Full Project-OIL AND GAS ACCOUNTING: PRACTICE, CHALLENGES AND SOLUTIONS

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CHAPTER ONE

INTRODUCTION

1.1      BACKGROUND OF THE STUDY

Accounting regulatory bodies usually formulate industry specific standards when an industry has peculiar characteristic of accounting for banks and non-bank financial institutions. The oil and gas industry is one of such industries that has specific accounting standards. This can be attributed to its peculiarity interms of high capital  requirement, earning volatility, regulation, type of business ownership, taxation, non-correlation between the amount of investment made and returns obtained (Wright and Hallun et al, 2008)  and high sensitive to risk, price risk and foreign exchange risk.

Up and 2012 when the International Financial Reporting Standard (IFRS) was adopted by exploration companies in Nigeria, Nigerian companies in the upstream sector prepared their financial statement in line with the statement accounting standard 14 (accounting in the petroleum industry; upstream activities and SAS 17 (accounting in the petroleum industry) formulated by the Nigerian Accounting Standard Board.

By its adoption of IFRS, Nigeria joined over 100 countries that either use or have adopted t he accounting guidelines as stipulated by the International Accounting Standard Board (IASB). This will ensure harmony and easy comparison of financial statements. This is particularly useful in the oil and gas industry considering that it is one of the most global industries. The adoption of a common accounting framework also widens access to investment opportunities.

IFRS 6 applies to expenditure incurred by an entity in connection with the search for mineral resources. The standard divides upstream activities into two groups namely: exploration and evaluation activities and development activities. The standard under paragraph 9 discusses exploration and evaluation activities. Examples of expenditure that can be categorized as exploration and evaluation according to paragraph 9 are acquisition of right to explore, topographical, geological, geochemical and geophysical studies, exploratory drilling, trenching, sampling cost, costs incurred in trying to evaluate the technical feasibility and commercial violability of extracting resources. These cost are capitalized and classified as tangible or intangible (IFRS 2011). Developing activities involves developing the results from extractive activities. This usually requires huge amount and paragraph 10 of (IFRS) 6 states that these expenditures should be categorized as intangible assets and treated as per the guideline provided in IAS 38 (intangible assets).

Accounting for the upstream sector is quite controversial and companies may choose from either the successful efforts method or full cost method. Successful effort is a method of accounting for petroleum exploration and development expenditures that permits capitalization of expenditures only a successful projects while expenditures in unsuccessful wells are expensed. A drilling effort is classified as successful if it results in the extraction of economically recoverable oil and gas and classified as unsuccessful if it results I a dry hole. On the other hand, the full cost method allows for the capitalization and amortization of all exploration and development expenditures i.e. both successful and unsuccessful efforts.

The main difference between the two accounting method is that only cost in proven wells are capitalized in the successful effort method while every cost is capitalized under the full cost method. The research, therefore, seeks to investigate the nature of oil and gas accounting practice, its challenges and solutions excerpts Ejiroghene E. (2013) Accounting for oil and gas Reserve; implication for investors. The oil and gas industry is one of such industries that has specific accounting standards. This is as a result of its peculiarity in-terms of high capital requirement, earnings violability, regulation, type of business ownership, taxation, non-correlation between the account of investment made and returns obtained (Wright and Gullen et al, 2008) and high sensitivity to risk like price risk and foreign exchange risk etc. Therefore, when the international Financial Reporting Standards (IFRS) was adopted by exploration companies in Nigeria, it became imperatives for oil and gas companies in the sector to prepare financial statements in line with the statement of accounting standards.

Upstream oil and gas organizations must meticulously record, track, distribute and report sales of oil and gas and other products. Accurate and timely oil and gas revenues accounting require tracking complex contracts and owner lease agreements. It must also reflect joint venture and capital expenditure accounts among others. The nature of the complexity of the oil and gas operations makes the nature of its accounting reporting even more complex by new challenges such as horizontal drilling etc. The research, therefore, intends to explore the nature of oil and gas accounting in Nigeria, challenges and solutions.

1.2      STATEMENT OF THE PROBLEM

The complex nature of the operations of the upstream oil and gas industry makes the oil and gas accounting more complex in nature. However, the International Financial Reporting Standards (IFRS) requires that oil and gas companies in the upstream sector prepare their financial statement in-line with the statement of accounting standards 14 (accounting in the petroleum industry; upstream activities) and SAS 17 (accounting in petroleum) formulated by the Nigerian Accounting Standard Board. This is as a result of the guidelines stipulated by the International Accounting Standard Board (IASB). However, oil and gas accounting is made increasingly difficult by new challenges and risks such as horizontal drilling, price risk, foreign exchange risk etc. Therefore, this research seeks to investigate oil and gas accounting in Nigeria, practice, challenges and solution.

1.3      RESEARCH QUESTIONS

1.        What is the nature of oil and gas accounting?

2.        What constitute the challenges of oil and gas accounting?

3.        What possible solution are necessary in oil and gas accounting?

4.        What is the nature of oil and gas accounting in Nigeria?

1.4      OBJECTIVE OF THE STUDY

1.        To determine the nature of oil and gas accounting.

2.        TO determine the discharges and solutions in oil and gas accounting.

3.        To determine the nature of oil and gas accounting in Nigeria.

1.5      SIGNIFICANCE OF THE STUDY

1.        It shall provide a detail analysis of the nature of oil and gas accounting as a framework for further studies.

2.        It shall provide a framework to evaluate the challenges in oil and gas accounting and proper solution.

3.        It shall serve a reference part of information for accounting professionals etc.

4.        It shall elucidate the nature of oil and gas practice in Nigeria.

1.6     STATEMENT OF HYPOTHESIS

1.     H0:  Oil and gas accounting practice is not standardized in Nigeria.

H1        Oil and gas accounting practice is standardized in Nigeria.

2.        H0: Challenges in oil and gas accounting in Nigeria is high.

H1        Challenges in oil and gas accounting in Nigeria is low.

3.        H0: The prospect of oil and gas accounting in Nigeria is low.

H1        The prospect of oil and gas accounting in Nigeria is high.

1.7      SCOPE OF THE STUDY

The scope of the study is centered on the oil and gas accounting practice in Nigeria, its challenges and solutions.

1.8      DEFINITION OF TERMS

IFRS:      International Financial Reporting Standard

SAS:       Statement of Accounting Standard

IASB:     International Accounting Standard Board

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