ABSTRACT

This study examined the accounting practices used in Nigeria's oil and gas industry, with particular reference to the Nigerian National Petroleum Corporation (NNPC). It focused on identifying the major accounting challenges within the Nigerian oil industry and suggesting possible solutions. The study also assessed the contributions of the Nigerian Accounting Standard Board (NASB), the Institute of Chartered Accountants of Nigeria (ICAN), and the Association of National Accountants of Nigeria (ANAN) towards developing appropriate accounting standards for the industry. Data were obtained from both primary and secondary sources, with a structured questionnaire serving as the major instrument for primary data collection. Simple percentages and the Chi-square statistical technique were used to analyze the data. The findings revealed that accounting standards applied in Nigeria's oil and gas industry were largely developed from accounting methods originally established in the United States and Britain, with some adjustments to suit local conditions. The study also established that NASB, ICAN, and ANAN play important roles in developing accounting standards that respond to the changing needs of the oil and gas accounting sector in Nigeria. Based on these findings, the study recommended that oil and gas companies operating in Nigeria, regardless of their country of origin, should demonstrate strong commitment to ethical practices that promote the quality and reliability of accounting information. It further recommended that NNPC and other oil companies should strengthen their working relationships with statutory and professional institutions, including ICAN, NASB, and ANAN. The study also found that incorporating oil and gas accounting procedures into the training curriculum of relevant institutions would improve the knowledge and professional competence of accountants in the industry. Consequently, it recommended that the Financial Reporting Council of Nigeria, in collaboration with stakeholders in the oil and gas industry and professional accounting bodies, should work towards establishing a uniform accounting framework for the sector.

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Accounting is applicable to virtually every area of human and business activity, and the oil and gas industry is no exception. The petroleum industry produces not only crude oil and natural gas but also several useful by-products, including gasoline, diesel, kerosene, aviation fuel, lubricants, asphalt, bitumen, and petrochemicals such as pesticides. The wide range of products and activities within the industry makes it necessary to develop appropriate accounting methods and procedures that can ensure proper recording, monitoring, and accountability of financial transactions.

Nigeria's economy continues to depend significantly on the oil and gas industry. According to the Nigerian National Petroleum Corporation (NNPC) (2023), the sector accounts for over 90% of the country's foreign exchange earnings and approximately 70% of government revenue. This level of dependence makes the accounting practices adopted by companies in the industry particularly important, as the quality of financial reporting affects public accountability, investment decisions, and the management of national resources.

The oil and gas industry is generally divided into upstream, midstream, and downstream operations. The upstream segment, also known as Exploration and Production (E&P), covers activities involved in discovering and extracting oil and gas resources. These activities include geological surveys to identify possible reserves, exploratory drilling to establish the presence of hydrocarbons, development of wells after successful discoveries, extraction of crude oil, and initial processing at the wellhead. The midstream segment focuses on transporting, storing, and marketing oil and gas in bulk, connecting production activities with the downstream market. The downstream segment involves refining crude oil into finished petroleum products and chemicals, as well as distributing and selling these products to consumers.

The costs incurred by oil and gas companies are commonly grouped into mineral rights acquisition costs, exploration and drilling expenses, development costs, production costs, support equipment and facilities costs, and general operating expenses. Since not every exploration or drilling activity results in the discovery of commercially viable oil or gas, the treatment and amortization of these expenses depend largely on the accounting method adopted by the company. Two major approaches are commonly applied in the industry:

1. Full Cost Method.

2. Successful Efforts Method.

Under the Successful Efforts Method, companies are allowed to capitalize costs associated with successful exploration activities, while expenses relating to unsuccessful exploration efforts are recognized immediately in the income statement. A drilling operation is regarded as successful when it leads to the discovery of oil or gas that can be commercially recovered. Where drilling does not produce an economically viable discovery, the expenditure is treated as an expense. In contrast, the Full Cost Method permits companies to capitalize exploration and development expenditures, including costs associated with unsuccessful drilling activities, within a designated cost centre. These capitalized costs are subsequently amortized. Current professional guidance continues to recognize the difference between the two methods. Under the Full Cost Method, both successful and unsuccessful exploration expenditures are capitalized, whereas the Successful Efforts Method allows capitalization only for costs associated with successful exploration activities. This difference affects reported financial performance. The Full Cost Method generally produces less fluctuation in reported earnings, while the Successful Efforts Method can result in greater changes in income because unsuccessful exploration costs are charged as expenses immediately.

The choice between these accounting methods is also influenced by the financial reporting framework adopted by a company. United States Generally Accepted Accounting Principles (U.S. GAAP) permit both the Full Cost and Successful Efforts Methods, while International Financial Reporting Standards (IFRS) provide for the successful efforts approach in accounting for exploration and evaluation activities under IFRS 6. These accounting choices can have considerable effects on the financial statements of oil and gas companies, particularly their reported profits, asset values, and overall financial position. Such differences may also influence investment decisions and comparisons between companies. In this regard, a 2025 study of listed Nigerian oil and gas firms covering the period from 2012 to 2022 examined the relationship between IFRS 6 accounting options and the value relevance of financial information (Kolawole, Alabi & Awotomilusi, 2025).

The structure and legal status of Nigeria's national oil company have also undergone significant changes in recent years. Following the enactment of the Petroleum Industry Act (PIA) 2021, the Nigerian National Petroleum Company Limited was incorporated by the Corporate Affairs Commission on 22 September 2021. On 19 July 2022, the President officially unveiled NNPC Limited as the new limited liability company that replaced the former Nigerian National Petroleum Corporation. The company commenced full operations under its new structure on 1 July 2022. This change in corporate status has important accounting implications because NNPC Limited is now expected to operate and report within the framework of the Companies and Allied Matters Act rather than under its former structure as a statutory corporation (Aluko & Oyebode, 2022). The impact of this transition can also be seen in the company's financial reporting. NNPC announced a net profit of N3.3 trillion in its audited financial statement for 2023, which its board chairman attributed to the Petroleum Industry Act 2021 and the commitment of the board, management, and employees (ThisDay, 2024).

Despite these institutional changes, concerns about transparency and accountability within the oil and gas industry remain. A governance review reported that officials from other government institutions had difficulties independently verifying or challenging oil sales figures provided by NNPC. Earlier assessments also described the corporation's internal oil sales data management as disorganized, secretive, and inaccurate (Natural Resource Governance Institute). In response to these concerns, legislative oversight activities were strengthened. A House committee examining the transfer of assets to NNPC Limited resolved that the annual audited reports of the company should be obtained from the Nigeria Extractive Industries Transparency Initiative (NEITI) and compared with NNPC's own audited financial statements. This action was taken amid continuing concerns about corruption, mismanagement, operational crises, and environmental degradation within the industry (ThisDay, 2022).

Recent academic discussions have also identified several accounting problems affecting the Nigerian oil and gas industry beyond the choice of accounting methods. A 2024 review of the subject highlighted difficulties in recognizing revenue from oil and gas operations, accounting for joint venture arrangements, assessing asset impairment in an unstable market, and recognizing environmental liabilities arising from changes in regulatory requirements. These issues demonstrate the complexity of financial reporting in the sector and the need for accounting procedures that reflect its operational realities. Similarly, a 2023 study connected weaknesses in accounting transparency with environmental and community-related problems. It argued that challenges such as unrest in the Niger Delta, environmental pollution, and oil theft are partly associated with inadequate accountability among multinational oil companies operating in the region (Bello & Nwaeke, 2023).

Regulatory requirements also influence the accounting treatment of assets and operations in the petroleum industry. Regulatory commentary published in 2023 explained that, under the existing legal framework, rights granted to participants for developing oil and natural gas reserves may be used as security or recognized for accounting purposes under Nigerian domestic law (Mondaq Oil & Gas Regulation, 2023). This further demonstrates the close relationship between petroleum regulation and accounting practices, particularly in the recognition, measurement, and reporting of assets in the upstream sector.

In view of these developments, effective accounting practices are necessary for ensuring that oil and gas companies maintain reliable financial records, comply with relevant standards, and provide transparent information to stakeholders. The changing legal and operational environment of the Nigerian petroleum industry, especially following the transition of NNPC into NNPC Limited, makes it important to examine existing accounting methods, the role of professional institutions, and the need for consistent accounting standards across the industry.

1.2 Statement of the Problem

The oil and gas industry is one of the most important sectors of the global economy because petroleum remains a major source of government revenue and an important factor in international economic and political relations. Given the economic importance of this natural resource, it is necessary for oil and gas operations to be properly accounted for so that governments and companies can obtain the maximum benefits from petroleum resources. However, there is no single accounting method universally applied across the industry. While U.S. GAAP permits both the Full Cost and Successful Efforts Methods, IFRS provides a different framework for accounting for exploration and evaluation expenditures. These differences can create inconsistencies among multinational oil companies operating under different financial reporting systems. Some Nigerian companies may therefore apply different accounting approaches depending on the standards and policies governing their operations.

The presence of oil companies from different countries also creates differences in the accounting principles and procedures used to record and present financial information. Companies may follow accounting practices that are consistent with the requirements of their home countries, making it difficult to compare their financial statements and properly assess their performance. The transformation of NNPC into NNPC Limited under the Petroleum Industry Act 2021 was intended to improve aspects of transparency, accountability, and financial reporting by bringing the company under the reporting framework of the Companies and Allied Matters Act (Aluko & Oyebode, 2022; ThisDay, 2024). Nevertheless, concerns remain about the consistency, independent verification, and quality of financial disclosures within the industry (Natural Resource Governance Institute; ThisDay, 2022).

Another major concern is the need to establish appropriate accounting procedures that can address the specific financial and operational conditions of the Nigerian oil and gas industry. Differences in cost capitalization, revenue recognition, asset valuation, and the treatment of unsuccessful exploration activities may affect the reliability and comparability of financial information. In addition, inadequate professional collaboration and limited industry-specific training may affect the ability of accountants to apply appropriate accounting standards and procedures.

Against this background, this study seeks to examine the suitability of accounting practices adopted by oil and gas companies operating in Nigeria, using NNPC, now NNPC Limited, as a case study. It also seeks to establish the need for a common accounting framework for the Nigerian oil and gas industry and examine the contributions of the Financial Reporting Council of Nigeria in developing relevant accounting standards for the sector.

1.3 Objectives of the Study

The main objective of this study is to examine accounting practices in the Nigerian oil and gas industry, using NNPC as a case study. The specific objectives are to:

1. Examine the relationship between the accounting methods and procedures adopted by NNPC in Nigeria.

2. Assess the relationship between NNPC's capitalization policy and the recommendations of Nigeria's accounting standard-setting authority.

3. Determine whether effective accounting procedures improve the performance, accuracy, and reliability of accounting records in NNPC.

4. Examine whether including NNPC's accounting procedures as a major component of the curriculum of training institutions can improve the professional standards and performance of accountants in the company.

1.4 Research Questions

The following research questions will guide the study:

1. Is there a significant relationship between the accounting methods and procedures adopted by NNPC in Nigeria?

2. Is there a significant relationship between NNPC's capitalization policy and the recommendations of Nigeria's accounting standard-setting authority?

3. How do effective accounting procedures improve the performance, accuracy, and reliability of accounting records in NNPC?

4. To what extent can the inclusion of NNPC's accounting procedures in the curriculum of training institutions improve the professional standards and performance of accountants in the company?

1.5 Research Hypotheses

The following null hypotheses will be tested in the study:

H₀₁: There is no significant relationship between the accounting methods and procedures adopted by NNPC.

H₀₂: There is no significant relationship between NNPC's capitalization policy and the recommendations of Nigeria's accounting standard-setting authority.

H₀₃: Effective accounting procedures do not improve the performance, accuracy, and reliability of accounting records in NNPC.

H₀₄: Including NNPC's accounting procedures as a major part of the training curriculum does not improve the professional standards and performance of accountants in NNPC.

1.6 Significance of the Study

This study is important to the Nigerian oil and gas industry because it examines the effectiveness of accounting practices, particularly those adopted by NNPC. The findings are expected to contribute to improved accounting procedures and financial reporting among organizations operating in the sector. The study will also provide useful information for future researchers and accounting professionals. Specifically, its significance includes the following:

1. It will provide a detailed examination of oil and gas accounting practices and establish a foundation for further research in the field.

2. It will present a framework for identifying the major challenges associated with oil and gas accounting and examining possible solutions.

3. It will serve as a useful source of information and reference material for accounting professionals working in the oil and gas industry.

4. It will improve understanding of accounting practices in Nigeria's oil and gas sector, particularly in relation to the transition of NNPC into NNPC Limited following the enactment of the Petroleum Industry Act 2021.

1.7 Scope of the Study

This study examines accounting practices, challenges, and possible solutions within Nigeria's oil and gas industry, using NNPC, now NNPC Limited, as a case study. It covers the major accounting methods and procedures applied in the Nigerian petroleum sector, the challenges associated with these practices, differences in accounting conventions adopted by companies operating in the industry, and possible measures for improving accounting standards. The study also considers developments arising from the enactment of the Petroleum Industry Act 2021 and the subsequent corporatization of NNPC. Geographically and institutionally, the study is limited to NNPC in Nigeria.

1.8 Definition of Terms

IFRS: International Financial Reporting Standards, which provide guidelines for preparing and presenting financial statements.

SAS: Statement of Accounting Standards, referring to accounting guidelines and requirements previously issued for financial reporting.

IASB: International Accounting Standards Board, the independent body responsible for developing and issuing International Financial Reporting Standards.

NNPC: Nigerian National Petroleum Corporation, the former national oil corporation that was transformed into the Nigerian National Petroleum Company Limited (NNPC Limited).

ICAN: Institute of Chartered Accountants of Nigeria, a professional accounting body responsible for promoting accounting standards, professional development, and ethical conduct among accountants in Nigeria.

NASB: Nigerian Accounting Standards Board, the former body responsible for developing accounting standards in Nigeria, whose functions are now performed within the framework of the Financial Reporting Council of Nigeria (FRCN).

PIA: Petroleum Industry Act, 2021, the legislation that introduced significant reforms to the governance, regulation, and operations of Nigeria's petroleum industry.

FRCN: Financial Reporting Council of Nigeria, the regulatory body responsible for developing and promoting financial reporting standards and ensuring compliance with applicable reporting requirements in Nigeria.