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ASSET RETIREMENT OBLIGATIONS IN UPSTREAM PETROLEUM INDUSTRY: ISSUES AND ACCOUNTING FRAMEWORK

ABSTRACT

The major drive of this study to appraise the convention of asset retirement obligation in the Nigerian upstream petroleum sector. Asset retirement obligation is seen to have many objectives and benefits as well as a number of challenges. There is also no consensus as to what is the underlying regulatory framework guiding its implementation. This study therefore attempts to bridge this existing gap in the literature to identify what constitutes asset retirement obligation, its objective, its challenges and the regulatory framework guiding it. The researcher uses survey technique research design in which an appropriate and representative sample was taken from the population of study. The stratified randomsampling was employed in selecting the sample. Questionnaire were used in collecting data. The data was subjected to analyses using descriptive statistics. It was observed that the benefits of using asset retirement is to improve disclosure, to improve the quality and reliability of financial statement. It was also observed that since there is difficulty as to what constitutes the framework of asset retirement obligation in the upstream sector to develop a policy to consider asset retirement obligation during property acquisition. It was also found that the specific challenges confronting asset retirement in the upstream sector is inflation, inaccurate estimate and change in discount factor.

CHAPTER ONE

INTRODUCTION

1.1    Background of the Study

Petroleum is presently one of the most important and valuable natural resources of Nigeria. It is exploited in many ways that maximizes its benefits to the nation. Nigeria receives a fair share of profits derived by the mineral companies while also offering stable and attractive terms to investors. According to Nigeria Extractive Industries Transparency Initiative (NEITI), in 2011, Nigeria is among the largest oil producers in Africa and among the top ten globally. The country has pumping capacity of about 900 million barrels a year with reserves of natural gas – an estimated 159 trillion standard cubic feet of proven reserves. The oil sector has accounted for over 40% of GDP, 95% of export receipts, and over 80 percent of Nigerian government revenue. The petroleum sector is dominated by Joint Venture operations between the Nigerian government and six (6) Major International Oil Companies – Shell, Mobil, Chevron, Agip, elf, and Pan Ocean. Nigeria’s reserves of natural gas – an estimated 159 trillion standard cubic feet of proven reserves (NEITI 2009).  The main activities that travail in the Petroleum industry are largely centered on exploration, production of hydrocarbon, refining, transportation and marketing of crude oil and its refined products.

The Nigerian Oil Industry is divided into two (2) main sectors the Upstream Sector deals with (a) Exploration and Field Development (b) Production and Marketing of crude and the downstream sector which performing the refining, marketing and distribution of refined product and retailing.

In Nigeria, over estimated $8 billion is spent annually on servicing the industry in operations such as fabrication, engineering procurement, construction (EPC), Front End Engineering Design (FEED), conceptual designs and seismic studies. Regrettably, despite these huge sums of money spent in servicing the industry, only a very little proportion of the accruable profit is spent in Nigeria. Majority of the amounts are repatriated abroad, where most of the equipment are manufactured; and providing employment opportunities for citizens of other countries.

The major reason for this situation may be attributed to many factors including accounting procedure of these resources. It was observed that one of the earliest challenges with revenue generated from the oil and gas industry in Nigeria is how revenue is paid by oil companies and collected by regulatory bodies without misappropriating the funds, and since government spending is one of the major influences of the level of economic activity, as government survival is largely dependent on the revenue realized from oil and gas sector. The term conditional asset retirement obligation as used in IFRS statement of accounting for asset retirement obligations, refers to a legal obligation to perform the asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation is to perform the asset retirement activity unconditional even though uncertainty exists about the timing and (or) method of settlement. Thus, the timing and (or) method of settlement may be conditional on a future event.

1.2       Statement of Research Problems

Retirement Obligation is an obligation associated with the retirement of a tangible long-lived asset in which the timing or method of settlement may be conditional on a future event, the occurrence of which may not be within the control of the entity burdened by the obligation.

Although the return remains a very positive in Nigeria and administrated, the system of operation. Government has not taken a decisive action toward a final decapitation of the heinous problems of the people too old for work or to be used for their original purpose is rather strange and difficult to explain.

Despite several moderations of retirement benefits for workers in Nigeria, pension fund has been characterized by outright corruption and embezzlement, mismanagement and diversion of fund over the years. Corruption in the Pension Scheme has become so pervasive. The embezzlement and corruption manifests in different shades and colors. Thus, exposing the retirees to a life of untold hardship and penury that can be better imagined and for this reason, so many of them (pensioners) have died waiting to receive their dues.

Additionally other problems identified are pipeline vandalism, oil theft, militancy, frequent changes of the management of the NNPC, ageing assets and volatility of oil prices as key challenges.

Outright embezzlement is also evident. Here the funds meant for the payment of retirement benefits are carted away and/or misappropriated. By this means both the pensioners and the government are cheated.

The enormous impression about retirement and pension which is fast gaining a higher dimension in the circle of those about to retire is a major focus of this study more-so to suggest ways forward the amelioration of sufferings of the retirees and channel the burden into government through a functional approach. 

1.3       Objectives of the Study

Considering the prevailing problems on asset retirement obligation in the upstream petroleum industry, the researcher develops the will enable proffering solutions. Specifically, these objectives are:

1.    To examine asset retirement obligation in the Nigerian upstream petroleum industry  

2.    To identify the objectives of asset retirement obligation in Nigeria

3.   To determine the challenges of asset retirement obligation in Nigeria

 4.  To assess the legal framework for asset retirement obligation in Nigeria

1.4       Research Question

For the importance of having a guide for the entire research work and to have a bearing on finding solution to the problems identified, important questions have been raised based on the objectives above. Which are; 

 1.  What is asset retirement obligation in upstream petroleum industry?

  2.  What are the objectives of asset retirement obligation in Nigeria?

  3.  What are the challenges of asset retirement obligation in Nigeria?

  4. What are the legal frameworks for asset retirement obligation in Nigeria?

1.5       Scope of the Study

This research work centers around the concept of asset retirement obligation in upstream petroleum industry in Nigeria. The study is conducted in Kaduna Refinery & Petrochemical Company (KRPC) Kaduna. The researcher restricts the work on selected divisions and departments that are relevant to the subject matter.  These units and departments include Finance, corporate investment and other departments related to the study. The choice of these departments is due to relevancy to asset retirement obligation. Thus, this study covers theoretical areas such as: The concept of asset retirement obligation; framework of exploration and evaluation of petroleum resource; development of accounting policies in upstream activities, etc.

1.6       Significance of the Study

As a test of knowledge, this project will help the researcher with the more understanding and the intrigues on the subject matter, and it is a pre-requisite for the qualification for the award of BSc at Bayero University Kano.

As a guide, the study will help future researchers, students, and institutions to develop theories and take actions on any future related problems associated with asset retirement obligation in Nigeria, make reliable suggestion on how asset retirement obligation.

1.7       Definition of Terms

Petroleum: A flammable liquid raging in color from clear to very dark brown and black, consisting mainly of hydrocarbons, occurring naturally in deposits under earth surface.

Upstream: Involving exploration and pre-production of crude oil rather than refining and selling.

Asset: Any component, model, process or framework of value that can be leveraged or reused.

Retirement: to withdraw from a public service, work or from a business.

Unitization: Process whereby owners of adjoining properties allocate reserves, production, costs, etc.

Unproved Reserves:  Unproved reserves are based on geologic and/or engineering data similar to that used in estimates of proved reserves; but technical, contractual, economic, or regulatory uncertainties preclude such reserves being classified as proved. Unproved reserves may be further classified as probable reserves and possible reserves. Unproved reserves may be estimated assuming future economic conditions different from those prevailing at the time of the estimate. The effect of possible future improvements in economic conditions and technological developments can be expressed by allocating appropriate quantities of reserves to the probable and possible classifications.

Unrecoverable Resources: The portion of discovered or undiscovered petroleum-initially-in-place quantities not currently considered to be recoverable.  A portion of these quantities may become recoverable in the future as commercial circumstances change, technological developments occur, or addition data is acquired.

Revenue Sharing Contract: Revenue-sharing contracts are very similar to the production-sharing contracts described earlier, with the exception of contractor payment. With these contracts, the contractor usually receives a defined share of revenue rather than a share of the production.

Reversionary Interest: The right of future possession of an interest in a property when a specified condition has been met.

Risk: The probability of loss or failure.  As “risk” is generally associated with the negative outcome, the term “chance” is preferred for general usage to describe the probability of a discrete event occurring.   

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