New Zealand Refining Co Ltd

Analytical Review exercise

The New Zealand Refining Co Ltd operates an oil refinery at Marsden Point, near Whangarei. It processes crude oil into gasoline, diesel and other petroleum products on behalf of the major oil companies, and charges a fee based on petroleum refining margins in the Asia-Pacific region for each barrel of oil processed. Information compiled from the companys announcements to the NZ Stock Exchange and annual reports and announcements shows the following production and sales results:

Production: Barrels in thousands

Jan/Feb Mar/Apr May/Jun Jul/Aug Sept/Oct Nov/Dec Total Reported in Annual report 1998 5,969 7,034 6,858 6,494 6,621 6,722 39,698 39,088 1999 6,604 5,703 6,424 6,225 6,508 5,962 37,426 37,062 2000 6,458 6,231 6,486 6,711 6,034 6,502 38,422 38,422 2001 6,465 6,600 5,829 6,623 6,496 6,068 38,081 38,082

Sales: Fee in $ thousands

Jan/Feb Mar/Apr May/Jun Jul/Aug Sept/Oct Nov/Dec Total Reported in Annual report 1998 18,195 27,763 24,755 18,011 19,848 14,588 123,160 125,143 1999 20,204 11,035 12,634 13,709 12,433 246 70,261 85,368 2000 23,442 26,448 8,117 45,071 37,805 28,372 169,255 174,931 2001 26,471 30,391 9,308 17,766 40,797 17,158 141,891 144,554

Average fee per barrel

Jan/Feb Mar/Apr May/Jun Jul/Aug Sept/Oct Nov/Dec 1998 3.05 3.95 3.61 2.77 3.00 2.17 1999 3.06 1.93 1.97 2.20 1.91 0.04 2000 3.63 4.24 1.25 6.72 6.27 4.36 2001 4.09 4.60 1.60 2.68 6.28 2.83

Required
Analytically review the sales figures shown. List the major questions you will ask management when you are auditing any of the four years for which data is shown. You can assume that the figures are produced under conditions of good internal control. Comments in annual reports: 1999: the processing income of $85.3 million is the lowest since the expansion was committed, and was supported by the guarantees of the processing fee minimum floor arrangements. 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 trend in the past 4 years which has seen margins in South East Asia fall from USD 4.50 to the 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 the year. Our processing fee is determined in US dollars, and the strength of this currency favourably 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 down by OPEC control of production rates, product availability in the region and refinery outages. 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 to annual total. Note large difference in 1999. Otherwise, explanations for: variations in fee; variations in production. Evidence for these.