BUDGETING AND BUDGETARY CONTROL IN THE OIL AND GAS INDUSTRY: A COMPARATIVE STUDY OF SHELL DEVELOPMENT COMPANY OF NIGERIA LTD. (SPDC) AND NIGERIA AGIP OIL COMPANY LTD. (NAOC)
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BUDGETING AND BUDGETARY CONTROL IN THE OIL AND GAS
INDUSTRY: A COMPARATIVE STUDY OF SHELL DEVELOPMENT COMPANY OF NIGERIA LTD.
(SPDC) AND NIGERIA AGIP OIL COMPANY LTD. (NAOC)
TABLE
OF CONTENTS
PAGE
CHAPTER
ONE: INTRODUCTION
1.1 overview
of the study 1
1.2 statement
of problem 7
1.3 purpose
of the study 8
1.4 research
questions 10
1.5 research
hypotheses 10
1.6 significance
of the study 11
1.7 definition
of terms 12
1.8 limitations
of the study 14
1.9 organization
of the study 15
CHAPTER
TWO: LITERATURE REVIEW
2.1 introduction 16
2.2 history of the Nigerian petroleum industry 17
2.2.1 current status of the petroleum industry in
Nigeria 18
2.2.2 oil and gas reserves 18
2.2.3 oil fields 19
2.2.4 Nigeria liquefied natural gas 19
2.2.5 licenses and leases 20
2.2.6 major events in the history of the Nigeria
oil and gas 21
2.3 government
memorandum on the petroleum industry
Bill, 2009 24
2.3.1 general nature of the government memorandum 24
2.3.2 increase oil and gas production 25
2.3.3. significance increase in gas supplies for
power
generation and domestic industries 26
2.3.4 increase government revenue from deep water 27
2.3.5 deal with the Niger delta crises 28
2.3.6 deregulate petroleum product prices 30
2.3.7 protect health, safety and environment 31
2.3.8 create efficient regulatory powers with a
strong
midstream entity 31
2.4 Nigerian
agip oil company, Nigerian agip exploration
and agip energy and
natural resources 32
2.4.1 adverse effects of the reform PIB on agip 33
2.4.2 proposed alternatives solutions for the
reforms 34
2.5 shell
petroleum development company limited (SPDC) 36
2.5.1 SPDC corporate strategy for ending gas
flaring 37
2.5.2 why gas is flared in Nigeria 38
2.5.3 SPDC and gas utilization 39
2.5.4 major ongoing gas gathering projects 39
2.5.5 major future gas gathering projects 39
2.6 The
concepts of budgeting and budgetary control 40
2.7 budgetary
control 46
2.7.1 objectives of budgetary control 47
2.7.2 problems associated with budgetary control 51
2.8 types
of budget 51
2.8.1 fixed budget 52
2.8.2 sales budget 52
2.8.3 flexible budget 53
2.8.4 activity based budget 53
2.8.5 value based budget 54
2.8.6 zero based budget 54
2.8.7 line item budgets 55
2.9 master budget 56
2.10 budgeting process 57
2.11 budget as a tool for management control 60
2.12
approaches to budgeting 62
2.12.1 advantages of budgeting 64
2.12.2 limitations of budgeting 65
2.13 administration of budget 67
2.13.1 budget committee 67
2.13.2 budget director 67
2.13.3 budget manual 68
2.13.4 budget education 68
2.14 oil and gas budgeting 68
2.14.1 methods of accounting 69
2.14.1.1 full cost method 69
2.14.1.2 successful efforts method 70
2.14.2 offshore operations 71
2.14.2.1 development costs 71
2.14.2.2 production costs 71
2.14.2.3 geological and geophysical costs 71
2.14.2.4 depreciation, depletion and amortization 72
2.14.2.5 removal and restoration 72
2.14.2.6 unproved properties 72
2.14.2.7 support facilities 73
2.14.3 accounting policy 73
2.14.4 oil and gas sales 73
2.14.4.1 cash and gas sales 74
2.14.4.2 accounts receivable approach 74
2.14.5 oil and gas reserves 75
2.14.5.1 performance curve 75
2.14.5.2 volumetric 75
2.14.5.3 material balance analysis 75
2.14.5.4 analogy 76
2.14.6 income tax 77
2.15 summary 78
CHAPTER
THREE: RESEARCH METHODOLOGY
3.1 Introduction 79
3.2 research
design 79
3.3 population
design 80
3.4 sampling
procedure and sample size determination 80
3.5 methods
of data collection 82
3.5.1.1 primary data 82
3.5.2 secondary data 82
3.6 operational
measures of variables 83
3.6.1 dependent variables 83
3.6.2 independent variables 83
3.7 data
analysis techniques 83
3.7.1 simple percentages 84
3.7.2 kendall coefficient of concordance 84
3.7.3 testing the significance of w 85
3.7.4 Z-test 86
References 87
CHAPTER ONE
INTRODUCTION
1.1 OVERVIEW OF THE STUDY
The
Shell Petroleum Development Company (SPDC) Nig. Ltd. And the Nigerian Agip Oil
Company (NAOC) Ltd. Belong to the group of multinational Oil Companies (MNOCs)
operating in Nigeria host country while its policies, decisions and mode of
operations made at the home country. Though they are into oil prospecting and
exploration however, our interest is to find out the budget and budgetary
control measure built in by them.
The
researcher interaction with staff of both companies linkened their budget
preparation and presentation to that of Nigeria where the executive submits the
budget to the legislature, the legislature in order to incorporate items that
will be of economic benefit to them delay the passage of the budget
appropriation bill into law. The implication of this is untimely budget
presentation, poor actualization of the budgeted goal, inability to make
comparison to see if there is deviation from set standard, no performance
report, etc. meanwhile a budget is supposed to be presented at the beginning of
the financial year say January ending latest is presented at the middle of the
year and most times third quarter as the case may be and so could not achieved
its objectives. they further advanced that what is prevailing at the larger
economy is happening at the sub-structured system.
For
SPDC, the budget and budgetary control processes which includes: preparation,
setting standard to check deviation against result, evaluation of performance,
inability to measure profitability, return on investment, market share, rate of
growth, etc. are decisions often times taken by the home country and are prone
to delay as such do not given room for a meaningful budget implementation.
On
the side of NAOC, there is no performance report due to time lag between the
preceding and current year for comparison purposes; inadequate budget review,
home country influence, etc. are some of the variables that militate against a
smooth budget implementation.
The
oil and gas industry also known as the petroleum industry constitute the
largest industry in the world. Chiefly because it is a major source of revenue
to the government including exercise taxes, royalties, license, rent, bonus,
etc.
Oil
and gas operations commenced in Nigeria effectively in 1956, with then Shell D’
Arch. Before this time, which is from November 1938, almost the entire country
was covered by a concession granted to the company to explore for petroleum
resources. This dominants role of shell in the Nigeria membership of the
organization of petroleum exporting countries (OPEC) in 1971, after which the
country began to take a former control of its oil and gas resources, in line
with the practices of the other members of OPEC.
This
period witnessed the emergence of National Oil Companies (NOCs) across OPEC
members’ countries with the sole objective of monitoring the state of the
oil-producing countries in the exploitation of the resources. Whereas in some
OPEC members countries the NOCs took direct control of production operations, Nigeria, the Multinational Oil Companies
(MNOCs) were allowed to continue with such operations under Joint Operating
Agreement (JOA) which clearly specified the respective stake of the companies
and the government of Nigeria in the ventures.
This
period also witnessed the arrival on the scene of other MNOCs such as Gulf Oil
and Texaco (now Chevron Texaco) Efl Petroleum (now Total), Mobil (now
Exxonmobil), and Agip, in addition to shell, which was already playing a
dominant role in the industry. These other companies were also operating under
JOAs with Nigeria National Petroleum Corporation (NNPC), with varying
percentages of stakes in their respective acreages. To date, the above
companies constitute the majority players in Nigeria’s oil industry, with shell
accounting for a just little less than 50% of Nigeria total daily production,
which currently stands at about 2.4 million barrels of oil per day. JOAs are
also still dominant in the oil industry in Nigeria, accounting for over 90% of
total oil and gas production in Nigeria today.
The
oil and gas industry is engaged in wide ranges of activities that are diverse
and technically distinct but all contributing in getting petroleum from the
ground to the final consumer. The industry has four major segments.
1. Exploitation
and production by which petroleum companies (referred to as oil and gas
companies or simply put oil companies) explore for underground reservoirs of
oil and gas and produce the discovered oil and gas using drilled wells through
which the reservoirs of oil, gas and water are brought to the surface and
separated.
2. Hydrocarbon
processing by which crude oil refineries and gas processing plants separate and
processes the hydrocarbon fluids and gas into various marketable products.
Refined products and natural gas liquids may be processed further in
petrochemical plants for making petrochemicals. Some petrochemical may in turn,
be sent to the crude oil refineries for mixing or processing with other liquid
hydrocarbon to make various refined products such as gasoline.
3. Transportation,
distribution and storage by which petroleum is moved from the producing well
areas to the crude oil refineries and gas processing plants. Crude oil is moved
by pipeline, truck, and barge or tanker oil. Natural gas is moved by pipeline
and refined products are transported by various means to retail distribution
point, such as gasoline and fuel stations.
4. Retail
or marketing which ultimately markets in various ways the refined products,
natural gas liquids and natural gas to various consumers.
However,
the above segments can be broadly classified as downstream and upstream
sectors. The exploitation and production segment is sometimes called upstream
operations, while the other three segments are collectively called downstream
operations. Companies having both upstream and downstream operations are
vertically integrated. Other companies involved in upstream only are referred
to as independents. The several largest integrated petroleum companies are
called majors.
However,
due to the complicated and capital intensive nature of the business, most
companies specialize in the different operations while some do carry on
business in all segment of the industry. Such companies like the Nigerian
National Petroleum Corporate (NNPC), Shell Petroleum Development Company
(S.P.D.C) and Nigerian Agip Oil Company (N.A.O.C).
It
is necessary at this point to give a general view of budget and budgetary
control having gone through the overview of the petroleum industry.
According
to the Certified Institute of Management Accountants’ Official Terminology
quoted in Idornigie (2003:57) a budget is “a plan quantified in monetary terms,
usually approved prior to a planned income to be generated and or expenditure
to be employed at attaining a given objectives”.
Adeniji
(2004:298) saw budget as “a plan quantified in monetary prepared and approved
prior to a defined period of time usually showing planned income to e generated
and/or expenditure to be incurred during that period and the capital to be
employed to attain a given objective”. It is a future plan of action formulated
by management for the whole organization or a section therefore, which is
expressed, in monetary terms. Therefore, it is a detailed commitment to a plan of action and in this
respect differs from a “forecasts” which is merely an assessment of future
events which are likely to occur if no positive planning action is taken.
Budgetary
control on the other hand is a part of overall system of responsibility
accounting within an organization. It is a system of accounting in which cost
and revenue are analyzed in accordance with areas of personal responsibilities
so that performance of the budget holders can be monitored in financial terms.
It provides a basis for monitoring the progress of organization as a whole and
of its components parts towards the achievement of the objectives specific in
the budget. Budgets therefore serve both planning purposes and control purposes
as reflected in the comparison of budgeted and actual results of organization.
Budgetary
control is an example of “management by exception” where an attention is
directed to the few items, which are not processing according to plan.
From
the discussion above, it is evidence that there have been studies on budgeting
and budgetary control in one of the multinational oil companies (S.P.D.C) non
have focus on a comparative study thereby creating a gap in the literature.
To
fill the gap in the literature, this study examines the comparative study of
S.P.D.C and NACO in Nigeria.
1.2 STATEMENT OF PROBLEM
Business
environment today is characterized with a lot of ups and down in its operation
that are complex in nature thus subjecting them to heavy competitive pressure
such that the rate of growing of the economy as a whole fluctuates and these
fluctuations affects different industries in one way or the other. The oil and
gas industry is not an exception to this fluctuation. Business cycle is
affected by so many factors; some are controllable while others are
uncontrollable such as changes in prices of oil and gas at the international
market and the regulatory of production quotas by the organization of Petroleum
Exporting Countries (OPEC). The budget as a control tool can be used to control
such controllable factors and make allowances and provisions for such
uncontrollable factors.
More
so, the economic reforms agenda initiated by the Obansanjo administration which
led to the deregulation of the petroleum downstream sector have liberalized the
industry for competition and commercialization. The attendant consequence is
that the oil and gas companies are now faced with so many challenges in the
industry with regards to their profit with little or no subsidy or subvention
from government. With this development and volatile nature of the industry for
example youth restiveness in the oil producing communities, military attacks especially
in the Niger Delta region of Nigeria, pipeline vandalization among others have
impede oil exploitation and production.
Hence,
there is need for oil companies to properly plan its operations periodically if
it must succeed. A blueprint of a company translated in monetary terms in
called the budget.
Thus
this study seeks to examine the industries budgeting and budgetary control
procedure with specific reference to the comparatives study of the Shell
Petroleum Development Company, Nig. Ltd and the Nigeria Agip Oil Company Ltd.
1.3 PURPOSE OF THE STUDY
The
aim for this study is to describe the budgeting and budgetary control in the
oil and gas industry and suggest effective ways of implementing management
control in the sector. There is a need for oil and gas industries in Nigeria to
develop and implement a well- conceived strategic plan in order to be competitive
in the business environment. Budgeting and budgetary control could be used to
verify that the company is on the trajectory for reaching the strategic
breakthrough as it is set in the long-term plan.
Hence
the main objective of the study is to examine the budgeting and budgetary
control in the oil and gas industry in Nigeria with specific reference to the
Shell Petroleum Development Company Nig. Ltd and Nigeria Agip Oil Company Ltd.
Specially, the study examines:
i. Whether
the delay in budget preparation and presentation could be responsible for poor
actualization of the yearly goals and objectives.
ii. Whether
the problem of comparison of budget performance between preceding and current
year is as a result of inadequate budget review and no performance result.
iii. Appropriate
suggestion made based on the comparative analysis of the study.
iv. How
home country influence impede budget implementation
v. The
budget process and the control measures built into the system and their
conformity in the oil and gas industries.
vi. How
budgeting and budgetary control will help an organization evaluate its
performance.
1.4 RESEARCH QUESTIONS
In
view of the research problems and objectives sated above, this study was
conducted in consideration of the following questions:
a. Does
budgeting and budgetary controls in oil and gas industry sector different from
manufacturing sectors?
b. What
is the impact of budget and budgetary control on the market share of the
industry?
c. Is
budget and budgetary control in the oil and gas industry a veritable indicator
of rate of growth?
d. Does
budget and budgetary control a determinant of return on investment?
e. Is
budget and budgetary control a measure of profitability?
1.5 RESEARCH HYPOTHESES
In
order to ascertain the validity and reliability of this research work, some
hypotheses which are fundamental to the study, must be tested to provide
empirical evidence. Hence the study tested the following hypotheses:
H01:
There is no significant relationship between budget and budgetary control and
profitability.
H02:
There is no significant relationship between budget and budgetary control with
return on investment.
H03:
There is no significant relationship between budget and budgetary control with
rate of growth.
H04:
There is no significant relationship between budget and budgetary control with
market share.
H05:
There is no significant relationship between budget and budgetary control in
the petroleum industry and that of manufacturing sectors.
Conceptual
Framework
|
Independent
Variable Dependent
Variables
|
||
|
i.
Budgeting
ii.
Budgetary control
|
 |
i.
Profitability
ii.
Return on investment
iii.
Rate of growth
iv.
Share of market
|
1.6 SIGNIFICANCE OF THE STUDY
This
study will be of importance to several categories of persons, individual,
corporate organizations, companies, etc. particularly those in the oil and gas
industry. The research will create a refreshing awareness to the management of
Shell Petroleum Development Company Nig. Ltd and Nigeria Agip Oil Company Ltd
where this study was carried out. It will hopefully go a long way in improving
the budgeting and budgetary control system in the face of dwindling resources.
Thus, investors in the petroleum industry will find this work worthwhile in
making their investment decisions.
Furthermore,
the study will be significance to the body of knowledge (students and lectures)
that may have little or no idea about the oil/gas industry and its budgeting
and budgetary system. It will afford them the opportunity of being aware of
what is obtaining in the oil and gas industry as regards to budgeting and
budgetary control systems in Nigeria.
It
will also give the researcher the opportunity of drawing the primary or basic distinctions
between budgeting and budgetary control in the petroleum sector and those in
other industries.
Finally,
it will serve as a guide to future researchers on this area who may decide to
continue from where the researcher stopped.
1.7 DEFINITION OF TERMS
Budgeting:
A plan that is express in quantitative, usually monetary terms over a specific
period of time usually one year.
Budgetary Control:
The part of the overall system of responsibility accounting within an
organization.
Corporate Strategy:
This involves strategic decisions such as: what is the company’s mission or
purpose? What re the values and principles that should govern the behaviour of
members of the organization?
Management Control:
The process by which managers assure that resources are obtained and used
effectively and efficiently in the accomplishment of the organization’s
objectives.
Concession:
Is a right granted to a company by the federal government on behalf of the
federation to explore and produce oil and gas within a given area.
Control:
Is the process of comparing actual result with planned result and reporting on
the variation so that corrective action can be taken.
Downstream Activities:
Refers to those activities that start from receipt of crude oil into tanks or
gas into petrochemical tanks to the transportation of refined products to the
final users or of processes products to secondary industry.
Upstream Activities:
This involves the acquisition of universal interest in properties for
prospecting exploration, development and production of crude oil and gas.
Refining:
This is simply the breaking down of the hydrocarbon mixture of crude oil into
useful petroleum products through the processes of distillation, cracking,
reforming and extraction.
Dry Hole:
Is a well that either finds no oil or gas, or finds too little to make it
commercially viable.
Controllable Factors:
These are factors that affect the firm that are within the control of firm and
are subject to changes by those decisions of management. Examples are material,
capital, manpower, etc.
Uncontrollable Factors:
These are factors which affect the firms that are beyond the control of the
firm and management action cannot change such factors e.g. government policies,
political factors, economic factors, etc.
Field:
Is a given area or region, usually comprising a number of individual reservoirs
in which oil/gas reserves exist.
Barrel:
Is a standard of measurement in the oil industry. One barrel equals 42 U.S
gallons (35 imperial gallons) at standard condition.
1.8 LIMITATION OF THE STUDY
This
study is supposed to cover all companies involves in oil and gas activities in
Nigeria so as to collect adequate data on their nature of budget and budgetary
control system put in place. This intended scope could not be however the
attained due to cost of collecting the data.
The
survey therefore, will cover three major cities Nigeria: Port Harcourt, Warri
and Lagos. This is based on the spatial distribution of oil and gas industries
in a few administrative and urban centres. Data collected from the petroleum
sector in these cities were generalized to the true representation of the other
parts of the country not covered in this study.
The
study is also hindered by sensitivity of the sample elements. It was quite
difficult to get some of the organizations and their employees to understand
the academic nature of this study. In other words, some of the employees saw
their response as one that will implicate them as evidence by the poor rate of
response to the distributed sets of questionnaire.
Further
limitation to the study was the attitude of most companies managers towards
giving out information in good time. There is the fear that the information
might lead to them losing their jobs or giving vital information to
competitors. All these frustrated the efforts of the researcher to retrieve the
entire questionnaire administered.
These
limitations notwithstanding, the samples techniques adopted allays all fears of
bias and make the finding of the study generalizable.
1.9 ORGANIZATION OF THE STUDY
This
study is organized into five chapters:
Chapter
one deals with the overview of the statement of the problems, purpose of the
study, research questions, hypotheses, significance of the study, definition of
terms and limitation of the study.
Chapter
two deals with the review of related literature on the subject and summary.
Chapter
three attempts to describe the research design, sampling procedure and sample
size determination, data collection method, operational measures of the
variables and the data analysis technique.
Chapter
four deals with the presentation and analysis of data.
Chapter
five presents the discussion, conclusions, implications of the research
findings, as well as the recommendations. Finally, there are suggestions for
further research.
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