SolvedHCOS4850 | Post detection audit and assessment: fuel laundering
From HM Revenue & Customs · Hydrocarbon Oils Strategy
This section explains basic laundering techniques and what is needed to commission a fully operational laundering plant. It will include a ‘simple’ economic model outlining costs, outlays and cash flows.
There are two main types of laundering techniques:
Chemical: washing marked gas oil with sulphuric / hydrochloric acid and sodium hydroxide
Filtration: filtering marked gas oil with cat litter, activated carbon or silicon
This section will concentrate on chemical laundering. Other types of laundering have slight variations especially in the cost of the compounds and plants. Any difference in the outlay costs are more than set off by reduced processing costs.
Methodology
To make this section ‘real time’ the suggested approach was to:
cost and equip an acid laundering plant capable of producing 100,000 litres of laundered fuel a week
identify sources and purchase prices of all equipment, chemicals and fuel for Wednesday 10 June 2009.
All plant equipment was sourced using ebay.co.uk and all fuel and chemical supplies were sourced from local dealers.
Key assumptions
Chemical laundering, or ‘washed diesel’ as it is sometimes known, is a common laundering technique using acid with an alkali to process marked gas oil into having the characteristics of duty-paid road diesel.
The process involves mixing a quantity of acid and alkali* (one litre of acid and 0.1 litre of alkali to a thousand litres of marked gas oil) and agitating the mixture until all the colour dye and most of the chemical marker is removed. The finished product is then mixed with an alkali to neutralise the acid in the fuel and the final product is drawn off, leaving a chemical black residual waste to be disposed of separately.
*Acid will remove the colour dye and the euromarker - sodium hydroxide (alkali) will remove the quinizarin and coumarin.
The acid alkali and marked gas oil is mixed and agitated using an air compressor blowing air through a submerged pipe in the mixing tank / IBC.
* The acid most commonly used is sulphuric and hydrochloric.
The following items are essential for the operation of an acid laundering plant:
IBCs or fuel containers
transfer pump
compressor
fuel tubes and couplings.
Cost of all equipment [excluding fuel] = £396
Costings and kit
10 IBCs will be used to store 10,000 litres of delivered Marked Gas Oil [MGO]
10 IBCs will be used to process the fuel
10 IBCs will be used to collect the finished product
2 x 10 IBCs will be used to make deliveries
Fuel Pump
Couplings & Pipes
Compressor
Plant cost £396 see attached examples in the table below.
100 litres of acid costing £100 (this amount will process 100,000 litres)
10 litres of alkali costing £50 (this amount will process 100,000 litres)
10,000 litres of MGO costing £4,435
Total initial outlay is £4,981
The cost of producing the first batch of laundered fuel, inclusive of plant purchase, is £0.498 pence per litre.
The average retail price of duty-paid diesel in postcode BT35 (May 2009) is £1.039
10,000 litres would cost £10,390
10,000 litres of first batch laundered MGO would cost £4,981
Cash after expenses from processing first batch of 10,000 litres is £5,409
The percentage margin is 108%
Allow 25% mark up to final retailer produces cash of £4,056 for the launderer, from this first batch, and £1,352 for the user.
For the next and each subsequent process the percentage margin improves as the cost of the plant is recovered in the proceeds of the first batch. See the table below.
The earnings from each subsequent batch of 10,000 litres will be £5,955.
Economic model
| Process | Plant Costs | Chemicals | Fuel | Total Outlay | Cash Return | Accumulated Cash |
|---|---|---|---|---|---|---|
| One | £396 | £150 | £4,435 | £4,981 | £9,037# | £4,056 |
| Two | Nil | Nil | £4,435 | £ 379 | £10,011 | £5,576 |
| Three | Nil | Nil | £4,435 | £ nil | £10,011 | £11,152 |
| Four | Nil | Nil | £4,435 | £nil | £10,011 | £16,728 |
| Five | Nil | Nil | £4,435 | £ nil | £10,011 | £22,304 |
| Six | Nil | Nil | £4,435 | £nil | £10,011 | £27,880 |
| Seven | Nil | Nil | £4,435 | £ nil | £10,011 | £33,456 |
| Eight | Nil | Nil | £4,435 | £nil | £10,011 | £39,032 |
| Nine | Nil | Nil | £4,435 | £ nil | £10,011 | £44,608 |
| Ten | Nil | Nil | £4,435 | £nil | £10,011 | £54,619 |
# Repay initial outlay of £4,981 and add £379 to cash reserves to fund next MGO purchase - see below.
Summary
Initial set up costs are £546 to cover chemicals and plant to process 100,000 litres
£4,435 is needed to buy first batch of 10,000 litres (this may be on a 7 to 30 day invoice).
(10,000 litres of green MGO would cost £6,956)
From first batch, all costs (£4,981) will be covered, leaving a cash balance of £4,056.
If the launderers take advantage of ‘seven days to pay’ for the fuel, their ‘out of pocket expenses’ would be limited to £546 for plant and chemicals.
For batch two, the launderer’s total out-of-pocket expenses has dropped to £379 needed to add to the accumulated cash from the first batch to fund the second purchase of fuel.
Each subsequent batch creates a surplus of cash and becomes self-funding.