railway /Coastal/Pipeline freight/siding charges have
been charged at applicable rates.
(vii) To verify whether Terminalling charges have been charged at
applicable rates.
(viii) To verify whether appropriate Tax rates on purchase (if applicable)
has been charged.
(ix) To verify whether the product despatched from loading location has
been received at receiving location and look into the same if not
received.
(x) To verify whether the payments for purchases have been made as
per contractual agreement with suppliers of product.
Sale of Bulk/Packed LPG
5.48 The type of sale effected may be Bulk/packed LPG. Sale of Bulk LPG
refers to sale of LPG in Large quantities to Industrial customers who will
store the LPG in storage tanks in their premises. The sale of Packed LPG
refers to sale of LPG filled in cylinders of various capacities of 5/14.2/19/
47.5 kgs. The sales of packed LPG cylinders in capacities of 5/14.2 kg are
termed as Domestic packed LPG sales. The sales of packed LPG cylinders
in capacities of 19/47.5 kg are termed as Non Domestic packed LPG sales.
The sales of Bulk LPG will be made directly to the industrial customers. The
sales of Packed LPG will be made through network of Distributors appointed
by the company.
(i) To verify the type of sales whether it is Bulk or Packed LPG sales.
(ii) To verify whether the sales made to Bulk LPG customers are as per
the terms of sales order.
(iii) To verify in case of Bulk LPG that the prices are charged as per
selling rates prevailing on the date of supply.
97
(iv) To verify the payment terms and to confirm that the payments are
received as per approved payment terms.
(v) To verify that the discounts extended to Bulk customers are within
the discount poly of the company.
(vi) To verify whether there is increase in sales volume of Bulk LPG due
to extension of credit terms/discounts.
(vii) To verify that the packed LPG sales are made through appointed
Distributors only bifurcating into domestic/non domestic sales
(viii) To verify the payment terms to ascertain that the distributors are
paying accordingly
(ix) To verify that the prices of Packed LPG are charged as per selling
rates prevailing on the date of supply in respect of Domestic/Non
domestic sales respectively.
(x) To verify that fines, penalties are collected from those distributors
who have violated the MDG guidelines.
Accounting of Stock of LPG (Bulk)
5.49 Receiving bulk LPG at BP is shown as receipt. (In MTs)
Bulk quantity used for filling cylinders on daily basis is shown as issue
(rebranding out)
Daily Stock account of Bulk LPG is maintained showing opening stock+
receipts- issues = closing stock.
The closing stock is compared with Physical stock to ascertain the loss or
gain on daily basis.
Bulk LPG physical closing stock is valued at the purchase cost i.e. IPP
(Import Parity Price)/RTP (Refinery Transfer Price) +excise/customs duty+
freight + Terminalling charges paid on purchases+ taxes paid on purchases.
For transportation of Bulk LPG from loading location to bottling plant, payment
for transportation are to be made to Transporters.
98
The rates of transportation are finalised through a tendering process by way
of Limited/Public tender.
(i) To verify that the quantity despatched from the Loading location is
received at the bottling plant.
(ii) To verify that shortage of product during Transit is recovered from
the transporter as per the limits specified in the Transport agreement
(iii) To verify that the product in Transit as on closing of accounts are
accounted properly
(iv) To verify that the Bulk stock is valued at purchase cost
(v) To verify that the stock losses are within the permissible limits.
(vi) To verify that the approval from competent authority has been obtained
for stock losses incurred beyond permissible limits.
(vii) To verify that the transportation rates/contracts are finalised by
tendering procedure only
(viii) To verify that the transportation payments are released as per the
rates finalised in the tender
(ix) To verify that the stocks are adequately are insured.
Packed Cylinders Accounting (Product)
5.50 Issue from bulk LPG storage is taken as receipt (rebranding in).
The quantity shown as receipt is compared with total quantity filled in various
capacities of cylinders to ascertain any loss or gain of LPG during filling of
cylinders.
Despatches of LPG (filled) packed cylinders are reflected as issue. (No. of
cylinders)
The difference between receipts and issues is the balance of packed LPG
cylinders at Plant as on particular date after considering the opening balance.
99
For transportation of packed cylinders from bottling plant to Distributors
premises payment towards transportation to be made to transporters.
The rates of transportation are finalised through a tendering process by way
of Limited/Public tender.
Every cylinder after its filling with LPG is checked for correctness of its
weight, before despatch to the Distributors.
These cylinders are called packed product cylinders and the cylinders are
returned by the customers to the company for refilling.
The peculiar feature of LPG accounting is that the filled cylinders with LPG
after consumption of gas by consumers, they have to return the empty
cylinders to distributors and get the filled cylinder.
Accounting is to be done for LPG gas used for filling in cylinders and for
cylinders also.
(i) To verify that the no. of cylinders as per the capacity of Truck used
for transportation of cylinders, are loaded correctly.
(ii) To verify that the no. of packed cylinders sent sold to Distributors are
retuned to Bottling plant as empty cylinders.
(iii) To verify that the transportation rates/contracts are finalised by
tendering procedure only
(iv) To verify that the transportation payments are released as per the
rates finalised in the tender.
(v) To verify that shortage on account of safety caps are recovered from
distributors.
(vi) To very that the product and cylinders are adequately insured.
Purchases and Stock of Various Sizes of Cylinders/Safety
Valves
5.51 As the LPG is highly inflammable and stored in a in a high pressure
vessel, the storage vessel like cylinders and regulators to control the pressure
100
of flow of LPGthe companies procure the cylinders from the reputed
manufacturers.
The cylinder used for storage of LPG is fitted with safety valve fixed on the
Top of the cylinder.
The requirements of Cylinders/ Safety valves are estimated on the basis of
No. of connections issued and to be issued.
As the requirement of Cylinders/ safety valves is huge in number the purchase
of these items are done through public tender process.
Inventory of LPG Cylinders/ Safety valves will be available at the Bottling
Plants, Distributor Premises and Repairer premises.
On periodical basis the physical verification of cylinders are done as per
requirement of companies Act. The difference between physical and book
balances of cylinders at distributors premises are recovered from distributors
at penal rate for shortages.
The reconciliation of LPG Equipments (Physical & book) will be done at
Plant location, Distributor Premises, repairs and in-transit.
The responsibility of physical inventory (cylinders) is with Bottling Plants-
Location-in-charge, Repairs- Bottling Plant, Distributors and Area Managers.
(i) To verify the estimation of new cylinders/ safety valves to be
purchased.
(ii) To verify that the proper purchase procedure has been followed for
procurement of new cylinders/ safety valves..
(iii) To verify that the distributors are returning the empty cylinders while
taking the filled cylinders
(iv) To verify that tariff costs of cylinders are recovered from Distributors
in case of non return of empty cylinders
(v) To verify that the rates for transportation of packed cylinders to
distributor premises are finalised by proper tendering procedure.
101
(vi) To verify that, the transportation payments to transporters are released
as per the finalised Tender.
Accounting of Pressure Regulators (PR)
5.52 The pressure regulator is connected to a hose connecting the Stove
and the cylinder. One pressure regulator is issued for individual connection
of packed LPG customers. The pressure regulators are issued to each
individual connection by the Distributor after getting the supply of regulators
from the company. Any defective pressure regulator should be replaced by a
new pressure regulator. The pressure regulator is the property of the company
and the customer should return the same to the company at time of surrender
of connection.
(i) To verify the estimation of new pressure regulators to be purchased.
(ii) To verify that the proper purchase procedure has been followed for
procurement of new pressure regulators.
(iii) To verify that tariff cost of pressure regulator is recovered from
distributors in case of shortage of pressure regulators.
(iv) To verify that unissued stock of Pressure regulators are valued
properly in the books of accounts.
Accounting of amount received towards deposit of Cylinders and Pressure
regulators:
5.53 As the cylinders/pressure regulators are the property of the company,
the customers are required to pay a specified deposit amount per cylinder/
pressure regulator to the company. The amount collected by the company
towards deposit of cylinders/pressure regulators are accounts current liability
in the books of accounts as the deposit amount is refundable to Customers
in case of surrender of LPG connection by customers. The amount from the
customers will be collected by distributors as when new connection is given.
The distributors are required to deposit the amount collected towards deposit
with the company on weekly basis. At any point of time the amount to be
remitted by distributors should not be more than one week. In case there is
default by distributors in remitting the amount to the company, the distributors
are liable to pay interest for delay in remitting amount.
102
The customers / consumers are required to pay the security deposit for
cylinders and regulator as a onetime payment which are accounted as liability
in the books of the company and the amount received towards cylinders &
regulator will be returned to customers when they surrender the gas
connection to the company.
As the consumers are supplied gas with cylinder (Storage container), one
time security deposit per cylinder is to paid for the no. Of cylinders held by
customers.
Various reports are prepared for reconciliation and control of transactions
between locations and distributors / repairs / reconciliations of inventory of
equipment, deposit recoverable.
Internal Audit of transactions
(i) To verify that the amount payable per cylinder/pressure regulator as
per the rates fixed by the company are paid by customers.
(ii) To verify that the distributors are remitting the deposit amount to
company on weekly basis.
(iii) To verify that the amount received from the customers are shown as
current liability in the books of accounts.
(iv) To verify that in case of surrender/termination of connection the
amount is refunded to the customer.
5.55 Pricing
Domestic Supplies (House hold sector) - Controlled by MOP&NG
Commercial supplies (Industrial/Hotel sector) - Free
Pricing, NDNE, Bulk
Auto LPG (Transport sector) - Free Pricing
Pricing of Bulk LPG per MT
1. FOB Price at Arab Gulf (AG) of LPG
2. Ocean Freight from AG to Indian Ports
103
3. C&F (Cost and Freight) Price (1+2)
4. Import Charges (Insurance/Ocean loss/LC Charges/Port Dues)
5. Customs Duty
6. Import Parity Price (IPP) (3+4+5)
7. Import Parity Price is the Refinery Transfer Price (RTP) Charged by
Refinery to Marketing Companies
8. Inland Freight and Delivery Charges
9. Marketing cost
10. Marketing margin
11. Filling charges
12. Total price (7+8+9+10+11)
13. Excise duty
14. VAT/Sales Tax
15. Selling price per MT (12+13+14)
Pricing of Packed LPG cylinder (Domestic-14.2 kg))
1. FOB Price at Arab Gulf (AG) of LPG per MT
2. Ocean Freight from AG to Indian Ports per MT
3. C&F (Cost and Freight) Price (1+2) per MT
4. Import Charges (Insurance/Ocean loss/LC Charges/Port Dues) - per
MT
5. Customs Duty- advalorem
6. Import Parity Price (IPP) (3+4+5) - per MT
7. Import Parity Price (IPP) (3+4+5)-per Cylinder (14.2 kg) (6/1000 kg
*14.2 kg)
104
Import Parity Price is the Refinery Transfer Price (RTP) Charged by
Refinery to Marketing Companies -per cylinder
8. Inland Freight and Delivery Charges-per cylinder
9. Marketing cost per cylinder
10. Marketing margin per cylinder
11. Bottling charges (Filling and Cylinder cost) per cylinder
12. Total price (7+8+9+10+11) per cylinder
13. Less: Subsidy by Central Govt. per cylinder
14. Less: Under recovery by PSU Oil Marketing Companiesper cylinder
15. Price Charged to Distributor (Bottling Plant Price) (12-13-14) per
cylinder
16. Add: Excise dutyper cylinder
17. Add: Distributor Commissionper cylinder
18. Add: VAT (including VAT on Distributor Commission) per cylinder
19. Retail Selling Priceper cylinder.
Pricing of Packed LPG cylinders (Non domestic (Commercial) - 19 and 47.5
kg)
1. FOB Price at Arab Gulf (AG) of LPG per MT
2. Ocean Freight fromZAS AG to Indian Ports per MT
3. C&F (Cost and Freight) Price (1+2) per MT
4. Import Charges (Insurance/Ocean loss/LC Charges/Port Dues) - per
MT
5. Customs Duty- advalorem
6. Import Parity Price (IPP) (3+4+5) - per MT
105
7. Import Parity Price (IPP) (3+4+5)-per Cylinder (19/47.5 kg) (6/1000
kg *19/47.5 kg)
Import Parity Price is the Refinery Transfer Price (RTP) Charged by
Refinery to Marketing Companies -per cylinder
8. Inland Freight and Delivery Charges-per cylinder
9. Marketing cost per cylinder
10. Marketing margin per cylinder
11. Bottling charges (Filling and Cylinder cost) per cylinder
12. Total price (7+8+9+10+11) per cylinder
14. Less: Discount -per cylinder
15. Price Charged to Distributor (Bottling Plant Price)(12-13-14) per
cylinder
16. Add: Excise dutyper cylinder
17. Add: Distributor Commissionper cylinder
18. Add: VAT (including VAT on Distributor Commission) per cylinder
19. Retail Selling Priceper cylinder
(i) To verify that the pricing of the product has been done as per end
use of product i.e. Domestic use, Commercial (NDNE and Bulk) and
Auto LPG
(ii) To verify that Pricing masters are maintained separately as per above
three categories.
(iii) To verify that the Pricing masters are updated immediately whenever
there are changes in Pricing Elements.
(iv) To verify that the Pricing Masters are sent to locations where billing
is done.
106
Hot Repair of Cylinders
5.56 Hot repair of LPG cylinders means repairing of valve protection
ring(VP ring) or foot ring because of very deformed VP rings or foot rings.
Hot repair Process includes accessories for cutting and surface welding of
VP rings and foot rings as well as equipment for normalizing LPG cylinders.
LPG cylinder found requiring repairs is put to Hot repairs once in its lifetime
as per IS code of practice. Each and every Hot repaired cylinder is also
certified for use by BIS and is accordingly put into circulation. Any LPG
cylinder which has undergone one Hot repair, if it is found damaged
subsequently deshaped and scrapped. New LPG cylinders are purchased
as replacement to the cylinders scrapped.
(i) To verify whether the process of segregation of cylinders requiring
Hot repairs is in vogue at each bottling plant.
(ii) To verify that the quantity of cylinders requiring Hot repairs are kept
separately.
(iii) To verify whether in house fecility is available for Hot repairs.
(iv) To verify that in case of there is no in house fecility for Hot repairs,
whether Tendering process (Public or Limited) is followed for allocation
of hot repair work.
(v) To verify the record keeping for movement of cylinders is updated on
regular basis.
(vi) To verify that the contractors for Hot repairs are uplifting the cylinders
for repairs as per the work order terms.
(vii) To verify that the cylinders which cannot be repaired are deshaped
and scrapped.
(viii) To verify that the scrapped cylinders are disposed off on regular
basis by following tendering process (public or limited).
(ix) To verify that the quantity of sale of scrapped cylinders are removed
from books of account.
107
Statutory Testing of Cylinders
5.57 LPG Cylinders are manufactured as per BIS 3196 through
manufacturers approved by the Chief Controller of Explosives, Nagpur
(CCOE) and having BIS license. Each and every new LPG cylinder is checked
at various manufacturing stages and marked by BIS (Bureau of Indian
Standards) after various tests carried out as per the BIS codes and Gas
Cylinder Rules, 2004, before putting them into circulation by the Public Sector
Oil Companies. Thereafter, each LPG cylinder is checked at the LPG Bottling
plants and only the ones which are meeting the Standards as specified in
the Gas Cylinder Rules are filled, checked and sent to the Distributors for
distribution to the customers. All new LPG cylinders are required to be put
to first Statutory Testing after 10 years. Thereafter, the cylinders are put to
statutory testing every 5 years. Such testing of LPG cylinders is done through
agencies approved by CCOE as specified in The Gas Cylinder Rules 2004
and once again put into circulation only if the cylinders pass the required
Pressure Tests.
On one of three vertical stay plates (side stems) of the LPG cylinder, the
date is coded alpha numerically as A or B or C or D and a two-digit number
following this e.g. D10. The alphabets stand for quarters - A for Qtr. ending
March (First Qtr), B - Qtr. ending June (Second Qtr), C-Qtr. ending Sept
(Third Qtr), & D for Qtr. ending December (Fourth Qtr). The digits stand for
the year when the cylinder is due for Statutory testing as explained above.
Hence D10 would mean that the particular cylinder is to be taken for the
next Statutory Testing by December 2010. In any case, this is not the date
of EXPIRY of PHYSICAL LIFE of the CYLINDER It is further clarified that,
during service, every empty LPG cylinder when it comes from the Distributor
to the Bottling Plant for filling, is checked for its condition including the
marked date for Statutory Testing due. Cylinders due for testing are
segregated and sent for testing. Every cylinder after its filling with LPG is
checked for correctness of its weight and soundness, before despatch to
the Distributors. Every care is taken to ensure that cylinders which are safe
for use are only sent to our Distributors for further distribution. It means if a
customer gets a cylinder in June 2010 with marking as B10, it does not
indicate that the physical life of the cylinder has expired. It only means that
this cylinder is due for Statutory testing by end June 2010.
There is an expiry date for LPG cylinders that are used in India to supply
gas used in our household for cooking.
108
Hence, the codes ABCD followed by the year only indicates the period
before which the vessel or the cylinder has to be tested & inspected to
ensure safety. It means if a customer gets a cylinder in June 2006 with
marking as B06, it does not indicate that the physical life of the cylinder has
expired. It only means that this cylinder is due for Statutory testing by end
June 2006.
The LPG inside will never misbehave in its physical or chemical properties
(as in the case of a pill or a dairy product)
Every empty LPG cylinder when it comes from the Distributor to the Bottling
Plant for filling is checked for its condition including the marked date for
Statutory Testing due. Cylinders due for testing are segregated and sent for
testing.
Every cylinder after its filling with LPG is checked for soundness, before
despatch to the Distributors. Every care is taken to ensure that cylinders
which are safe for use are only sent to our Distributors for further distribution.
(i) To verify that the cylinders are segregated for statutory testing as per
statutory norms
For instance, in the example shown
above with the number D06, the LPG
cylinder life expires by Dec of 2006 (The
picture is one of empty cylinders. Hope
they dont return it to our house again!
The second example with D13 allows the
cylinder to be in use until Dec 2013.
109
(ii) To verify that the quantity of statutory due cylinders are kept
separately.
(iii) To verify that the selection of parties for doing the statutory testing
are selected based on the tendering process (Public or limited)
(iv) To verify the record keeping for movement of cylinders is updated on
regular basis.
(v) To verify that the contractors for statutory testing are uplifting the
cylinders for testing as per the work order terms.
(vi) To verify that the cylinders which cannot be tested are deshaped and
scrapped
(vii) To verify that the scrapped cylinders are disposed off on regular
basis by following tendering process (public or limited)
(viii) To verify that the quantity of sale of scrapped cylinders are removed
from books of account
Natural Gas
5.58 It is colourless, shapeless and odourless in its pure form. Natural
gas is combustible and when burned it gives off a great deal of energy.
Natural gas is clean burning and emits lower levels of potentially harmful by-
products into the air. Natural gas is a combustible mixture of hydro carbon
gases. While natural gas is formed primarily of methane it can also include
ethane, propane, butane and pertane. Natural gas is considered as dry
when it is almost pure methane and other commonly associated hydrocarbons
are removed with other hydro carbons present, the natural gas is wet. Natural
gas is environmental friendly in nature making a competitive fuel / feed
stock in power and fertilizer sectors.
Production
5.59 Found in reservoirs underneath the earth, associated with oil deposits
with sophisticated technology that helps to find the location of natural gas
and rig wells in the earth where it is likely to be found. Once brought from
underground, the natural gas is refined to remove impurities like water,
other gases, sand and other compounds. Some hydrocarbons are removed
and sold separately including propane and butane. Other impurities are
110
also removed like hydrogen sulphide (through refining of which can produce
sulphur, which is also sold separately). After refining the clean natural gas,
it is transmitted through network of pipelines, thousands of miles. From
these pipelines natural gas is delivered to its point of use.
Measurement
5.60 Measured in cubit feet. Production and distribution company measure
gas in thousands of cubic feet (Mcf), Millions of cubic feet (Mmft), Trillions of
cubic feet (Tcf) also commonly measured and expressed in British thermal
Units (BTU). One BTU is the amount of natural gas that will produce enough
energy to heat one pound of water by one degree at normal pressure. One
cubic feet of natural gas contains about 1027 BTUs. When natural gas is
delivered to a residence it is measured by the gas utility in therms for
billing purposes. A therm is equivalent to 1,00,000 BTUs or just over 97
cubic feet of natural gas.
Compressed Natural Gas (CNG)
5.61 CNG is a Substitute for gasoline (petrol), diesel, or propane/LPG.
Although its combustion does produce greenhouse gases, it is a more
environmentally clean alternative to those fuels, and it is much safer than
other fuels in the event of a spill (natural gas is lighter than air, and disperses
quickly when released). CNG may also be mixed with biogas, produced from
landfills or wastewater, which doesnt increase the concentration of carbon
in the atmosphere.
CNG is made by compressing natural gas (which is mainly composed of
methane [CH
4
]), to less than 1% of the volume it occupies at standard
atmospheric pressure. It is stored and distributed in hard containers at a
pressure of 200248 bar (29003600 psi), usually in cylindrical or spherical
shapes.
CNG is used in traditional gasoline internal combustion engine cars that
have been converted into bi-fuel vehicles (gasoline/CNG). Natural gas
vehicles are increasingly used in the Asia-Pacific region, Latin America,
Europe, and America due to rising gasoline prices. In response to high fuel
prices and environmental concerns, CNG is starting to be used also in
pickup trucks, transit and school buses, and trains.
111
The cost of this conversion is a barrier for CNG use as fuel and explains
why public transportation vehicles are early adopters, as they can amortize
more quickly the money invested in the new (and usually cheaper) fuel. In
spite of these circumstances the number of vehicles in the world that use
CNG has grown steadily at a 30 per cent annual rate.
Advantages
1. Due to the absence of any lead or benzene content in CNG, the lead
fouling of spark plugs is eliminated.
2. CNG-powered vehicles have lower maintenance costs when compared
with other fossil fuel-powered vehicles.
3. CNG fuel systems are sealed, which prevents any spill or evaporation
losses.
4. Increased life of lubricating oils, as CNG does not contaminate and
dilute the crankcase oil.
5. CNG mixes easily and evenly in air being a gaseous fuel.
Drawback
Compressed natural gas vehicles require a greater amount of space for fuel
storage than conventional gasoline powered vehicles. Since it is a
compressed gas, rather than a liquid like gasoline, CNG takes up more
space for each gasoline gallon equivalent (GGE). Therefore, the tanks used
to store the CNG usually take up additional space in the trunk of a car or
bed of a pickup truck which runs on CNG. This problem is solved in factory-
built CNG vehicles that install the tanks under the body of the vehicle,
CNG compared to LNG
5.62 Compressed Natural Gas is often confused with liquefied natural gas
(LNG). While both are stored forms of natural gas, the key difference is that
CNG is gas that is stored (as a gas) at high pressure, while LNG is stored at
very low temperature, becoming liquid in the process. CNG has a lower cost
of production and storage compared to LNG as it does not require an
expensive cooling process and cryogenic tanks. CNG requires a much larger
volume to store the same mass of gasoline or petrol and the use of very
high pressures (3000 to 4000 psi, or 205 to 275 bar). As a consequence of
112
this, LNG is often used for transporting natural gas over large distances, in
ships, trains or pipelines, and the gas is then converted into CNG before
distribution to the end user.
CNG can also be confused with LPG, which is liquefied propane. Unlike
natural gas (mostly methane), propane can be compressed to a liquid without
continual refrigeration. LPG is commonly used to fuel vehicles in Australia.
Liquefied Natural Gas (LNG)
5.63 Natural gas at -161
o
c is transforms into liquid. When natural gas is
cooled below -161
o
c where it liquefies can be stored as a boiling liquid in
insulated tanks as an alternative means of transportation to pipelines for
natural gas.
This is done for easy storage and transportation since it reduces the volume
occupied by gas by a factor of 600. LNG is transported in specially built
ships with cryogenic tanks. It is received at the LNG receiving terminals and
is regassified to be supplied as natural gas to the consumers. LNG projects
are highly capital intensive in nature. The whole process consists of five
elements:
(i) Dedicated gas field development and production.
(ii) Liquefaction plant.
(iii) Transportation in special vessels.
(iv) Regassification Plant.
(v) Transportation & distribution to the Gas consumer.
LNG supply contracts are generally of long term nature and the prices are
linked to the international crude oil prices. However, the LNG importing
countries in recent times had started asking for medium/short term contracts
with varying linkages.
Marketing and Distribution
5.64 Domestic gas supply is not likely to keep pace with demand most of
gas requirements are to be met imports either via pipeline or LNG tanker.
LNG projects are high-risk. Capital intensive in nature and the critical
113
requirement for successful implementation of such projects is the identification
and aggregation of linked bankable market which can pay for expensive
LNG as long term basis. Since the power sector would be the anchor
market for LNG terminals, the present structure and pricing / tariffs of Indian
Electricity Sector may be dampen the new power generation capacity creation
programme and thus the demand for fuel.
Among the gas import options, generally the pipeline gas imports are
economically superior to LNG imports. The success of transnational gas
pipeline projects critically hinges on various geo political aspects involving
the supply, transit and importing countries etc.
Natural Gas is expected to be the fastest growing energy source for a
variety of reasons including environmental concerns, fuel diversification for
energy security issues, price and market deregulation. Three key customer
segments for Natural Gas are power, fertilizer and industrial users. Share of
residential and transportation seems which are currently minimal likely to
increase due to creation of infrastructure for supply of CNG to vehicles and
piped gas to households. Growing environmental concerns against the use
of diesel and the convenience of using gas as a domestic fuel will drive the
proliferation of gas usage in these scenes.
Gas Pricing
5.65 At present there are broadly two regimes for pricing of gas in the
country a. gas priced under Administrated Pricing Mechanism (APM) and b.
Non APM or free market gas. APM gas relates to gas produced in fields
nominated by the government prior to NELP regime adopted since 1999.
There is around 48 % of gas produced by ONGC and OIL under APM. The
gas is produced from nomination fields of National Oil Companies (NOCs)
viz. Oil and Natural gas Corporation (ONGC) & Oil India Limited (OIL).
Prices of natural gas from the nominated fields has been revised in 2010,
according to which the APM price for gas produced by NOCs like ONGC /
OIL has been fixed at $4.2/MMBTU(except for North East wherein the
consumer price applicable is $2.4 MMBTU). This gas is supplied to power,
fertilisers, court mandated consumers and consumers having total requirement
of less than 50 thousand SCMD. The price of gas supplied to consumers
other than the above mentioned categories has been fixed at non APM rate.
This rate varies in each gas zone. The APM and non APM rates are fixed by
the government from time to time.
114
The other major chunk of gas is from the pre NELP fields of various joint
ventures like PMT/Ravva etc. The price of this gas has been fixed based
PSCs signed with Government of India (GOI). The basic prices range between
$3.5-5.7/MMBTU. Gas price for NELP blocks is determined at arms length
by contractor and post that, approval for price is sought from GOI. Accordingly,
the price of RIL KG basin gas has been fixed at $4.2/MMBTU ex-Kakinada
by EGOM till March 2014.
The other source of gas is RLNG (Regasified LNG) imported through term
contracts. Price of long term LNG imported from Qatar at PLL Dahej has
been linked to Japanese Crude Cocktail (JCC) and varies on monthly basis.
Spot RNLG prices are based on market conditions, which are hovering around
$12-16/MMBTU. As per GOI policy, any one is free to market Market
determined Priced Gas for gas produced from new domestic fields. LNG
Import is under Open General Licence(OGL) and hence freely importable.
Storage
5.66 The most important type of gas storage is in underground reservoirs.
There are three principal types depleted gas reservoirs, aquifer reservoirs
and salt cavern reservoirs. Each of these types has distinct physical and
economic characteristics which govern the suitability of a particular type of
storage type for a given application.
Depleted gas reservoir: These are the most prominent and common form
of underground storage. They are the reservoir formations of natural gas
fields that have produced all their economically recoverable gas. The depleted
reservoir formation is readily capable of holding injected natural gas. Using
such a facility is economically attractive because it allows the re-use, with
suitable modification, of the extraction and distribution infrastructure remaining
from the productive life of the gas field which reduces the start-up costs.
Depleted reservoirs are also attractive because their geological and physical
characteristics have already been studied by geologists and petroleum
engineers and are usually well known. Consequently, depleted reservoirs
are generally the cheapest and easiest to develop, operate, and maintain of
the three types of underground storage.
Aquifer reservoir: Aquifers are underground, porous and permeable rock
formations that act as natural water reservoirs. In some cases they can be
used for natural gas storage. Usually these facilities are operated on a
115
single annual cycle as with depleted reservoirs. The geological and physical
characteristics of aquifer formation are not known ahead of time and a
significant investment has to go into investigating these and evaluating the
aquifers suitability for natural gas storage.
Salt Cavern reservoir: A salt cavern offers an underground natural gas
storage vessel with very high deliverability. Cushion gas requirements are
low, typically about 33 percent of total gas capacity. Salt caverns are usually
much smaller than depleted gas reservoir and aquifer storage facilities. A
salt cavern facility may occupy only one one-hundredth of the area taken up
by a depleted gas reservoir facility. Consequently, salt caverns cannot hold
the large volumes of gas necessary to meet base load storage requirements.
Deliverability from salt caverns is, however, much higher than for either
aquifers or depleted reservoirs.
Natural Gas Markets
5.67 The critical feature of most gas markets is the cost and nature of
transportation, moving gas from the point of production to the point of use is
highly capital intensive, expensive relative to the cost of commodity itself
and characterised by important economies of scale.
There are two distinct markets (1) Spot market (2) Futures Market. Spot
market is the daily market where natural gas is bought and sold right now.
To get the price of natural gas on a specific day, it is the spot market price
which is most informative. Futures market consists of buying and selling
natural gas under contract at least one month and upto 36 months in advance.
Two types of natural gas marketing and trading are (1) Physical and (2)
Financial Trading. Physical trading involves buying and selling the physical
commodity. Financial trading involves derivatives and sophisticated financial
instruments in which the buyer and seller never take physical delivery of the
natural gas.
Uses of Natural Gas
The uses of natural gases are as follows:
(i) Residential Uses : For heating (water heater) and cooking self
ignition, temperature control and self-cleaning, cool houses through
natural gas powered air conditioning and home appliances.
116
(ii) Commercial Uses : Private / Public Sector enterprises office building,
schools, churches, hotels, restaurants and govt. Buildings for space
heating, water heating, cooling and cooking and lighting.
(iii) Industrial Uses : Natural gas as ingredients for varied products such
as plastic, fertilizer, anti freeze and fabrics, for lighting and cooking,
in pulp & paper, metals, chemicals, stone, clay and glass, plastic and
food processing, fertilizer, pharmaceuticals and Petrochemicals.
(iv) Transportation : As alternative fuel CNG (compressed natural gas)
cleanest burning alternative transportation fuel., being lighter than
air, in the event of accident natural gas simply dissipates into the air
instead of forming a dangerous flammable pool on the ground like
other liquid fuels prevents the pollution of ground water in the event
of spill.
(v) Power Sector : Natural Gas is the major input for generation of
electricity.
Natural gas is much cleaner burning than traditionally fuelled vehicles due
to chemical composition of natural gas while natural gas is primarily methane,
gasoline and diesel fuels contain numerous other harmful compounds that
are released into the environment through vehicle exhaust.
The primary impediments to the public proliferation of NGV (Natural Gas
Vehicle) include the high initial cost, limited refuelling infrastructure and
automobile performance characteristics. NGVs despite being cheaper to
refuel and maintain are more expensive initially than gasoline powered
counterparts. As the technology is more advanced, the cost of manufacturing
should drop, which may be then be passed on to consumers.
(i) To verify the production/purchase contracts for production/purchase
of Natural gas.
(ii) To verify the production cost/purchase cost of gas.
(iii) To verify the sale contacts entered for sale of gas
(iv) To verify the method of pricing adopted for different types of
consumers.
117
(v) To verify the cost benefit analysis for putting up of LNG terminals.
(vi) To verify that the prices of gas are determined based on the supply
and demand factors.
Pipelines and its Accounting
5.70 Pipelines refer to a facility used to transport products / commodities
from point of production/receipt to the point of delivery. Crude oil and
petroleum products are the most common products / commodities transported
by pipelines.
Comparison of pipelines as a mode of transport with other modes of
transportation.
Head Pipeline Rail Road
Energy Cost Low High Very High
Operating Cost Low High Very High
Pollution Nil Low High
Movement / Congestion Nil Low High
Handling Loss Negligible Low High
Safety Hazards Negligible Low High
Reliability 100% Low Low
Advantages of pipeline transportation:
1. Lower cost of transportation
2. Lower transit losses
3. Lower energy intensiveness
4. Economics of scale
5. Safely & reliability minimum disruptions
6. Environment Friendliness
118
7. Multi product handling
8. Flexibility]
9. Stationery carrier
10. Augmentation at low cost
11. Minimal land cost
12. Decongestion of surface transport systems.
Pipelines are the best suitable mode of transportation of large volumes of
petroleum products over long leads. The crude oil pipelines transport waxy
crude as well as low sulphur high sulphur crude. The finished product
pipelines transport primarily light and middle distillates including ATF, in
multi-product pipelines.
Disadvantages
1. Capital intensive
2. Viability depends on utilisation
3. Once laid it is sunk cost / No alternative use
4. Less flexibility regarding batch size.
5. Inverting carrying costs
6. Interface and contamination of product
7. Door to door delivery not possibl
Pipelines Tariff Mechanism
5.71 Tariff Constitutes
Operating cost including depreciation
Return on net worth and borrowings
Weighted average interest rate on borrowed capital
119
1. Operating Cost:
a. Variable Costs Chemicals (protection against internal
corrosion, utilities power & fuel)
b. Variable cost prorated to stand throughput levels.
c. Fixed Costs Salaries & Wages, Repairs & Maintenance, other
expenses (administration), depreciation.
2. Return on net worth and borrowings.
3. Standard thruput in MT as divisor.
Pipeline tariff Rs. per MT =
1+2
3
Standard thruput as divisor in case of the following
(a) For product pipelines- 70% of installed capacity of pipeline for
first year of operation. - 95 % of installed capacity of pipeline
from second year of operation.
(b) For crude oil pipelines 70% of installed capacity of pipeline
for first 2-3 years of operations. Thereafter installed capacity of
pipelines.
Alternative Tariff Fixation:
1. Tariff equivalent to freight of alternate mode
2. As per market forces
3. As per take or pay contract
Present Pipe line Tariff:
75% of rail freight is the present tariff rate for pipeline distribution.
120
5.72 Fixed Assets - Assets can be Tangible and Intangible.
Intangible Assets :
a. Right of way
b. Licences (expenditure on technical knowhow / licence / Engineering
fees relating to plant design / facilities)
c. Computer software
d. Right of way (ROW): right of way for laying of pipelines shall be
recognised as intangible asset. Since the ROW is perpetual in nature,
the same shall continue to be non depreciable asset and hence no
amortisation is to be provided on ROW.
Tangible Assets:
a. Plant & Machinery Main line, single buoy mooring (SBM), pump
station and terminals, tank farm, tele communication, tele supervising,
fire fighting equipments, equipments& appliances, construction
equipments.
b. Pump Station Facilities Pumping Units (diesel or crude oil division
engines or motors coupled to single / multiple stage centrifugal pumps),
Booster pumps (motor driver) fire fighting facilities, DG set, Air
compressor, Control Panel and allied instrumentation, Communication
system, Oil water separator and sump tank.
c. Terminal facilities Delivery manifold, scraper receiver, surge relief
system, control panel and allied instrumentation, DG set, Fire fighting
facilities, communication system, OWS and sump tank.
d. Tank Farm facilities Storage tanks ( fixed / floating roof), fire
fighting facilities, control panel and allied instrumentation, oil water
separator and sump tank, Communication system Etc.
5.73 Profit/ (Loss) Determination.
Income: Tariff rate 75% of railway freight for pipeline distribution.
121
Cost of throughput (COT) Quantity delivered x tariff rate / MT
Profit: COT operating expenses.
5.74 Internal Audit of transactions:
(i) To verify that the Board approval has been taken for laying of new
pipelines.
(ii) To verify that cost benefit analysis has been done for laying of
pipelines.
(iii) To verify that fixation of pipeline tariff has been done taking into
account all the operating expenditure (variable and fixed) and amount
of investment in pipelines.
(iv) To verify that the pipeline tariff is revised wherever there is need for
revision due to change in operating expenditure or expiry of tariff
period.
(v) To verify that the assets are capitalised as per the classification of
the asset.
(vi) To verify that maintenance schedule of pipelines are adhered to so
that the pipelines are used for transportation of products with minimal
disruption
(vii) To verify that the contracts of laying the pipelines are awarded after
following proper purchase procedure
(viii) To verify that procurement of materials for laying pipelines are finalised
after following proper purchase procedure
(ix) To verify that the COT (Cost of throughput) are collected as terms of
agreement entered with the companies who utilise the facilities.
(x) To verify whether the pipelines and its facilities are idling due to non
maintenance or non availability of product for pipeline transportation.
Enterprise Resource Planning (ERP)
5.75 ERP is an integrated enterprise wide information system. It integrates
the information system of an organisation and automates most of the business
122
functions. A properly implemented ERP system can dramatically improve
the efficiency and competitive advantage of an organisation.
In the ERP scenario, the complete audit trail is protected. The transaction in
the ERP software is being recorded with user identification, time and date.
No transaction is deleted or erased. Any erroneous transaction can only be
rectified or reversed. This helps in identifying the full path of transaction
from its origin to completion.
With introduction of ERP in the organisation the Audit has access to
integrated consistent online, real time information.
Comparison of Pre-ERP and Post- ERP Scenario
Pre-ERP Post-ERP
Islands of inconsistent information Integrated, consistent and concurrent
information
Distributed information processing, Centralised information processing,
data transfer from different online, real time updated information
locations and functions
Duplication of jobs due lack of Integrated information, data once
information and connectivity entered updates all relevant records
Local processing Remote Processing on central server
In the pre ERP scenario or legacy system, the audit was required to collect
the hard copies of all the documents to start the audit. If for any reason, the
required information not made available to audit, the job of audit is held up.
Purpose/ Advantages of ERP System
5.76 The main advantages of ERP packages are improved efficiency,
information integration for better decision making faster response time to
customer queries etc. The indirect benefits include better corporate image,
improved customer goodwill, customer satisfaction and so on. Other benefits
are business interpretation, flexibility, better analysis and planning capabilities
and use of latest technology.
123
The activities supported by ERP systems include all core function of
enterprises, including financial management, human resources management
and operations.
ERP packages if chosen correctly, implemented judiciously and used
efficiently have the ability to raise productivity and profits of companies
dramatically. But many companies fail in this because of incorrect selection
of a package, in competent and haphazard implementation and inefficient or
ineffective usage. The most crucial factor that decides the success of an
ERP implementation is how the employees use the system. Even best ERP
system can fail if the employees are not interested in using it or using it
wrongly or inefficiently. To receive total and complete employee support
and participation the organisation must make it a point to educate its
employees about the potential benefits and provide them the requisite training.
ERP systems help to make this task easier by integrating the information
systems, enabling smooth and seamless flow of information across
departmental barriers automating business process and functions and thus
helping the organisation to work and move forward as a single entity.
ERP means the techniques and concepts for integrated management of
business as a whole from the view point of the effective use of management
resources to improve the efficiency of enterprise management. ERP packages
are integrated (covering all business functions) software package that support
the ERP concepts.
ERP is a set of tools and process that integrates departments and functions
across a company into one computer system. ERP runs off on a single data
base, enabling various departments to share information and communicate
with each other. ERP system comprises function specific modules designed
to interact with the other modules like accounts receivable, accounts payable,
purchasing, manufacturing, sales etc.
ERP offers a means of effectively increasing and managing the required
resources (materials, equipments, tools, labour, money etc.,) for each of
these resources ERP can identify what is required, when it is needed and
how much is needed, thus making the operation of the organisation efficient
and effective.
124
ERP systems serve an important function by integrating separate business
functions, materials management, production planning, production, sales
distribution, financials, human resources and others into a simple application.
Limitations of ERP System
5.77 ERP systems have their significant limitations.
1. Managers cannot generate customs reports or queries without help
from a programme and thus inhibits managers from obtaining
information quickly so that they can act on it for competitive advantage.
2. ERP systems provide current status only, such as open orders.
Managers often need to look past the current status to find trends
and patterns than aid better decision making.
3. The data in the ERP application is not integrated with other enterprises
or division systems and does not include external intelligence.
There are many technologies that help to overcome these limitations. These
technologies when used in conjunctions with the ERP package will help in
overcoming the limitations of standalone ERP system and thus help the
employee in making better decisions. Some of these technologies are data
warehousing & data marts, data mining, online analytical processing (OLAP),
Supply chain management (SCM), Customer relationship management (CRM)
geographical information system (GIS), intranets, extranets, electronic data
interchange (EDI), digital cash, cryptography etc.
Functional Modules of ERP Software
5.78 ERP software is made up of many software modules. Each ERP
software module contains major functional area of an organization. Common
ERP modules includes modules for Finance, manufacturing, production
planning, human resources, plant maintenance, materials management,
quality management, marketing, sales and distribution, purchasing, inventory
control, product distribution, order tracking, accounting, marketing and HR.
Organizations often selectively implement the ERP modules that are both
economically and technically feasible. Some of these modules are as follows:
Financial Module This module consists areas relating to Trial
balance, Balance sheet, Profit and loss account, General Ledger,
125
Treasury, Accounts receivable and Payable, cost centre accounting,
Funds management(Budgetary control system),Investment
Management(Capital Budgeting),Assets Accounting.
HR Module This Module consistsof areas relating to Employee
master records like personal data like education, Job profile, Training
details, leave history, family details and salary details.
Materials Management Module This module consists areas relating
to Purchasing, Store keeping and inventory management of raw
materials, stores and spares, procurement of services, works contract,
quantity accounting and materials management information system.
Production Planning Module This Module consists of areas relating
to Production process including control and costing. Production
planning optimizes the utilization of manufacturing capacity, parts,
components and material resources using historical production data
and sales forecasting.
Manufacturing Module This module consists of areas relating to
manufacturing methods that can be combined
Plant Maintenance Module This Module consists of areas relating
to Preventive maintenance and service management, maintenance
order management, history of equipment and technical aspects and
plant management information system. . It also forms the basis for
defining an optimum maintenance strategy.
Sales and Distribution Module This Module consists of areas relating
to Customer master maintenance, Price master maintenance, supplies
at concessional rates, movements of products including in transit,
transport vehicles utilisation and Sales and distribution management
information system.
Quality Management Module -This Module consists ofareas relating
to Quality planning, inspection, control, notification, certificates, test
equipment management and quality management information system.
Project Management Module- This Module consists ofareas relating
to Basic data about projects like planning, approval, execution and
integration and project information system.
126
Available ERP packages
5.79 The available ERP packages are
1.SAP AG, 2.Oracle, 3.Peoplesoft, 4.JDEdwards, 5.QADInc. 6. SSA
Global, 7.Lawson software, 8.Epicor and 9. Intuitive.
Internal Audit of ERP Transactions
5.80 The audit in ERP scenario will be done by selecting various
Transaction (T) codes available in the ERP software for the particular area
of transactions.
(i) To view the trial balance
(ii) To view the General ledger
(iii) To view bank/cash book
(iv) To view vendor balances
(v) To view Customer balances
(vi) To view assets ledger
(vii) To view stock/ stores ledger
(viii) To view Balance sheet
(ix) To view Balance sheet schedules
(x) To view Profit and loss account
(xi) To view Profit and loss account schedules
(xii) To view Purchase/work orders
(xiii) To view Bank reconciliation
(xiv) To view debtors ageing
(xv) To view surplus/non-moving/slow-moving stock/stores
(xvi) To view cost/profit centre report
127
(xvii) To view Budget vs Actuals comparison for capital and revenue
expenditure
(xviii) To view sales reports
(xix) To view production reports
By selecting the relevant T codes the particular area of transaction can be
viewed and checked.
5.81. Internal Audit of Implementation of ERP Software
(i) To verify that there is a Board approval for implementation of ERP
software
(ii) To verify that cost benefit analysis has been carried out before
implementation of ERP.
(iii) To verify that proper purchase procedure has been adopted for
selection of software.
(iv) To verify that the particular ERP software has been chosen for
implementation only after evaluation of the available ERP Softwares
in the market.
(v) To verify that proper training has been imparted by the software
supplier to the power users
(vi) To verify that proper training has been imparted by the power users
to all users of software.
(vii) To verify that the updation of software committed by the supplier
within the warranty, has been done.
Strategic Reserves
5.82 In view of the countrys high import dependence for its oil and gas
needs, Government of India has accorded high priority to securing Indias
energy security objectives. Today major portion of countrys crude oil
requirements is met from imports mainly from oil rich Middle East countries.
It has therefore, become necessary for India to construct a reserve for
buffer supply of crude oil, to deal any disruption in the supply chain due to
external reasons such as political instability, war naval blockade, abnormal
128
spike in the world oil prices for other reasons. The projects are under
execution at three locations at Visakhapatnam, Padur and Mangalore.
To implement and manage the proposed strategic crude oil storage projects,
a Special Purpose Vehicle, namely, Indian Strategic Petroleum Reserves
Limited (ISPRL) was formed on 16/06/04 which became a 100 % owned
subsidiary of Oil Industry development Board (OIDB) on 09/05/06.
To strengthen the countrys energy security , the Ministry of Petroleum &
Natural Gas is engaged in oil diplomacy through Government to Government
negotiations, Inter- Governmental Commissions, Joint working Groups and
regionspecific events such as India Africa Hydrocarbon Conference. Indian
oil PSUs are being encouraged to adopt global vision in their pursuit of raw
materials and raw material producing assets abroad and to vigorously
pursue acquisition of oil and gas assets overseas.
With rapid economic growth and the increasing energy intensity in Indian
households, the issue of Energy security has assumed importance. The
integrated Energy policy recommends that a reserve equivalent to 90 days
of imports should be maintained for strategic cum buffer stock purposes and
/or buy options for emergency supplies from neighbouring large storages
such as those available in Singapore. The buffer stocks should be used to
address short term price volatility. Operating the strategic/buffer reserves in
cooperation with other countries, which maintain such reserves, should also
increase their effectiveness.
It is expected that with the concerted efforts of the oil refining & marketing
companies as well as the strategic storage facilities being created by the
Central Government, around three months storage capacity would be available
before the end of the next decade. In addition, the refineries and oil marketing
companies are enhancing their storage capacity.
The required funds for filling up of crude oil at the three locations would
treated as Plan expenditure and funds would be made available through
plan scheme of Ministry of Petroleum & Natural Gas.
Oil Industry Development Board (OIDB) is to carry out a prefeasibility study,
for the additional storages in Phase II of the Strategic Reserve program. The
additional Locations identified for Phase II storage are 1. Bikaner, Rajasthan,
2. Chandikhol, Orissa, 3. Rajkot, Gujarat and 4.Padur, Karnataka.
129
Regulatory Authorities
Ministry of Petroleum & Natural Gas (MOPNG)
5.83 The Ministry of Petroleum & Natural Gas is entrusted with the
responsibility of exploration and production of oil and natural gas, their
refining, distribution and marketing, import, export, and conservation of
petroleum products and Liquefied Natural Gas.
The Petroleum Industry or Sector works under the Administrative Control of
Ministry of Petroleum & Natural Gas.
Petroleum and Natural Gas Regulatory Board (PNGRB)
5.84 The Petroleum and Natural Gas Regulatory Board (PNGRB) was
constituted under The Petroleum and Natural Gas Regulatory Board Act,
2006 (NO. 19 OF 2006) notified via Gazette Notification dated 31st March,
2006.Petroleum and Natural Gas Regulatory Board, a body set up as
downstream regulator under the PNGRB Act, 2006.
The Act, interalia, provides for a legal framework for downstream gas sector
regulation, as also development of natural gas pipelines and city/local
distribution network. The PNGRB has been empowered to give authorisation
to entities for (a) Laying, building, operating or expanding any pipeline as
common carrier or contract carrier or (b) Laying, building, operating or
expanding any city or local natural gas distribution network.
The Act provide for the establishment of Petroleum and Natural Gas
Regulatory Board to protect the interests of consumers and entities engaged
in specified activities relating to petroleum, petroleum products and natural
gas and to promote competitive markets and for matters connected therewith
or incidental thereto.
Further as enshrined in the act, the board has also been mandated to regulate
the refining, processing, storage, transportation, distribution, marketing and
sale of petroleum, petroleum products and natural gas excluding production
of crude oil and natural gas so as and to ensure uninterrupted and adequate
supply of petroleum, petroleum products and natural gas in all parts of the
country.
The Board shall consist of a Chairperson, Member (Legal) and three other
members to be appointed by Central Government.
130
5.85 Functions of Board
The Board shall-
(A) Protect the interest of consumers by fostering fair trade and
competition amongst the entities;
(B) Register entities to-
1. market notified petroleum and petroleum products and,
subject to the contractual obligations of the Central
Government, natural gas;
2. establish and operate liquefied natural gas terminals;
3. establish storage facilities for petroleum, petroleum
products or natural gas exceeding such capacity as may
be specified by regulations;
(C) Authorise entities to-
1. lay, build, operate or expand a common carrier or contract
carrier;
2. lay, build, operate or expand city or local natural gas
distribution network;
(D) Declare pipelines as common carrier or contract carrier;
(E) Regulate, by regulations,
1. access to common carrier or contract carrier so as to
ensure fair trade and competition amongst entities and for
that purpose specify pipeline access code;
2. transportation rates for common carrier or contract carrier;
3. access to city or local natural gas distribution network so
as to ensure fair trade and competition amongst entities
as per pipeline access code;
131
(F) In respect of notified petroleum, petroleum products and natural
gas
1. ensure adequate availability;
2. ensure display of information about the maximum retail
prices fixed by the entity for consumers at retail outlets;
3. monitor prices and take corrective measures to prevent
restrictive trade practice by the entities;
4. secure equitable distribution for petroleum and petroleum
products;
5. provide, by regulations, and enforce, retail service
obligations for retail outlets and marketing service
obligations for entities;
6. monitor transportation rates and take corrective action to
prevent restrictive trade practice by the entities;
(G) Levy fees and other charges as determined by regulations;
(H) Maintain a data bank of information on activities relating to
petroleum, petroleum products and natural gas;
(I) Lay down, by regulations, the technical standards and
specifications including safety standards in activities relating to
petroleum, petroleum products and natural gas, including the
construction and operation of pipeline and infrastructure projects
related to downstream petroleum and natural gas sector;
(J) Perform such other functions as may be entrusted to it by the
Central Government to carry out the provisions of this Act.
(K) Determination of Marketing Margin
5.86 Powers regarding complaints and resolutions of disputes by the Board
A. The Board shall have jurisdiction to-
a. Adjudicate upon and decide any dispute or matter arising
132
amongst entities or between an entity and any other
person on issues relating to refining, processing, storage,
transportation, distribution, marketing and sale of
petroleum, petroleum products and natural gas according
to the provisions of Chapter V, unless the parties have
agreed for arbitration;
b. Receive any complaint from any person and conduct any
inquiry and investigation connected with the activities
relating to petroleum, petroleum products and natural gas
on contravention of-
i. Retail service obligations;
ii. Marketing service obligations;
iii. Display of retail price at retail outlets;
iv. Terms and conditions subject to which a pipeline
has been declared as common carrier or contract
carrier or access for other entities was allowed to
a city or local natural gas distribution network, or
authorisation has been granted to an entity for
laying, building, expanding or operating a pipeline
as common carrier or contract carrier or
authorisation has been granted to an entity for
laying, building, expanding or operating a city or
local natural gas distribution network;
v. Any other provision of this Act or the rules or the
regulations or orders made their under.
B. While deciding a complaint under sub-section (1), the Board
may pass such orders and issues such directions as it deems
fit or refer the matter for investigation according to the provision
of Chapter V.
Carbon Credits
5.87 Carbon dioxide, the most important greenhouse gas produced by
combustion of fuels, has become a cause of global panic as its concentration
in the Earths atmosphere has been rising alarmingly.
133
Carbon credits are a tradable permit scheme. A permit that allows the holder
to emit one ton of carbon dioxide. Credits are awarded to countries or
groups that have reduced their greenhouse gases below their emission
quota. Carbon credits can be traded in the international market at their current
market price. It is a simple, non-compulsory way to counteract the
greenhouse gasses that contribute to climate change and global warming.
Carbon credits create a market for reducing greenhouse emissions by giving
a monetary value to the cost of polluting the air. The Carbon Credit is this
new currency and each carbon credit represents one tonne of carbon dioxide
either removed from the atmosphere or saved from being emitted. Carbon
credits are also called emission permit. Carbon credit is in the Environment
and Pollution Control subject. Carbon credits are certificates awarded to
countries that are successful in reducing emissions of greenhousegases.
Since most of the industries rely on fossil fuels and are responsible for a
great amount of greenhouse gas emissions, the Intergovernmental Panel on
Climate Change(IPCC) decided to come up with a practical solution to
increase awareness regarding these gas emissions and make going green
feasible for industrialists- Carbon Credits. When the countries came together
to sign the Kyoto Protocol, they voluntarily decided to reduce the amount of
Carbon they emit into the atmosphere. A financially viable way out was the
concept of Carbon trading and Carbon credits.
Need for Carbon Credits
5.88 Over millions of years, our planet has managed to regulate
concentrations of greenhouse gases through sources (emitters) and sinks
(reservoirs). Carbon (in the form of CO2 and methane) is emitted by
volcanoes, by rotting vegetation, by burning of fossil fuels and other organic
matter. But CO2 is absorbed, by trees, forests or by some natural
phenomenon like photosynthesis and also oceans to some extent.
In modern times the burning of fossil fuels like coal, oil and natural gas in
which carbon has been stored for millions of years combined with
accelerated land clearance has led to exceptional levels of greenhouse gas
emissions. Vegetation, largely forest, is already absorbing about one-third
of human-induced emissions, planting more forests could increase absorption.
Carbon sinks cant keep up, and concentrations of greenhouse gases in the
atmosphere have risen dramatically leading to an enhanced greenhouse
effect which will result in very rapid warming of the worlds climate.
134
Existence of Carbon Credits
5.89 The concept of carbon credits came into existence as a result of
increasing awareness of the need for pollution control.
Carbon credits were one of the outcomes of the Kyoto Protocol, an
international agreement between 169 countries. The Kyoto Protocol created
legally binding emission targets for developing nations. To meet these targets,
nations must limit C02 emissions. The very phase Kyoto Protocol has
become synonymous with the idea of saving the planet from the global
meltdown. This can be accomplished by either reducing emissions or by
absorbing emissions through processes such as tree-planting and
sequestration.
Under the protocol, each country is given a quota of the amount of
greenhouse gases they are allowed to emit, and in turn these countries set
limits on the amount of greenhouse gases run by their corresponding local
operators. So these operators can save up on the amount of greenhouse
gases they emit, and if they have carbon credits left over from the quota
allotted to them, they can sell it to another company that needs carbon
credits owing to it emitting greenhouse gases in excess to the quota allotted
to it. This allows for flexibility while making sure that the entire amount of
emissions still stays within the cap. Under the this policy called the Clean
Development Mechanism(CDM),big companies (usually from developed
countries) that are exceeding their assigned quota of carbon credits can tie
up with another company, or with its own subsidiary(usually in a developing
nation) and make it more environmental friendly. Thus , an operator investing
in carbon credits can go for the most cost-effective way to reduce emissions,
either by investing in eco-friendly machinery and equipment ,or by purchasing
carbon credits from another operator who has not reached his quota of
greenhouse emissions.
Trading of Carbon Credits
5.90 Buying carbon credits is not a charitable donation, but a retail action.
Trade in carbon credits has the potential to make forestry more profitable
and to sustain the environment at the same time.
One of the primary solutions for climate change being thought by global
warming alarmists is the purchase and sale of carbon credits. For trading
purposes, one credit is considered equivalent to one tonne of CO2 emissions.
135
Credits can be exchanged between businesses or bought and sold in
international markets at the prevailing market price
Generation of Carbon Credits
5.91 Many types of activities can generate carbon offsets. Renewable
energy such as wind farms, or installations of solar, small hydro, geothermal,
and biomass energy can all create carbon offsets by displacing fossil fuels.
Other types of offsets available for sale on the market include those resulting
from energy efficiency projects, methane capture from landfills or livestock,
destruction of potent greenhouse gases such as halocarbons, and carbon
sequestration projects (such as reforestation) that absorb carbon dioxide
from the atmosphere.
One carbon credit is equivalent to one tonne of CO2 emissions. Credits can
be sold in the international market at the prevailing prices via certain credit
exchanges. Formalised in the Kyoto Protocol, carbon credits help developing/
underdeveloped countries as they traditionally have lower per-capita carbon
emissions than developed countries and will need to emit CO2 owing to
increasing industrial growth. At this point though, these countries can sell
their carbon credits to other countries and reap the economic benefits of not
polluting the planet. Under a basic cap-and-trade scheme, if a companys
carbon emissions fall below a set allowance, that company can sell the
difference in the form of credits to other companies that exceed their limits.
Monetary Value of Carbon Credits
5.92 Carbon credits create market for reducing greenhouse emissions by
giving a monetary value to the cost of polluting the air such as carbon
emitted by burning of fossil fuels. This means that carbon becomes cost of
business and seen like other inputs such as raw materials or lobour.
Carbon credits are measured in tonnes of carbon dioxide (CO
2
).
1 credit = one tonne of CO
2
Each carbon credit represents one metric ton of CO
2
either removed from
the atmosphere or saved from being emitted. The carbon credit market
creates a monetary value for carbon credit and allows the credits to be
traded. For each tonne of carbon dioxide that is saved or no emitted carbon
credit producers may sell one carbon credit.
136
This devil, however, is now turning into a product that helps people, countries,
consultants, traders, corporations and even farmers earn billions of rupees.
This was an unimaginable trading opportunity not more than a decade ago.
Carbon credits are a part of international emission trading norms. They
incentivise companies or countries that emit less carbon. The total annual
emissions are capped and the market allocates a monetary value to any
shortfall through trading. Businesses can exchange, buy or sell carbon credits
in international markets at the prevailing market price.
India and China are likely to emerge as the biggest sellers and Europe is
going to be the biggest buyers of carbon credits.India is one of the countries
that have credits for emitting less carbon. India and China have surplus
credit to offer to countries that have a deficit.Waste disposal units, plantation
companies, chemical plants and municipal corporations can sell the carbon
credits and make money.
Carbon, like any other commodity, has begun to be traded on Indias Multi
Commodity Exchange. MCX has become first exchange in Asia to trade
carbon credits.
Developed countries, mostly European, had said that they have decided on
different norms to bring down the level of emission fixed for their companies
and factories.
A company has two ways to reduce emissions. One, it can reduce the GHG
(greenhouse gases) by adopting new technology or improving upon the
existing technology to attain the new norms for emission of gases. Or it can
tie up with developing nations and help them set up new technology that is
eco-friendly, thereby helping developing country or its companies earn
credits.
India, China and some other Asian countries have the advantage because
they are developing countries. Any company, factories or farm owner in
India can get linked to United Nations Framework Convention on Climate
Change and know the standard level of carbon emission allowed for its
outfit or activity. The extent to which I am emitting less carbon (as per
standard fixed by UNFCCC) I get credited in a developing country. This is
called carbon credit.
137
These credits are bought over by the companies of developed countries
mostly Europeans because the United States has not signed the Kyoto
Protocol.
How does it work in real life?
5.93 Assume that British Petroleum is running a plant in the United
Kingdom. Say, that it is emitting more gases than the accepted norms of the
UNFCCC. It can tie up with its own subsidiary in, say, India or China under
the Clean Development Mechanism. It can buy the carbon credit by making
Indian or Chinese plant more eco-savvy with the help of technology transfer.
It can tie up with any other company like Indian Oil or anybody else, in the
open market.
India and Carbon Credits
Analyzing Indian Scenario
5.94 India being a developing country has no emission targets to be
followed. However, she can enter into CDM projects. As mentioned earlier,
industries like cement, steel, power, textile, fertilizer etc. emit greenhouse
gases as an outcome of burning fossil fuels. Companies investing in Windmill,
Bio-gas, Bio-diesel, and Co-generation are the ones that will generate Carbon
Credits for selling to developed nations. Polluting industries, which are trying
to reduce emissions and in turn earn carbon credits and make money include
steel, power generation, cement, fertilizers, waste disposal units, plantation
companies, sugar companies, chemical plants and municipal corporations.
Benefits For India
5.95 By, switching to Clean Development Mechanism Projects, India has
a lot to gain from Carbon Credits:
(a) It will gain in terms of advanced technological improvements and
related foreign investments.
(b) It will contribute to the underlying theme of greenhouse gas reduction
by adopting alternative sources of energy
(c) Indian companies can make profits by selling the Carbon credits to
the developed countries to meet their emission targets.
138
Chapter 6
Cost Audit
6.1 Central Government has notified Cost Accounting Records (Petroleum
Industry), Rules 2002 vide G.S.R. 686(E), dated the 8th October, 2002 for
the financial year commencing on or after first day of April 2003 to be
followed by petroleum companies is superseded by G.S.R. No. 870(E)
dated 7th December 2011 - Cost Accounting Records (Petroleum Industry)
Rules 2011. It is applicable to every Company engaged in production,
processing and manufacturing of crude oil, gases (including Compressed
Natural Gas or liquefied natural gas and re-gasification thereof) or Biogas or
any other petroleum productsor included under Chapter 27 of the Central
Excise Tariff Act, 1985 (5 of 1986), including the intermediate products and
articles or allied products or activities thereof and includes storage,
transportation or distribution of crude oil or gases or biogas or any or all of
the petroleum products. Every Company to whom the rules are applicable
shall in respect of each of its financial year commencing on or after first day
of April 2003 keep proper books of accounts relating to the utilization of
materials, labour and other elements of cost in so far as they are applicable
to any of the products or activities referred in the rules.
6.2 In case of down stream activities, Cost Accounting Records (Petroleum
Industry) Rules 2002 is applicable only for Refineries/ Lube blending Units.
In respect of companies having only marketing activities, the Rules do not
cover such marketing activities. Pipelines used for transportation of crude
would only get covered as part of refining activity. The pipelines meant for
transport of finished products are considered to be a part of the marketing
activity and therefore not considered for the purpose of reporting as per
Cost Accounting Record (Petroleum Industry) Rules 2002. The Lube blending
plants form part of the manufacturing activity and hence separate records as
per the requirement of Cost Accounting Record (Petroleum Industry) Rules
2002 need to be maintained. The LPG bottling plants are part of marketing
activities and do not fall under the definition of manufacturing. Hence, the
Cost Accounting Record (Petroleum Industry Rules) 2002 are not applicable
for LPG plants at marketing locations i.e., outside the refinery.
139
6.3 Under the above Rules, it is mandatory to maintain proper books of
accounts and records related to manufacturing of product under reference.
Further, information in the prescribed proforma A to I has to be furnished
to the Central Government within 90 days of the close of the financial year.
The records are subject to audit by a Cost Auditor under the Cost Audit
Order issued by the Central Government. The statutory auditor, pursuant to
the requirements of the Companies (Auditors Report) Order, 2003, is required
to comment whether the company has maintained proper cost records in
conformity with Section 209 (1d) of the Companies Act, 1956.
Cost Audit
140
Chapter 7
Information Systems Audit
7.1 With the advent of the information technology revolution in every
sphere of economic activity, it has also become necessary to obtain
assurance that the IT systems in place are working as designed since the
cost of errors and irregularities in the IT systems can be very high and
detection of the same is also rendered difficult. Hence, the need for the
information systems audit. The prime objective of information systems audit
is to determine whether the procedures followed and the system design
maintains data integrity and utilises resources optimally.
Information Systems Security
7.2 Information systems security is defined as the procedures and
practices to assure that computer facilities are available at all required times,
that data is processed completely and efficiently and that access to data in
computer systems is restricted to authorised people only. For any
organization, the security objective is met when:
Information systems are available and usable when required.
Data and information are disclosed only to those who have a right to
access .
Data and information are protected against unauthorized modification.
7.3 Systems security encompasses the various layers of information
systems such as the physical layer and logical layer. The physical layer
would encompass physical and environmental security. The logical layer
would encompass security at various layers such as Operating System,
Network, Database and Applications Software. The overall nature of business,
organisation structure, Management philosophy and IT deployment would
determine the type of security to be deployed in the enterprise.
141
Types of Information Systems Audit
Type of Audit Description
1. Application Review Access control
User management
Security architecture
Test of adherence to policies
Server configuration
Password policy/ Standards
System monitoring
Backup and recovery
2. Desk Top Management Software inventory
Hardware inventory
Software license management
DeskTop Support (including
annual maintenance contracts)
3. Computer Services Department Review
Review of changes control
process
Authorization procedures for
new users
Process for disabling access for
terminated employees
Disaster recovery and business
resumption plans
Inventory and software licensing
procedures
4. Network Review Detailed review of network
management
Server configurations including
security parameters.
Routers access control list
User management
Event logging and system
monitoring
Information Systems Audit
142
Petroleum Gas (Below 40C)
Gasoline (Petrol) (Below 40C to
170C)
Kerosene Oil (170C to 250C)
Diesel Oil (250C to 350C)
Fuel Oil (350C to 450C)
Residual Oil (Above 400C) (This
on further fractionation gives;
Lubricating Oil, Paraffin wax and
Asphatt)
400C
Crude Oil Vapours
Fractionating Column
or Tower
400C
Crude Oil
Furnace
Appendix A
Process of Refining
143
Appendix
Appendix B
Refinery Block Diagram
144
Appendix C
Types of Products Produced from Crude Oil

20999tg Oilgas downstreamIA

Uploaded by

Copyright:

Available Formats

20999tg Oilgas downstreamIA

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

20999tg Oilgas downstreamIA

Uploaded by

Copyright:

Available Formats

Technical Guide on Internal Audit

in Oil & Gas Refining &

You might also like