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New Zealand Refining Co Ltd

Analytical Review exercise

The New Zealand Refining Co Ltd operates an oil refinery at Marsden Point, nearWhangarei. It processes crude oil into gasoline, diesel and other petroleum productson behalf of the major oil companies, and charges a fee based on petroleum refiningmargins in the Asia-Pacific region for each barrel of oil processed.

Information compiled from the companys announcements to the NZ Stock Exchangeand annual reports and announcements shows the following production and salesresults:

Production: Barrels in thousands1998 1999 2000 2001

Jan/Feb 5,969 6,604 6,458 6,465

Mar/Apr 7,034 5,703 6,231 6,600

May/Jun 6,858 6,424 6,486 5,829

Jul/Aug 6,494 6,225 6,711 6,623

Sept/Oct 6,621 6,508 6,034 6,496

Nov/Dec 6,722 5,962 6,502 6,068

Total 39,698 37,426 38,422 38,081

Reported in Annual report 39,088 37,062 38,422 38,082

Sales: Fee in $ thousands

1998 1999 2000 2001

Jan/Feb 18,195 20,204 23,442 26,471

Mar/Apr 27,763 11,035 26,448 30,391

May/Jun 24,755 12,634 8,117 9,308

Jul/Aug 18,011 13,709 45,071 17,766

Sept/Oct 19,848 12,433 37,805 40,797

Nov/Dec 14,588 246 28,372 17,158

Total 123,160 70,261 169,255 141,891

Reported in Annual report 125,143 85,368 174,931 144,554

Average fee per barrel

1998 1999 2000 2001

Jan/Feb 3.05 3.06 3.63 4.09

Mar/Apr 3.95 1.93 4.24 4.60

May/Jun 3.61 1.97 1.25 1.60

Jul/Aug 2.77 2.20 6.72 2.68

Sept/Oct 3.00 1.91 6.27 6.28

Nov/Dec 2.17 0.04 4.36 2.83

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Required

Analytically review the sales figures shown.List the major questions you will ask management when you are auditing any of thefour years for which data is shown.You can assume that the figures are produced under conditions of good internalcontrol.

Comments in annual reports:

1999: the processing income of $85.3 million is the lowest since the expansion wascommitted, and was supported by the guarantees of the processing fee minimum floorarrangements. These had the effect of increasing earned fees by $12.7 million.

Intake was a small drop from 1998, and reflects [maintenance shutdowns] and some

minor unplanned plant failures at the end if the year.

The downward movement [in refining margins] has been a continuation of the trendin the past 4 years which has seen margins in South East Asia fall from USD 4.50 tothe current USD 1.00 and occasionally worse.

2000: The US dollar and margins remained strong for much of the year.

Intake was greater than in 1999, as there was only one major shutdown during theyear.

Our processing fee is determined in US dollars, and the strength of this currencyfavourably affected our New Zealand dollar income.

2001: This years average margin was lower than the exceptional level of 2000

Refiners margins were quite volatile due to such factors as crude prices driven downby OPEC control of production rates, product availability in the region and refineryoutages.

Major questions:

Biggest concern is Nov/Dec 1999. Question: why is fee per barrel so low? Error?Evidence?

Total bi-monthly fees (from NZ Stock Exchange announcements) do not add up toannual total. Note large difference in 1999.

Otherwise, explanations for: variations in fee; variations in production. Evidence forthese.