Management Accounting: The Oil and Gas Industry - Case Study Example

Table of Contents Table of Contents 0 The YJ Oil and Gas Company Report 1 Introduction 1 Background Information on the YJ Company 2 Terms of Reference 3 Prioritization of the Issues Facing YJ 3 The Issue of Licensing 3 The Issue of Test Drilling 4 The Farm-Out Offer 4 Sustainable Development 5 Issues at the AAA Oil and Gas Field 5 Discussion of the Issues Facing YJ 5 Ethical Issues and Recommendations 7 Sustainable Production 7 Safety Concerns 8 Breach of Employment Terms and Conditions 9 Transparency, Integrity, and Fairness 10 Conclusion and Recommendations 12 Bibliography 13 Appendices 14 Appendix I 14 Appendix II: SWOT Analysis 14 Evaluation of rights issue and new debt finance 15 The YJ Oil and Gas Company Report Introduction Across the globe, the oil and gas industry is crucial for the development of the economy and the enhancement of life. The sector provides energy in the broadest sense making it entirely important for the assurance of effectiveness and enhanced productivity in different sectors that shape societal living. The development of industries, the transport sector, the medical sector, and homestead operations among other basic sectors that promote humanity depend solely on energy. Most of the different forms of energy used in these sectors come from the oil and Gas industry. The UK oil and Gas industry is extensively established and provides a large percentage of the primary energy used in the country. Specifically, according to Energy and Climate Change Committee (2011, p. 35), the oil and Gas industry provides the UK with 75% of its primary energy. As such, that the industry influences almost all sectors of existence within the UK is an acknowledged fact. Different oil and Gas companies in the UK form a part of the broad industry. These companies concentrate on drilling of oil and the production of gas and oil/gas related products. Like any other company, the major goal is the maximization of profits, continued development, and the attainment of numerous other organizational objectives. Among the well-established oil and gas companies in the UK is the YJ Oil and Gas Company. The company deals with drilling work, production of oil and gas related products, and other services. Throughout all the processes, the management of the Company must ensure the prioritization, analysis, and evaluation of issues that face the YJ board. As a management accountant in the organization, a focus on the identification of the different issues that face the company is important[14Ch]. This forms a basis for the determination of the impacts of the processes involved in the exploration and production of different products for distribution and sale by the Company. Most of the processes and actions taken by the management and the workforce have a direct influence on the development of the YJ Oil and Gas Company. The Department of Management Accounting in the Company can apply the priorities, the analysis, and the evaluation of the aspects of exploration and production in the development of accurate financial, accounting, and management reports. These reports are used making short-term decisions, which in this case will be offered as recommendations throughout the YJ Oil and Gas Company report. Background Information on the YJ Company Founded in 2005, the YJ Oil and Gas Company is an exploration and production oil and gas company. It is a UK based company, listed in the AIM in January 2007. It was founded primarily for the exploration of gas and oil reserves but has in the recent years developed into the production of oil and gas products, the distribution, and sale among other major services[14Ch]. The YJ Oil and Gas Company is owned by twelve major institutional shareholders, which altogether own 96 percent shares in the Company. The company focuses on sustainable development through sustainable exploration of its licensed oil and gas fields across the world. It focuses on the promotion of awareness on the need for the protection and conservation of the environment from pollution and other issues that limit life in the environment, either for fauna or flora. Throughout the processes, however, the Company faces different issues that must be articulately scrutinized for the identification of solutions to the underlying challenges. The prioritization of certain issues and the discussion of others is critical for the development of accounting, financial, and management reports that would pave way for proper decision making by the Company’s management[14Ch]. Terms of Reference As the Management Accountant of the YJ Oil and gas Company, I was appointed to compile the accounting, management, and financial report for the Company. Throughout the report, I will focus on the identification, analysis, evaluation of issues facing the YJ. The prioritization, analysis, and evaluation will form a basis for the development of recommendations that if applied can enhance the productivity and the proficiency of the Company, leading to the maximization of profits. This report is to be used primarily for short-term decision-making on issues critical for the development of the Company and its workforce. Prioritization of the Issues Facing YJ The Issue of Licensing One of the issues that the YJ should prioritize involves licenses for Licensing is an EEE, FFF, and GGG. Licensing is an essentially important aspect in the oil and gas industry. Exploration and production of oil and gas fields demands for genuine licensing from the proper authorities. Recently, the YJ has focused on the attainment of licenses for EEE, FFF, and GGG. However, it is also important to push for the licensing of the HHH. That the Company was recently awarded three drilling certificates for EEE, FFF, and GGG reveals that a license for HHH is achievable. However, it should be understood that these licenses come with costs and thus the need for the prioritization of the measures for financing the test drilling process, which it must undertake. The Issue of Test Drilling Test drilling is crucial after licensing. This determines the size of the oil and gas field reserve an exploration and production is licensed to explore. In our case, the exploration of EEE, GGG, and FFF should be the driving force. This commences with test drilling. However, acquiring the licenses for the different oil and gas fields goes hand in hand with the issue of finance. Test drilling requires extensive finances for full exploration and production. What makes this issue a priority, however, is the fact that the company has been given a two weeks period for the acceptance of the licence. Considering the period the test drilling operations must take place, there is a need for extensive finances. An estimation of the finance capacity of the Company, and a forecast of the finance figures for March 2015 would be crucial for development. The Farm-Out Offer Considering the extensive finances required for the exploration of the licensed oil and gas fields, there is a need for a financial capacity calculation, though clearly, the YJ capacity is insufficient. The knowledge of the three licenses awarded to YJ has prompted interest from different oil and gas companies. For instance, LG is interested in offering the Company a farm-out proposal. The YJ is incapable of raising enough funds for the exploration of the fields in the quest for the production of oil and gas products and services. A consideration of the farm-out offer may be a strategic decision though not without a consideration of alternatives and the financial benefit to the Company at the end. LG assumes all risks by offering to incur all costs during test drilling. Sustainable Development One of the major issues of concern within the oil and gas industry in the impact it has on the environment. Though the industry has adopted measures to alleviate pollution and any other negative influence on the environment, the public is still dissatisfied by the industry’s use of finite fossil fuels. The issue of preservation of the environment and the promotion of sustainable development of the E&P industry through the development of renewable energy sources is crucial. The management of YJ should focus on the promotion of sustainable development through curbing any exploration and production measures that cause pollution. Issues at the AAA Oil and Gas Field Of the fully operational YJ oil and gas fields, the AAA field, which is located offshore in an African country is of great significance. The field influences directly on the returns of the YJ Company, and thus the need to prioritize it, mainly upon the occurrence of issues that limit its productivity. At the present time, the field is faced with a great challenge of operation alongside the DrillIT, an outsourcer of the Company at the field. The country where the field is located is facing political unrest due to militant activities. These activities have resulted to a great challenge in human resource management by making it difficult to recruit and retain employees. In addition, safety in the field is greatly compromised. As such, there is a need for the management to adopt measures that would effectively handle the issue. Discussion of the Issues Facing YJ The prioritized issues in the YJ Oil and Gas Company are of great importance for the development of the Company. For instance, the issue of the licenses awarded to the Company and the forecast cash flows form a major base upon which it is built. The three licensed fields demand for extensive financing in order to ensure productive exploration and production. This is a major challenge for the YJ Company. The Company faces a great challenge in raising sufficient cash for the exploration of the fields. Test drilling costs are significantly high. Forecasting on cash flows depicts the possibility of spending more than $100 million on test drilling of the three gas/oil fields. However, there is a need for the consideration of production drilling alongside other costs. The adoption of a rights issue, which can raise more than $50 million towards the processes of drilling and production in the newly licensed fields is a critical effective step. With the 10 million shares, a revenue of US$ 174 million, and US$41 million post-tax profits, the Company can service some of the expenses it will incur in the exploration and production of oil and gas. However, this may not be sufficient. A consideration of the farm-out offer by LG may be an important in supplementing the financial deficit. The LG Company offers to incur all costs in test drilling and carry all possible risks in case of barren fields. The Company offers US$10 million that will be given according to the option YJ chooses. However, though the deal may be efficient in cutting down the test drill costs, the different options should be analysed critically before choosing. For instance, if the Company chooses to be paid the US$10 million prior to test drilling, the Company can start investing on the exploration of other opportunities. On the other hand, choosing an option where the Company is paid US$1 million for every complete part may inhibit development. Further, the option where the Company receives US$2M during signing the drilling contract, US$2M on commencement, and US$6M upon completion could be an effective choice like option one. As the management accountant, I would recommend the first option as it promises the possibility of exploitation of other opportunities in the course of test drilling. Nonetheless, even with the rights issue and the adoption of a new loan finance, it still remains a great challenge for the Company to meet the financial challenges it faces in the exploration of the fields. There is, therefore, a need for the YJ Company to consider other avenues. One such avenue is the stock exchange. The Company can consider a listing on the stock exchange with the hope of attracting many investors. But this process is time consuming and, therefore, costly. Full stock exchange listing may cause confusion in the management of the Company. However, its application in the future may be considered as an effective measure for raising capital. On the issue of farm out proposals, different issues are worth of consideration. The YJ Oil and Gas Company must consider the issue of forecast cash flow and deficit, and the choice of farm out proposals from different proposals. It is evident that despite the application of different techniques to raise finances for the exploration and production, the Company will still experience a deficit. As such, it is essential to apply different strategies to attain the needed finances. For instance, the adoption of different farm-in and farm-out arrangements with multinational organizations like the LG could serve the purpose. While this is the case, more measures to raise finances can be developed in order to explore potential gas and oil fields in foreign countries. However, this may pose a major financial constraint to the Company, and thus it is only logical for the management to exploit the existing fields first, while raising capital for further exploration in the future. This is considering that Company is already incapable of raising capital for the three licensed fields[Man14]. Ethical Issues and Recommendations Sustainable Production The CIMA Code of Ethics calls for all organizations/companies to ensure the management and control of the environment, ensuring prevention and preservation of natural resources. Since it was founded on 2005, the YJ Oil and Gas Company has ensured the protection and preservation of the environment from pollution. It ensures the achievement of this important goal through the alleviation of activities that can endanger the environment through pollution. Throughout the processes from drilling to production of oil and Gas, the Company purposes to limit all possible activities that can lead to pollution of the environment. Though immense success is recorded on the issue, the Company still faces a challenge of release of greenhouse gases due to use of finite fossil fuels. The CEO feels that it is the duty of the oil and gas industry to produce energy for the sake of the development of the society and the enhancement of livelihood. Though we may feel like the society is indebted to the oil and gas industry, it is important to acknowledge the necessity for the protection and conservation of the environment. These pollutants threaten flora and fauna and thus the measures must be adopted to limit their release into the environment. The Company must, therefore, adopt the necessary paraphernalia for the treatment of wastes, and limit the use of fossil fuels in order to prevent the release of greenhouse gases into the environment. In addition, the Company should ensure constant management reviews of the environmental concerns, and focus on the improvement by constant monitoring[Ene11]. Safety Concerns Employee safety is an ethical issue with a direct influence on the performance of any oil and gas industry. From drilling to production, the processes that take place in the oil and gas industry are extremely risky. As such, reluctance in handling safety issues might lead to dire consequences. The YJ prioritizes the safety of every staff member in the company. However, most of the safety measures seem to cover employees in the work environment. External factors that risk the safety of employees are incorporated in the Company’s safety measures. For instance, in oil and gas field AAA, where there is turmoil due to militant activities, the Company seems reluctant in ensuring the safety of its employees. When such cases arise, it is important that the Company prioritizes the safety of its employees. This can be ensured by giving them paid leave and incorporating safety reviews in the already existing safety measures. Breach of Employment Terms and Conditions Another ethical issue of concern in the YJ Oil and Gas Company concerns employees assigned duties in foreign countries. Whilst any organization or company must stick to certain termed agreed upon before sending employees abroad for organizational duties, the YJ Oil and Gas Company seems to breach the terms. Most employees as reported recently are not treated in accordance with the terms and conditions they sign before the contracts or abroad assignments. Employees are entitled to leaves and in the course of their performance of the assigned duties. This is with consideration of the fact that most of them work far away from their families. However, a breach of the terms is experienced often in the Company where some are denied their rights despite following the right procedure for leave application. Such a case was reported by a geologist who was denied the chance to go on leave. The employee was noted as one of the loyal employees and thus denying him the leave was unjustifiable under whatever explanation. Such cases influences the performance of the employees, reducing their productivity and proficiency, and thus limits the Company’s returns, process of achievement of organizational goals, and development. As such, as the management accountant there is a need to devise a solution to the issue[Man14]. One sure way for a successful alleviation of the unethical behaviour is making certain that all organizational rules and regulations, terms and conditions are met. Issues concerning all employees, whether working on their home countries or in foreign countries should be respected and held with the weight they deserve. Denying employees their rightful leaves can result to accidents and the development of mental health problems like stress, which threaten their wellbeing and thus their proficiency, productivity, and performance. The impact on the financial wellbeing on the Company is greater than the supposed gain from refusing to give employees a leave. The Company’s human resource management should work on the issue to ensure reported cases are handled sufficiently. The HRM must ensure that all employees working in foreign countries enjoy the leaves the Company guarantees before sending them on organizational duties. The Directors of Exploration and Drilling Operations must adopt different employee rotation techniques in order to ascertain success in the process. This would ensure that every YJ Oil and Gas Company employee can benefit from the terms of employment, specifically the issue of leaves[Man14]. Transparency, Integrity, and Fairness For sustainable operations, the YJ Gas/Oil Company must put into consideration different ethical issues. The Company must ensure that the issue of payments, how they are made, and the degree of honesty, and transparency go in line with the governing code of ethics, which every oil and Gas Company must comply with[Wei10]. High levels of integrity in the payment of employees is another critical issue of ethics on the payments. Even with this understanding, the YJ Gas/Oil Company depicts shortcomings in following the code of ethics that every gas and oil company must follow. For instance, the Company does not depict transparency and integrity in the process. Cases where individuals within the management feel pressurised to offer payments under certain conditions that compromise the CIMA Code of Ethics are rampant. The CEO of the Company, Ullan Shah, shows little consideration for the code of ethics that govern the payment process in the YJ. The influence of the issue on the workforce of the Company and its reputation are diverse. As such, it is crucial that the Company adopts different measures to ensure the consolidation of the CIMA Code of Ethics in its operations and mainly in the payment processes. It is important that as the management accountant, I inform the Chief Financial Officer (CFO) of the YJ gas/Oil Company of the trend in the payment process. In addition, it is essential that the management of the organization focuses on the establishment of a culture of transparency and integrity in all processes of its production, distribution, and sale products and services. Moreover, there is a need for the creation of a working environment where every individual conducts their duty without a negative influence of the chain of command. The achievement of such an environment in the YJ Gas/Oil Company is possible through the assurance of investigations on all processes in the company, to ensure that all payments are transparent and genuine. In addition, the CIMA Code of Ethics assert that the workforce of any oil and Gas company must receive meaningful pay for their services to the company. The YJ Oil and Gas Company must, therefore, stick on the ethical issue of appropriate satisfying pay for all its workers. However, the Company seems reluctant in ensuring that every employee receives a pay equivalent to the duties they perform, their levels of expertise, and years of service. There is a need for the Company to raise pay for most of its employees so as to boost their livelihood. This eventually result to increased productivity and efficiency in performance and thus a general achievement of the set organizational goals. A consideration of the Maslow’s Hierarchy of Needs is essential for the motivation of the workforce. The application of such a recommendation will ensure abidance to the code of ethics and the development of the Company. Conclusion and Recommendations The YJ Oil and Gas Company is a small but one of the well-established oil and gas companies in the UK. Several years after it was founded, the Company has experienced a significant growth. Its three licensed oil and gas fields have made its major goals and objectives, mainly concerning exploration and production possible. However, there are different challenges that the Company faces. The prioritization of different issues facing the Company such as the issue of licensing and farm out proposals demand for effectiveness in the decision-making processes. As a small Company, multinational oil and gas companies may take advantage of YJ and its exploration and production with promise of clearing fees and costs required for running production and management in the fields. This is mainly because the Company may be faced by difficulties in raising the required capital. In addition, Future development may be hindered for the same reason. The exploration of fields in foreign countries like the KKK is faced with difficulty as the country demands exorbitant benefits. All notwithstanding, the future is promising for the Company. However, the challenge of finances seems inevitable. There is, therefore, a need for the YJ to formulate different techniques for raising capital such as those discussed in the discussion of the issues facing YJ. Some of the techniques would be proceeding with the rights issues, seek for a listing on a full stock exchange, and identifying the different farm-in and farm-out proposals that can effectively generate finances and applying them in the creation of capital. If the management considers these, there is possibility for increased productivity and development. Bibliography 14Ch: , (Chartered Institute of Management Acountants, 2014, p. 6), 14Ch: , (Chartered Institute of Management Acountants, 2014, p. 3), 14Ch: , (Chartered Institute of Management Acountants, 2014, p. 8), Man14: , (Management Accountant, 2014, p. 5), Ene11: , (Energy and Climate Change Committee, 2011, p. 3), Man14: , (Management Accountant, 2014, p. 11), Man14: , (Management Accountant, 2014, p. 12), Wei10: , (Weiss, 2010, p. 325), Appendices Appendix I Revenue – the same oil and gas volumes from AAA and BBB as at March 31 2014 CCC – volumetric growth of 30% for both oil and gas Gross Profit – 48% on average by March 31 2015 Distribution, finance, and administration costs remain unchanged Working capital – US$10 M Non-Current assets – US$30M, depreciation charge of US$28M Dividends - a suggestion of US$10M Appendix II: SWOT Analysis Strengths Development, organizational and individual Growth of CCC by 30% Identification of new oil and gas fields Licenses for EEE, FFF, and GGG Weaknesses Insufficient financing Difficulty in maintaining talented and productive workforce Pollution Opportunities To bid a license for HHH Possibility of growth of CCC New unexploited oil and gas fields Threats Future risk of a shortage of skilled oil and gas employees Exploitation of oil and gas resources in 40-60 years. Fluctuation of oil and gas prices Evaluation of rights issue and new debt finance Read More