ACCOUNTING FOR DEPLETION OF MINERAL RESOURCES IN NIGERIA
(A CASE STUDY OF SHELL PETROLEUM DEVELOPMENT
COMPANY OF NIGERIA LIMITED)
The Oil and Gas industries are great contributors to the growth and development of national economy. The accounting treatment of exploration costs for mineral resources, the kind of method use and why the method is used, differs from one company to another. The method used by the Shell Petroleum Development Company Nigeria Limited, as the major objective of this study will subsist with the choice of accounting methods, how oil and gas reserves are determined and how depletion charges are calculated.
It is advisable for companies in the petroleum industries to adopt the successful effort method, because of the risk associated with exploration activities, involving huge capital outlay. This study looked at the method of accounting the accountant in the surveyed area use in disclosing their financial statements.
A total of thirty-two (32) respondents participated in this study through the use of questionnaires.
Three hypotheses were however tested with the use of chi-squares (x2) statistical tool. Findings were also drawn from the testing of hypothesis. The testing of one of the hypotheses, hypothesis 3 made it clear that the financial accounting method being practiced by the oil and gas companies in Nigeria resolve the problem of ascertaining oil reserve in producing well.
TABLE OF CONTENT
Table of content
Chapter one - Introduction
1.2 Background of the Study
1.3 Statement of the Problem
1.4 Objectives of the Study
1.5 Research Questions
1.6 Statement of Hypothesis
1.7 Significance of the Study
1.8 Limitations of the Study
1.9 Historical Background of the Study
1.10 Definition of Terms
Chapter Two - Literature Review
2.1 Definition of Accounting
2.2 Origin of Petroleum
2.3 The History of Oil and Gas in Nigeria
2.4 Problem of Determination of Recoverable
Reserves in Producing Oil Well
2.5 Steps in Finding Oil and Gas On-Shore
2.6 Oil and Gas Accounting Methods
2.7 Assessment of Unproved Property
2.8 Restoration and Abandonment Costs
2.10 Petroleum Profit Tax Act Provisions
2.11 Expenditure on Wells
2.12 Refining and Distribution
Chapter three - Research Methodology
3.2 Research Design
3.3 Population and Sample Size
3.4 Data Collection Method
3.5 Data Analysis Technique
Chapter Four - Data Presentation, Analysis, and Interpretation
4.2 Data Analysis and Interpretation
4.3 Hypothesis Testing
Chapter Five - Summary of Findings, Conclusions and Recommendations
5.1 Summary of Findings
The discovery of oil in Nigeria years back is not only a blessing to the country but also a source of pride and a ray of hope of a prosperous future.
Equally important are the age long controversy over the financial practice and reporting of oil companies as it relates to which cost or expense to capitalize.
The principles guiding accounting practice and reporting have undergone a process of evolution since the 1920’s to the present stage where two basic concepts for accounting for cost are generally accepted.
The two basic concepts are the “Full Cost method” which are costs associated with acquisition, exploration, and development activities and are capitalized irrespective of whether or not the activities resulted in the discovery of reserve, and the “Successful Efforts method”. This method leads to specific reserve and are to be capitalized. Such cost include costs of acquiring mineral rights, cost of drilling successful exploratory well and also development cost. The distinguishing features of the Successful Efforts and the Full Cost methods depend on which costs are to be capitalized and the method which these cost should amortize.
From United States of America to Nigeria, mineral resources have generated heated debate among accountants. The main reason would perhaps be the very uniqueness of the challenges of the product involved in the search for drilling of, and complex steps taken to bring crude oil to the surface. These may pose some problems to the accountant.
The differences in both methods arises from the treatments given to drilling cost, that is, the cost of topographical, geological and geophysical studies (G&G) and the cost of drilling exploratory holes.
The researcher has been motivated to research on this controversial topic because of the uniqueness of oil and gas to Nigerian economy which accounts for over 80% of the nation’s revenue. Therefore, any discussion on this important sector of economy will not only be a step towards strengthening Nigeria’s economic base but will also ensure the survival of the country economically.
1.2 BACKGROUND OF THE STUDY
A long time unresolved debate has ensured among accountants over the financial accounting and reporting practices in petroleum industry. This controversy centers on the diversity of the application of the accounting of Historical Cost Convention of Successful Efforts and Full Cost methods as it relates (Sunders 1976:1) to oil prospecting. Under the same operational circumstances, both methods produce significantly different results (Lay 1977:33) because Successful Efforts and Full Cost methods use proved reserves to amortize acquisition costs. They differ however, in respect of amortization of wells and related facilities.
Full cost companies usually use proved reserves for determining the unit of production, while Successful Efforts companies use proved developed reserves. This differences arises because, full cost companies usually include future development cost in the cost subject to amortization. The difference between both methods centres on treatment of costs that are not directly traceable to the discovery of specific oil and gas reserves. Under the Successful Efforts (SE) concept, an oil company expense all cost including acquisition, exploratory and drilling cost which do not resent in discovery of reservoirs. On the other hand, the basic concept of the Full Cost method is that an oil company should capitalized and amortize to income all cost incurred in acquiring mineral rights, exploring for and developing oil and gas reservoirs even when specific projects do not result in the discovery of reservoirs.
All productive and non-productive cost of searching for oil and gas are capitalized and carried as asset. If the cost carried forward does not exceed the estimated value of the reserves at a particular location whichever methods are finally chosen will determine the treatment to be given to specific cost items.
1.3 STATEMENT OF THE PROBLEM
According to Statement of Accounting Standard 14 (SAS 14), paragraphs 102 – 103, all companies engaged in oil and gas exploration, development and production activities shall state in their financial statements, the policy for accounting for costs incurred and the manner of disposing of capitalized costs in respect of such activities. In addition, the policy on accounting for restoration and abandonment costs should be disclosed in their financial statements, even if already included in the cost of sales. (SAS 14)
A company may use either the “Full cost” method or the “Successful cost” method. The method used should be consistently applied and disclosed.
Unfortunately, there is no enough evidence to show that these methods of accounting are properly used by the concerned companies in Nigeria and where used, whether they are consistently applied and disclosed.
1.4 OBJECTIVES OF THE STUDY
This research is aimed at resolving the problems associated with accounting for depletion of mineral resources in Nigeria: A case study of Shell Petroleum Development Company, Nigeria Limited, Warri branch. Hence, this study is directed towards identifying which of the two methods (Successful Effort and Full Cost method) is practiced and why one method is favoured in preference to the other, to identify how the accountant resolve the problem of ascertaining oil and reserve in a producing well so as to enable him compute depletion charges and also make recommendations, where necessary towards enhancing the financial accounting method being practiced by Oil and Gas Companies in Nigeria.
1.5 RESEARCH QUESTIONS
For the purpose of this research, it is necessary to establish some research questions so as to understand the Accounting for depletion of mineral resources in Nigeria. Thus, the following research questions were applied in the study.
- Do the oil and gas industries in Nigeria use the full cost or the Successful Effort method in disclosing their financial statement?
- Are the methods used in disclosing their financial statements consistently applied and disclosed?
1.6 STATEMENT OF HYPOTHESIS
To enable us achieve the objectives of the work, the following hypothesis will be tested.
H0: The oil and gas industries in Nigeria do not disclose the policy on accounting for restoration and abandonment costs in their financial statements.
H1: The oil and gas industries in Nigeria disclose the policy on accounting for restoration and abandonment costs in their financial statements.
H0: The differences in both full cost method and successful effort method do not arise from the treatment given to drilling cost.
H1: The differences in both Full Cost method and Successful effort method arise from the treatment given to drilling cost.
H0: The Financial accounting method being practiced by the oil and gas companies in Nigeria does not resolve the problem of ascertaining oil reserve in a producing well so as to compute depletion charges.
H1: The Financial accounting method being practiced by the oil and gas companies in Nigeria resolves the problem of ascertaining oil reserve in a producing well so as to compute depletion charges.
1.7 SIGNIFICANCE OF THE STUDY
Many people, researchers, authors alike have written on the depletion of mineral resources problem of accounting. But it is my opinion that other problems in the developed world be looked into since they are not so variable. These problems include; pollution and damages of eco-systems, loss of biodiversity and loss of forest, soil erosion and depletion of mineral and energy resource base on which their society is based,.
The problem of what method should be used in accounting for the depletion of this resource and information needs depletion of mineral resources as a means of improving their performance and growth in Nigeria.
The importance of this type of resource cannot be over-emphasized. This is so when one looks at the role the oil industry is playing as the country’s major revenue earner. Moreover, every research work in this area will in no doubt affect the Nigeria’s economic base. This will only be possible when an attempt is made to standardize the major debate on the depletion of mineral resource a view to coming up with a solid accounting method which will serve as a blue-print for not only the government but also to the entire successive accountants in the oil and gas industry. It will also be significant to students, researchers and the general public in their studies and research.
1.8 LIMITATIONS OF THE STUDY
This project is primarily limited to the Accounting for depletion of mineral resources in Shell Petroleum Development Company of Nigeria limited, Warri zonal headquarter. The reluctance of the respondents to complete and return the questionnaires on time also played another limiting role in the study. Lastly, the scarcity of related study materials also limited the study. But despite all these limitations the study was a huge success.
1.9 HISTORICAL BACKGROUND OF SHELL PETROLEUM DEVELOPMENT COMPANY
The company was incorporated about sixty years ago precisely 1936 as the pioneers oil prospecting company in Nigeria, its history synonymous with the history of oil prospecting in Nigeria, At its inception in 1936, the Royal Dutch/Shell group of companies and British Petroleum Group jointly financed it. It commenced operations in Nigeria in 1937 as Shell D’Arcy but the name was later changed to Shell British Petroleum in 1956.
Federal Government of Nigeria in April 1, 1973 acquired 35% participation in the company’s lease and subsequently increased it to 55% from April 1974. By 1976, the Federal Government of Nigerian National Oil Corporation (NNOC) now Nigerian National Petroleum Corporation (NNPC) to represent its interest in the joint venture. (Nigeria Oil and Gas Industry May, 2001).
Following the promulgation of the Nigerian Enterprises Decree, the federal government, in July 1 1979 increased its participation to 60%.
However, the government made an additional acquisition of 20% previously owned by British Petroleum Group thereby increasing its interest to 80% while SHELL remains 20% interest participation.
The company has three Divisions.
Lagos Headquarters is responsible for the formulation of the company’s policy, as it affects strategic planning technical and management services in Nigerian National Petroleum Corporation (NNPC) and other government agencies responsible for planning, control or regulation and evaluation of the activities oil companies operating in Nigeria. It has two operational divisions.
- Western Division based in Warri and
- Eastern Division based in Port Harcourt
The search for oil in 1937 was pioneer by the Shell Petroleum Development Company Limited (then known as Shell D’Arcy and later Shell-BP) which was then based at Owerri. The Royal Dutch/Shell Group of companies and the British Petroleum Group joint financed the company. At first, the operations covered the whole of Nigeria, but later the concession area under oil prospecting licenses (OPL’s) was reduced to 40,000 squares miles in and around the Niger Delta Basin. The Second World War Forced the company to spend its activities in 1941, but they were resumed in 1946.
The first deep exploration well was in 1951 at Ihuo, 10 miles Northeast of Owerri, to a depth of 11,228 feet, but no oil was found. Akata – 1, drilled in 1953 and suspended in 1954, as the first well in which oil was encountered, but seven appraisal wells, which were drilled in the area, were dry hole oil in commercial quantity was fist discovered at Olubiri in present day Bayelsa that by Shell, in January 1956. Towards the end of the same year, a second discovery was made at Afam, also in Rivers State. Until 1956, Shell was the principal company undertaking the search, although the search, although there has been sporadic exploration by others over the ears. Pipeline connection between Olubiri and Port Harcourt made it possible for the first cargo of Crude oil to leave Nigeria in February 1958 when production stood at 6,000 barrels per day.
By 1967, the oil industry has spent some #900 million for more oil and in the construction and operation of facilities such as oil terminals, storage tanks and pumping stations that are needed to bring oil from the well in the oil fields to the tankers seaport terminals.
As at 1969, there were fourteen companies from six different countries interested and engaged in exploration or development activities in Nigeria, either in partnership or on their own; and besides these countries, there were many others whose nationals contributed their skills in petroleum activities in Nigeria. This discovery marked a turning point in the history of the company and Nigeria in general.
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