DELIANCE: OIL & GAS

Submitted in partial fulfilment of the requirements of the course

MANAGEMENT ACCOUNTING

Instructor: PROF. ALOK DIXIT

Submitted on January 15, 2022 by

GROUP 2: MADANKISHORE KUMAR ABM18033

NISHI PANT ABM18034

ROHIT P PGP37317

SHIMONA ARORA PGP37324

SUNJAY CALVVIN PGP37326

 DELIANCE OIL & GAS Ltd.
As India recovers from the second wave of the COVID pandemic, Mr. Verma, general manager
of Deliance Oil and Gas Ltd ponders in his office about the future of Deliance, ahead of the
meeting with the production and procurement departments about the ramifications of the
pandemic on the supply of crude oil and the demand for the company’s products, both
domestically and internationally and the strategy going forward.

Deliance is a company involved in the Oil and gas industry. It has the largest refining capacity
for crude oil and its primary output is Petrol alongside some by-products.

The company imports crude oil as its primary input, refines the oil into petrol, and exports it to
Western Europe. The by-product obtained from this process is primarily petroleum jelly which
can be refined to produce moisturizer and lubricant. The company primarily sources crude oil
from Venezuela. Crude oil from Venezuela is high- grade oil with lower sulphur content and
is considered ideal.

Crude oil Import

Crude oil is a commodity traded on the open market. As a result, its prices are subject to
fluctuations. The company tries to predict future market prices using proprietary software. The
predicted average future prices for the forthcoming month is available in Exhibit 1.

The cost of insurance and freight for importing a barrel of oil from Venezuela and Iran is 32%
and 30% respectively. The total duty and taxes on importing a barrel of oil can be taken to be
around 30% (Basic custom duty - 10% and IGST – 20%). The product does not qualify for
ITC.

Process and products

Deliance has the largest distillation facility in India, located at Koyali, Vadodara District in
Gujarat. The processing of the imported crude oil starts in the distillation department by heating
the oil to vapor and then passing the vapour through a chamber to extract individual
components. This process produces petrol and petroleum jelly.

Typically, an input of 10,00,000 Barrels of high-grade crude oil would produce 5,00,000
Barrels of petrol and 10,000 Barrels of jelly. Petrol is sold in Europe, while the jelly is sold
domestically. Prices of Petrol are subjected to dynamic changes and a forecast is available in
Exhibit 2
Of the retail price, the Deliance captures roughly half, the rest going in the form of taxes,
tariffs, and dealer commissions. The jelly produced is an input for other chemical industries
can be sold at a price of INR 50 per ltr which incurs an additional cost of INR 48 per ltr to
Deliance. The additional cost for petrol is 20/- per ltr.
With the growth of the beauty care industry in recent years, Deliance has diversified its
portfolio into the segment starting a Filtration department. This department filters the
petroleum jelly and produces a moisturizer and residue as a by-product at the cost of INR 30
per ltr of the input jelly. The moisturizer can be sold at Rs 100 for a 250ml bottle on the market.
The filtration process can convert 10000 Barrels of the jelly into 4000 Barrels of moisturizer
and 4000 Barrels of residue.
Historically Deliance has been disposing of residue (by-product) at the cost of 50 INR per ltr.
However, to improve the company’s overall ESG score the production department has
decided to further process the residue to produce a lubricant gel. To generate the gel the
company incurs a cost of INR 25 per ltr of input residue while the market price per kg of
lubricant gel is INR 20 per ltr of finished output.

Under normal conditions, the company imports oil exclusively from Venezuela for its
operations. However, the prevalent volatile political environment could result in a drop in the
availability of Venezuelan crude oil, with the company expecting to secure only 60% of its
monthly requirement from the country.

New Technology

The R&D investment of Deliance paid fruition, and Deliance has come up with an alternative
method of processing petroleum jelly in the filteration department, which would improve the
quality primarily of its moisturizer so that the selling price of the moisturizer can be increased
by Rs 10/- per a bottle of 250ml. However, this would increase processing cost in the
extraction department by Rs 10 per ltr of petroleum jelly. Further, due to the improvement in
technology, the product mix of Moisturizer and lubricant would change such that 10000
Barrels of petroleum jelly would produce 7000 Barrels of Moisturizer and 1000 Barrels of
lubricant.

Questions:
(Treat every question independent of each other unless otherwise mentioned)

1. Calculate Contribution margin per product and break-even quantity for the crude oil
under old and new production techniques

2. If the company could source only 60% of crude oil, should Deliance operate both the
departments?

3. If the rupee devalues to INR 84 against the dollar and drops to INR 88 against the
Euro, should Mr. Verma and his team change their decision?

4. If alternatively, the company could make up for the loss in supply of crude oil by
sourcing from Iran what would be the revised break-even values.

(Note: Iranian crude is of poorer grade and therefore the refining costs in the distillation
department are expected to rise by 5% with a 15% fall in petrol output as well)

5. The impact of covid on the economy has led to concerns of drop in consumption
as a result of this the team believes there is a 60% chance that the moisturizer
price would have to be capped at INR 90 per bottle Given this information should
the company revise its decision to adopt the new production technique.
 EXHIBIT 1

Price (USD/Barrel) Average Price

Merey Crude (Venezuela) $85
Iran Heavy (Iran) $83

(1 Barrel = 160 Ltrs, Exchange rate: 1USD = INR75)

Forecasted prices of Crude oil

EXHIBIT 2

Price (EUR/ltr) Average Price

Petrol 2.2

(1 EUR = INR 85)

Forecasted price of Petrol

EXHIBIT 3

Particulars Crude Oil Distlillation Petroleum Jelly Refining

Direct Material 3,00,00,000 30,00,000
Direct Labour 1,00,00,000 10,00,000
Fixed Cost 5,00,00,000 4,00,00,000
9,00,00,000 4,40,00,000
Output
Petrol 5,00,000 barrels
Petroleum Jelly 10,000 barrels
Moisturizer 4,000 barrels
Lubricant 4,000 barrels

Additional Specific costs

Petrol 1,60,00,00,000
Moisturizer 24,32,00,000
Lubricant 1,60,00,000

Note:

1. Raw Material Input: 10,00,000 Barrels of Crude oil

2. All costs mentioned are in INR
3. 10 percent of the fixed costs in the distillation department, and 20 percent of the fixed
cost in the filtration department are different types of amortizations and are fixed in
nature.