Report on PARCO Oil Refinery

INTRODUCTION
Petroleum energy plays a pivotal role in the socio economic development of a
country, especially for a developing country like Pakistan, where demand for
petroleum products is fast increasing.
Incorporated in May 1974, Pak Arab Refinery Ltd. (PARCO) has now been in
existence for 27 years as a joint venture between the government of Pakistan (GOP)
and Abu Dhabi. Its authorized capital is Rs. 5 billion and paid up capital is Rs. 2160
million of which 60% is held by the GOP and 40% by Abu Dhabi petroleum
investments of Abu Dhabi.
This long awaited project has been setup despite facing numerous obstacles and
hurdles during the 1998-99 period and despite international sanctions.
PARCO is presently engaged in the transportation of petroleum product on behalf of
oil marketing companies OMCs from Karachi to Mahmood Kot near Multan and to
Faisalabad and Machike near Lahore through its 1,230 kms. Pipeline. Parcos pipeline
system includes a network of highly sophisticated telecommunication facilities and a
comprehensive supervisory control and data acquisition system.
Originally, Parcos pipeline network was functioning up to Mahmood Kot near
Multan, a distance of 864 kms. And operating on the basis of two pumping stations at
Karachi and Shikarpur with an annual pumping capacity of 2.9 million tons. Two
additional intermediary pumping stations commissioned in 1994 at Bubak (Sindh) and
at Fazilpur (Punjab) increased the pumping capacity to 4.5 million tons per annum.
Later, with further technological upgrading of the system the pumping capacity was
increased to 6 million tons. This additional capacity is a major step towards meeting
the increasing requirements of petroleum products in the central and northern areas of
the country, which account for over 60% of the countrys demand of petroleum
products. This increased capacity will also come in extremely handy for transporting
4.5 million tons of crude and 1.5 million tons per year of products through the existing
pipelines. This timely initiative by PARCO will relieve a lot of pressure on road
movement.
In June 1997, PARCO completed its 364 Kms. MFM pipeline extension project and
extended its operations to Faisalabad and Machike. The project design allows for
further expansion of the pipeline from Faisalabad at Kharian besides Sahiwal and
from Mahmood Kot to Peshawar.
PARCOs pipeline system consists of 7 pumping stations namely:
PS-1 Korangi
PS-2 Bubak
PS-3 Shikarpur
PS-4 Fazilpur
PS-5 Mahmood Kot
PS-6 Kot Bahadur Shah
PS-7 Faisalabad Not operational as yet)
Also, there are four terminal stations namely:
TS-1 Keamari
TS-2 Mahmood Kot
TS-3 Faisalabad
TS-4 Machike
PARCO delivers the products at Mahmood Kot through a further pipeline
connection of 4.5 kms. To the joint oil marketing companies facilities called
JIMCO.
All PARCO terminals and pumping stations have been designed according to the
latest international standards and laid out in a standardized fashion for ease of
operation. PARCO crosses country installations have been adjudged to be
comparable to the best available in the international oil industry.
The refinery will be on stream by September 2000, which will place PARCO in a
unique position, with an additional capability to exploit the future trends of the oil
industry in Pakistan.
BOARD OF DIRECTORS
Dr. Gulfaraz Ahmad Chairman
Mr. Mohammad Nasser Al-Khaily Director/Vice Chairman
Dr. Shahid K. Hak Managing Director
Mr. G.A Sabri Director
Mr.Abdus Sattar Director
Mr. Iftikhar Alam Director
Mr. Ismail J. Al-Ramahi Director
Mr. Naseer Al-Qahtani Director
Dr. Hans-Heinz Horrak Director
The company manages by professional management. The relationship between
workers and management are coordinated. The employees are quite satisfied with
their management. The workers are drawing handsome salaries. The management
is also satisfied with the performance of employees.
Financial Year
The financial year of the company begins from 1
st
July to 30
th
June.
Bankers Of the Company
Following are the Bankers of the company.
ANB-AsMRO Bank
Allied Bank of Pakistan Ltd.
ANZ Grindlays Bank
Bank Al-Falah Ltd.
Bank of America
Crescent Investment Bank Ltd.
Deutsche Bank
Emirates Bank International
Gulf Commercial Bank Ltd.
Habib Bank Ltd.
Mashreq Bank
Muslim Commercial Bank Ltd.
National Bank of Pakistan
National Development Finance Corporation
Pakistan Kuwait Investment Co. (Pvt.) Ltd.
Standard Chartered Bank
The Bank of Khyber
The Bank of Punjab
United Bank Ltd.
Auditors of the Company
The auditors of the company are Taseer Hadi Khalid & Co. Chartered
Accountants.
NUMBER OF DEPARTMENTS
Finance Department.
Human Resource Department.
Process.
Personnel & Administration.
Electrical / Instrument.
Mechanical
Technical Services.
Health & Safety Environment.
Engineering Services
Company Secretary
Mr. S.M. Mahboob
Corporate Office
Corporate Headquarters,
Korangi Creek Road,
Karachi- 75190,
Pakistan.
Registered Office
Avari Plaza,
Adjacent to Hilton Hotel,
87,Shahrah-e-Quaid-e-Azam,
Lahore. Pakistan.
Refinery Office
Qasba Gujrat, Mahmood Kot,
Distt. Muzaffargarh,
Pakistan.


NEED FOR
THE
REFINERY
Due to the following reasons PARCOS mid country refinery project come into
existence:
Petroleum product demand in Pakistan has outstripped local production
Demand in northern region of Pakistan is more than 60% of Pakistans total
requirement.
Furnace Oil being a viscous product cannot be transported over long distance in
pipeline to meet requirement of power plants in the vicinity of Mahmood Kot.
It is more economical to transport Crude Oil to Mid Country Refinery and
produce products including furnace Oil.
Indigenous refining capability brings additional security and the desired
flexibility of product supply with respect to imports.
PARCO Mid country Refinery has a lead of at least 3-5 years on any other
refinery project in the country giving market positioning benefits and ensuring
maximum commercial advantage.
PARCO 1,228-km cross-country pipeline network is already available for crude/
product transportation.
Enables PARCO to diversify into marketing of LPG and other Fuel products.


Refinery coupled with the White Oil Pipeline Project (WOPP) gives PARCO a
competitive advantage to meet up-country demand.
REAPING THE BENEFITS
PARCOS Mid-Country Refinery will be a source of great pride and benefit for the
people of Pakistan, since it has been put up in the last 2 years despite very heavy
odds and economic retractions on Pakistan. The following benefits are:
EMPLOYMENT OPPORTUNITIES
PARCOS Mid-Country Refinery has created employment opportunities for
10.000 people, especially during the construction phase and gives a chance to
people to enhance their skills. Further they will expand it for marketing point of
view and opportunities of employment created.
FOREIGN EXCHANGE SAVING
The operation of the Refinery will result in greater foreign exchange saving ($ 100
million per year) for the country by reducing the import of petroleum products and
stream line transportation logistics and generating nearly $24 million per year in
taxes, duties, and dividends.
DEVELOPMENT OF ALLIED INDUSTRIES
In addition to the production of petroleum products, the refinery is expected to
become a nucleus for the development of downstream petrochemical units in the
area, and it will provide and opportunity for the development of the allied
industries in the area.
All these benefits will contribute to the economic growth of the country and thus
will be considerable value for all Pakistanis.
MISSION STATEMENT OF PARCO
To provide the country and the oil marketing companies (OMCs) with as
good a service in the area of product transportation, as it has in the past with
the pipeline transportation.
To maximize production of middle distillates and full oil to meet the national
demands of petroleum products which is currently around 18 million metric
tons, increasing at rate of 5% per annum.
OBJECTIVES OF PARCO
The following long term corporate objective, which are inherently embodied in the
name of the company are:
(P) Professional and Progressive Corporate outlook.
(A) Aggressive Pursuit of Technical Excellence, Advanced Planning.
(R) Reliability of Service
(C) Consistency in performance
(O) Organized, Systematic Development.
LOCATION
CONSTRUCTION
The major cost involved in any organization is in the shape of construction cost. The
total cost of the refinery is around US$886 million of this colossal amount, US$50
million have been spent on environmental protection measures and US$ 28 million
have been spent on buildings and civil works, including the housing complex hospital,
school, refinery buildings, approach roads etc.
ADVANTAGES OF REFINERY LOCATION
PARCO select the location due to the following advantages.
It is sensible and strategic location from a commercial and national Security
point of view.
Serves major consumption centers catering to a population of 35 million with
a current / projected significant deficit.
It is located close to power plants with an annual demand of over 1 million
tons of furnace oil.
Streamlines the movement of crude oil and petroleum products thus reducing
burden on countrys rail / road transportation.
It is close to petrochemical demand centers giving advantages for future
growth into bulk petrochemicals.
Utility supplies have been secured through adjacent power plants and there is
plenty of water to meet refinery requirement.


CAPACITY
Capacity is the minimum rate of output for a facility
The Refinery complex includes 11 onsite units process units besides numerous off site
/ utilities units and other permanent facilities with 51 tanks to store the crude oil,
intermediate feeds stocks and finished products.
PARCOS mid-country Refinery will have a refining capacity of 100,000 barrels per
day or 4.5 million tons per annum making it the largest in the country.
PROCESS UNITS AND CAPACITIES
Unit code Unit BPSD
100 Crude distillation 100,000
110 Vacuum distillation 42,800
200 Naptha Hydrotreater 25,650
300 CCR platformer 16,350
284 Diesel max 22,450
130 Visbreaker 15,560
801 Kerosene merox 20,000
802 LPG merox 4,500
411 Gas concentration Liquid: 22050
Gas: 11.242 (MMSCFD)
810 Amine treating F.G.: 7.721 (MMSCFD)
SWS: 9,963
820 Sulphur recovery 115 MTPD


FINANCE
DEPARTME
NT
Finance department is the center point of my internship. Finance department is the
backbone of every organization. In MCR finance department has several sections. The
Finance department is responsible for the entire accounting process of the
organization, regarding the recording of the transactions, designing the accounting,
preparing of financial statements and computer application to the accounting process.
In MCR only Trial Balance prepare, all Accounts are maintained in Karachi head
office. Sophisticated techniques are used, LAN & WAN systems, Inter Com facility
through MCR to Head Office Karachi is very beneficial to maintain the accounts of
PARCO.
From this quick and better work is possible. These techniques are very effective and
prove efficient for growth and progress of this organization. Now it will possible to
check and collected the information or routine work of any employee of PARCO.
DESIGNATIONS
Mid-Country Refinery has following local staff Designation grade wise.
1. DEPUTY MANAGING DIRECTOR (Operation).
2. MANAGER.
3. DEPARTMENT HEAD :


Chief Accountant
4. SECTION HEADS :
Senior Accountant
5. GRADE-V :
Accountant I
6. GRADE-VI :
Accountant II
7. GRADE-VII :
Accountant III
8. GRADE-VIII :
Assistant Accountant I
9. GRADE-IV :
Assistant Accountant II
10. TRAINEE :

Hierarchy level of Finance department.
Sections of Finance Department
Accounting matter of finance department is deal both in the Refinery office and Head
office. Head office deals Banking section, Payroll section, Insurance Section, Import
Section, Income Tax accounting while Refinery office deals initial stage of business
transaction, recorded and maintained. Refinery finance department consists of billing
payable Section, Receive able Section, Impressed or cash section, MIS Section,
Invoice Section, Cost, Budget & Sales Section. Also other section which are not
directly linked with accounts but also necessary. I would like to mention these
sections Oil accounting Section, Purchase Section or store or supplies, shipping
Section, Commercial department. All final accounts are maintained in Head Office
INCOME STATEMENT AND BALANCE SHEET. In the Refinery office only Trial
balance posting complete.
The main functions of these sections are record the business transactions.
Sections are restricted up to the recording and maintaining the accounting data. For
proper maintain the accounts, used coding techniques on their voucher. There are four
kinds of vouchers.
CASH VOUCHER: These vouchers are prepared for payment of petty cash.
CHEQUE VOUCHER: CHEQUE payments made by these vouchers.
PAYABLE VOUCHER: This voucher is prepared at the time of making payment to
any party. In accounting term, party name will be debited and income, taxes and
advances will be credited.
JOURNAL VOUCHER: This is also known Adjustment voucher. This voucher is
prepared for adjusting any entry.
Vouchers are prepared after every transaction. Write narration about these
vouchers.These vouchers are signed by certain authorities e.g. (prepared by, checked
by, approved by, punched by, Verified by).
IMPREST/CASH SECTION:
Scrutinizing of vouchers / cash disbursements & maintenance of record (REFINERY
& PIPELINE) of the following activities: -
Cash withdraw from Bank.
Payment of Medical Allowance
Payment Petrol Subsidy.
Payment Hardship Allowance
Payment of Out Station Allowance (Rs.100/= per day.)
Payment of Tea Allowance (Rs.8.4/= per day to every employee.)
Payment of Office Entertainment & Refreshment
Payment of Utilities
Advances to Employees against Expenses.(If necessary)
Statement of General Expenses (T.A & D.A, Suppliers labor etc)
Grade I Payment made by the Head Office.
Grade II- Entertainment 1000/= per month and current value of 250 liters petrol paid.
Grade III Rs.600/= per month as entertainment and current value of 200 liters
petrol are paid.
Grade IV- Rs.400/=per month as entertainment and 175 liters petrol paid.
Grade V to IX- Petrol subsidy 150 liters paid to the employees.
Salaries of Refinery employees paid by Head Office.
Custom Staff payment and submission of Monthly summary to corporate office to
recoverable from OMCS.
Bloom field Hall School (Advances & Reimbursement of Expenses)
Payment of Salaries to casual Staff.
Preparation of journal Vouchers of Expenses Statement against advance and
maintenance of record.
Maintenance of Cash Book
Checking of Vouchers, coding and posting and dispatch to Head Office.
BILLING PAYABLE SECTION
This section received the bills or invoices that including tax amount that may differ
according to the nature of bill and paid within 10 days. Payments of Daily wages,
Casual employee (Non-permanent Staff) are made through CHEQUE. For this
Payment till Rs.5000/= may issue CHEQUE without crossing. All party payment is
made through cross CHEQUE. There is no deduction of tax till Rs.24999/= up to this
amount certain taxes will be deducted from the total amount of bill. 3.5 % tax
deducted on all receipt of Inventories. 5 % tax deducted on Services e.g. hospitals,
clubs, schools, other utilities. 7.5 % tax on Rent, 10 % amount deducted as
commission of supplier. This section made the payment to contractors who provide
the Inventories or Supplies and Services. Payable section refunded the amount that
has paid to parties or contractors in their bills. Food beverage tax is non -refundable.
Now here the question arises, what is the procedure of Bills payment?
Chief Accountant received the Bills from concern parties. Bills are checked by
payable section. They tally the amounts of 1-Purchase order 2-Material Receipt
Statement 3- Invoice and made vouchers that approved by the chief
Accountant. These bills are paid by CHEQUES and recorded in CHEQUE
voucher. After posting all record dispatch to Head Office.
RECEIVEABLE SECTION
This section, we may call banking section. It deals revenues. If there is capital in our
banks, The amount of taxes will be credited. The record of all transaction maintained
through Bank Reconciliation Statement. PARCO receive Demand Draft (D.D) or
Telegram (T.T).
BANKING LODGEMENT is prepared on the amount by selling its product that
PARCO sale via its own Brand Name Pearl. The revenue through sale of Oil
Marketing Companies (OMCs) deals Head Office. Central Excise Duty (CED) paid
advance Rs.85 per metric ton. Whenever the product is being sold, the shipping
department prepare the four copies of Article Removal 1(AR1) and Article Removal 2
(AR2). One copy held in its own possession and remaining copies are send to Receive
able Section, Concerned party, and in the office of Excise and Taxation. AR2 is
prepared when product sold through Under Bound. Government store Under Bounder
Product in the warehouses. Duties and Taxes are paid later on. AR1 received Receive
able Section of Refinery office.
Refinery office use these banks: National Bank of Pakistan (NBP). Allied Bank of
Pakistan (ABL) Muslim Commercial Bank (MCB).
CHEQUE VOUCHER is used for TAX LODGEMENT. Taxes are deposit by each
party.
JOURNAL VOUCHER is used for the adjustment of taxes. When party paid amount.
Bank is debited and the Party Name credited. When duty paid. Central Excise duty is
debited and Bank account credited. We prepare Journal Voucher or make adjustment
when Central Excise Duty is paid. This section used the term Tax Withdraw Voucher
or Journal Voucher (JV) Or Journal Receipts (JR).
MIS SECTION
Management Information System Section prepares the Trial Balance via the posting
of journal voucher through coding that made in computer systems by using the
BASIC LANGUAGE programming.
MIS Section receive Journal vouchers from pay able section, cash section, and sales
tax section. By posting in specific code, these posting adjust in Trial Balance
automatically for programming.
Every section has coding system, either Budget cost or Center cost. They post these
vouchers by using these coding system. BASIC LAGUAGE programming convert it
in to Trial Balance by using these codes in specific heads. Information Technology
Department provides the facility of programming. Some programming are installed in
Visual Basic M/S Excel, named PPT personnel Protection Equipment and Library
System etc. Oracle programming is also installing.
INVOICE SECTION
We may call this section Sales section. The product of refinery sold via OMCs,
PEARL, and direct to the direct consumer. Pipe line and Gantry means of
transportation. Parties submit the Projection/ Agreement and the amount of that
product, they required in the projection. Payment made through D.D or T.T. In this
amount taxes also included.
When Invoice Section prepare invoice, it deduct the sales tax amount 15 % of sale,
Central and Excise Duty Rs.85 per metric ton and development surcharge from the
Sales and calculate the Net amount. After posting dispatch to Head Office.
Parties submit projection before some days of delivery. In shipping department, there
are Control Room1 (CR1) and Control Room 2 (CR 2) that are used as gate
pass.Invoice Section receive the Delivery Advice (D.A) which shipping department
prepare. This D.A includes capisty and number of tanker.
COST AND BUDGETING & SALES TAX
This Section deals the Budget control and Sales taxes.
Cost and Budget:
Budget is allocated for every year. This period start from 1
st
July to30
th
June. We can
classify the budget in to two main heads, Revenue Budget and Capital
Budget.Revenue Budget is allocated for operating expenses which are helpful for
generate the revenue e.g. telephone, store and supplies etc. Capita Budget is allocated
for fixed expenses e.g. furniture and fixture, machinery etc.
These are allocated in proper heads, either about Revenue items or Capital items. This
will helpful in better coding and maintaining the record. Each department demanded
required budget. When ever any thing is required Indent Sheet is prepared. This is
written issue order which is approved by finance department. To fulfill the need of
any thing which is mentioned in Indent Sheet, calls quatations from various
department.Suitable quatation accepted and place purchase order. Purchase
department prepares Material receipts statement (MCR), when material received.
From this received material, issue to the demanded department, and prepare Material
Issue Requisition (MIR). Every department prepared the coordinate, in the form of
summary. This summary is send via approval of Manager. Board of Director approved
it. When Managing Director singed it, then send to related department.
Sales Tax:
Sales Tax has coordinated relationship between sales output invoices and purchase
input invoices. If amount of sales output invoices increases, we will have to pay sales
tax, and if the amount purchase input invoices increase, we recover amount of tax. So
for we adjust either we pay or pay. In case of favorable balance, we will not received
and carry forward for next transaction.
Four copies of Invoices are classified as such. First original invoice, send to
consignee, Second duplicate copy send to Parco commercial department, triplicate
copy receive Parco finance department and quadruplicate copy send to
shipping/clearance department. 99 % parties are registered that pay the sales tax 15 %
and remaining unregistered parties that pay the sales tax 15 % plus 1.5 % deduct as
sales tax, not as the whole 16.5 % deduct as sales tax. Sales tax pays up to 15
th
date to
next month.Head Office purchases the crude oil by the Letter of Credit. We can
refund the sales tax amount under Section 22(1) a, Sales tax act 1990. We adjust the
favorable balance, carry forward for next transactions.
MATERIAL MANAGEMENT
Material Management is concerned about short range decisions about
supplies,inventories, production level, staffing patterns, schedules and distribution.
MATERIAL IMPORTANCE FOR PARCO
Material is important for PARCO because the Refinery will optimize product supply
logistics and ensure efficient and economic availability of petroleum products to the
central and northern regions of the country, which about for over 60% of the countrys
total requirement.
Impact of inventory:
Inventory has direct impact on the profitability of the organization. Parco can not keep
much more inventory, because if they do so, they bear much more cost of holding.
FUNCTIONS OF THE MATERIAL MANAGEMENT
PURCHASING:
Parco will import three vessels per month, approximately carrying 64,000 metric
tons each from Saudi Arabia.
SUPPLIER:
The supplier of the crude oil for Parco is ARAMCO. PARCO entered a crude oil sales
agreement with ARAMCO for the purchase of 30,000 barrels/day of light ARABIN
crude. The agreement was signed at Dahran on Jun 18,2000.
CONTRACTING:
Contract for the transportation of crude oil for the MID-COUNTRY Refinery, from
Saudi Arabia and Abu Dhabi, was signed with Pakistan National Shipping
Corporation (PNSC) on July 18,2000.
INVENTORY MANAGEMENT
INVENTORY IS A STOCK OF ANY THING HELD TO MEET THE FUTURE
DEMAND OF ORGANIZATION.
TYPES OF INVENTORY
RAW MATERIAL:
Raw material used by the Mid-Country Refinery is the crude oil ( light Arabian crude)
which is purchased from Saudi-Arabia and Abu Dhadia.
FINISHED GOODS
Finished goods of PARCO Mid-Country Refinery are
LPG Regular Gasoline
HOBC JP-4
Jet A-1 Kerosene
LDO HSD
Fuel Oils
INVENTORY CONTROL SYSTEM
Inventory control system has two types of systems
CONTINUOUS REVIEW SYSTEM
When ever the number of the units are drawn out of the inventory stores they judge
the position of the inventory that whether it is a time to reorder of not. In this way t he
inventory is controlled.
PERIODIC REVIEW SYSTEM
The second method of inventory control system is periodic review system. In this
system the inventory position is judge periodically instead of continuously. In a p
system the lot size may change form one order to the next, but time between orders is
fixed.
INVENTORY CONTROL SYSTEM AT PARCO
PARCO USING THE PERIOD reviews system. It means that lot size vary but the
time between orders is fixed. As PARCO will import three vessels per month
approximately carrying 64,000 metric tons each, but the first vessel brought 66,000
metric tons of crude oil for the Mid Country Refinery.
QUALITY CONTROL
Total quality management (TQM) stresses three principles:
Employee involvement
Continuous improvement
Customer satisfaction
EMPLOYEE INVOLVEMENT
One of the important elements of TQM is employee involvement. Employee
involvement consist of
CULTURAL CHANGE
In TQM, every one in the organization must share the view that quality control is an
end itself. It is possible only if the environment of the organization is good. For this
purpose PARCO spent US$50 million on environmental protection measures and
established a friendly environment.
INDIVIDUAL DEVELOPMENT
Individuals motivated by giving awards and incentives. PARCO give their employees
the following awards.
Long Service Award
PARCO distributed the 7, 10, 15 and 20 years service awards among their employees.
Best Station Award:
Every year one of Parcos terminal pumping stations is given the best station award
after being assessed on the standard of its house keeping and safety.
CONTINUOUS IMPROVEMENT
PARCO improve the quality continuously. For optimization and product quality
control, the facility of advance process control is available in the system. PARCO has
a laboratory also whose function is to check the quality of products. If the quality of
products are not satisfied they are reprocessed until of products acquire the desired
quality standards.
CUSTOMER SATISFACTION
PARCO gearing to deliver the correct quantity of high quality products to consumers
tank on timely basis, through the safest and shortest routes and at the lowest costs.
Further more the objective of this initiative is to provide excellent consumer service,
where customer complaints are promptly attended. Also where measures are instituted
to ensure that the customer is properly informed and that lessons are learnt to prevent
re-occurrence of errors. Parcos existing infrastructure and expertise should assist in
achieving this aim and establishing a marketing network.



SIGNIFICANT OF ACCOUNTING
Summary of Significant Accounting Policies are as follow.
Basis of Presentation
These accounts have been prepared in accordance with International Accounting
Standards, as applicable in Pakistan.
Accounting Conversion
These accounts are prepared under the historical cost convention as modified by
capitalization of exchange differences.
Fixed Assets and Capital Work-in-Process
Fixed assets except land are stated at cost less accumulated depreciation. Land and
capital work in progress are stated at cost. Cost in relation to certain fixed assets and
capital work in- progress signifies in historical, exchange differences e.g. (Assets and
liabilities in foreign currencies are translated into rupees at the specifics rate of
exchange announce by the State Bank of Pakistan. Prevailing on the balance date,
except those which are covered under exchange risk cover scheme, which are
translated at cover rate.
Exchange gain/loss on loan relating to assets that have been fully depreciated is
directly charge to profit and loss account) and financial charges on borrowing for
financing the project until such projects are completed or become operational.
Depreciated is charged to income applying the straight line method, where by cost of
an assets are written of over its estimated useful life without taking into accounts any
residual value. Full year depreciated is charged on addition while no depreciation is
charged on items disposed off during the year.
Maintaining and repaired are charged to income as and when incurred, major renewals
and improvements are capitalized and the assets so replace, if any, are retired. Gains
and losses are disposals of assets (If any) are included in income currently.
Assets Subject to Finance lease
Assets subjects to finance lease are stated at the lower of present value of minimum
lease payments under the lease agreement under the fair value of assets, the related
obligation of the lease are accounted for as liabilities. Assets acquired under the
finance lease are depreciated over the useful life of the assets on the straight line
method at the rate given:, Depreciation on lease assets is taken to profit and loss
accounts.
Borrowing Cost
Borrowing costs that are attributed to the acquisition, construction, or production of
fixed assets have been capitalization as the part of cost of the relevant asset.
Investment:
Long Term
These are stated at cost. Provision is made for decline, other than temporary, in the
value of investment, if any.
Short Term
These are stated at the lower of cost or market value.
Stores & Spares
These are valued at the moving average cost, while items considered obsolete are
carried at nil value. Items in transit are valued at cost comprising invoice value plus
other charges paid thereon.
Revenue Recognition:
Revenue from Transportation
Revenue from transportation of petroleum is recognized on delivering the products.
Investment
Return on investment recognized at the rate specified in the respective investment
scheme and accrued for the period. The income is recognized on the assumption that
such investments will be held till the next terminal date.
Staff Retirement Benefits:
Gratuity
The company operates a defined benefits funded gratuity scheme for all supervisory
staff. Contributions are made annually to the fund on the basis of actuarial
recommendations @ 7.32 % of basic salary, cost of living, allowance and
indexation.The actuarial valuation is performed once every three year and the most
recent actuarial valuation of the scheme was carried out at 30
th
June 1997, which
reflected the fair value of the funds assets and liabilities at Rs.24.845 million and
Rs.25.171 million respectively. The actuarial valuation was carried out using
Projected Unit Credit Method.
For Nonsupervisory staff, contribution for gratuity is made on the basis of
entitlement of the employees at the Balance Sheet date.
Pension Fund
The company operates a defined befits funded pension scheme for all supervisory
staff.Contribution made annually to the fund on the basis of actuarial recommendation
@ 20 % of the basic salary, cost of living allowance and indexation. An actuarial
valuation is performed once in three years and the most recent actuarial valuation of
the scheme was carried out at 30
th
June 1997, which reflected the fair value of the
funds assets and the liabilities at Rs.42.197 million and Rs.54.270 million
respectively. The actuarial valuation was carried out using Projected Unit Credit
Method.
Starting from the year 1997, the company is also operation a defined benefit funded
pension scheme for all workmen staff. Contributions are made annually to the fund on
the basis of actuarial recommendations. Based on the first actuarial valuation carried
out on 01 January 1997, contributions are made at the rate of 4% per annum in
addition to initial contribution of Rs.899,000.
Provident Fund
In addition, the company also operates a defined contribution Provident Fund for all
its regular permanent employees. Contributions are made equally by the company and
the employees @8.33% of basic salary, cost of living allowance and indexation to the
fund.
Taxation:
Current
Provision for current taxation is based on taxable income at the current rates of
taxation after taking into account tax credits available if any.
Deferred
Provision for deferred taxation is made on all material timing differences using the
liability method.
RATIO ANALYSIS
Ratio analysis of financial statements refers to the process of Determining and
Presenting the relationship of items and group of items in the statements.
Ratio analysis however is not an exact science but a useful art. It is a
Statistical yardstick providing a measure of relationship between two
Accounting figures. Ratio analysis can be of use both in the trend or structural
Analysis and static analysis. Great care is needed while calculating meaningful ratios
and in interpreting them. Although there are several ratios which can be employed by
an analyst, yet the type of ratio, he would use entirely depends on the purpose for
which the analysis is done i.e., a creditor would keep himself abreast about the ability
of a concern to cover up its current obligations and so would care about current and
liquid ratios, turnover of receivable, coverage of interest by the level of earning etc.
So the Financial statement analysis is the process of identifying of financial strengths
and weaknesses of the firm by properly establishing relationship between the items of
the balance sheet and the profit and loss account.
The need for ratios arises due to the fact that absolute figures are often
misleading. For example, if sale increases from Rs.300,000/= to Rs.350,000/=, it may
not be a good thing as appears. The increase in sales may be affected at the cost of a
disproportionate rise in expenses. Absolute figures are only valuable if they are
studied in relation to each other.
Expenses of Ratios
Expenses of ratios is done in the following ways:
1- Actual ratios are arrived at by dividing one number by another e.g. current asset to
current liability is 2 : 1
2- Ratio between two numerical facts usually over a period of time e.g. Stock turnover
is three times a year.
3- Ratio between two numerical may be expressed in percentage.
Advantages of Ratio Analysis
It helps to give comprehensive financials statements in evaluating aspects of any
undertaking in respect of financial health, operation efficiency and profitability.
It gives a chance of inter-firm-comparison to measure efficiency and helps
management to resort to some remedial measures.
Dynamic or trend analysis is helpful towards planning and forecasting the virtuous
use of ratios.
It provides a good help in decision making for investors and to the financial
institutions.
CLASSIFICATION OF RATIOS
Ratios can conveniently be classified as follows:
1-INCOME STATEMENT RATIOS:
Income statement ratios are also called operational ratios. These ratios deal with the
relationship of two items and both are in the profit and loss account or income
statement. It is necessary for income statement ratios that both items must belong to
the same profit and loss account. The following are the important types of income
statement ratios:
A. GRASS PROFIT RATIO
This ratio is of great importance in the analysis of the trading results of the business.
Gross profit Ratio is the ratio of gross profit to net sales expressed in percentage. Thus
it expresses the relationship between gross profit and sales. It tells the management
the ability of sales to generate earnings before any cost of business except cost of
goods sold.
FORMULA: -
Gross Profit
Net Sales
Year 1994-95 1995-96 1996-97 1997-98 1998-99
% 47.95 51.43 72.38 79.67 87.17
The figure of gross profit ratio is continuously increasing. Its mean that PARCO is
regularly developing.
B. OPERATING PROFIT RATIO
The operating profit ratio measures the percentage of profit earned on each sales
dollar before interest and taxes. A high operating profit margin is preferred. It takes
into consideration the trading results and operating expenses. It is more important
ratio than the simple gross profit ratio. It can be obtained by dividing operating profit
on sales.
FORMULA: -
Operating Profit
Sales
Year 1994-95 1995-96 1996-97 1997-98 1998-99
% 47.03 51.26 73.92 59.33 69.90
Operating profit ration margin is gradually increasing except there is a lightly
declining in the year 1997-98, and is increasing trend for next year.
C. NET PROFIT RATIO
The net profit ratio measures the percentage of each sales dollar remaining after all
expenses, including taxes, have been deducted. The higher the net profit margin, the
better will be the company position. It is expressed in percentages. It is also useful for
the proprietors of the business. This is a good yardstick in the hands of management to
measure the overall profitability.
FORMULA: -
Net Profit (after taxes)
Sales
Year 1994-95 1995-96 1996-97 1997-98 1998-99
% 34.73 41.67 60.90 55.04 63.41
The profitability position of PARCO is satisfactory.
D.OPERATING RATIO
This is the ratio of cost of goods sold plus operating expenses to net sales. It is
generally expressed in percentage. It measures the cost of operations per rupee of
sales. This ratio shows the operational efficiency of the business. Lower operating
ratio shows higher operating profit and vice versa. An operating ratio between 75%
and 80% is generally considered as standard.
FORMULA: -
Cost of Goods Sold + Operating Expenses
Net Sales
Year 1994-95 1995-96 1996-97 1997-98 1998-99
% 62.30 62.54 40.67 36.19 28.98
This trend shows that operational efficiency of the business increasing each year.
E. STOCK TURNOVER RATIO
Every firm has to maintain a certain level of inventory of finished goods so as to be
able to meet the requirements of the business. This level of inventory should neither
too be high, nor too low. A too high inventory means higher carrying cost sand higher
risk of stocks becoming obsolete whereas too low inventory may mean the loss of
business opportunities. Thus it is essential to keep sufficient stocks in business.
Stock turnover ratio is also known as inventory turnover. It is the relationship between
the cost of goods sold during a particular period of time and the cost of average
inventory during that period. It is expressed in number of times.
FORMULA: -
Cost of Goods Sold
Average Inventory
OR
Net Sales
Inventory
Year 1994-95 1995-96 1996-97 1997-98 1998-99
% 44.99 45.00 45.00 45.00 44.99
Inventory turnover ratio measures the velocity of conversion of stock into
sales.Parco inventory turnover ratio is revealing that it is near about the same. This
is a good point of the company.
2- BALANCE SHEET RATIOS:
Balance sheet ratios deal with the relationship between two balance sheet items,
e.g. the ratio of current assets to current liabilities or the ratio of proprietors funds
to fixes assets. Both the items must pertain to the balance sheet items:
A. CURRENT RATIO
Current ratio may be defined as the relationship between current assets and current
liabilities. This ratio is also known as working capital ratio. The current ratio is the
test of solvency or it is a test of short term, financial strength. It the current ratio is
higher it means the current assets are more free from debt claims by creditors, and the
creditors would feel themselves more satisfied.
It is a good measure of general liquid and is most widely used to make the analysis for
a short-term financial position or liquidity of a firm. The standard for this ratio is 2:
1. It is calculated by dividing the total of the current assets by total of the current
liabilities.
FORMULA: -
Current Assets : Current Liabilities
Year 1994-95 1995-96 1996-97 1997-98 1998-99
% 1.94:1 1.489:1 1.66:1 3.45:1 1.21:1
This financial position is satisfactory.
B. QUICK RATIO
This ratio is also termed as acid test ratio or liquid ratio, It is the ratio of liquid
assets to current liabilities. The true liquidity refers to the ability of a firm to pay its
short-term obligations as and when they become due. The standard for this ratio is 1:
1.
FORMULA: -
Liquid Assets : Current Liabilities
Year 1997-98 1998-99
% 55.64 181.10
This is highly positive aspect toward the liquidity position of the firm.
3- COMBINED OR MIXED RATIOS:
These ratios exhibit the relation between a profit and loss accountant and balance
item.The important ratios are as under:
A- RETURN ON INVESTMENT
It measures the return of total investment with the borrowed money or invested by
owners in the business. It is obtained by dividing the net profit on total assets.
FORMULA: -
Net Profit (after tax)
Total Assets
Year 1997-98 1998-99
% 28.15 5.39
B-RETURN ON EQUITY
This is a measure of the return on ordinary capital of the company. It indicates, for
every Rs.10/= of capital invested in the firm how many rupees were produced or lost
this year. If it is increasing than the previous year then it is good one. It may be
obtained by dividing. Net profit on the sum total of ordinary capital, reserve and
profit.
FORMULA: -
Net Profit (after tax) Preference
Dividend
Equity share Capital
Year 1994-95 1995-96 1996-97 1997-98 1998-99
% 27.25 29.51 32.03 24.71 26.51
Trend shows that the return on ordinary capital of the company is increasing and
up to 1996-97 and decline in the year 1997-98, and increased again for next year.
Over all trends of these years are satisfactory.
C- EARNING PER SHARE
Earning per share is a good measure of profitability, when compared with earning per
share of other companies. Earning per share is a small variation of return of equity
capital and is calculated by dividing the net profit after taxes minus preference
dividend by the total number of equity shares.
FORMULA: -
Net Profit (after tax) Preference
Dividend
Number Equity Shares
Year 1994-95 1995-96 1996-97 1997-98 1998-99
% 6.12 8.19 11.52 10.69 14.31
The figures of earning per share are increasing continuously. Trend is very positive for
the shareholders of the company. Because the earning on the share increasing
continuous during these years.


Suggestions
This year PARCO has been granted the Marketing License to sell POL products.
PARCO plans to market fuel products and LPG of kits refinery and the lubricants of
ADNOC & OMV.
Being the internee of the largest oil refinery and pipeline network PARCO is better
placed to gradually become a major market player of the industry. With its joint
venture partner of Emirate of Abu Dhabi and their Austrian associates OMV, PARCO
has a multinational character. OMV owns the largest fuel and lube refineries and retail
outlets in other European countries around Austria. It is also engaged in oil and Gas
exploration Pakistan. This association will provide additional expertise/advise on
refinery and marketing operations.
In view PARCOS unique position of having sufficient experience and expertise in
laying and efficiently operating 1,228 Km. Long oil pipeline the Government of
Pakistan has assigned to PARCO the White Oil Pipeline Project (WOPP) for
laying a pipeline from Karachi to Mahmood Kot for transporting petroleum products
to up-country. After commissioning of the Refinery, PARCOs existing pipeline up to
Mahmood Kot will be in a position to execute this project at the lowest cost and
operate it with least overheads as compared to a new operator. It will also provide
additional standby facility for transporting crude in emergencies.
The management is making continuous efforts to modernize the systems and
procedures and to improve the working atmosphere leading to higher
productivity.Housing facilities for the staff have been developed at Pumping and
Terminal stations.A full fledged housing complex including mosque, school, a
hospital and a club with recreational facilities is nearing completion at Mahmood Kot,
to accommodate the Mid-Country Refinery staff.
I am pleased to say that the company has established a reputation of a well managed
and profit oriented Joint Venture between Pakistan and Abu Dhabi. It will continue to
set high standards of performance and profitability and implement new projects for
the benefit of shareholders and for the good of the country.
It is a pleasure to state that keeping in line with its progress, your company is playing
its de role in the field of social and community welfare activities by supporting
educational institutions, and community welfare activities in the vicinity all along the
route of our pipeline, including deploying of mobile dispensaries to cater to needs of
the people living in rural areas.
CONCLUSION
Every thing PARCO achieves is the product of team effort. All PARCO employees
share the achievements of the company and have every reason to feel proud of what
has been achieve so far. However with the diversification in business activity,
especially in the finance department, PARCO meet the new challenges, since success
lies in better service and consumer satisfaction.
PARCOS future aim is therefore to consolidate a significant account presence, as a
major contender in the petroleum sector of Pakistan, with a future that heralds bright
prospects.
There is need for proof any concept of refresher courses for the employees. If
directors would make arrangement to provide training to the employees then they
would work efficiently. By this productivity will also increase.
I would like to recommend that the management should develop some policies for the
promotion of efficient workers. If no policy for the promotion of workers so it will
create unrest among the workers. The management should make sound policies for the
promotion of efficient workers. This will not only increase the productivity of workers
but the management will also retain efficient workers with them.