For petroleum products sold to retail distribution

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Unformatted text preview: xample, for crude oil sales generally there are two points at which title could pass from seller to buyer: when the crude oil is lifted from the site of production; or when the crude oil is delivered to the refinery/ storage depot. For petroleum products sold to retail distribution networks, generally revenue is recognised on delivery to service stations. Physical exchange of products The physical exchange of products is common within the oil and gas industry. For example, under crude oil buy/sell arrangements a company agrees to buy a specified quantity and grade of oil to be delivered at a specified location, while simultaneously agreeing to sell a specified quantity and grade of oil at a different location with the same counterparty, generally to facilitate operational requirements. In accordance with IAS 18 Revenue, the swapping of goods or services that are of a similar nature and value is a transaction that does not generate revenue. The nature of the exchange will determine if it is a like-for-like exchange accounted for at book value, or an exchange of dissimilar goods within the scope of IAS 18. The quantum of the balancing payment is one important factor in deciding whether the transaction is a sale and a purchase or a swap of similar products. The more significant the balancing payment is compared to the value of the products being exchanged, the more likely the transaction is to be a swap of dissimilar products. Overlift and underlift In many joint arrangements the timing of revenue recognition will coincide with a fixed schedule of lifting, which stipulates when each participant lifts its share of crude oil or gas from the production facility. The practicalities of loading an oil tanker mean that any single lifting can be more or less than a company's entitlement, resulting in an overlift (a lifting in excess of the company's contractual allocation of production) or an underlift (a lifting less than the company's contractual allocation of production). Oil and gas companies need to consider how they a...
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