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ASSET RETIREMENT OBLIGATIONS IN UPSTREAM PETROLEUM INDUSTRY

ACCOUNTING PROJECT TOPICS AND MATERIALS

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

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 the, 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.

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