scrap

Title: Surplus, Salvage and Scrap Material OSPM Number: 64 - 029

of 13

64.029 SURPLUS, SALVAGE AND SCRAP MATERIAL

64.029.1 General Information

1. Operations Support Department is responsible for identifying and controlling Surplus, Salvage and Scrap in order to optimize the company’s financial and operational position by:

- avoiding, postponing or reducing out of pocket expenses by using available material;

- increasing cash inflow by selling unwanted material;

- reducing the costs of storage facilities and Procurement and Logistics Department’s operating expenses.

2. It is therefore highly desirable that Surplus material is identified and disposed of without undue delay.

3. Procurement is responsible for:

- determining and listing Surplus Stock;

- determining Surplus construction Material.

4. Operations is responsible for:

- identifying Selected Salvage and Scrap and listing Selected/Salvage items not returned to stock;

- the storage of Surplus, Selected Salvage and Scrap items;

- the destruction of any items which the Company wishes to destroy (attractive/hazardous).

5. Administration is responsible for:

- Accounting records for Salvage repair, Surplus and Scrap Disposal;

- Informing DMR of the disposal if to be carried out locally, otherwise arranging for re-export.

64.029.2 Surplus Material

1. Definition of Surplus Material

Surplus refers to any material or equipment which either has no foreseeable use in Company’s operations or will not be used within a reasonable period of time (that period for which Company’s needs can be foreseen).

No item of materials or equipment should be classified as surplus unless it is in fit condition, or can be economically reconditioned, to be used safely.

Operations Support Procedure Manual.PREPARED EPO/64 APPROVED EPO/6 Revision - 1 Next Review

1 Oct’ 98 Oct’ 2000


of 13

Surplus is subdivided into two classifications:

Excess - Being the quantity over and above that necessary to cover the company’s requirements for a reasonable period of time.

Dead - Being the total quantity of any one item for which is issued infrequently and fail the justification for keeping as non-moving item. The definition of the term infrequently are defined:

General Stock - no issue for two years or more.

Spare Parts - no issue for four years or more.

2. Determination of Excess Surplus

The decision to declare an item, or portion thereof, as Excess depends on a number of factors:

The value of the proposed excess should generally be greater than Baht 1,000 per item, or a total value not less than Baht 10,000.

The material/equipment must have a foreseeable use in Company’s operations, and an estimate should be made as to when it will be used. Sometimes it is possible only to give a tentative commitment to use the item. In this case a further review should be made at a date when a firm decision can be expected.

3 Determination of Dead Surplus

The determination of Dead Surplus depends entirely on whether it met the justifications for keeping them as non-moving stock. The following paragraphs cover the justifications for retaining non-moving items.

3.1 Spares about to Need Replacement

It is usually reasonable to suppose that an item which has not moved for four years or more will not move in the future. There are, however, cases where this is not the right conclusion to draw:

- Many items of mechanical and electronic equipment function perfectly adequately for four years or more but then start to fail. It is at just this stage that spares may start to be consumed

- Spare parts for equipment on which scheduled overhauls take place at intervals greater than four years cannot be considered dead solely on the grounds that they have not moved for four years.

3.2 Insurance and Emergency Items

Spare parts classed as insurance items are held in the expectation of little or no movement. Similarly there may be items held in stock for use only in emergencies (e.g. blowout materials or oil-spill chemicals and equipment). Neither group should be classified as dead stock simply because no movement occurs.


1 Oct’ 98 Oct’ 2000


of 13

3.3 Items No Longer Manufactured

Spare held for old equipment which is still in use could justifiably be retained if replacement spares are no longer available from the manufacturer. In such a case it may be best to re-classify the items either as insurance spares or with some other analysis code.

Before accepting this justification for keeping non-moving spares, the materials department should assure itself that no alternative sources of supply, such as stockists or clearing houses, exist.

3.4 Identified Future Use

If a specific use for a non-moving item can be definitely then it should not be classified as dead. A good example is material which can be used on a firm project in the near future.

An acceptable reason to keep non-moving spares can be that the equipment for which the spares are held is due for a major overhaul in the near future. If this justification is accepted then the items in question should be reviewed again immediately after completion of the overhaul. Any items still unmoved should then be declared dead stock.

The review exercise is carried out quarterly by EPO/64 on all non-moving stock. The considered dead surplus should be written off no later than the next review exercise.

4. Surplus Construction/Project Material

Surplus Construction/Project Material should be determined on the completion of a project or, in the case of major projects, if possible. On the completion of each phase. The term “completion” refers to the physical completion and not the financial completion which may occur several months later.

When projects are cancelled or partly cancelled the determination of surplus should be initiated as soon as possible. The open order file should be checked to ensure that any item outstanding for the project under review is taken into consideration.

If the material is a stock item it should be transferred to Materials Stock Account. The transfer may produce an Excess stock position which would be identified and appropriately action in the normal course of inventory control, along with other similar materials. Where it is obvious that an Excess stock position is going to result then material should be disposed to against the original project account. The remaining material should be reviewed in conjunction with the Project Department and, where appropriate, with requirement either firm or tentative.

In particular the department(s) responsible for the operation and maintenance of the new asset should be consulted since it may be that certain remaining items of materials will become new stock items for future maintenance.

If there is a firm requirement, the value of the materials should be transferred to the


1 Oct’ 98 Oct’ 2000


of 13

appropriate account.

If equipment is transferred and for administrative reasons the MESC number of the item is changed, then a record should be kept to facilitate tracing back to the purchase order.

5. Storage of Surplus

It is responsibility of Operations Support Department to ensure that any Surplus with a disposal value is suitably stored and protected against deterioration whilst awaiting disposal i.e. the rubber materials previously stored in an air-conditioned room have to remain store in an air-conditioned room and clearly marked as surplus.

Except for equipment in its original packing, the storage of surplus in boxes is not advisable since identification and retrieval of individual items is difficult. Where this method of storage is unavoidable, the contents should be clearly identified and the box marked on the outside with a list of contents and whether they are Dead or Excess.

6. Surplus Lists

Comprehensive list of surplus should be prepared and used

- To promote the use of Surplus within the Company. To this end they should be given a wide distribution and recipients asked to advise on the possibilities of using the materials.

- To screen against new requisitions.

- To sponsor its use as a substitute.

64.029.3 Salvage Materials

1. Definition of Salvage, Sorting

On receipt of Salvage Materials (i.e. used material and equipment recovered from operations through maintenance, plant modification or dismantling) by the Procurement and Logistics Department, it is the responsibility of the Department to select out those items which have a future use within the operations of the Company (either with or without reconditioning) and those that do not. The unrequired items should be automatically classified as Scrap and sold, the balance termed as Selected Salvage.

It should be borne in mind that a foreseeable use might be a use for which the item was not originally designed, e.g. linepipe might be used for constructing racks.

If any doubt exists as to whether an item should be classified as Selected Salvage or Scrap, advice should be sought from the appropriate technical department and/or the last user department.

Where a large quantity of potential salvage arises in a single location then the materials should be sorted on site so that those items which are obviously scrap can be sent direct to the scrap Yard and so save double handling in the Salvage Yard.


1 Oct’ 98 Oct’ 2000


of 13

Unreconditioned Selected Salvage should not normally have a value in the Company accounts and therefore no accounting documentation is required. However a record should be kept to provide a means of identifying the source of the material so that the returning department can be contacted if the need arises.

Material and equipment which has been used in connection with hazardous substances, such as acid, chemicals, etc., should normally be made safe for handling by the returning department. The Salvage Yard operator should ensure that this has been done before accepting the item, irrespective of whether the item is classified as Selected Salvage or Scrap.

Care should be taken to avoid taking into Selected Salvage obsolete materials which are no longer acceptable in the Company’s operations. These materials should be sent direct to the Scrap Yard.

Test certificates may also be required for certain commodities. If in such case test certificates cannot be obtained, then the materials concerned should not be returned to stock.

2. Storage

Materials in the Salvage Yard should be clearly identified, listed and stored in an orderly manner, in as near as possible, MESC number sequence.

Material being stored for a specific purpose, or at the request of a user department, should be clearly identified with a label giving the reasons for its retention.

To avoid congestion the contents of the Salvage Yard should be reviewed from time to time a consideration given as to whether certain items should be reclassified as scrap.

3. Reconditioning

Reconditioning work should not be undertaken until near the time that the material is to be used to meet a firm requirement. In this context replenishment is considered as a firm requirement.

The economic justification for reconditioning Salvage depends primarily on the cost of reconditioning compared with the cost of procuring new material. There are other factors, however, which must be considered, such as stock outs due to unforeseen requirements or lengthening delivery time, changes in market conditions leading to short supply, etc.

When it becomes necessary to order new materials, Procurement should take into account the availability of unreconditioned Selected Salvage and arrange for the reconditioning of the required quantity.

Reconditioning work may be done by either Company workshops or approved third party workshops. A Repair Purchase Order should be used to authorize the work to be done and to facilitate the subsequent accounting entries.

The authorizing document should clearly indicate the standard and/or specifications to which the materials is to be reconditioned.


1 Oct’ 98 Oct’ 2000


of 13

Where applicable, reconditioned materials should be tested in accordance with the appropriate standard and where necessary certificates provided. Where appropriate the date and identification mark of the workshop carrying out the work should be stamped on each item.

Before accepting materials, reconditioned by a third party, Receiving Section should arrange with Engineering Department for an inspection of the materials to ensure that it complies with the correct specifications.

In the absence of a specific instruction, reconditioned material would be treated as if it is new material and issued in preference to new material. To permit this the quality of workmanship, testing and inspection must be to a suitable level.

Reconditioned materials should be returned to stock at 100% of the current average inventory value.

4. Salvage Documentation

Action

1) Salvage materials returned from the well must be booked into EPO/64Salvage Stock Account via Materials Transfer Voucher (MTV) EPO/642

2) Work Orders or Purchase Orders (Stipulating inspection by Lloyds) PSP/121for repair and inspection of salvage materials must mention MESC EPO/64/642number of such materials and a duplicate copy of such Work Orders (Lloyds)and Purchase Orders be sent to PSP/121

3) Detail of Work Orders or Purchase Orders must be noted by pencil PSP/121onto the stockcard.

4) Upon receipt of salvage materials, Materials Return Voucher (MRV) EPO/64must be prepared and the Work Order or Purchase Order Number EPO/642should be specified.

5) MESC Number and Work Order or Purchase number must be PSP/121mentioned at the narration column of the Payment Voucher.

6) Repair Cost must be compared with recovery cost at the end of PSP/121each quarter. Any adjustment to the percentage of recovery costmust be approved by EPO/6

7) The unbooked repair cost at the end of each year must be accrued PSP/121


1 Oct’ 98 Oct’ 2000


of 13

64.029.4 Scrap Material

Scrap is used materials or equipment which cannot be reconditioned or safety used, and which has a marketable value.

Material falling within the definition of Scrap should be collected as nearly as possible and sold as Scrap metal.

1. Storage

The Scrap Yard is used mainly for the sorting and storage of scrap metal. Sufficient space should be allowed in the yard for the easy access of transport and handling equipment.

Scrap metal should be segregated into ferrous and non-ferrous. Further segregation of non-ferrous metals may be necessary depending on the volume arising, the prices obtainable and the conditions which can be negotiated with the buyer.

The yard should be divided into clearly defined areas, each area being allocated for the storage of a specific category of metal.

Attention should be given to security measures for the storage of high value scrap, such as non-ferrous. Alloy and precious metals.

2. Scrap Disposal

As most of the Company’s materials and equipment are imported duty and tax free, it is most important that disposal of scrap be made with the acknowledgement of DMR, who will later request Customs to inspect Scrap proposed for disposal.

Customs will assess the value of scrap and determine a duty in line with importation of similar product.

Both DMR and Customs have to inspect scrap before it can be disposed.

3. Sale of Scrap to Local Dealer

Action

1) Separate the scrap required to be disposed and prepare EPO/64inventory list of total holding and forward to PSP/121

2) Thai Shell prepares letter requesting permission for sale of EPO/6scrapped material to Department of Mineral Resources and PSP/121forwards to EPO via EPO/6 for signature.

3) Letter addressed to Director-General of DMR signed by EPO. EPO

4) Director-General of DMR orders DMR Inspectors to carry out DMRphysical check of the scrap.


1 Oct’ 98 Oct’ 2000


of 13 Action

5) DMR Inspectors check the scrap at Warehouse/Yard DMR

6) DMR Inspectors report the outcome of physical check to DMRDirector-General of DMR

7) Director-General of DMR presents Thai Shell letter together DMRDMR report to Sub-Petroleum Committee.

8) Sub-Petroleum Committee submits related Documentation to Govt.Petroleum Committee for endorsement

9) Petroleum Committee grants Thai Shell permission to transfer to Govt.scraps inventory.

10) Director-General DMR informs Director-General Customs DMRDepartment by letter with letter copied to Thai Shell.

11) Director-General Customs Department orders Customs CustomsInspectors to carry out physical check of the scrap.

12) Customs Inspectors check the scrap at Warehouse/Yard. CustomsPSP/121

13) Customs Inspectors report the outcome of physical check to CustomsDirector-General Customs Department.

14) Customs Department calculates tax for scrap being sold. Customs

15) Thai Shell pays tax on the scrap. EPS/33

16) EPO/6 for Disposal of Scrap to Contract Board EPO/6

17) Contracts Board approves the tenderer list comprising: C.B.

1. Previous successful tenderer.

2. Two (2) Scrap Dealers from Bangkok as listedIn Yellow-Pages.

3. Three (3) Scrap Dealers from either Phitsanulok,Sukhothai and Kampaengpetch if applicable.

ActionOperations Support Procedure Manual.

PREPARED EPO/64 APPROVED EPO/6 Revision - 1 Next Review1 Oct’ 98 Oct’ 2000


of 13

18) EPO/6 sends tender documents to selected dealer and EPO/6Contracts Board Procedure followed through to evaluation.

19) Contract make payment to cashier.

20) Contracts Board approves disposal of scrap to highest bidder. C.B.

21) Contractor removes approved scrap following procedure of EPO/64Weighting via public weigh-bridge facilities.

22) PSP/121 informed of total weight loaded scrap. EPO/6

Appendix I


1 Oct’ 98 Oct’ 2000


of 13

SALVAGE REPAIR ACCOUNTING

1. Introduction

The following are the main types of materials being returned to Lan Krabue Warehouse from Well Sites:

1) Casing

2) Tubing

3) Well Head Equipment

4) Subsurface Equipment

2. Return of Stock Materials

Return of used stock materials to the Lan

Krabue materials Yard must be made under cover of a Materials Transfer Voucher (MTV). The returned materials should be priced at 60% of the current stock price and the same well account concerned which received charges is to be credited accordingly (viz 60%)

These MTV’s have the effect of reducing the value of Well in progress and debiting Salvage Stock Account (A/C 1002160BA[1002160BE]).

3. Inspection/Repair of Materials

Where sufficient quantities of returned materials have accumulated in the Materials Yard, EPO/64 will arrange for inspection and reconditioning where necessary. The cost of these activities will be charged to a Salvage Repair Cost Account (A/C 1007712GA37385[1007712GE37385]) under control of PSP/121.

Any item found to be un-recoverable should be transferred to the scrap areas in the yard but should not be disposed of pending DMR/Customs approval, to be obtained via PSP/121.

4. Return to Stock

Items which are in usable condition after inspection/cleaning/repair should be returned to stock at the current stock price, by means of a Materials Return Voucher (MRV), crediting the Salvage Stock Account (A/C No. 1002160BA[1002160BE]) and debiting Stock.

5. Quarterly Accounting

EPS/33, PSP/121 will quarterly monitor the Salvage Stock and Salvage Repair Cost Accounts to ensure their balancing by year end (i.e. increase or decrease the 60% credit to

wells as required).


1 Oct’ 98 Oct’ 2000


of 13

6. Control Over Salvage Accounts

At end of each quarter the balance on the Salvage Stock Account should be transferred to the Salvage Repair Cost Account.

7. Stabilizer Sleeves

Due to the very high costs of repairs to stabilizer sleeves, it has been agreed until further review, that the normal procedure for crediting the well with a salvage value will be adhered to in that the value to be fixed at Baht 1,000.- and not a percentage of original value.

Example


1 Oct’ 98 Oct’ 2000


of 13Note

1. Warehouse issue 10 pcs. Stock materials value Baht 1,000.- to Well A account.

2. Well A account transfer 10 pcs. Used materials to Warehouse at value 60%.

3. Company pay for cost of recondition and inspection Baht 300.-

4. Warehouse return 7 pcs. Used materials which are in good condition back to stock.

5. Company issue D/N to Scrap Dealer for Scrap Sale.

6. At end of each quarter, the difference between Salvage Stock Account and Physical Stock should be transferred to the Salvage Repair Cost Account.

Debit Credit

Well A Account xxx

(1) MIV (10 pcs.) 1,000.- (2) MTV (10 pcs.) 600.-

Salvage Stock Account 1002160BA or 1002160BE

(2) MTV (10 pcs.) 600.- (4) MRV (7 pcs.) 700.-

(6) Balance Transfer to 100.-Salvage Repair Cost

Account

Workshop Mr. “X”

(3) Invoice 300.-

Stock Account

(4) MRV (7 pcs.) 700.- (1) MIV (10 pcs.) 1,000.-

Salvage Repair Cost A/C 1007712GA37385 or 1007712GE37385

(3) Invoice 300.- (6) Balance Transfer from Salvage 100.-

Scrap Dealer A/C Mr. “Y”

(5) Debit Note (1 pcs.) 5.-

Other Incomes A/C 1004159BA or 1004159BE

(5) Debit Note (1 pcs.) 5.-


1 Oct’ 98 Oct’ 2000


of 13


1 Oct’ 98 Oct’ 2000

INSPECTOR

CAN BE REPAIRE

DSCRAP

WORK SHOP

STOCK

SALVAAGEACC : 2160 BA/BE

MRV AT 100 %

GOOD

NO

YES

MRV AT 100%

WORK ORDER/PURCHASE ORDER ACC : 7712GA37385 OR 7712GE37385

YES

MTV AT 48%

WORK ORDER ACC : 7712GA37385 OR 7712GE37385

WELL AACC : xxxxxx

NO

scrap

Documents