ACCOUNTING FOR OIL AND GAS RESERVES: Implications for Investors

By Ejiroghene Elizabeth Agbude

Ejiroghene is an Accounting and Finance professional with interest in tax, corporate governance and policy analysis.

 (Professional contacts only: grandejiro@hotmail.com)

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Accounting regulatory bodies usually formulate industry specific standards when an industry has peculiar characteristics e.g. accounting for banks and non-bank financial institutions. The oil and gas industry is one of such industries that has specific accounting standards, this can be attributed to its peculiarity in terms of huge capital requirements, earnings volatility, regulation, type of business ownerships, taxation, non-correlation between the amount of investment made and returns obtained (Wright & Gallun, et al., 2008) and high sensitivity to risk like price risk and foreign exchange risk.

Up until 2012 when the International Financial Reporting Standard (IFRS) was adopted by exploration companies in Nigeria, Nigerian companies in the upstream sector prepared their financial statements in line with the Statement of Accounting Standard 14 (Accounting in the Petroleum Industry: Upstream Activities) and SAS 17 (Accounting in the Petroleum) formulated by the Nigerian Accounting Standard Board.

By its adoption of IFRS, Nigeria joined over 100 countries who either use or have adopted the accounting guidelines as stipulated by the International Accounting Standard Board (IASB). This will ensure harmony and easy comparison of financial statements, this is particularly useful in the oil and gas industry considering that it is one of the most global industries. The adoption of a common accounting framework also widens access to investment opportunities.

IFRS 6 (Exploration for and Evaluation of Mineral Resources) touches on issues that are unique to the extractive industry, other standards relevant to the oil and gas are IAS 16 (Property, Plant and Equipment), IAS 31 (Interests in Joint Ventures), IAS 36 (Impairment of Assets) and IAS 38 (Intangible Assets).

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IS YOUR TAKE OR PAY CLAUSE ENFORCEABLE?

BY OLUWADAMILOLA DOMINIC-ESSIEN

DAMILOLA holds a degree in Law from the Obafemi Awolowo University and an LLM in Environmental Law and Policy from the prestigious Centre for Energy, Petroleum, Mineral Law and Policy (CEPMLP) University of Dundee. An exceptionally driven individual with a track record of academic and professional excellence, She graduated with a Second Class Upper Division from both the university and the Nigerian Law School. She is currently a partner at Essien Ogunniyi Legal Practitioners, a firm whose primary area of interest is the Natural Resources Sector.

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A Take or pay contract is a form of off take agreement used mainly in the energy industry. It is a contract whereby one party is under an obligation to take delivery of a specified amount of goods or pay a specified amount. Often times it is inserted as a clause in a wider agreement. The aim of this provision is that the supplier will receive a guaranteed amount of income under the agreement irrespective of whether the buyer takes the commodity or not. A properly constructed take or pay clause gives the seller an assured revenue stream that ensures an adequate return on the capital invested on the project.[1] Furthermore, a take or pay clause could be a key consideration for securing an external debt financing. This form of financing is commonly used in the energy industry because it of its capital intensive nature. It usually serves as collateral in an off balance sheet financing (project finance). It is also a risk allocation mechanism used by sellers of commodities.[2] A take or pay clause or agreement usually shifts the market demand risks (also known as volume risk) from the buyer to the seller. It is pertinent to note that a seller is usually confronted with two forms of risks: Market demand risks and the price risks. Where a seller then enters into a take or pay contract, his volume risks becomes minimized leaving him with only the price risks which in certain cases might be hedged.[3]


Essentially, in a take or pay contract, a buyer’s obligation is always described as being in the ‘alternative’. This connotes that a buyer either agrees to

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