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The Oil Industry Accounting Committee (OIAC) defines decommissioning as the "process of plugging and abandoning wells, of dismantlement of wellhead, production and transport facilities and of restoration of producing areas in accordance with the licence requirements and the relevant legislation" OIAC (2001; paragraph 88 quoted in Lawal 2009, p.11). Decommissioning is not only unique and peculiar to an industry, but because of its financial implications and the possible environmental consequences in the oil and gas industry and nuclear energy plants, it has however attracted more attention than other industries' decommissioning Lawal (2009).
In this context, (Potter 1996, p.144) argues that since "the aftermath of the Brent Spar fiasco, the environmental issues of decommissioning large structures in the North Sea became the major topic of concern and debate. But this is just one of the now-recognized five key factors. The other four are technical feasibility of the proposed plan; economics impact; public concern; and the potential impact on human health and safety". Thus, it is reasonable to argue that decommissioning of oil and gas infrastructures raise social and environmental concerns Lawal (2009). And therefore, as Lawal (2009) further argues, the world oil and gas industry faces a major issue relating to decommissioning of its oil and gas infrastructures, as the industry would have to contend with environmental and financial issues relating to decommissioning in the near future.
The first comprehensive accounting regulatory framework for the reporting of decommissioning were issued in 1998, by the Accounting Standard Board (ASB) of UK and the international Accounting Standard Board (IASB), the Financial Reporting Standards (FRS) 12 and International Financial Reporting Standards (IFRS) 37 respectively. Then the Statement of Recommended Practice (SORP) 2001, which provides further guidance to the standard, by OIAC. However, prior to 1998 lax accounting regulatory frameworks exist for decommissioning.
For example, Russell et al. (1998) argued that, the standards recommended by the OIAC, which is SORP 3 "Accounting for Abandonment", were vague, over flexible and lacked the strong teeth to reflect the potential problem that the issue pose. It required the reporting organisations to provide the cost of decommissioning in their financial statements as cost of production which should be allocated to accounting periods on a unit of production basis, to be reported in both the profit and loss account and the balance sheet and also to account for the changes in estimates for the size of decommissioning prospectively or retrospectively where changes relate to price only Russell et all. (1998).
However, it failed to address clearly what to expense or capitalize and how to cope with the uncertainties associated with future estimates and accounting for decommissioning cost (Russell et al.1998; Gallun and Wright, 2003).
These uncertainties arise because decommissioning cost is unique as suggested by Wright and Johnson (2003) in the following ways:
- The cash outlays associated with these costs occur after production cessation,
- Great uncertainty on forecasting future outlays since oil and gas reserves have to be fully exhausted, and
- Rapid fluctuations in price, innovations in new technology and enactment of new laws, make estimation very difficult.
Prior to 1977, Wright and Johnson (2003) studied that there were no proper guidelines for the estimation of future decommissioning cost and the reporting industries had to rely on the Statement of Financial Accounting Standards (SFAS) 5 (Accounting for Contingencies) as a guide.
According to (Gallun and Wright 2005, p.30) "Internationally, the United States was the first country to issue accounting standards specifically for the oil producers" .Wright and Johnson (2003) stated that in 1977,the Financial Accounting Standard Board (FASB) issued SFAS No.19 (Financial Accounting and Reporting by oil and Gas Producing Companies) to address and give guidelines on the treatments of future dismantlement, removal and restoration cost as it relates its recognition into the books, and the consideration of the abandonment cost and residual value in the estimation of the amortization or depreciation value.
Wright and Johnson (2003) further argued that because the standard failed to address critical issues on the appropriateness of recognising a liability estimated for future decommissioning cost, how to treat a transaction when offsetting credit after depreciation expense has been recorded and how to measure the amounts, Lawal (2009), argued that it lacked specific guidance and hence prompted companies adopt different approaches.
However, common to the two standards, is the flexibility and free will it allows companies to adopt either the full cost or successful effort methods of their choice based on their county's version of the method (Gallun and Wright, 2005).
The need to review the laps available in the SORPs regarding its unclear disclosure requirements on the recognition of the future estimated cost of dismantle and abandonment, and the need for harmonisation of financial reporting practices arose in 1998 where the ASB came up with a final solution by the issuance of the a new full accounting mandatory standard, the FIRS 12 "Provisions for Contingent Assets and Contingent Liabilities" which has a direct impact on the reporting practices of the oil and gas industries. It required full provision to be made at the beginning of a facility and also the future cost to be charged shall be discounted to recognise time value of money Russell and Jetty (2003 cited in Lawal 2009, p. 30).
However, Lawal (2009) believed that the objectives desired by the standard, may be defeated because its requirement for the adoption of discount rates may create uncertainties and difficulties in selection of an appropriate rate and interpretation.
In 2001, the US FASB issued a new standard, the SFAS NO.143 (Accounting for Asset Retirement and Obligation) to tackle the issues relating to decommissioning obligations that existed in the preceding accounting practises (Lawal, 2009). Contrary to what has been in practice, SFAS 143 required that, decommissioning cost be measured at fair value and be recognised as a liability while the corresponding entry should be capitalised to the related asset account as soon as the facilities are installed and further required that any changes in the present liability to be charged to income (Lawal, 2009).
However, a study by Wright and Johnson (2003) argued that once a change has occurred in the liability estimation, more complications arise because separate tables for the calculation of discounted amounts for the new and revised liability will be required as a result of the difference in the discount rate and time period to be used for each liability.
According to Gallun and Wright (2005), the latest source of authority for the Oil and Gas industry in UK is the SORP 2001 "Accounting for Oil and Gas Exploration, Development, Production and Decommissioning Activities" which is considered up to date as it reflects a recent changes identified by FRS and other bodies.
In 1998, the IASB published the IFRS 37 "provisions, contingent assets and contingent liabilities", which has similar requirements with the UK FRS 12 and since then had made several attempts both at the global and regional levels towards harmonisation of accounting practices (Gullan and Wright, 2005; Lawal, 2009).
Some governmental agencies and standard setting bodies around the world, allow the use of any method for estimation of decommissioning cost provided specific rules of either the UK, US standards or the combination of both are followed in its application (Gallun and Wright, 2005).
For example, according to Lawal (2009), Nigeria uses the Statement of Accounting Standards (SAS) 14:" Accounting in the Petroleum Industry: Upstream Activities", to regulate its oil and gas accounting activities issued in 1993, by the Nigerian Accounting Standards Board (NASB), whose provision is similar to the US IFRS 37.
Lawal (2009) further argued that the main objective of the standard is for comparability of financial statements, thus it is reasonable to suggest that its goal as an accounting standard is not satisfactory. Furthermore, it is obvious that the standard was only meant for indigenous oil companies because the foreign companies operate as unincorporated joint ventures and are not under any obligation to report their performance in Nigerian standard Lawal (2009).
Again, Chamisa (2000, cited in Lawal 2009, p. 39) believe that lack of adequate regulatory framework, proper enforcement mechanism, effective capital market and sufficient qualified personnel, must have contributed to why developing countries like Nigeria, offer insignificant compliance performance as regards the standard.
To date, three studies exist relating to decommissioning activities in Nigeria. Ayoade (2002) and Amakiri (1997) studied decommissioning in Nigeria from the legal perspectives, and both concluded that no legal framework exists in Nigeria as far decommissioning of oil and gas infrastructures is concerned, including in the oil and gas contracts. Lawal (2009) study was from the accounting perspective of decommissioning. The study surveyed about ten stakeholders in the Nigerian oil and gas industry, with a view to determining whether decommissioning accountability expectations gap exists between and amongst them, and the results indicate the expectations gap do exists. It was probably the first comprehensive study of decommissioning reporting. To date, no study exists relating to decommissioning reporting by the Nigerian indigenous oil and gas exploration and production companies. Thus, this study intends to fill the gap.
- Amakiri, A. C. O. 1997. Developing an offshore installations decommissioning policy in Nigeria, Oil and Gas Law and Taxation Review. 15(11): pp. 423-433.
- Ayoade, M. A. 2002. Disused offshore installations and pipelines: towards "sustainable decommissioning". Kluwer Law International: The Hague.
- Lawal, L. 2009. Decommissioning accountability "Expectations Gap" the perceptions of stakeholders in the Nigerian oil and gas industry. VDM Verlag Dr. Muller Aktiengesellschaft & Co. KG: Saarbrucken, Germany.
- Potter, N. 1996. North Sea decommissioning focus switches to human impact, Offshore. 56(5): p.144.
- Russell, A., Kouhy, R. And Lyon, R.A. 1998. Accounting for the abandonment of North Sea oil and gas wells. ACCA Research Report, London: Certified Accountants Educational Trust.
- Wright, C. J. and Gallun, R. A. 2005. International petroleum accounting. PennWell Corporation: Tulsa, Oklahoma.
- Wright, C.J. and Johnson, C.B. 2003. Accounting for asset retirement obligations by oil and gas producing companies: the past and the future, Petroleum Accounting and Financial Management Journal, summer. 2(2): pp.37-54.