Decommissioning Costs in Oil and Gas Operations in Nigeria: Theoretical Reflection

Abstract

This study entails a theoretical review of issues arising on decommissioning cost in oil and gas operations in Nigeria. In Nigeria, the PIA (2021) builds on the existing framework of the Petroleum Act, which mandates the implementation of decommissioning programme in oil and gas industry. There are however concerns that indigenous oil and gas companies may not be able to discharge their decommissioning obligation, given the enormous cost involved. It is upon this premise that this paper tends to address some issues arising from the decommissioning costs of oil facility in Nigeria, and these issues include accounting for decommissioning cost, financing decommissioning programme, strategies for minimizing decommissioning cost, and tax implications of decommissioning cost. A critical review of the extant literature was made. In accounting for decommissioning cost, the accounting standards to apply are IAS 16 and IAS 37. To secure decommissioning cost, a decommissioning fund must be maintained by the company in the form of sinking fund. Since decommissioning cost is usually huge, companies must it cost using several strategies such as fit-for-purpose designs and technologies, factory model, innovative contracting model, building decommissioning teams, importing decommissioning skills and resources, excellent decommissioning planning and execution, cluster decommissioning programme, divestment of oil facility, and potential for reusing existing systems and structures. According to the Nigerian tax law, contribution to decommissioning fund and actual decommissioning cost are allowable for tax purpose whereas annual provision for decommissioning cost is a non-allowable expense.