Word from Industry
May 22, 2019
An outlook on “Accounting Hydrocarbons”, its importance and methodology to manage Hydrocarbon
accounting by Alpen Gandhi, General Manager, Commercial, has been featured in FIPI’s Journal, Jan-March
In the field of Oil & Gas, the commonality is a “hydrocarbon molecule”. How effectively and efficiently one monetizes this molecule, is the one who profits more. This paper is to explain, the importance of its accounting called – “Hydrocarbon Accounting-HCA”. This accounting is at times not properly understood or given less importance, which leads to losses, which are difficult to trace. A structured planning and deciding on the methodology of Hydrocarbon Accounting, helps the industry to avoid such leakages during operations.
Understanding Hydrocarbon Accounting (HCA):
I would take the illustration of a regasification terminal, however, HCA plays a key role in determining revenues in the entire oil & gas sector. HCA, now-a¬days, is taken up by both Finance and Commercial departments, independently and considered as one of the key contributors to the business revenue and profits.
HCA is defined as “the system by which ownership of oil, gas, gas liquids and produced water is determined and tracked from the point of production to a point of sale or discharge”. The terms allocation and production reporting are also commonly used to refer to this function.
The scope of this article is limited to a regasification terminal, receiving LNG from various suppliers under various contractual terms, storing in the cryogenic tanks, regasification and supplying natural gas (Regasified liquefied natural gas- RLNG) to end consumers through common carrier pipelines. The typical schematic is shown in Figurel.
Importance of HCA:
Used for reporting to various governmental authorities
– It helps to determine the ownership of the comingled product in the case of multiple users/titles of the hydrocarbons in one area.
– Provides important information to top management, finance and commercial team to ascertain whether value monetisation is done for that molecule.
Generally, HCA is done on energy units for ease of computation and understanding. Reason being in LNG/ gas industry, hydrocarbon molecules are bought and sold on energy terms (US$/mmbtu), though measurements primarily are done either on weight or volume. HCA has two essential elements to
focus on –
a) Accurate and timely measurement of LNG/ NG
b) Allocation of molecules
It has two essential elements: firstly, gathering and validating flow measurement data in order to establish the definitive record of hydrocarbon molecules purchased, unloaded, stored, regasified and transport to end consumers. In this entire chain, there is a need to measure the quantity of LNG procured, unloaded, stored, all in liquid phase. After processing to deliver to customers, need to be measured in gaseous phase. Another focus area is related to the molecules remained unaccounted, due to measurement uncertainties, flaring, process losses, aging of the product in tank or vessel, used in process, etc. Some organisations do focus on all these unaccounted losses and ensure to accurately measure them for HCA purpose.
… Secondly, it involves carrying out allocation of molecules on the flow measurements to derive quantities with price of purchase. Allocation procedures vary in complexity from the trivial to the highly complicated. In some cases, organisation do simple allocation wrt to the measured energy of unloaded LNG to the LNG owner, on whom the title is transferred. While at the other end of the complexity scale is the requirement to allocate based on the molecules sold to the end consumers.
Financial accounting of hydrocarbons purchased and sold can be either based on FIFO or LIFO based inventories in tanks. However, HCA enables organisation to predict the future deliveries and gives flexibility to allocate such molecules which are yet to arrive in inventories. This method is actually allowing to pool price, optimise the deals and continue to reap benefits of rolling margins, though a need remains is to reconcile the price with the financial accounting at the end of the year.
What is required to manage HCA successfully? An effective HCA system must include:
– A well defined allocation procedure, in which the input data and calculations are specified in detail, and which is approved by all stake holders.
– A robust software which can collect, store, run algorithm and perform calculations and generate the required results. Such system needs a high degree of controls over the access of data and calculations in multi-user environments. As the systems need adequate controls, excel spread sheets should be avoided.
– Needs clear identification of roles and responsibilities avoiding conflicts and ensuring audit trails.
What can go wrong in absence of inadequate HCA systems?
HCA can be a complicated business, so much that the accurate and reliable collection, calculation and presentation of data often present a challenge. When it comes to errors, the following recur and becomes difficult to justify:
– Failure to establish one view in the organisation. There must be a single database that is accepted as the definitive source of production and accessible to everyone in the organisation who needs it. This is essentially to avoid duplication of work and wastage of time to avoid reconciling efforts between different numbers.
– An important function of HCA system is to allow corrections to measured data. Insufficient control over numbers and its corrections, becomes difficult to resolve.
– Consistency overruns accuracy at times. The user of HCA shall always double check its numbers before sharing it with wider audience, else can lead to serious errors going undetected for long periods, due to errors or outdated data or equations.
– Confidence in HCA results depends on a well understood and accepted set of calculations being carried out reliably. Nothing erodes confidence more quickly than unexplained errors appearing in the calculations.
To view, E-copy of magazine, click here.
Page reference for this article is 38-39.
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