ACCOUNTING FOR DEPLETION OF MINERAL RESOURCES IN NIGERIA (A CASE STUDY OF SHELL PETROLEUM DEVELOPMENT COMPANY OF NIGERIA LIMITED)

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ACCOUNTING FOR DEPLETION OF MINERAL RESOURCES IN NIGERIA (A CASE STUDY OF SHELL PETROLEUM DEVELOPMENT COMPANY OF NIGERIA LIMITED)

ABSTRACT

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:

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

1.2 Statement of the Research Problem

1.3 Objectives of the Study

1.4 Significance of the Study

1.5 Research Questions

1.6 Research Hypothesis

1.7 Conceptual and Operational Definition

1.8 Assumptions

1.9 Limitations of the Study

CHAPTER TWO

LITERATURE REVIEW

2.1 Sources of Literature

2.2 The Review

2.3 Summary of Literature Review

CHAPTER THREE

RESEARCH METHODOLOGY

3.1 Research Method

3.2 Research Design

3.3 Research Sample

3.4 Measuring Instrument

3.5 Data Collection

3.6 Data Analysis

3.7 Expected Result

CHAPTER FOUR

DATA ANALYSIS AND RESULTS

4.1 Data Analysis

4.2 Results

4.3 Discussion

CHAPTER FIVE

SUMMARY AND RECOMMENDATIONS

5.1 Summary

5.2 Recommendations for Further Study

Bibliography

CHAPTER ONE

INTRODUCTION

1.1 PREAMBLE

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.

Hypothesis 1

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.

Hypothesis 2

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.

Hypothesis 3

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.

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ACCOUNTING FOR DEPLETION OF MINERAL RESOURCES IN NIGERIA (A CASE STUDY OF SHELL PETROLEUM DEVELOPMENT COMPANY OF NIGERIA LIMITED)

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