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					              SUMMER TRAINING PROJECT REPORT

                              ON

“PRICING AND ACCOUNTING OF CRUDE OIL AND ITS FINANCIAL
                    IMPLICATION”

                              AT



            INDIAN OIL CORPORATION LIMITED,
                 ASSAM OIL DIVISION,
                    DIGBOI, ASSAM


                         Prepared by
              PRIYADARSHINI CHAKRAVARTY
                   PRN NO:11060221042
                    BATCH: 2011-2014
               DUARATION: 15/05/12 – 15/06/12

         UNDER THE GUIDANCE OF T.R. KRISHNAN


       As a partial fulfillment of Bachlors in Economics
                              in
          SYMBIOSIS SCHOOL OF ECONOMICS
      SYMBIOSIS INTERNATIONAL UNIVERSITY
                 PUNE , MAHARASHTRA
                                     DECLARATION


I hereby declare that my Internship on “PRICING OF CRUDE OIL” is an original work carried
out by me under the guidance and supervision of CA. KHUMUHCHAM BINOY SINGH
(Senior Accounts Officer) and T.R.KRISHNAN (Deputy Finance Manager). I confirm that this
report truly represents my work undertaken as a part of my Summer Internship Program and is
not a replication of work done previously by any other person. I also confirm that the contents of
the report and the views contained therein have been discussed and deliberated with the
Company Guide.

Finally, I oblige to all the rules and regulation of IOCL (AOD), and comply that none of the
genuine and authentic data or as such of the organization will be disclosed by me for any other
purpose other than my Summer Internship Report. The successful completion of the project is
the result of many efforts combined with unfailing yet fruitful insights from others.




Signed:

Date:

(PRIYADARSHINI CHAKRAVARTY)
                                   ACKNOWLEDGEMENT




I consider it my privilege to express a few words of gratitude and respect to all those who guided
and inspired me in the successful completion of the project. I wish to take this opportunity to
express my deep sense of gratitude to thank my company guide T.R. Krishnan(Deputy Finance
Manager) and K. Binoy Singh (Senior Accounts Officer, IOCL, Digboi) for his invaluable
guidance and support throughout my project. I sincerely thank Indian Oil Corporation Limited
(IOCL) for providing me with an opportunity to work as an intern.

I also extend my heartfelt thanks to Mr Surajit Goswami (Chief Finance Officer, IOCL, Digboi),
Mr. P.K.Nath (Senior Manager, Training Department, IOCL, Digboi) and all other staff of IOCL,
Digboi for their timely inputs that helped me in accomplishing this project.
                                CERTIFICATE OF GUIDE



This is to certify that the project entitled “CRUDE OIL PRICING AND ACCOUNTING AND
ITS FINANCIAL IMPLICATION” has been prepared by Priyadarshini Chakravarty, B.Sc
student, Symbiosis School of Economics, Pune at IOCL (AOD). It has been successfully
completed by her for partial fulfillment of Bachelors of Science in Economics. The duration of
the internship was from 15/05/12 to 15/06/12. During the course of this project her work was
satisfactory and I wish him all the best for his future.




T.R. Krishnan                                                Mr.Surajit Goswami
(Deputy Finance Manager)                                   (Chief Finance Manager)
              TABLE OF CONTENTS



Ch. No.   Particulars                       Page no.
          Executive Summary                 1
1         Introduction to global oil        3
          industry
2         Indian Oil industry an overview   4-7
3         IOCL                              8-17
4         Introduction to Crude oil         18
5         International crude oil pricing   19-21
6         Crude oil pricing at AOD          22-32
7         Findings & suggestions            33-34
8         Conclusion                        35
9         Bibliography                      36
                                  EXECUTIVE SUMMARY




Indian Oil Corporation Limited is an Indian Public sector petroleum company. It is India’s
largest commercial enterprise, ranking 98th on the Fortune 500 listing (2012). It began operation
in 1959 as Indian Oil Company Ltd. The Indian Oil Corporation was formed in 1964, with the
merger of Indian Refineries Ltd. Indian Oil and its subsidiaries account for a 47% share in the
petroleum products market, 40% share in refining capacity and 67% downstream sector pipelines
capacity in India. The Indian Oil Group of Companies owns and operates 10 of India’s 20 (17
PSU’s & 3 Private owned) refineries.

The present study has been undertaken in the Finance Department of the Assam Oil Division i.e.
Digboi. The title of the project is ‘Crude Oil Pricing in IOCL (AOD)’ and aims to study the
differences in pricing of various type of crude available for processing depending upon its place
of origin, quality etc. The refinery gets it crude oil from two sources: OIL, Duliajan and
Kharsang Oil Field in Arunachal Pradesh. The price estimation of both the sources has been
done.
                                     CHAPTER 1

               1.1 INTRODUCTION TO GLOBAL OIL INDUSTRY:


Since it first bubbled from the ground in Pennsylvania in 1859, oil has affected the
economy. And since its inception in 1960, OPEC has shaped oil prices. Even though oil
prices tripled over the past 18 months, they are moderate by historical standards. Given its
market share, large reserves and low production costs, OPEC will remain dominant in the
world oil markets. Both the national and regional economies have diversified away from
energy –intensive and energy producing industries. A dramatic and persistent increase in oil
prices would slow the U.S. economy while stimulating the economies of energy – producing
states.
Petroleum in an unrefined state has been utilized by humans for over 5000 years. Oil in
general has been used since early human history to keep fires ablaze, and also for warfares.
The Oil Industry started off more than five thousand years back. Oil sipping up from the
ground was used to make boats waterproof in the Middle East and also used as medicating
as well as for painting different things.
Its importance in the world economy evolved slowly, with whale oil used for lighting into
the 19th century, and wood and coal used for heating and cooking well into the 20th century.
A petroleum industry emerged in North America in Canada and United States. The
Industrial Revolution generated an increasing need for energy which was fueled mainly by
coal, and other sources including whale oil. However, it was discovered that kerosene could
be extracted from crude oil and used as a light and heating fuel. Petroleum was in great
demand, and by the 20th century had become the most valuable commodity traded in the
world market.
                            1.2 GLOBAL OIL DEMAND

Global oil demand was revised down by 190 kb/d on average in 2009 and 2010. Oil demand
has been stronger in some OECD areas but weaker in two non OECD areas of Asia and
Middle East. Global oil demand has been estimated at 84.8 mb/d in 2009.
In 2010 , oil demand was projected at 86.4 mb/d. similar to the level recorded in 2007.
Overall these revisions stand largely from baseline changes highlighted above, as the higher
GDP prognoses are largely counter balanced by the higher price asssupmtion. Oil demand
has been stronger in some OECD areas but weaker in two non OECD areas of Asia and
Middle East.
 India’s rapid gasoline demand growth is stretching refining and marketing capabilities to
the limit. Recent reports suggest that switching to Euro IV- equivalent standards in 13 cities
and the gradual adoption of Euro III standards in the rest of the country may result in
domestic production shortfalls, which will have to be met with imports. Indeed , the recent
demand trend has vastly exceeded the growth projections upon which the switching has
been planed. Oil companies also apparently underestimate the time required to upgrade
refining units.




                             1.3 GLOBAL OIL SUPPLY

Global oil supply was unchanged at 86.6mb/d in April from March’10. As lower non OPEC
countries output was offset by a rise in OPEC NGLs and crude. However, year on year ,
total production was up by 2.6 mb/d , with growth of 1 mb, 0.7 mb/d and 0.9 mb/d,
respectively in the 3 components.
                                     CHAPTER: 2
                      2.1 INDIAN OIL INDUSTRY: AN OVERVIEW

The origin of oil and gas industry in India can be traced back to 1867 when was struck at
Makum near Margherita in Assam. At the time of independence 1947, the oil and gas
industry was controlled by international companies. India’s domestic oil production was just
250 thousand tonnes per annum. And the entire production was from one state Assam.
The foundation of Oil and Gas industry in India was lead by the industrial policy resolution,
1954, when the Government announced that petroleum would be the core sector industry. In
pursuance of the Industrial Policy Resolution , 1954, Government owned National Oil
Indian Refineries Ltd ONGC (Oil & Natural Gas Commission), IOC ( Indian Oil
corporation) and OIL (Oil India Limited) were formed. ONGC was formed as a directorate
in 1955, and became a commission in 1956. In 1958, Indian Refineries Ltd, a government
company was set up. In 1959, for marketing of petroleum products, the government set up
another company called Indian Refineries Limited. In 1964, Indian Refineries Ltd was
merged with Indian Oil Company Ltd. To form Indian Oil Corporation Ltd.

During 1960s, a number of oil and gas-bearing structures were discovered by ONGC in
Gujarat and Assam. Discovery of oil in significant quantities in Bombay High in February,
1974 opened up new avenues of oil exploration in offshore areas. During 1970s and till mid
1980s exploratory efforts by ONGC and OIL India yielded discoveries of oil and gas in a
number of structures in Bassein, Tapti, Krishna-Godavari-Cauvery basins, Cachar (Assam),
Nagaland, and Tripura. In 1984-85, India achieved a self-sufficiency level of 70% in
petroleum products.
After Independence, India also made significant additions to its refining capacity. In the first
decade after independence, three coastal refineries were established by multinational oil
companies operating in India at that time. These included refineries by Burma Shell, and
Esso Stanvac at Mumbai, and by Caltex at Visakhapatnam. Today, there are a total of 18
refineries in the country comprising 17 in the Public Sector, 3 in the private sector. The 17
Public sector refineries are located at Guwahati, Barauni, Koyali, Haldia, Mathura, Digboi,
Panipat, Vishakhapatnam, Chennai, Nagapatinam, Kochi, Bongaigaon, Numaligarh,
Mangalore, Tatipaka, and two refineries in Mumbai. The private sector refinery built by
Reliance Petroleum Ltd is in Jamnagar. The other two are Exxon Mobil and Shell.

By the end of 1980s, the petroleum sector was in the doldrums. Oil production had begun to
decline whereas there was a steady increase in consumption and domestic oil production
was able to meet only about 35% of the domestic requirement. The situation was further
compounded by the resource crunch in early 1990s. The Government had no money for the
development of some of the then newly discovered fields (Gandhar, Heera Phase-II and III,
Neelam, Ravva, Panna, Mukta, Tapti, Lakwa Phase-II, Geleki, Bombay High Final
Development schemes etc). This forced the Government to go for the petroleum sector
reforms which had become inevitable if India had to attract funds and technology from
abroad into the petroleum sector.
The government in order to increase exploration activity approved the New Exploration
Licensing Policy (NELP) in March 1997 to ensure level playing field in the upstream sector
between private and public sector companies in all fiscal, financial and contractual matters.
This ensured there was no mandatory state participation through ONGC/OIL nor there was
any carried interest of the government. To meet its growing petroleum demand, India is
investing heavily in oil fields abroad. India's state-owned oil firms already have stakes in oil
and gas fields in Russia, Sudan, Iraq, Libya, Egypt, Qatar, Ivory Coast, Australia, Vietnam
and Myanmar. Oil and Gas Industry has a vital role to play in India's energy security and if
India has to sustain its high economic growth rate.



            2.2 WORKING MODEL OF THE INDIAN OIL INDUSTRY

   The oil Industry is the life line of the Indian economy .The raw material for this industry
   is crude oil which is an exhaustible natural resource. India imports more than 75% of its
   raw material requirement .The remaining 25% is provided by indigenous crude oil.

   Indian Oil Industry can be broadly divided into the following three categories:

1. Upstream Oil Companies:
They are into Exploration and Production of Crude Oil. Their business model has huge Risk
(Entire money is charged to Revenue in case an exploration in a potential oil field does not
yield any oil), but Returns are equally very high when Potential oil fields start producing oil.
Companies with huge amount of cash on their Balance Sheet are able to venture into E&P
activities .Joint Ventures between companies bidding for blocks is a common practices since
investments are huge and risk are also very high, although potential return on a successful oil
well is windfall specially when there is a supply crunch leading to skyrocketing crude oil
prices. E.g. - ONGC, OIL.

  2. Downstream Oil Companies:
Downstream oil companies could be broadly divided into the following two categories:

 (i)     Refining Oil Companies:
          These companies are the customers of upstream oil companies and purchase the
          crude oil from them. The crude oil purchased is then refined via the process of
          fractional distillation. The various components of crude oil have different sizes,
          weights and boiling temperatures; so, the first step is to separate these
          components. Because they have different boiling temperatures, they can be
             separated easily by a process called fractional distillation. The steps of fractional
             Petroleum refining are the process of separating the many compounds present in
             crude petroleum. The principle which is used is that the longer the carbon chain,
             the higher the temperature at which the compounds will boil. The crude petroleum
             is heated and changed into a gas. The gases are passed through a distillation
             column which becomes cooler as the height increases. When a compound in the
             gaseous state cools below its boiling point, it condenses into a liquid. The liquids
             may be drawn off the distilling column at various heights.


    (ii)    Marketing Oil Companies:
            Marketing Oil companies purchase the end products produced by Refining oil
            companies like MS (Motor Sprit), SKO (Superior Kerosene Oil), HSD (High
            Speed Diesel Oil) etc and sell the same to Retail & Industrial customers via their
            Retail outlet.

    (iii)    Petrochemical Companies
            Petrochemical companies are also part of the downstream business. Petrochemicals
            are chemical products made from raw materials of petroleum or other hydrocarbon
            origin. The technology for the production of petrochemicals from oil, by hydro
            cracking or naphtha cracking, is well known and established. Naphtha is a refinery
            by-product of crude oil. These are hydrogenated to get the desired basic
            petrochemical olefins.


A fully integrated oil company is one which is into all the three broad categories of
hydrocarbon sector, i.e, Upstream, Downstream and Petrochemicals ( example of
integrated oil company is Exxon Mobil, USA ).


   2.3 INDIAN OIL COMPANIES CAN BE GROUPED AS

       There are three oil companies involved in both refining and marketing – Indian Oil
        Corporation Ltd. (IOCL), Hindustan Petroleum Corporation Ltd. (HPCL) and Bharat
        Petroleum Corporation Ltd. (BPCL).IOCL is also the sole importing or canalizing
        agent for supplying crude and petroleum products to the industry.

        There are three merchant refineries, which have no retail-marketing network of their
         own. Cochin Refineries Ltd. (CRL), Madras Refineries Ltd. (MRL), Mangalore
         Refineries & Petroleum Ltd (MRPL) , Merchant Refineries rely on Marketing
   companies to distribute their output presently, the Cochin refinery is a subsidiary of
   BPCL and MRPL is also a subsidiary of ONGC.

 There is one single pure marketing company IBP ltd. This has no refining capability
  of its own but buys product from refining companies to market through its network
  of service stations. It is now merged in marketing division of IOCL.

 Finally , there are two Indian upstream exploration and production (E&P)
  companies, Oil and Gas Corporation (ONGC) and Oil India Ltd.

 A large number of Joint Ventures Companies (JVCs) have ventured into upstream
  business. Reliance is one of the companies, which has entered into joint ventures for
  exploration.
                                      CHAPTER: 3

                       3.1 INDIAN OIL CORPORATION LTD. (IOCL)


In order to ensure greater efficiency and smooth working in the petroleum sector, Government of
India decided to merge the refineries and the distribution activities. The Indian Refineries and
Indian Oil Company were combined to form the giant Indian Oil Corporation Ltd. (IOCL) on 1st
September 1964,(with Registered Office: Indian Oil Bhavan, G-9, Ali Yavar Jung Marg,
Bandra(East), Mumbai-400 051 Corporate Office: 3079/3, Sadiqnagar, J,B Tito Marg, New
Delhi- 110 049).
In 1967, the pipeline division of the corporation was merged with the refineries division.
Research &Development of Indian Oil Came into Existence in 1972. In October 1981 Assam Oil
Company was nationalized and has been amalgamated with IOCL as Assam Oil Division
(AOD).
Beginning in 1959 as Indian Oil Company Ltd., Indian Oil Corporation Ltd. was formed in 1964
with the merger of Indian Refineries Ltd. (established in 1958). Indian Oil and its subsidiaries
account for 49% petroleum products market share, 40.4% refining capacity and 69% downstream
sector pipelines capacity in India.
As the flagship National Oil Company in the downstream sector, Indian Oil reaches precious
petroleum products to millions of people every day through a countrywide network of about
34,000 sales points. They are backed for supplies by 166 bulk storage terminal sand depots, 101
aviation fuel stations and 89 Indane (LPG) bottling plants. About 7,100 bulk consumer pumps
are also in operation for the convenience of large consumers, ensuring products and inventory at
their doorstep. Indian Oil operates the largest and the widest network of petrol & diesel stations
in the country, numbering over 17,600. It reaches Indane cooking gas to the doorsteps of over 50
million households in nearly 2,700 markets through a network of about 5,000 Indane distributors.
Indian Oil’s ISO-9002 certified Aviation Service commands over 62% market share in aviation
fuel business, meeting the fuel needs of domestic and international flag carriers, private airlines
and the Indian Defense Services. The Corporation also enjoys a dominant share of the bulk
consumer business, including that of railways, state transport undertakings, and industrial,
agricultural and marine sectors.
                                  3.1.1 DIVISIONS OF IOCL

With the adoption of the Industrial Policy Resolution of 1956 petroleum refining and marketing
was planned to be brought under state ownership in gradual phases. In 1959, the Indian Oil
company was formed as the marketing company under state ownership- a Public Sector
Undertaking (PSU). Another company for refining of crude oil; the Indian Refineries Ltd. was
also established. These two were later merged to form the Indian Oil Corporation Limited
(IOCL). The IOCL developed different divisions within the overall canopy of IOCL, namely,


    Refineries Division,
    Pipeline Division,
    Marketing Division,
    Research & Development and
    Assam Oil Division




Refineries Division with Headquarters at New Delhi: -


Born from the vision of achieving self-reliance in Oil refining and marketing for the nation,
Indian oil has gathered as luminous legacy of more than 100 years of accumulated experiences in
all areas of petroleum refining by taking into its fold, the Digboi Refinery commissioned in
1901. Indian Oil controls 10 of India 20 refineries- at Digboi, Guwahati, Barauni, Koyali, Haldia,
Mathura, Panipat, Chennai, Narimanam and Bongaigaon. The group refining capacity is 60.2
million metric tons per annum (MMTPA) or 1.2 million barrels per day –the largest share among
refining companies in India. It accounts for 33.8% share of national refining capacity. In addition
to this one upcoming refinery is going to be added very soon at Paradip with installed capacity
15 million metric tons per annum.
Pipelines Division with Headquarters at Noida: -
Indian Oil Corporation ltd. operates a network of 10899 km long crude oil and petroleum product
pipelines with a capacity of 71.60 million metrics tons per annum. Indian oil sees gas pipelines
as a major growth area in the future.


Marketing division with headquarters at Mumbai: -


Indian Oil has one of the largest petroleum marketing and distribution networks in Asia, with
over 35,000 marketing touch points. Its ubiquitous petrol/diesel stations are located at different
terrains and regions of the Indian sub-continent. From the icy heights of Himalaya to the sun-
soaked shares of Kerala, from Kutch on India’s western tip to Kohima in the verdant North East,
Indian Oil is truly ‘in every heart, in every part’.


Research and Development Centre at Faridabad: -
In today’s dynamic business environment, innovation through a sustained process of Research &
Development (R & D) is the only cutting edge tool for organizations to thrive. With emphasis on
development and speedy commercialization of globally competitive products, processes, and
technologies, the focus has now shifted from R & D to RD & D (Research, Development &
Deployment.




                                            3.1.2 VISION

With a dream to explore new vistas and emerge as a global entity, the vision IOCL is a matrix of
six cornerstone elements and is designed to serve as the bedrock of Indian Oil’s future growth
and transformation into globally admired company. Its Vision is “A major diversified,
transnational, integrated energy company, with national leadership and a strong environment
conscience, playing a role in oil security and distribution”
                                       3.1.2 VALUES

The values of IOCL are Care, Innovation, Passion and Trust.



Care stands for: -                             Innovation stands for: -

                       Concern                                    Creativity
                      Empathy                             Ability to learn/absorb
                 Understanding                                    Flexibility
                     Co-operation                                    Change
                 Empowerment

Passion stands for: -                          Trust stands for: -

                     Commitment                               Delivered Promises
                      Dedication                                  Reliability
                        Pride                                      Integrity
                      Inspiration                                Truthfulness
                      Ownership                                 Transparency
                     Zeal & Zest
                                        3.1.4 MISSION


      To achieve international standards of excellence in all aspects of energy and diversified
       business with focus on customer delight through value of products and services, and cost
       reduction.
      To maximize creation of wealth, value and satisfaction for the stakeholders.
      To attain leadership in developing, adopting and assimilating state-of-the-art
       technology for competitive advantage.
      To provide technology and services through sustained Research and Development.
      To foster a culture of participation and innovation for employee growth and contribution.
      To cultivate high standards of business ethics and Total Quality Management for a strong
       corporate identity and brand equity.
      To help enrich the quality of life of the community and preserve ecological balance
       and heritage through a strong environment conscience.




                                       3.1.5 OBJECTIVES


•To serve the national interests in oil and related sectors in accordance and consistent with
Government policies.
•To ensure maintenance of continuous and smooth supplies of petroleum products by way of
crude oil refining, transportation marketing activities and to provide appropriate assistance to
consumers to conserve and use petroleum products efficiently.
•To enhance the country's self-sufficiency in crude oil refining and build expertise inlaying of
crude oil and petroleum product pipelines.
•To further enhance marketing infrastructure and reseller network for providing assured service
to customers throughout the country.
•To create a strong research and development base in refinery processes, product formulations,
pipeline transportation and alternative fuels with a view to minimizing/eliminating imports and
to have next generation products.
•To optimize utilization of refining capacity and maximize distillate yield and gross refining
margin.
•To   maximize       utilization   of   the   existing   facilities   for   improving   efficiency and
increasing productivity.
•To minimize fuel consumption and hydrocarbon loss in refineries and stock loss in marketing
operations to effect energy conservation.
•To earn a reasonable rate of return on investment.
•To avail of all viable opportunities, both national and global, arising out of the Government of
India’s policy of liberalization and reforms.
•To achieve higher growth through mergers, acquisitions, integration and diversification by
harnessing new business opportunities in oil exploration production, petrochemicals, natural gas
and downstream opportunities overseas.
•To inculcate strong ‘core values’ among the employees and continuously update skill sets for
full exploitation of the new business opportunities.
•To develop operational synergies with subsidiaries and joint ventures and continuously engaged
across the hydrocarbon value chain for the benefit of society at large.



                                   3.1.6 FINANCIAL OBJECTIVES


•To ensure adequate return on the capital employed and maintain a reasonable annual dividend
on equity capital.


•To ensure maximum economy in expenditure.


•To manage and operate all facilities in an efficient manner so as to generate adequate internal
resources to meet revenue cost and requirements for project investment, without budgetary
support.


•To develop long-term corporate plans to provide for adequate growth of the Corporation’s
business.
•To reduce the cost of production of petroleum products by means of systematic cost control
measures and thereby sustain market leadership through cost competitiveness.


•To complete all planned projects within the scheduled time and approved cost




                                    3.1.7 OBLIGATIONS


      Towards customers and dealers
To provide prompt, courteous and efficient service and quality products at competitive prices.


      Towards suppliers
To ensure prompt dealings with integrity, impartiality and courtesy and help promote ancillary
industries.


      Towards employees
 To develop their capabilities and facilitate their advancement through appropriate training and
career planning. To have fair dealings with recognized representatives of employees in
pursuance of healthy industrial relations practices and sound personnel policies.


      Towards community
To develop techno-economically viable and environment-friendly products. To maintain the
highest standards in respect of safety, environment protection and occupational health at all
production units.


      Towards Defense Services
To maintain adequate supplies to Defense and other Para-military services during normal as
well as emergency situations.
                                   3.1.8 SWOT ANALYSIS


A SWOT (Strength, Weakness, and Opportunity & Threats) analysis is a tool to provide a
general or detailed snapshot of a company’s health.
In any business, it is imperative that the business be its own worst critic. A SWOT analysis
forces an objective analysis of a company’s position vis-a-vis its competitors and the
marketplace. Simultaneously, an effective SWOT analysis will help determine in which areas a
company is succeeding, allowing it to allocate resources in such a way as to maintain any
dominant positions it may have.




STRENGTHS:
   1. Extensive access to rural market.
   2. Extensive marketing channels.
   3. Proper quality-implementation of quality concepts like Six Sigma, etc
   4. World class Research & Development centre.
   5. Nearness to the market.
   6. Largest pipeline network.
   7. Location of refineries near to exploration site.
   8. Control over 10 refineries in India.
   9. Large variance of products & services.
   10. Its growing market share.


WEAKNESS:
   1. Social obligation.
   2. Government intervention.
   3. Dependence on exploration means depending on upstream companies like ONGC, Oil
       and on other sources like companies from Middle East.
   4. Rising prices of the crude oil day by day this affects production capacity of the
       downstream companies.
  5. No control over the price fluctuation in the international market because prices are
     determined by OPEC countries.
  6. Just entered into the stream of crude oil exploration business so first it has to know all its
     obligations and techniques of making profit.


OPPORTUNITIES:

  1. As Indian Oil Corporation Limited has entered into new market like Sri Lanka and
     Mauritius it can continue to spread out its offshore marketing ventures to tap new markets
     and explore business opportunities.

  2. Indian Oil Corporation Limited is venturing new business avenues like petrochemicals
     and power generations. The demand for petrochemical and power generation is increased
     day by day so it is a great opportunity for Indian Oil Corporation Limited to earn revenue
     as it already established as one in the refining sector.

  3. In India economic growth is rising day by day so purchasing power of people is increased
     in India and it’s an opportunity for Indian Oil Corporation Limited to sell their products.

  4. Recently it entered into oil exploration business so there is a vast opportunity as crude oil
     prices are increasing day by day. As well as Indian Oil was associated with two
     successful discoveries in oil exploration blocks, one each in India and Iran.

THREATS:

  1. Large number of substitutes in the petroleum sector like coal, solar energy, natural gas,
     and bio-fuel is coming as a sharp substitute to the petroleum.

  2. Limited stock of crude oil as crude oil is non-renewable sources of energy.

  3. Buyers of the petroleum products are getting inclined to the new substitutes introduced by
     new companies.

  4. Stiff competition from national and international players and volatility of oil prices will
     continue to put pressure on the refining and marketing margins, thus refocusing the
     attention of all players on achieving all-round efficiencies.
                                        3.2 IOCL (AOD)

The Digboi Refinery in North Eastern India is India's oldest refinery and was commissioned in
1901. Originally a part of Assam Oil Company, it became part of IndianOil in 1981. Its original
refining capacity had been 0.5 MMTPA since 1901. After modernisation the capacity of the
refinery has been enhanced to to 0.65 MMTPA. The Digboi refinery produces distillates, heavy
ends and excellent quality wax from indigenous crude oil produced at the Assam oil fields. The
refinery presently produces MS and HSD complying BS-III grade. The town's history begins in
1867 when a small group of men from the Assam Railway and Trading Co. found their
elephants' legs soaked in black mud, that smelt somewhat like oil. The men began exploring
more, and in 1889, the English started a small oil installation. India (and Asia) obtained its first
refinery in Digboi in the year 1901. Assam Oil Company was formed in 1899 to look after the
running of the oil business in this area. The Digboi oil field produced close to 7,000 barrels per
day (1,100 m3/d) of crude oil at its peak, which was during World War II. The field was pushed
to produce the maximum amount of oil with little regard to reservoir management; as a result,
production started to drop almost immediately after the war. The current production from the
Digboi fields is about 240 barrels per day (38 m3/d). Over 1,000 wells have been drilled at
Digboi – the first well in 1889 had stuck oil at 178 feet (54 m). In 1989, the Department of Posts,
India came out with a stamp commemorating 100 years of the Digboi fields.

Today, though the crude production is not high, Digboi has the distinction of being India's oldest
continuously producing oilfield. Digboi refinery, now a division of Indian Oil Corporation, had a
capacity of about 0.65 MMTPA as of 2003. The Digboi refinery is the world's oldest oil refinery
still in operation.

Digboi is now Headquarter of Assam Oil Division of Indian Oil Corporation Limited
                                           CHAPTER:4

                              INTRODUCTION TO CRUDE OIL

Crude Oil , commonly known as petroleum, is a liquid found within the Earth comprised of
hydrocarbons, organic compounds and small ( very minute) amounts of metal. Crude oil (
mineral oil) in its natural state consists of a mixture of chemicals. It is called “ Hydrocarbon”
because it is a mixture of hydrogen and carbon( with some traces of nitrogen, sulphur and
oxygen). Petroleum or crude oil is a naturally occurring, flammable liquid consisting of a
complex mixture of hydrocarbons of various molecular weights, and other organic compounds,
that are found in geologic formations beneath the Earth’s surface.

Since the mixtures vary in composition we get an array of crude oils ranging in colour from
almost clear to black and in mass ( measured by specific gravity) from light to heavy. Crudes
extracted in different fields differ importantly on viscosity and sulphur content. The more
viscous crudes(as measured by a lower API gravity) are called “heavier” , and those with higher
sulphur content are called “sour” (as opposed to low surphur “sweet crude”). The heavier and
more sour the crude, the more difficult and expensive it is to turn it into usable refined products.
The price of crude we generally hear quoted is the price of a light, sweet grade like West Texas
Intermediate.



Crude oil composition

          On an average, crude oils are made of the following elements / compounds:
   Carbon                 83% to 87%
 Hydrogen                   10% to 14%
  Sulphur                    0.1% to 2%                 Hydrogen sulfides, disulfides, elemental
                                                                       sulphur
  Nitrogen                   0.1% to 2%                  Basic compounds with amine groups
  Oxygen                    0.1% to 1.5%
   Metals                   Less than 1%               Nickel, Iron, Vanadium, Copper, Arsenic
    Salts                   Less than 1%                          NaCl, Mgcl2, CaCl2
                                         CHAPTER: 5

                        INTERNATIONAL CRUDE OIL PRICING

                           5.1CRUDE OIL PRICE FORMATION

The crude oil price formation takes place in two markets, namely, physical market and paper
market. Both the markets have their own dynamics and both interact with each other in a
complicated manner. In parlance of economics, price is what a buyer pays for the utility of goods
that he buys, in that sense the price of crude oil is the market price in physical market. paper
market is a backward extension of the physical market and a derivative market where physical
crude is not available. Here the right on physical crude is traded and thereby a future price is
formed.

5.1.1 PHYSICAL MARKET:

   1. The original producers
      Every oil producing country has one such company , who holds the ownership of the oil
      in their geographical territory, these are known as National Oil Company (NOC). Such
      NOCs play different roles in the perspective countries. Some NOcs are actively into the
      crude selling and refining business and are in control of the sale and destination of their
      cargo. They in fact allocate the quota among their buyers. They also declare prices, what
      is called official selling price (OSP). They are the price makers in the markets. Example
      of such NOC is Saudi Arabia’s ARAMCO. Their OSP level determines the revenue of
      their country in one hand and sets the price level in the market on the other hand.
      There are some NOC whose main role is to set price of their crude and ensure the
      revenue of the respectively country. They have even given the act of marketing their
      crude wholly or partly to some MNCs. Example of such NOCs are the Egyptian general
      petroleum corporation (EGPC) and Yemen oil and gas company (YOG).
      There is one more type of NOC, like PETRONAS ( Malaysia) who are quite diversified
      in the activities. First they are sole equity holder of the Malaysian crude viz, Labuan, Miri
      Tapis, second they declared OSP, they market their crude, also have E & P activities in
      other countries like Sudan, they trade crude oil of other countries’ origin, they refine and
      do domestic marketing of the products and they sell refined products to other countries.

   2. The trading companies
      They buy crude oil from the market and sell to others. They invariably have some equity
      holdings in some crude oil somewhere in the world. Alternatively they have purchase
      contract from the original crude oil producers. They buy and sell depending on their
      relative position and price at the moment of selling and buying, they swap their crude oil
      with others. Sometimes they also hold physical stocks at some other parts of the world.
      They take advantage of price movements in all the markets across the globe. Usually they
       operate all over the world. They keep tabs on the requirement of the refineries. They
       closely monitor the developments in the world crude oil market affecting price. They own
       or operate fleet of vessels, so that they can quickly seize arbitrage opportunities arising
       between two markets. Thus they plan an intermediary role between buyer and seller
       across the world and make margins for themselves taking advantage of price movement.

   3. The integrated multinational companies(MNCs)
      They have integrated operations in the oil market , namely, E & P ( exploration and
      production), refining, marketing and trading. For example: British Petroleum,Exxon
      Mobil, Shell,Chevron , Texaco and TotalElfFina. They play multiple roles in the crude
      oil market, such as :

               They are suppliers of crude oil, as they bring equity crude oil to the market.
               They buy crude oil for their own refinery system.
               Their trading wing buys and sells crude oil and makes margins.

   4. The Refineries
      They are users of crude oil and are the ultimate buyers. Refiners have interest not only on
      the price they pay for the crude but they also have interest on the value of the crude
      which they realize from the refined products thet are produced from the same crude,
      therefore a particular type of crude oil has an economic value for a particular refinery, the
      CFR (cost and freight) price of crude determines the margin that a refinery gets by
      processing a type of crude.



5.1.2 PAPER MARKET:

Paper Markets are basically markets where rights of crude oil are traded. It is a mixture of crude
oil market and financial market; here the players donot necessarily have any interest whatsoever
on the physical product. This market has multiple uses, the principle among which is price risk
management. Since oil price is volatile, which creates risk for the buyer and seller of crude oil,
this market provides avenues where this risk can be transferred. This is an integral part of oil
market. This market consists of institutions like oil exchanges, financial institution and brokers,
in which instruments like futures and swaps are bought and sold. The futures and swaps in the
paper market help to form the price in the physical market.
5.2 BENCHMARK CRUDE:

Crude Oil benchmarks, also known as oil markers, were first introduced in the mid 1980s. There
are three primary benchmarks, WTI, Brent Blend, and Dubai. Other well known blends include
the OPEC basket used by OPEC , Tapis Crude which is traded in Singapore, Bonny Light used
in Nigeria and Mexico Isthmus.

benchmarks makes referencing type of oil easier for sellers and buyers. Other varieties are then
priced at discount or premium according to their quality , the main criteria for a marker crude oil
are for it to be sold in sufficient volumes to provide liquidity (many buyers and sellers) in the
physical market as well as having similar physical quantities of alternative crudes. Brent crude
oil is generally accepted to be the world benchmark. Brent is used to price 2/3rd of the world’s
internationally traded crude oil supplies. Brent crude is used primarily in the Europe and OPEC
market basket. This benchmark is a mix of crude oil from 15 different oil fields in the North Sea.
Dubai crude also known as Fateh is produced in the Emirate of Dubai, part of the United Arab
Emirates. West Texas Intermediate is used primarily in the U.S. It is light and sweet (low
sulphur) thus making it ideal for producing products like low sulphur gasoline and low sulphur
diesel.



Formula price:

The price of crude has two elements, one is basic price (say β) and another is the premium or
discount (say ρ). Therefore the invoice price would be :

                         Invoice price = β +ρ

 At the time of booking the cargo by the refiner, what he agrees is ρ, which remains fixed. As far
as β is concerned, it is usually linked to the price of a benchmark crude or Official Selling Price
(OSP) of NOC. The price of benchmark crude is assessed by independent price assessing
agencies like Platts or Petroleum Argus on daily basis acceptable to both buyer and seller. At the
time of signing a contract, neither buyer nor seller has knowledge of basic price; their respective
fundamental position and knowledge of the market guide them to agree to the fixed part of the
formula, that is premium or discount.
                                        CHAPTER:6

                             CRUDE OIL PRICING AT AOD

The total crude requirements for the Digboi Refinery are being met through two different
suppliers:

   a) M/s Oil India Limited- supplied from Digboi Oil field ( on an average 83.9% of Digboi
      Refineries crude requirement). Crude is sourced mainly from Assam and a small portion
      from Kumchai ( Arunachal Pradesh ).
   b) Production Sharing Contract (PSC) operators JVC-Kharsang Oil Block Arunachal
      Pradesh (on an average the Oil field supplies 16.1% of Digboi Refineries crude
      requirement).

   High waxy crude (HWC) and Low Waxy Crude (LWC) are being supplied from both the
   fields. Primarily, Digboi Refinery requires HWC for its profitable operations. Hence, the
   Refinery requires crude with a minimum of 8.5% wax content.



   6.1 PRICING MECHANISM OF CRUDE OIL AT DIGBOI REFINERY:

   6.1.1 PRICING OF CRUDE SUPPLIED BY M/S OIL:

              Introduction:

      The story of Oil India Limited (OIL) traces and symbolizes the development and growth
      of the Indian petroleum industry. From the discovery of crude oil in the far east of India
      at Digboi, Assam in 1889 to its present status as a fully integrated upstream petroleum
      company, OIL has come far, crossing many milestones. On February 18, 1959, Oil India
      Private Limited was incorporated to expand and develop the newly discovered oil fields
      of Nahorkatia and Moran in the Indian North East. In 1961, it became a joint venture
      company between the Indian Government and Burma Oil Company Limited, UK.

      In 1981, OIL became a wholly-owned Government of India enterprise. Today, OIL is a
      premier Indian National Oil Company engaged in the business of exploration,
      development and production of crude oil and natural gas, transportation of crude oil and
      production of LPG.
    OIL has over 1 lakh sq km for its exploration and production activities, most of it in the
    Indian North East, which accounts for its entire crude oil production and majority of gas
    production. Rajasthan is the other producing area of OIL, contributing 10 per cent of its
    totalgasproduction.


    Additionally, OIL’s exploration activities are spread over onshore areas of Ganga Valley
    and Mahanadi. OIL also has participating interest in NELP exploration blocks in
    Mahanadi Offshore, Mumbai Deepwater, Krishna Godavari Deepwater, etc. as well as
    various overseas projects in Libya, Gabon, Iran, Nigeria and Sudan.

    In a recent CRISIL-India Today survey, OIL was adjudged as one of the five best major
    PSUs and one of three best energy sector PSUs in the country.




 Procedure of pricing:

    1) NEW IMPLEMENTED PRICING POLICY OF PURVIN AND GERTZ

       Petroleum Planning and Analysis Cell appointed Purvin & Gertz (P&G), the
       International consultant to prepare a report on benchmark pricing for Assam crude
       oil. The pricing formula recommended in the report for each of the seven varieties of
       Assam Crude Oil has been accepted which has been made effective from 01.04.2008.
       the new benchmark pricing model goes further to make adjustments for two more
       quality factors, crude sulphur and residure API. These quality factors are negative in
       the basket price, lowering the Assam crude prices (post- adjustment) in the
       comparison to their existing levels. Thus to conclude, the new benchmark pricing
       formula for Assam crude oil by P&G has following components, viz.

              The weighted average price of the five benchmark crude oil i.e.
               Qua Iboe       Ardjuna          Duri           Labuan             Widuri
              Adjustment for yield difference (GPW discount)
              Adjustment for Crude Sulphur.
              Adjustment for Residue API.
             PAYABLE TO M/S OIL

            (USING OLD PRICING)

       The old pricing mechanism for crude oil was effective during 01/04/2002 till
       01/04/2008. A Memorandum of Understanding was signed between IOCL and Oil
       India Limited (OIL) on 07/04/03 that explained the pricing mechanism in its
       Article 3. It stated that pricing of crude oil shall be on FOB basis plus
       transportation charges and taxes.

FOB (Free On Board)

 The FOB prices payable would be net of BS&W. The FOB price will have components
viz (a) Base Price, (b) Premium/Discounts compared to Marker crude and(c) Adjustment
for BS&W (d) Conditional Taxes (e) Conditional National Transportation.

(a) Base Price

The Base price per barrel of crude oil sold/purchased hereunder shall be the average of
the mean Bonny light crude quotations (as published under spot crude assessment
heading in Platts Crude of MARKETWIRE spot assessment) for the entire month in
which the Bill of Lading date falls. The Bill of Lading date for pipeline supplies shall be
the date of custody transfer.

(b)Premium/Discounts compared to Marker Crude (GPW Discount)

The premium/discounts compared to marker crude oil(i.e. Bonny Light) for different
crude oils would be worked out by calculating differential in Gross Product Worth
(GPW) of indigenous crude oil and the marker crude oil in $/bbl. The GPW shall be
calculated using Four cut Method.

The following four cuts and yields would be used:

  PARAMETERS                    Bonny Light               Assam (*)
  Up to C4                      1.4                       0.83
  C5-175                        22.4                      18.41
  175-350                       42.2                      31.76
  350+                          34.0                      49.0
  TOTAL                         100.0                     100.0
  Barrel         per      Ton 7.435                       7.263
  Conversion Factor(BPT)
      The prices for the above four cuts to be used for working out GPW for deriving
      Premiums/Discounts would be as follows:-

      TBP cuts      Pricing Basis                                     Price        Conversion
                                                                      Unit         Factor
      Up to C4      Propane and Butane Prices of Saudi Aramco $/MT                 -
                    Contract Prices published during the month
                    under Heading AG. The ratio of Propane:
                    Butane to be considered would be 40:60.
      C5-175        Monthly average of Mean of Naphtha $/bbl                       9.0
                    quotations under heading “FOB Singapore”
      175-35        Monthly average of Mean of Gasoil 0.5% “S” $/bbl               7.45
                    quotations under heading “FOB Singapore”
      350+          Average of “monthly average of Mean of FO FO-$/MT              -
                    180    CST      2%   quotations   and    LSWR
                    quotations” under heading “FOB Singapore”         LSWR         6.70
                                                                      $/bbl



The crude oil and product prices shall be rounded off to three decimal places for working out GPW and
differential. The crude oil prices payable shall also be rounded off to three decimal places.

(c)Basic Sediments & Water

 It is an Adjustment for quality variation in crude oil obtained from different sources. For all crudes the
following discounts shall be applicable:

      BS&W Level                                          Discounts $/bbl
      0.2 < BS&W ≤ 0.5 Vol%                               0.10
      0.5 < BS&W ≤ 1.0 Vol%                               0.15


      For every increase of 0.5% vol or part thereof over 1.0% vol of BS&W, an additional discount of
      $0.05 /bbl shall be applicable.
                     USING NEW PRICING

       Petroleum Planning and Analysis Cell (PPAC), India has retained Purvin & Gertz, Inc to
     determine a fair pricing mechanism for the Assam crudes. These crudes are valued based on
     Platt’s published prices for crude oils. The value does not take into account any sort of transport
     cost but considers the quality of the crudes and cut qualities. The valuations were done based on
     the assays of the Assam crudes provided by PPAC and the assays of the Platt’s crudes from
     PPAC, Purvin & Gertz database of public assays and publicly available sources.

     After the new pricing , the final pricing of digboi crude is given as under:

     [(36.4481*Qua Iboe Price + 1.8636*Ardjuna Price + 28.3537*Duri Price + 28.9291*Labuan
     Price +4.4055*Widuri Price)/100] + [(LPG % yield of Assam crude assay-0.7023)/100*LPG
     Price] + [(Naphtha % yield of Assam crude assay-18.1633)/100*Naphtha Price] + [(Middle
     Distillate % yield of Assam crude assay-36.5057)/100*Middle Distillate Price] + [(Residue
     % yield of Assam crude assay-44.6287)/100*Residue Price] + [{(-0.037371) * Forcados
     Price + (-0.936203)}*(%S in Assam crude assay-0.133665)] + [{0.004488*Forcados Price+(-
     0.074991)}* {(141.5/Residue Specific Gravity of Assam assay) – (141.5/0.938885)}]



COMPARISION OF OLD PRICING AND NEW PRICING




1.          If Old pricing mechanism is followed by IOCL in 2010-11, the monthly average FOB
price of Crude oil provided by OIL to IOCL, Digboi is Rs 3913.82/bbl whereas it is Rs.
3902.12/bbl if new price mechanism is followed. Thus the adoption of new price mechanism saved
Rs.13.70/bbl for IOCL in the 2010-11. Around           4,079,478.569 bbl of crude oil was purchased by
IOCL, Digboi from OIL. Thus, savings on account of FOB price is Rs.5,58,88,856.40




2.          Crude oil is subjected to Sales Tax. If it is continued till date without any amendments in
the terms and conditions as agreed between IOCL and OIL in Memorandum of Understanding, the
burden of tax would have been more on the suppliers. As this would not be acceptable to the
suppliers, adopting the new pricing mechanism can be considered better.
For the year 2010-11 FOB price according to old and new mechanisms are 86.048 US$/bbl and
85.752 US$/bbl. Hence, suppliers would have to pay an additional Sales Tax on 0.296 US$/bbl
which did not happen as new method was adopted. For 4,079,478.569 bbl purchased by IOCL,
Digboi from OIL in 2010-11, additional payment on account of sales tax would have been on US
$12,07,525.66 or Rs. 5,50,17,284 considering Exchange rate Rs.45.562/US$ (RBI Reference).


3.        With the implementation of the new pricing mechanism, the concept of ‘Escalated
Transport Charges’ was introduced. The escalated amount was deducted from the actual
transportation charges to get the total transportation charges.
In the old mechanism, the transportation charges were calculated based on the quantity (in MT) at
the rate of Rs 17.33/MT. However, in new mechanism, the rate of Rs. 17.33/MT is escalated every
year starting from 2009 using following formula:
Escalated rate of Nth year = [{Escalated rate of (N-1) th year – ROI (Rs. /MT) of Nth year} *
{WPI of (N-1) th year/WPI of (N-2) th year} + ROI (Rs. /MT) of Nth year].

 Deducting the Escalated Charges from Transportation, reduces the impact of VAT on
Transportation or Freight as VAT is applicable on Net Transportation Charges i.e., Transportation
– Escalated charges.

If old mechanism was still followed and escalated transportation charges is not considered, then
VAT would be 4% on Rs. 22,287,779 amounting to Rs.8,91,511 in the year 2010-11. However,
with escalated charges being Rs 9, 740,414, Net transportation charges amounts to Rs. 12,547,365
only. Thus, VAT payable in new mechanism was Rs.5, 01,895.

Hence, implementation of new pricing mechanism saved Rs.3, 95, 616 to IOCL, Digboi in the year
2010-11 by way of VAT.

4. IOCL, Digboi also benefitted in terms of Entry Tax. It is payable by the purchaser at the rate of
2% on Freight plus VAT. According to old mechanism, Entry Tax would have been Rs. 4, 63,586
but it is only Rs. 2, 60,985 according to new price mechanism. Thus, savings from Entry Tax was
Rs. 2, 02,601in the year 2010-11.
  There are other charges which are charged on FOB prices of crude oil and are applicable to both
  old and new price mechanism. The other charges are:



(A) TRANSPORTATION:
  Browsers are the roadway means of transportation that has a maximum capacity of carrying 12
  KL of crude oil or petroleum products. The charges of transportation by browsers consist of the
  following:
      a) Fixed charges- It depends upon the distance travelled between the place of crude oil
  provided and the place of processing in the refinery. In case of Kharsang field oil, it was ordered
  by the Ministry of Petroleum and Natural Gas to consider Rs. 1637.64 per round trip between oil
  field and the refinery for the year 2010-11 totaling to Rs. 1, 32, 43,592.
      b) Variable- It is calculated by the product of distance covered by browsers and Rs 14.44
  per km as stated in the Ministry letter for the year 2010-11. For the total distance of 1075571 km
  travelled between Kharsang field oil and Digboi Refinery in 2010-11, total variable cost summed
  to Rs. 1, 66, 12,151.
      c) Incidental charges- These are the overhead charges billed to IOCL (Digboi refinery) by
  the suppliers of crude oil. It was agreed to be 15% on actual browser transportation cost, i.e.,
  summation of fixed and variable cost. For the year 2010-11, it amounted to Rs.44, 78,363 and
  includes Transit Insurance, pilferage etc.


(B) ASSAM ENTRY TAX

  Since Kharsang oil field is located outside Assam, its crude oil is subjected to Assam Entry Tax,
  2001. Assam Entry Tax was enacted “to levy a tax on the entry of goods into any local area in
  Assam for consumption, use or sale therein for the purpose of providing the infrastructure and
  amenities to facilitate trade and commerce within the State of Assam”. Accordingly for any
  crude oil received through pipeline or otherwise from any place outside the local area, Oil
  Refineries in the state of Assam are liable to pay Assam Entry Tax at applicable rate (at present
  2%).

  In case of crude oil received at Digboi refinery from adjoining oil fields (excluding Digboi oil
  field) within the state of Assam, IOC (AOD) is liable to pay Assam Entry Tax at an applicable
rate of 2% on purchase value. On 12th September 2009 State Govt. made changes in AET Act by
an Ordinance act. 12-09-08 making the AET Act 2008 effective from 1st Oct 2001. Although
Entry case was challenged in the court of Law, however IOCL lost the case in Guwahati High
Court. As per the court decision which was pronounced on 9th January 2009 is as follows:

          Decided in the favor of the Govt. Of Assam.
          Tax has to be paid with retrospective date i.e. 01st October 2001.


However, Court has given a small relief that even when tax is applicable from 01.10.01 specified
goods will be taxed only from the date they were brought to tax. Crude oil was brought to tax
October 2004.




       4.2 CRUDE OIL PRICING OF JOINT VENTURE CONSORTIUM (JVC) IN
                                   KHARSANG OIL FIELD

Kharsang oil field is located in Arunachal Pradesh and is about 133 km away from Digboi
refinery. The ‘Production Sharing Contract’ with respect to contract area identified as Kharsang
field was made on 16th June 1995 between Ministry of Petroleum and Natural Gas referred to as
Government in the contract and the following four parties altogether called JOINT VENTURE
CONSORTIUM (JVC):

    a) Oil India Limited (OIL) with registered office in Duliajan, (40%)
    b) Geopetrol International Inc. with registered office in Panama, (25%)
    c) Jubilant Energy (Kharsang) Pvt. Ltd., (25%)
    d) Geoenpro Petroleum Ltd. with registered office in New Delhi. (10%)

On 5th June 1997, Ministry of Petroleum and Natural Gas suggested the following formula for
calculation of crude oil of Kharsang field.




CRUDE OIL PRICE= (AVERAGE OF BONNY LIGHT AND QUA IBOE) – (AVERAGE
DELTA OF BONNY LIGHT AND BONNY MEDIUM)
The prices of Bonny Light and Qua Iboe are published in ‘Platt’s Oil Gram’ of the previous
month to date of supply. Since pricing is based on previous month, there is an anomaly in it. As
advised by the Platts, average delta is considered to be 0.3075 always.

                           JVC CRUDE OIL PRICING FOR 2010-11

                                                Avg.
                                                Bonny Lt. Avg. ∆ OSP
                                                &         Qua Bonny Lt. &
             Bonny       Light Qua         Iboe Iboe          Bonny            Final
MONTHS ($/bbl)                   ($/bbl)        ($/bbl)       Medium($/bbl)    Price($/bbl)
Apr'10       86.579              86.599         86.589        0.3075           86.2815
May'10       77.510              77.526         77.518        0.3075           77.2105
Jun'10       76.954              76.954         76.954        0.3075           76.6465
Jul'10       76.678              76.678         76.678        0.3075           76.3705
Aug'10       78.640              78.640         78.64         0.3075           78.3325
Sep'10       79.132              79.132         79.132        0.3075           78.8245
Oct'10       84.602              84.624         84.613        0.3075           84.3055
Nov'10       87.343              87.460         87.4015       0.3075           87.094
Dec'10       93.089              93.238         93.1635       0.3075           92.856
Jan'11       98.181              98.331         98.256        0.3075           97.9485
Feb'11       106.147             106.326        106.2365      0.3075           105.929
Mar'11       118.051             118.268        118.1595      0.3075           117.852



For Kharsang oil field $/bbl is converted into Rs./bbl using SBI card rate which is kept
confidential. Hence, the final price of Kharsang crude oil is mentioned in US $/bbl.
                        4.2.2 ANALYSIS OF KHARSANG OIL FIELD




(A)        PRICING:
The FOB price of Kharsang Oil Field is based on previous month’s prices of crudes Bonny
Light and Qua Iboe. It is not a true reflection of the crude supplied and allows an undue advantage
to Joint Venture Consortium (JVC) to control its operation for the month since price for the month
would already be known.
However, it is beneficial for JVC consortium to continue taking previous month’s price. Had it
been fixed taking current months prices, then IOCL, Digboi had to pay an extra amount of US$
3.099 more on every barrel purchased from Kharsang Oil Field. (Tables showing the prices based
on both previous month and current have been attached to pages to 58 and 59)


(B)        TRANSPORTATION:
The Ministry Of Petroleum and Natural Gas, India had contemplated a sharp increase in crude
production from Kharsang Oil Field, Arunachal Pradesh i.e. an annual production of about
1,233 KL/Day in 2016-17.Since then the Ministry is in talking terms Indian Oil Corporation ltd
(IOCL) to construct a pipeline for transportation of crude from Kharsang field in Arunachal
Pradesh to the company’s Digboi Refinery in Assam. At present the current method of
dispatching crude from the field to the refinery via trucks is not good enough due the following
reasons:
1. Browsers transport only 250-300 KL per day
2. The cost of transportation per browser is Rs. 414/MT or Rs. 357/KL.



Hence,

      1. Minimum per day cost of transportation on IOCL, Digboi comes to Rs.89,250 (250*357)
      2. The roadways and weather conditions do not support the transportation via browsers in
North east region.
      3.The Kharsang crude has some differences from regular crude and hence it has been
suggested to transport through pipelines in blended form with some specific gravity, temperature
etc

Therefore, installation of pipelines from Kharsang oil field to Digboi refinery is the solution to
the problem of transporting crude. It involves only one time investment in terms of money and
time with minimum operating expenses. Also, the proposed pipeline route will reduce the length
to 100km. Browsers covered a distance of 133km from Kharsang oil field to Digboi refinery. The
cost of transportation via browsers is Rs. 414/MT but via pipeline it is only Rs 32/MT.

It is also predicted by MOP&NG that the crude oil production in Kharsang Oil Field will increase
in the coming decades. It was 231 KL/day in 2009-10 and is expected to be 1233KL/day from
2016-20. Thus, pipelines will ensure continuous and steady flow of crude without hampering the
processing and refining procedures.
                                      7.1 FINDINGS

A) OIL:
1. IOCL, Digboi has made considerable savings with implementation of new pricing
   mechanism of crude oil pricing. The savings under some attributes are mentioned below:


   ATTRIBUTE            UNIT             OLD        PRICE NEW           PRICE SAVINGS
                                         MECHANISM           MECHANISM
   FOB                  Rs./bbl          3913.82             3902.12              13.70
   FOB                  US $/bbl         86.048              85.752               0.296
   Transportation       Rs.              2,22,87,779         1,25,47,365          97,40,414
   VAT            on Rs.                 8,91,511            5,01,895             3,95,616
   Transportation
   Entry Tax            Rs.              4,63,586            2,60,985             2,02,601




2. With the introduction of new price mechanism, the supplier (OIL) also saved by way of
   Sales Tax. It had to pay additional Sales Tax on Rs. 5, 50, 17,284 if old price mechanism
   was still followed by IOCL.


B) JVC:
3. The Kharsang Oil Field is a viable project to IOCL, Digboi even if it provides only
   16.1% of crude oil to the Digboi Refinery. It should be given its due importance.


4. IOCL, Digboi has taken the right decision of taking previous month’s price of Bonny
   Light and Qua Iboe crudes as this has resulted in lesser FOB price of Kharsang crude. It
   has reduced the purchase cost of crude from US$ 88.304/bbl to US $ 85.206/bbl. Thus,
   with previous month’s pricing, IOCL, Digboi saves US$ 3.098/bbl.



5. It is beneficial if crude transported via pipeline from oil field to the Digboi refinery.
                                7.2 SUGGESTIONS

1. IOCL should have adopted new price mechanism based on the report by ‘Purvin &Gertz’
   appointed by Ministry of Petroleum and Natural Gas (Petroleum Planning and Analysis
   Cell) much earlier in order to save more on account of tax, freight charges etc. Such
   action would have reduced the expenses of IOCL by a significant margin.


2. Feasibility of Kharsang Oil Field can be revised to ensure its greater and long term
   returns. It is not reviewed ever since it started providing crude oil to IOCL, Digboi.



3. Another issue with the Kharsang Oil field is that it takes preceding month’s price of
   crudes Bonny Light and Qua Iboe to estimate its FOB price. Even though it is not a true
   reflection of price, it should be continued as it reduces the purchase cost of IOCL,
   Digboi.


4. Crude oil from Kharsang Oil Field to Digboi Refinery should be done through pipelines
   as it requires one time investment.



5. The pricing mechanism should be revised from time to time in order to attract maximum
   advantage from sale and purchase of this non-renewable source of energy.


6. IOCL has never engaged in ‘No arms length price’ and it should never engage in such
   activities in future.
                                          8. CONCLUSION

Finance is rightly said to be the life blood of any organization. It is the basic requirement of the
business and is responsible for the commencement, sustenance and growth of the business. An
effective financial plan ensures the procurement of sufficient funds and their optimum
utilization. Both the situations of under and over capitalization are injurious to the financial
health of the enterprise. As such, there must be financial planning for rapid growth.

In order to ensure steady returns, it is essential to ensure that the price of its goods and services
are fixed appropriately. It must include fixed and variable cost, plus a profit margin that will
make the organization sustainable in the market for a longer duration. In this matter, the demand
and supply of the goods also plays an extremely important role.

The pricing mechanism of any organization, especially for those which are in the Downstream
Refining Industries, should be very cost effective such that it is beneficial for the organization.
As such, the pricing policies must be revised at constant intervals so that if any drawbacks persist
can be rectified. The pricing mechanism is influenced by many factors; market fluctuations,
Government policies, currency fluctuation etc. all such variables must be considered.


Hence, finance is required to review and control decisions to commit or recommit funds to new
or ongoing uses. Thus, in addition to raising funds, Finance is directly concerned with
production, marketing and other functions of an enterprise, wherever decisions are made about
the acquisition or destruction of asset
                                 9. BIBLOGRAPHY




1) Memorandum of Understanding between IOCL and Oil India Limited
2) ‘Production Sharing Contract’ with respect to Contract Area identified as Kharsang Oil
   Field
3) Report of ‘Assam Crude Pricing’ prepared by ‘Purvin & Gertz’ (Oct 2008)
4) Annual Report of IOCL for the FY 2010-11
5) Circulars from MOP&NG:
      Pricing of Kharsang crude under Production Sharing Contract’ (Dated: 13th July
       1995)
      Benchmark pricing of Assam Crude Oil for North-East Refineries (Dated: 1st May
       2009)
      Fixation of pipeline tariff for transportation of crude oil for forward pumping sector
       (Dated: 19th July 2011)
6) www.iocl.co.in
7) www.google.com
8) www.wikipedia.com
9) www.economywatch.com

				
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