THE IMPACT OF FINANCE AND ACCOUNTING ON THE ENERGY INDUSTRY

The Energy Industry as it also concerns Oil and Gas has typically been an industry which requires
substantial levels of speculative investment over lengthy periods in challenging environments with
probabilistic outcomes. Is it the Hedging and derivatives transactions that expose excessive risk -
taking by financial institutions on oil and gas projects or the construction of a power plant which
could take up as much as 30 to 50years in terms of life expectancy? These make the Energy industry
an attractive gem for several accounting and financial regulatory rules and standards and absolutely,
it cannot undermine the impact of Finance and Accounting where oil and gas resources are
increasingly scarce and where the volatility of pricing of such resources is already a recurring feature
in the global press.

Financial Regulations dictate the Finance and impact on the way deals and transactions are done in
the energy industry. Such is the new Dodd-Frank Wall street reform and the Consumer protection
act just passed into law in July 2010. The Dodd-Frank rules require that most derivative trades be
routed through clearinghouses, whose members are its users, and includes several rules to reduce
counterparty risk and increase transparency. Pushing trades through a clearinghouse as done in Banks
is designed to help spread the risk of default among a wider group of participants instead of between
two participants locked into a bilateral over-the-counter contract.

This implies that clearing houses would have to hold sufficiently large financial reserves to cushion
the effects of the potential loss of a major player thus bringing about liquidity issues in the market.
This threatens the availability of Credit as it limits the ability of financial institutions to provide long-
term hedges. It would also raise costs and ultimately discourage investment in an industry that needs
to plan for major investments several years in advance. It will also affect a wider group of energy
users including large industrial energy consumers like airlines. It would be imperative to state that
they also engage in hedging to try to control the future cost of energy inputs into their products and
services.

The intricacies of Accounting also affect the Energy Industry. Upstream and downstream oil and gas
activities are characterized by complex accounting issues as well as complex contracts with diverse
accounting implications. A thorough understanding of these contractual issues and the accounting
treatments relating to different contractual arrangements is required. Some of these complexities
include recognition of revenue, valuation and disclosure of reserve information; accounting for
production costs, full cost and successful-efforts accounting, depreciation, depletion and amortization
methods, and accounting for international joint operations. In fact, one of the challenges that
upstream firms face is the valuation of its reserves .Oil and Gas reserves determine the true value of a
firm. A wrong or improper valuation sends a bad signal to the market and invites the wrath of the
Authorities. This implies that investments would go into recruiting talents in this field as well as on
manpower training and development of the ones at hand.

For Energy companies to thrive in a capitalist economy like the United States, much consideration
has to be made about the effect of different tax regimes while accounting for production costs and
international joint operations. For instance, Energy companies were caught between a Bush-Era Tax
cut and a $40billion Obama Administration proposed tax hike in the year 2010. A devastating blow
would it have been for Energy producers; small independent oil and natural gas producers who on an
average employ 12 workers and responsible for producing an average of 10 wells nationwide would
have been be forced to cough out tens of billions in federal taxes. Is it the intangible drilling costs,
marginal well tax credits, and enhanced oil recovery credit or amortization costs?

Simply put, it would be more difficult to have “made in USA” products because U.S energy companies
will cut jobs, research budgets, production and the smaller ones may not survive the “tsunami”.

In as much as fledgling financial regulations and accounting standards over the years have always
committed Energy Companies to investing more time, money and personnel to meet new standards;
finance and accounting have proven to be good tools for budget preparation and implementation and
this has made book-keeping a less arduous task. They definitely have a significant impact on the
Energy Industry but I would rather state it now that the people behind these two mechanisms make
the difference.

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