OIL AND GAS ACCOUNTING: PRACTICE, CHALLENGE AND SOLUTIONS IN NIGERIA (A CASE STUDY OF NNPC)

There is no aspect of life that accounting cannot be applied, and the oil and gas sector is not an exception. Apart from the petroleum product in itself, there are numerous by-products such as gasoline, diesel, kerosene, jet fuel, lubricants, asphalt, bitumen, petrochemicals such as pesticide and others, which necessitate serious development of accounting techniques to cater for their accountability.

Nigeria's economy remains heavily reliant on oil and gas. Recent industry data shows that over 90% of Nigeria's foreign exchange earnings and around 70% of government revenue come from the oil and gas business, according to the Nigerian National Petroleum Corporation (NNPC) (2023). This dependence keeps accounting practice in the sector under continuous scrutiny.

The oil and gas value chain is split into upstream and midstream/downstream segments. The upstream sector covers all activities involved in finding and producing oil and gas and is also called the Exploration and Production (E&P) segment, comprising geological surveys to locate reservoirs, exploratory drilling to confirm hydrocarbons, well development once a find is confirmed, crude oil extraction, and initial processing at the wellhead. Midstream activities involve the transportation, storage, and wholesale marketing of oil and gas, bridging the gap between the upstream and downstream sectors, while downstream is the refining and processing phase, where crude oil is transformed into refined products and chemicals, including their distribution and sale to consumers.

Costs incurred by oil companies are usually classified as mineral rights acquisition costs, exploration and drilling costs, development costs, production costs, support equipment and facilities costs, and general costs. Because commercial discovery is not guaranteed from every drilling effort, the amortization of these costs depends on the accounting system a company adopts. Two methods remain central to industry practice:

i. Full Cost Method ii. Successful Efforts Method

Successful efforts accounting permits capitalization of expenditures only on successful projects, while expenditures on unsuccessful wells are expensed; a drilling effort is classified as successful if it results in the extraction of economically recoverable oil and gas, and unsuccessful if it results in a dry hole. The full cost method, by contrast, allows for the capitalization and amortization of all exploration and development expenditures, both successful and unsuccessful. Current professional guidance confirms this distinction remains operative: under the full cost method, all exploration and development costs within a designated cost centre are capitalized, including the costs of unsuccessful wells, whereas under the successful efforts method, only costs associated with successful exploration efforts are capitalized, with unsuccessful exploration costs expensed as incurred. The practical consequence is that the full cost method generally produces smoother earnings, whereas the successful efforts method results in greater income volatility, since all costs are capitalized regardless of whether a drilled well is productive under full cost, while only costs related to commercially viable wells are capitalized under successful efforts, with the rest expensed immediately.

This choice is not purely discretionary at the international level. U.S. GAAP allows for both the full cost and successful efforts methods, while IFRS requires use of the successful efforts method. Under IFRS 6, which governs exploration and evaluation expenditures, the accounting choices permitted can substantially affect the financial statements of oil and gas companies, influencing their profitability, asset values, and overall financial performance, and consequently shaping investor decisions; a 2025 study of Nigerian listed oil and gas firms covering 2012–2022 examined precisely this relationship between IFRS 6 accounting options and firm value relevance (Kolawole, Alabi & Awotomilusi, 2025).

The structure of Nigeria's national oil company has itself changed fundamentally in this period. 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, and on 19 July 2022 the President unveiled NNPC Limited, the new limited liability company that replaced the former Nigerian National Petroleum Corporation, with the company commencing full operations effective 1 July 2022. This corporatization carries direct accounting implications, since NNPC Limited must now report under the Companies and Allied Matters Act framework rather than as a statutory corporation (Aluko & Oyebode, 2022). The effects of this reform are already visible in NNPC's reporting: NNPC announced a N3.3 trillion net profit in its 2023 audited financial statement, a performance its board chairman attributed to the Petroleum Industry Act 2021 and the commitment of the company's board, management and staff (ThisDay, 2024).

Despite this structural reform, transparency concerns persist in the literature. A governance review found that officials from other government bodies say they cannot independently verify or challenge the oil sale figures provided by NNPC, with past reviews describing the corporation's internal oil sale data management practices as disorganized, secretive and inaccurate (Natural Resource Governance Institute). In response, legislative oversight has increased: a House committee reviewing the transfer of assets to NNPC Limited resolved that yearly audited reports of NNPC would be requested from the Nigeria Extractive Industries Transparency Initiative (NEITI) for comparison against NNPC's own audited reports, citing ongoing concerns about corruption, mismanagement, crisis and environmental degradation in the sector (ThisDay, 2022).

Contemporary scholarship also identifies persistent accounting challenges beyond method choice. A 2024 review of the field highlights revenue recognition challenges in accurately recognizing revenue from oil and gas operations, complexities in accounting for joint venture arrangements, asset impairment assessment in a volatile market, and accounting for environmental liabilities arising from regulatory change as ongoing contemporary issues in Nigerian oil and gas accounting. Separately, a 2023 study linked accounting opacity to environmental and community outcomes, arguing that the problems of Niger Delta unrest, environmental degradation and oil theft stem in part from a lack of accountability of the multinational companies operating in the region (Bello & Nwaeke, 2023).

Regulatory compliance commentary from 2023 further confirms that under the current legal framework, rights to develop oil and natural gas reserves granted to a participant may be pledged for security or booked for accounting purposes under Nigerian domestic law (Mondaq Oil & Gas Regulation, 2023), reinforcing the continued interconnection between Nigeria's petroleum regulatory regime and its accounting treatment of upstream assets.

1.2 Statement of Problem

The oil industry is considered the most strategic of all industries worldwide, and oil remains both a major source of revenue and a visible instrument in international politics. It is therefore crucial that such a veritable asset be properly accounted for, to enable government and oil companies to maximize benefits derivable from this natural endowment. There is still no single globally applied standard for oil and gas accounting; U.S. GAAP permits both the full cost and successful efforts methods, while IFRS mandates the successful efforts method, creating potential inconsistency for multinational operators reporting across jurisdictions, and some Nigerian companies continue to apply different methods as a matter of internal choice.

The fact that operating companies originate from different countries means varying accounting principles and procedures may be used for recording and reporting, consistent with practices in their respective home countries. This makes comparability of financial statements across oil companies difficult and complicates proper assessment of growth. The corporatization of NNPC into NNPC Limited under the PIA 2021 was intended to address some of these comparability and transparency concerns by aligning the entity with standard CAMA-governed reporting obligations (Aluko & Oyebode, 2022; ThisDay, 2024), yet concerns about the consistency, verifiability and disclosure quality of its accounts persist (Natural Resource Governance Institute; ThisDay, 2022).

The focus of this study is to ascertain the appropriateness of the accounting practices of oil and gas companies operating in Nigeria, using NNPC (now NNPC Limited) as a case study, and to establish the need for a common accounting standard for the oil industry in Nigeria. The study will also assess the role and efforts of the Financial Reporting Council of Nigeria in developing relevant accounting standards for the oil industry.

1.3 Objectives of the Study

1. To ascertain the relationship between the accounting methods and procedures practiced by NNPC in Nigeria.
2. To assess the relationship between the capitalization policy of NNPC and that recommended by Nigeria's accounting standard-setting authority.
3. To find out whether effective accounting procedures enhance performance, accuracy and reliability of accounting records in NNPC.
4. To find out whether making the accounting procedures of NNPC a major part of training institutions' curriculum will increase the standard and performance of accountants in NNPC.

1.4 Research Questions

1. Are there significant relationships in the accounting methods and procedures practiced by NNPC in Nigeria?
2. Are there significant relationships between the capitalization policy of NNPC and that recommended by Nigeria's accounting standard-setting authority?
3. How does an effective accounting procedure enhance performance, accuracy and reliability of accounting records in NNPC?
4. Is there any significant contribution in making the accounting procedures of NNPC a major part of training institutions' curriculum to increase the standard and performance of accountants in NNPC?

1.5 Research Hypotheses

H01: There is no significant relationship between the accounting procedures and methods practiced by NNPC. H02: There is no significant relationship between the capitalization policy of NNPC and that recommended by Nigeria's accounting standard-setting authority. H03: Effective accounting procedures do not enhance performance, accuracy and reliability of accounting records in NNPC. H04: Making the accounting procedures of NNPC a major part of training curriculum will not increase the standard and performance of accountants in NNPC.

1.6 Significance of the Study

This study is significant to the oil and gas sector in evaluating the effectiveness of oil and gas accounting, especially in NNPC. The findings will contribute to enhancing the effectiveness of oil and gas accounting in organisations within the sector and serve as a guide to future researchers. Summarily, it shall:

1. Provide a detailed analysis of the nature of oil and gas accounting as a framework for further studies.
2. Provide a framework to evaluate the challenges in oil and gas accounting and proper solutions.
3. Serve as a reference point of information for accounting professionals.
4. Elucidate the nature of oil and gas accounting practice in Nigeria, particularly in light of the post-PIA corporatization of NNPC.

1.7 Scope of the Study

This study focuses on oil and gas accounting: practice, challenges and solutions, with a case study of NNPC (NNPC Limited). It covers oil and gas accounting in Nigeria, challenges faced, different operating accounting conventions in the sector, and possible solutions, including developments since the enactment of the Petroleum Industry Act 2021. The study is limited to NNPC, Nigeria.

1.8 Definition of Terms

IFRS: International Financial Reporting Standard SAS: Statement of Accounting Standard IASB: International Accounting Standard Board NNPC: Nigerian National Petroleum Corporation (now Nigerian National Petroleum Company Limited, NNPC Ltd.) ICAN: Institute of Chartered Accountants of Nigeria NASB: Nigerian Accounting Standard Board (now Financial Reporting Council of Nigeria, FRCN) PIA: Petroleum Industry Act, 2021 FRCN: Financial Reporting Council of Nigeria

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