Disclosure of provisions for decommissioning costs in annual reports of oil and gas companies: A content analysis and stakeholder views

Abstract

This study examines the extent of compliance with accounting disclosure requirements relating to provisions for decommissioning costs by oil and gas companies. We also investigate the views of stakeholders on the reporting practices of these companies. Using a content analysis approach, our findings reveal that compliance is substantially high, but companies tend to take a tick-box approach providing only minimum disclosure requirements. In semi-structured interviews, we find that disclosure decisions were driven by concerns about the credibility of information due to complexities in the accounting processes, regulatory requirements, lack of information demand and proprietary costs. These findings have policy implications.

Keywords:

• Disclosure decisions
• Compliance
• Decommissioning costs
• Factors of disclosure
• International accounting standards
• Oil and gas sector
• Provisions

Companies Annual Reports and Accounts

Empyrean Energy Plc, 2015.

Europa Oil&Gas, 2015.

EnQuest Plc, 2015.

The Oil and Gas Development Company, 2015.

Rose Petroleum Plc, 2015.

Royal Dutch Shell Oil, 2015.

Tullow Oil, 2015.

Notes

5 Decommissioning is defined in the Statement of Recommended Practice (OIAC (Oil Industry Accounting Committee), 2001) as “the process of plugging and abandoning wells, of dismantlement of wellhead, production and transport facilities and of restoration of producing areas in accordance with licence requirements and the relevant legislation” (para 88).

6 The London Stock Exchange is divided into two markets: the Main Market and the Alternative Investment Market (AIM). The main market lists large and more mature or established companies, while the AIM is the market for smaller and growing companies with limited history. Our study sample of oil and gas companies is drawn from both markets.

7 Our original intention was to also include investors as one of the key stakeholders. However, we were unable to identify investors with an interest in the oil and gas sector to interview for this study. Hence, the findings reported in this study do not include the perception of investors.

8 Our scoring approach does not capture the importance of the disclosure items. It is possible that the decisions to report is based on the perceived importance of the item, that is, companies disclose information items that they believe are important. However, Mangena and Pike (2005) examined disclosure on the basis of the importance of the items based on the perception of users of information. They find no significant difference between the two measures and concluded that companies disclose important information items as much as they do information that is perceived as less important.

9 We note that the disclosure literature has examined many factors using multiple regressions (e.g., governance factors, firm-specific factors, etc.). However, our aim is to understand compliance with disclosure practices and factors influencing such practices from the stakeholders’ perspectives, some of which may be difficult to capture in economic modelling. Given this, we do not undertake extensive statistical tests of these other factors as in prior literature. In addition, our sample size is generally too small to undertake multiple regressions as in prior studies.

10 This is also noted in the annual report of The Oil and Gas Development Company which states “Provision is based on the best estimates; however, the actual outflows can differ from estimated cash outflows due to changes in laws, regulations, public expectations, technology, prices and conditions, and can take place many years in the future. (Annual Report, 2015: 77)

11 The accounting policies of Europa Oil&Gas states “By its nature, the detailed scope of work required and timing is uncertain” (Annual Report, 2015: 50). Similarly, the independent auditor’s report of EnQuest Plc states “The decommissioning provisions are also affected by changes in the oil and gas reserve estimates and price assumptions which determine the date on which production will cease “(Annual Report, 2015: 80).