OIL AND GAS ACCOUNTING: PRACTICE, CHALLENGE AND SOLUTIONS IN NIGERIA (A CASE STUDY OF NNPC)
ABSTRACT
This study was aimed at assessing accounting practices operated in the oil and gas industry in Nigeria (with a case study of NNPC) particularly to examine the major problems of accounting in the Nigerian oil industry and proffer possible solutions. Also, attempt was made, to assess the role of Nigerian Accounting Standard Board (NASB), the Institute of Chartered Accountants of Nigeria (ICAN) and the Association of National Accountants of Nigeria (ANAN) in developing relevant accounting standards for the industry. Data was collected using both primary and secondary sources with the aid of structured questionnaire. Simple percentages and Chi-square Statistical models were used to analyse the data. It was found that accounting standards for oil and gas industry in Nigeria owe its origin to the methods initially formulated in America and Britain with slight modifications. It was also observed that NASB, ICAN and ANAN play significant role in formulating standards for the oil and gas accounting sector in Nigeria to suit the realities of the time. It was recommended that oil and gas companies in Nigeria irrespective of their origin should show unequivocal commitment in adopting and upholding ethical standards that would lead to improvement in accounting information. The Nigeria National Petroleum Corporation (NNPC) and oil companies should relate functionally with statutory institutions like ICAN, NASB and ANAN with a view to fostering a stronger working relationship. It was also found that making the accounting procedures of this industry a major part of training curriculum will increase the standard and performance of accountants in the industry. Recommendation was therefore made that the NASB in conjunction with stakeholders in the oil and gas sector of the economy and accounting professional bodies should come together and come up with a uniform standard of accounting for this sector of the economy.
CHAPTER ONE
INTRODUCTION
1.1Â Â Â Â Background of Study
There is no aspect of life that accounting cannot be applied, and the oil and gas sector is not an exception. Apart from the petroleum product in itself, there are numerous by-products such as gasoline, diesel, kerosene, jet fuel, lubricants asphalt, bitumen, petrochemicals such as pesticide and others, which necessitate serious development of accounting techniques to cater for it accountability.
The Nigeria economy, up to the 21st century has remained an oil economy, as it forms well over 60% of our Gross Domestic Product (GDP). Until recently, when the Nigeria government, under sectors of the economy, such as agriculture (which had been the mainstay of the economy before the discovery of oil and gas), solid mineral and industries. It is the economy under which other economic activities revolve. The Nigeria economy, one could conclude without missing words, that it is an oil-push economy, at present (Labaran, 2011).
The Nigeria Oil and Gas industry has been described as the most dynamic sector of the Nigeria economy and the development of oil resources as the most significant sector of the economic in recent years. Similar remarks which dominate the press and literature have created certain euphoria of optimistic expectations around the oil and gas industry. It is most appropriate, thereof that a thorough assessment be made of the accounting procedures in this sector of the economy (Aderiye, 1991).
Petroleum is a compound word which in Latin language is called Petra (meaning ROCK) and Oleum (meaning Oil), by this, one will not be wrong if petroleum is referred to as Rock Oil. Petroleum could also be formed from debris of forest fossil and it is also not wrong to call this Oil formation as offshore oil, while the rock oil can be called on-shore oil. The petroleum is as old as man itself over 5000 years of discovery. The early use of petroleum and gas was in China. The first commercial drillings were undertaken by a retired soldiers Col. Edwin L. Dake and later Captian Anthony Lucas in Titusuvile and Texas in USA respectively.
The Oil and gas operation has two major activities, which encompasses the umbrella of major activities from searching of the oil final consuming. These are:
- Upstream activities and
- Downstream activities
Upstream activities involved the acquisition of mineral interest in properties, exploration (including prospecting), developing and production of crude oil and gas. The activities are:
- Exploration and Appraisal: Exploration is the initial activities with a view to discovering oil place.
Appraisal is the evaluation of the discovered oil site to determine whether it is of commercial value and quantity
- Acquisition: This is the entire process of obtaining the drilling right, which is made up of
- Drilling rights
- Other activities imperative to oil and gas production
- Development: This is the preparation of ground for the oil and gas production after discovery. It entails
- Drilling well and installing facilities necessary to obtain access to proven reserves and to efficiently and economically deplete the field.
NOTE: While explorations discover oil-in-place, development converts oil-in-place to recoverable reserves.
- Production: This is the removal of oil from ground. This continues until it is uneconomical to continue production, then it will be abandoned.
A downstream activity involves transporting, refining and distribution and marketing of oil, gas and derivatives. The activities are:
(a) Transportation: This is the movement of oil and gas from production site to:
- Refinery
- Point of Sale
iii. From refinery to distribution point it is the link between upstream and downstream activities.
(b) Refining (Manufacturing): This is the treatment of crude oil in order to form finished products.
(c) Distribution and Marketing: This entails getting the refined petroleum product to the final users.
The cost incurred by the oil companies usually are classifies as: minerals rights acquisition costs, exploration and drilling cost, development costs, production costs, support equipment and facilities costs and general costs.
The discovery of crude oil in commercial quantity is not always the result of all drilling and explorations. Therefore, the amortization of these costs will depend on the accounting system adopted by the company involved.Two methods of accounting system prescribed by SAS 14 are:
- Full Cost Method
- Successful Effort Method
Under the full cost method, costs incurred on mineral rights acquisition, exploration, appraisal and development activities should be capitalized. While, cost incurred on mineral rights acquisition, exploration, appraisal and development activities under the successful effort method should be capitalized on the basis of walls field or exploration cost centers, pending determination. Cost incurred prior to acquisition of mineral rights and other exploration cost centers, pending determination. Cost incurred prior to acquisition of mineral rights and other exploration activities not specifically directed to an identifiable structure should be expanded in the period they are incurred. (Aderiye, 1991).
Using successful effort method, costs incurred prior to acquisition of mineral rights and other exploration activities not specifically directed to an identifiable structure should be written-off in the period they are incurred. All costs incurred on mineral rights acquisition, exploration, appraisal and development activities should be capitalized initially on the basis of wells field or exploration cost centers pending determination such costs should be written off when it is determined that the well is dry mineral right acquisition costs that have not been allocated should be amortized over the remaining life of the license, amortization of exploration and drilling costs, incurred costs, incurred on each well, field or property should be on a unit of production basis, using proven developed reserves, the use of ceiling test is not mandatory under this method.
