Oil and Gas Accounting and

Performance Measurement

Dr. Batool Alrfooh

 Introduction

Why do companies explore ?

 To generate national wealth

 To create employment

 To maximize profits

 To grow and create value for shareholders /

stakeholders
 What The Objective Of Oil And Gas
Operations?

 Is to Find, Extract, Refine and Sell oil and gas,

refined products and related products.
 It requires Substantial Capital Investment and
Long Lead Times to find and extract the
hydrocarbons in Challenging Environmental
Conditions with Uncertain Outcomes.
 What The Objective Of Oil And Gas
Operations?

 Exploration, development and production often

take place in joint ventures or joint activities to
share The substantial capital costs.
 The outputs often need to be transported
significant distances through pipelines and
tankers; gas volumes are increasingly liquefied,
transported by special carriers and then regasified
on arrival at destination.
Role and Application of Petroleum
Economics

Upstream Activities
Reserves and Resources
 Depletion and depreciation of upstream assets
 Exploration and evaluation
 Development expenditures
Borrowing costs
 Revenue recognition
Disclosure of reserves and resources
 Production sharing agreements and Concessions
Role and application of Petroleum
Economics

Midstream and downstream activities

Product valuation issues
Revenue recognition issues
Emission trading schemes
Depreciation of downstream assets
 Role and application of
Petroleum Economics

Sector-wide Issues:
Business combinations
Joint ventures
Decommissioning
Impairment
Royalty and income taxes
Functional currency
Leasing
Financial instruments
 Upstream Activities

Upstream activities comprise the exploration for and

discovery of hydrocarbons; crude oil and
natural gas. They also include the development of
these hydrocarbon reserves and resources, and
their subsequent extraction (production).
Where does the Money Come From ?

INCREASING THE VALUE OF CRUDE OIL & GAS

Where does the Money Go ?
VALUE OF PRODUCTION > TOTAL COST
Division of Revenue
Decision through the life-cycle of a
Petroleum project
Input for Petroleum Economics

 Hydrocarbon In-place estimates

 Production Profile Investment & Production Profile
(IPP): Development Concept / Scenario, Facility
design, Development Plan and costing
 General Economic data: Discounting, Inflation,
exchange rate etc.
 PSC Terms: Taxation and other Fiscal parameters
 Economic Life
Economic Life
(determines economically
recoverable reserves)

Gross Revenue
Opex

Fiscal Field is
costs uneconomic
here
Ignoring fiscal
costs

Net Cash Flow

Time
Field is uneconomic here
taking into account fiscal costs
 Economic Production Limit

PRODUCE UNTIL: OPERATING COST > GROSS REVENUE

Determined by :

•Geological & engineering parameters

•Oil & gas prices
•Fiscal terms
•General economic factors

Impacts :
• Project value
•Ultimate recovery
 Upstream Activities/ Reserves and
Resources

The oil and gas natural resources found by an entity are its most
important economic asset. The financial strength of the entity
depends on the amount and quality of the resources it has
the right to extract and sell. Resources are the source of future
cash inflows from the sale of hydrocarbons and provide the
basis for borrowing and for raising equity finance.
 What are Reserves and Resources?

 Resources are those volumes of oil and gas that are

estimated to be present in the ground, which may or may
not be economically recoverable.
 Reserves are those resources that are anticipated to be
commercially recovered from known accumulations from a
specific date.
 Natural resources are outside the scope of IAS 16 Property,
plant and equipment and IAS 38 Intangible assets.
 What are Reserves and Resources?

 The IASB is considering the accounting for mineral resources

and reserves as part of its Extractive Activities project.
 Entities record reserves at the historical cost of finding and
developing reserves or acquiring them from third parties. The
cost of finding and developing reserves is not directly related to
the quantity of reserves.
 The purchase price allocated to reserves acquired in a business
combination is the fair value of the reserves and resources at
the date of the business combination but only at that point in
time.
 What are reserves and resources?

Depletion, Depreciation And Amortisation;

impairment and reversal of impairment; the recognition
of future decommissioning and restoration obligations;
and allocation of purchase price in business
combinations.
 Reserves

Several countries have their own definitions of reserves, for

example China, Russia, Canada, and Norway. Companies that are
SEC registrants apply the SEC’s own definition of reserves for
financial reporting purposes. There are also definitions developed
by professional bodies such as the Society of Petroleum Engineers
(SPE). Application of different reserve estimation techniques can
result in a comparability issue; entities should disclose what
definitions they are using and use them consistently.
 Reserves
Proved reserves are further sub-classified into those described as
proved developed and proved undeveloped:
 Proved Developed Reserves
are those reserves that can be expected to be recovered through
existing wells with existing equipment and operating methods;
Proved Undeveloped Reserves
are reserves that are expected to be recovered from new wells on
undrilled proved acreage, or from existing wells where relatively
major expenditure is required before the reserves can be extracted.
Unproved reserves
are those reserves that technical or other uncertainties preclude
from being classified as proved.
 Reserves

Unproved reserves may be further categorised as probable and possible reserves:

 probable reserves are those additional reserves that are less likely to be recovered
than proved
reserves but more certain to be recovered than possible reserves;
 possible reserves are those additional reserves that analysis of geoscience and
engineering data
suggest are less likely to be recoverable than probable reserves.
 Estimation
Reserves estimates are usually made by petroleum reservoir engineers, sometimes by
geologists but,
as a rule, not by accountants.
Preparing reserve estimates is a complex process. It requires an analysis of
information about the
geology of the reservoir and the surrounding rock formations and analysis of the
fluids and gases
within the reservoir. It also requires an assessment of the impact of factors such as
temperature
and pressure on the recoverability of the reserves. It must also take account of
operating practices,
statutory and regulatory requirements, costs and other factors that will affect the
commercial
viability of extraction. More information is obtained about the mix of oil, gas, and
water, the
reservoir pressure, and other relevant data as the field is developed and then enters
production.
The information is used to update the estimates of recoverable reserves. Estimates of
reserves are
revised over the life of the field.
 Exploration and evaluation
Exploration costs are incurred to discover hydrocarbon resources. Evaluation costs are
incurred to assess the technical feasibility and commercial viability of the resources
found.
Exploration, as defined in IFRS 6 Exploration and evaluation of mineral resources, starts
when the legal rights to explore have been obtained. Expenditure incurred before
obtaining the legal right to explore is generally expensed; an exception to this would be
separately acquired intangible assets such as payment for an option to obtain legal rights.
The accounting treatment of exploration and evaluation (“E&E”) expenditures
(capitalising or expensing) can have a significant impact on the financial statements and
reported financial results,
particularly for entities at the exploration stage with no production activities.
 Successful Efforts and Full
Cost Methods

Many different variants of the

two methods exist. US GAAP has had a significant
influence on the development of accounting
practice in this area; entities in those countries that may
not have specific rules often follow US GAAP
by analogy, and US GAAP has influenced the accounting
rules in other countries.
 Successful Efforts and Full
Cost Methods

Companies involved in the exploration and development of

crude oil and natural gas can choose between two
accounting approaches: the successful-efforts (SE) method
and the full-cost (FC) method. These approaches differ in
how they treat specific operating expenses related to the
industry
 Successful Efforts and Full
Cost Methods
• Successful-efforts accounting allows a company to
capitalize on only those expenses associated with
successfully locating new oil and natural gas reserves.

• Full-cost accounting allows companies to capitalize on

all operating expenses related to locating new oil and
gas reserves, regardless of the outcome.

• The reason for the two types of accounting methods is

that people are divided on which method they believe
best achieves transparency around a company’s
earnings and cash flows.
 Successful-Efforts Accounting
• The SE method allows a company to capitalize on only
those expenses associated with successfully locating new
oil and natural gas reserves. For unsuccessful (or "dry
hole") results, the company charges associated
operating costs immediately against revenues for that
period.
• According to the theory behind the SE method, the
ultimate objective of an oil and gas company is to
produce the oil or natural gas from reserves it locates
and develops, so the company should only capitalize on
those costs relating to successful efforts. Conversely,
because there is no change in productive assets with
unsuccessful results, companies should expense costs
incurred from those efforts.
 Full-Cost Accounting

• The alternative approach, known as the FC method,

allows companies to capitalize on all operating expenses
related to locating new oil and gas reserves regardless of
the outcome.

• The theory behind the FC method holds that, in general,

the dominant activity of an oil and gas company is
simply the exploration and development of oil and gas
reserves. Therefore, companies should capitalize all
costs they incur in pursuit of that activity and then write
them off over the course of a full operating cycle.
 Key Differences
The effect of choosing one accounting method over
another is apparent when periodic financial results
involving the income and cash flow statement are
compared. Each method highlights the individual
costs, which fall into the categories of acquisition,
exploration, development, and production,
differently. However, such a comparison also points
out the impact on periodic results caused by differing
levels of capitalized assets under the two accounting
methods.
 Key Differences
the financial results for an oil and gas company are
affected by periodic charges in depreciation, depletion,
and amortization (DD&A) of costs relating to
expenditures for the acquisition, exploration, and
development of new oil and natural gas reserves. The
charges include the depreciation of certain long-lived
operating equipment, the depletion of costs relating to
the acquisition of property or property mineral rights,
and the amortization of tangible non-drilling costs
incurred with developing the reserves.
 Key Differences
The periodic depreciation, depletion, and amortization
expense charged to the income statement are
determined by the "units-of-production" method, for
which the percent of total production for the period to
total proven reserves at the beginning of the period is
applied to the gross total of costs capitalized on the
balance sheet.
 Post balance sheet events
Identification of dry holes
An exploratory well in progress at the reporting date
may be found to be unsuccessful (dry)
subsequent to the balance sheet date. If this is identified
before the issuance of the financial statements, a
question arises whether this is an adjusting or non-
adjusting event.
IAS 10 Events after the reporting period requires an
entity to recognise adjusting events after the reporting
period in its financial statements for the period.
 Post balance sheet events
Identification of dry holes
Adjusting events are those that provide evidence of
conditions that existed at the end of the reporting
period. If the condition arose after the reporting period,
these would result in non-adjusting events.
Industry practice is varied in this area. An exploratory
well in progress at period end which is
determined to be unsuccessful subsequent to the
balance sheet date based on substantive evidence
obtained during the drilling process in that subsequent
period could be viewed as a non-adjusting
event. These conditions should be carefully evaluated
based on the facts and circumstances.
 License relinquishment

Licences for exploration (and development) usually

cover a specified period of time. They may also
contain conditions relating to achieving certain
milestones on agreed deadlines. Often, the terms of
the license specify that if the entity does not meet these
deadlines, the licence can be withdrawn.
Sometimes, entities fail to achieve these deadlines,
resulting in relinquishment of the licence.
 License relinquishment

relinquishment that occurs subsequent to the balance

sheet date but before the issuance of the financial
statements, must be assessed as an adjusting or non-
adjusting event.
If the entity was continuing to evaluate the results of
their exploration activity at the end of the reporting
period and had not yet decided if they would meet the
terms of the licence, the relinquishment is a non-
adjusting event. The event did not confirm a condition
that existed at the balance sheet date.
 License relinquishment

The decision after the period end created the

relinquishment event. If the entity had made the
decision before the end of the period that they would
not meet the terms of the licence or the remaining term
of the licence would not allow sufficient time to meet the
requirements then the subsequent relinquishment is an
adjusting event and the assets are impaired at the
period end.
Appropriate disclosures should be made in the financial
statements under either scenario.
 What Is an Income Statement?
An income statement is one of the three important financial
statements used for reporting a company’s financial
performance over a specific accounting period. The other
two key statements are the balance sheet and the cash flow
statement.

The income statement focuses on the revenue, expenses,

gains, and losses of a company during a particular period.
Also known as the profit and loss (P&L) statement or the
statement of revenue and expense, an income statement
provides valuable insights into a company’s operations, the
efficiency of its management, underperforming sectors, and
its performance relative to industry peers.
 Understanding the Income
Statement

The income statement is an integral part of the company

performance reports that must be submitted to the U.S.
Securities and Exchange Commission (SEC).

While a balance sheet provides the snapshot of a

company’s financials as of a particular date, the income
statement reports income through a specific period, usually
a quarter or a year, and its heading indicates the duration,
which may read as “For the (fiscal) year/quarter ended
June 30, 2021.”
 Understanding the Income
Statement
The income statement focuses on four key items: revenue,
expenses, gains, and losses. It does not differentiate
between cash and non-cash receipts (sales in cash vs. sales
on credit) or cash vs. non-cash payments/disbursements
(purchases in cash vs. purchases on credit).
It starts with the details of sales and then works down to
compute net income and eventually earnings per share
(EPS). Essentially, it gives an account of how the net
revenue realized by the company gets transformed into net
earnings (profit or loss).
 Operating Revenue

Revenue realized through primary activities is often

referred to as operating revenue. For a company
manufacturing a product, or for a wholesaler, distributor,
or retailer involved in the business of selling that product,
the revenue from primary activities refers to revenue
achieved from the sale of the product. Similarly, for a
company (or its franchisees) in the business of offering
services, revenue from primary activities refers to the
revenue or fees earned in exchange for offering those
services.
 Non-Operating Revenue

Revenue realized through secondary, noncore business

activities is often referred to as nonoperating, recurring
revenue. This revenue is sourced from the earnings that are
outside the purchase and sale of goods and services and
may include income from interest earned on business
capital parked in the bank, rental income from business
property, income from strategic partnerships like royalty
payment receipts, or income from an advertisement display
placed on business property.
 Gains
Also called other income, gains indicate the net money
made from other activities, like the sale of long-term assets.
These include the net income realized from one-time
nonbusiness activities, such as a company selling its old
transportation van, unused land, or a subsidiary company.

Revenue should not be confused with receipts. Payment is

usually accounted for in the period when sales are made or
services are delivered. Receipts are the cash received and
are accounted for when the money is received.
A customer may take goods/services from a company on
Sept. 28, which will lead to the revenue accounted for in
September. The customer may be given a 30-day payment
window due to his excellent credit and reputation, allowing
until Oct. 28 to make the payment, which is when the
receipts are accounted for.
 Non-Operating Revenue

Expenses and Losses

A business's cost to continue operating and turning a profit
is known as an expense. Some of these expenses may be
written off on a tax return if they meet Internal Revenue
Service (IRS) guidelines.
 Primary-Activity Expenses
These are all expenses incurred for earning the average
operating revenue linked to the primary activity of the
business. They include the cost of goods sold (COGS);
selling, general, and administrative (SG&A) expenses;
depreciation or amortization; and research and
development (R&D) expenses. Typical items that make up
the list are employee wages, sales commissions, and
expenses for utilities such as electricity and transportation.
 Primary-Activity Expenses
Secondary-Activity Expenses
These are all expenses linked to noncore business activities,
like interest paid on loan money.

Losses as Expenses
These are all expenses that go toward a loss-making sale of
long-term assets, one-time or any other unusual costs, or
expenses toward lawsuits.
 Losses as Expenses
While primary revenue and expenses offer insights into how well the
company’s core business is performing, the secondary revenue and fees
account for the company’s involvement and expertise in managing ad
hoc, non-core activities. Compared with the income from the sale of
manufactured goods, a substantially high-interest income from money
lying in the bank indicates that the business may not be using the
available cash to its full potential by expanding the production
capacity, or that it is facing challenges in increasing its market share
amid competition.

Recurring rental income gained by hosting billboards at the company

factory along a highway indicates that management is capitalizing upon
the available resources and assets for additional profitability.
 Income Statement Structure

Mathematically, net income is calculated based on the

following:

Net Income = (Revenue + Gains) - (Expenses + Losses)

To understand the above formula with some real numbers,

let’s assume that a fictitious sports merchandise business,
which additionally provides training, is reporting its
income statement for a recent hypothetical quarter.
Income Statement Structure
 Income Statement Structure

Mathematically, net income is calculated based on the

following:

Net Income = (Revenue + Gains) - (Expenses + Losses)

To understand the above formula with some real numbers,

let’s assume that a fictitious sports merchandise business,
which additionally provides training, is reporting its
income statement for a recent hypothetical quarter.
 Special Considerations
DD&A, production expenses, and exploration costs
incurred from unsuccessful efforts to discover new
reserves are recorded on the income statement.
Initially, net income for both an SE and an FC
company is impacted by the periodic charges for
DD&A and production expenses, but net income for
the SE company is further impacted by exploration
costs that may have been incurred for that period.
 Successful efforts and full
cost methods

However, some upstream companies have used the full cost

method under national GAAP. All costs
incurred in searching for, acquiring and developing the
reserves in a large geographic cost centre or
pool are capitalised. A cost centre or pool is typically a
country. The cost pools are then depleted on a
country basis as production occurs. If exploration efforts in
the country or the geological formation
are wholly unsuccessful, the costs are expensed.
 Successful efforts and full
cost methods

Full cost, generally, results in a greater deferral of costs

during exploration and development and
higher subsequent depletion charges.
Debate continues within the industry on the conceptual
merits of both methods although neither is
wholly consistent with the IFRS framework. The IASB
published IFRS 6 Exploration for and
evaluation of mineral resources to provide an interim
solution for E&E costs pending the outcome of
the wider extractive activities project.
 Successful efforts and full
cost methods

Full cost, generally, results in a greater deferral of costs

during exploration and development and
higher subsequent depletion charges.
Debate continues within the industry on the conceptual
merits of both methods although neither is
wholly consistent with the IFRS framework. The IASB
published IFRS 6 Exploration for and
evaluation of mineral resources to provide an interim
solution for E&E costs pending the outcome of
the wider extractive activities project.
 Successful efforts and full
cost methods

The successful efforts method is seen as more compatible

with the Framework. Entities transitioning
to IFRS can continue applying their current accounting
policy for E&E. IFRS 6 does not apply to
costs incurred once E&E is completed. The period of
shelter provided by the standard is a relatively
narrow one, and the componentisation principles of IAS 16
and impairment rules of IAS 36 prevent
the continuation of full cost past the E&E phase.
 Successful efforts and full
cost methods

Specific transition relief has been included in IFRS 1

First-time adoption of IFRSs to help entities
transition from full cost accounting under previous
GAAP to successful efforts under IFRS. Further
discussion is included in section 6.1
 Successful efforts and full
cost methods

Specific transition relief has been included in IFRS 1

First-time adoption of IFRSs to help entities
transition from full cost accounting under previous
GAAP to successful efforts under IFRS. Further
discussion is included in section 6.1
 Accounting for E&E under
IFRS 6

An entity accounts for its E&E expenditure by developing

an accounting policy that complies with the IFRS
Framework or in accordance with the exemption permitted
by IFRS 6 [IFRS 6 para 7]. The entity would have selected a
policy under previous GAAP of capitalising or expensing
exploration costs. IFRS 6 allows an entity to continue to
apply its existing accounting policy under national GAAP
for E&E. The policy need not be in full compliance with the
IFRS Framework [IFRS 6 para 6-7].
 Accounting for E&E under
IFRS 6
An entity can change its accounting policy for E&E
only if the change results in an accounting policy that
is closer to the principles of the Framework [IFRS 6
para 13]. The change must result in a new policy that is
more relevant and no less reliable or more reliable and
no less relevant than the previous policy. The policy, in
short, can move closer to the Framework but not
further away. This restriction on changes to the
accounting policy includes changes implemented on
adoption of IFRS 6.
 Accounting for E&E under
IFRS 6

The criteria used to determine if a policy is relevant and

reliable are those set out in paragraph 10 of IAS 8. That is,
it must be:
 relevant to decision-making needs of users;
 provide a faithful representation;
 reflect the economic substance;
 neutral (free from bias);
 prudent; and
 complete.
 Accounting for E&E under
IFRS 6

The criteria used to determine if a policy is relevant and

reliable are those set out in paragraph 10 of IAS 8. That
is, it must be:
 relevant to decision-making needs of users;
 provide a faithful representation;
 reflect the economic substance;
 neutral (free from bias);
 prudent; and
 complete.
 Accounting for E&E under
IFRS 6

A new entity that has not reported under a previous

GAAP and is preparing its initial set of financial
statements can choose a policy for exploration cost.
Management can choose to adopt the provisions
of IFRS 6 and capitalise such costs.

This is subject to the requirement to test for impairment

if there are indications that the carrying amount of any
assets will not be recoverable. The field-by-field
approach to impairment and depreciation is applied
when the asset moves out of the exploration phase.
 Initial recognition of E&E
under the IFRS 6 exemption
A new entity that has not reported under a previous
GAAP and is preparing its initial set of financial
statements can choose a policy for exploration cost.
Management can choose to adopt the provisions
of IFRS 6 and capitalise such costs.

This is subject to the requirement to test for impairment

if there are indications that the carrying amount of any
assets will not be recoverable. The field-by-field
approach to impairment and depreciation is applied
when the asset moves out of the exploration phase.
 Initial recognition of E&E
under the IFRS 6 exemption
Virtually all entities transitioning to IFRS have chosen
to use the IFRS 6 shelter rather than develop a policy
under the Framework.

The exemption in IFRS 6 allows an entity to continue to

apply the same accounting policy to exploration and
evaluation expenditures as it did before the application
of IFRS 6. The costs capitalised under this policy might
not meet the IFRS Framework definition of an asset, as
the probability of future economic benefits has not yet
been demonstrated.
 Initial recognition of E&E
under the IFRS 6 exemption

However, IFRS 6 deems these costs to be assets. E&E

expenditures might therefore be capitalised earlier than
would otherwise be the case under the Framework.

The shelter of IFRS 6 only covers the exploration and

evaluation phase, until the point at which the
commercial viability of the property, positive or
negative, has been established.
 Initial recognition under the
Framework
Expenditures incurred in exploration activities should
be expensed unless they meet the definition of an asset.
An entity recognises an asset when it is probable that
economic benefits will flow to the entity as a result of
the expenditure.

The economic benefits might be available through

commercial exploitation of hydrocarbon reserves or
sales of exploration findings or further development
rights. It is difficult for an entity to demonstrate that the
recovery of exploration expenditure is probable.
 Initial recognition under the
Framework

Where entities do not adopt IFRS 6 and instead develop

a policy under the Framework, expenditures
on an exploration property are expensed until the
capitalisation point.
 Initial recognition under the
Framework

The capitalization point is the earlier of:

i) the point at which the fair value less costs to sell of the
property can be reliably determined as
higher than the total of the expenses incurred and costs
already capitalised (such as licence
acquisition costs); and
ii) an assessment of the property demonstrates that
commercially viable reserves are present and
hence there are probable future economic benefits from
the continued development and
production of the resource.
 Initial recognition under the
Framework

Costs incurred after probability of economic feasibility

is established are capitalised only if the costs are
necessary to bring the resource to commercial
production.

Subsequent expenditures should not be capitalised after

commercial production commences, unless they meet
the asset recognition criteria.
 Tangible/Intangible
classification

Exploration and evaluation assets recognised should be

classified as either tangible or intangible
according to their nature [IFRS 6 para 15]. A test well,
however, is normally considered to be a
tangible asset. The classification of E&E assets as
tangible or intangible has a particular consequence
if the revaluation model is used for subsequent
measurement (although this is not common) or if the
fair value as deemed cost exemption in IFRS 1 is used on
first-time adoption of IFRS.
 Tangible/Intangible
Classification
The revaluation model can only be applied to intangible
assets if there is an active market in the relevant
intangible assets. This criterion is rarely met and would
never be met for E&E assets as they are not
homogeneous.

The ‘fair value as deemed cost’ exemption in IFRS only

applies to tangible fixed assets and thus is not available
for intangible assets. Classification as tangible or
intangible may therefore be important in certain
circumstances.
 Tangible/Intangible
Classification
The revaluation model can only be applied to intangible
assets if there is an active market in the relevant
intangible assets. This criterion is rarely met and would
never be met for E&E assets as they are not
homogeneous.

The ‘fair value as deemed cost’ exemption in IFRS only

applies to tangible fixed assets and thus is not available
for intangible assets. Classification as tangible or
intangible may therefore be important in certain
circumstances.
 Tangible/Intangible
Classification
However, different approaches are widely seen in
practice. Some companies will initially capitalise
exploration and evaluation assets as intangible and,
when the development decision is taken, reclassify all of
these costs to oil and gas properties within property,
plant and equipment. Some capitalise exploration
expenditure as an intangible asset and amortise this on
a straight line basis over the contractually-established
period of exploration.
 Tangible/Intangible
Classification

Others capitalise exploration costs as tangible within

construction in progress or PP&E from commencement
of the exploration.
Clear disclosure of the accounting policy chosen and
consistent application of the policy chosen are
important to allow users to understand the entity’s
financial statements.
 Impairment of E&E assets
The affected E&E assets are tested for impairment once
indicators have been identified.
IFRS introduces a notion of larger cash generating units
(CGUs) for E&E assets. Entities are allowed to group
E&E assets with producing assets, as long as the policy
is applied consistently and is clearly disclosed.
Each CGU or group of CGUs cannot be larger than an
operating segment (before aggregation).
The grouping of E&E assets with producing assets might
therefore enable an impairment to be avoided for a
period of time.
 Subsequent Measurement of
E&E Assets
Exploration and evaluation assets can be measured
using either the cost model or the revaluation model as
described in IAS 16 and IAS 38 after initial recognition
[IFRS 6 para 12].

most companies use the cost model. Depreciation and

amortisation of E&E assets usually does not commence
until the assets are placed in service.
Some entities choose to amortise the cost of the E&E
assets over the term of the exploration
license.
 Reclassification out of E&E
under IFRS 6
Once an E&E asset has been reclassified from E&E, it is
subject to the normal IFRS requirements.

This includes impairment testing at the CGU level and

depreciation on a component basis. The relief provided
by IFRS applies only to the point of evaluation (IFRIC
Update November 2005).

An E&E asset for which no commercially-viable reserves

have been identified should be written down to its fair
value less costs to sell. The E&E asset can no longer be
grouped with other producing properties
 Reclassification out of E&E
under IFRS 6
E&E assets are reclassified from Exploration and
Evaluation when evaluation procedures have been
completed [IFRS 6 para 17]. E&E assets that are not
commercially viable are written down.
E&E assets for which commercially-viable reserves have
been identified are reclassified to development assets.
E&E assets are tested for impairment immediately prior
to reclassification out of E&E [IFRS 6 para 17].
 Reclassification out of E&E
under IFRS 6
Once an E&E asset has been reclassified from E&E, it is
subject to the normal IFRS requirements.

This includes impairment testing at the CGU level and

depreciation on a component basis. The relief provided
by IFRS applies only to the point of evaluation (IFRIC
Update November 2005).

An E&E asset for which no commercially-viable reserves

have been identified should be written down to its fair
value less costs to sell. The E&E asset can no longer be
grouped with other producing properties
 Impairment of E&E assets

IFRS 6 introduces an alternative impairment-testing regime for

E&E assets. An entity assesses E&E
assets for impairment only when there are indicators that
impairment exists.
Indicators of impairment include, but are not limited to:
 Rights to explore in an area have expired or will expire in the
near future without renewal.
 No further exploration or evaluation is planned or budgeted.
 A decision to discontinue exploration and evaluation in an area
because of the absence of commercial reserves.
 Sufficient data exists to indicate that the book value will not be
fully recovered from future development and production.
 Side tracks

Performing exploratory drilling at a particular location

can indicate that reserves are present in a nearby
location rather than the original target. It may be cost-
effective to “side track” from the initial drill hole to the
location of reserves instead of drilling a new hole. If this
side track is successful in locating reserves, the cost
previously incurred on the original target can remain
capitalised instead of being written off as a dry hole.
 Side tracks

The additional costs of the side track are treated in

accordance with the company’s accounting policy which
should be followed consistently. The asset should be
considered for impairment if the total cost of the asset
has increased significantly. If the additional drilling is
unsuccessful, all costs would be expensed.
 Suspended wells

Exploratory wells may be drilled and then suspended or

a well’s success may not be determined at the point
drilling has been completed. The entity may decide to
drill another well and subsequently recommence work
on the suspended well at a later date.
A question arises as to the treatment of the costs
incurred on the original drilling: should these be written
off or remain capitalised? The intention of the entity to
recommence the drilling process is critical. If the entity
had decided to abandon the well, the costs incurred
should be written off.
 Suspended wells
However, in cases where there is an intention to
recommence work on the suspended well at a later date, the
related costs may remain capitalised.

FASB ASC-932 Extractive Activities – Oil and Gas includes

guidance on whether to expense or defer exploratory well
costs when the well’s success cannot be determined at the
time of drilling.

Capitalised drilling costs can continue to be capitalised

when the well has found a sufficient quantity of reserves to
justify completion as a producing field and sufficient
progress is being made in assessing the reserves and
viability of the project.
 Suspended wells

If either criterion is not met, or substantial doubt exists

about the economic or operational viability of the
project, the exploratory well costs are considered
impaired and are written off.
Costs should not remain capitalised on the basis that
current market conditions will change or technology will
be developed in the future to make the project viable.
Long delays in assessment or development plans raise
doubts about whether sufficient progress is being made
to justify the continued capitalisation of exploratory well
costs after completion of drilling.
 Suspended wells

IFRS does not contain specific guidance on

measurement of costs for suspended wells. The
principles of IFRS 6 would be applied to assess whether
impairment has occurred.

If the entity intends to recommence drilling or

development operations in respect of a suspended well,
it may be possible to carry forward these costs in the
balance sheet for the same period of time.
 FR
Capital Expenditure (CAPEX)
1. Exploration Cost Estimation.

Normally the exploration operations cost is about 10% of the

investment. Exploration operations include license of operating, survey
and GIS Services, sea-bed studies, geological studies, gravimetric,
micro gravimetric and magnetic surveys, shallow reflection seismic
data acquisitions, refraction data acquisitions, up-hole data acquisitions,
2D & 3D data processing, and seismic data interpretation. The
exploration operations estimated cost is 100 million USD.

87
 FR

Capital Expenditure (CAPEX)

2. Drilling Cost Estimation

88
 FR

Capital Expenditure (CAPEX)

2. Drilling Cost Estimation

89
 FR

Capital Expenditure (CAPEX)

3. Completion Cost Estimation

90
 FR

Capital Expenditure (CAPEX)

4. Production Facilities Cost Estimation

91
 FR

Capital Expenditure (CAPEX)

5. HSE Cost Estimation

92
 FR

Capital Expenditure (CAPEX)

5. HSE Cost Estimation

93
 FR

Capital Expenditure (CAPEX)

6. Abandonment Cost Estimation

94
 FR

Operational Expenditure
(OPEX)
1. Drilling Operational Cost Estimation

95
 FR

Operational Expenditure
(OPEX)
3. Production Operational Cost Estimation

96
 FR

Operational Expenditure
(OPEX)
3. Production Operational Cost Estimation

97
 FR

Operational Expenditure
(OPEX)
4. Annual Operational Cost Estimation

98
 FR

Summary of CAPEX & OPEX

1. Summary of CAPEX

99
 FR

Summary of CAPEX & OPEX

2. Summary of OPEX

100
 FR

Additional Cost for Scenario 1 & 2

 Additional cost for scenario 1 & 2

101
 FR

Summary of CAPEX & OPEX for Scenario 1 & 2

1. Summary of CAPEX for scenario 1 & 2

102
 FR

Summary of CAPEX & OPEX for Scenario 1 & 2

2. Summary of OPEX for scenario 1 & 2

103
 FR
Economic Evaluation
 Discounted Net Cash Flow (NPV) & Payback Period
1. Economic evaluation for scenario 1

104
 FR
Economic Evaluation
 Discounted Net Cash Flow (NPV) & Payback Period
2. Economic evaluation for scenario 2

105
 FR
Economic Evaluation
 Discounted Net Cash Flow (NPV) & Payback Period
 Discounted NCF profile for scenario 1 & 2

106
 FR
Economic Evaluation
 IRR The internal rate of return
• NPV VS discount rate for scenario 1 & 2

While both scenarios approved for development as both reach 15% WACC, in order to provide an
overview of the economic viability of object of different discounted rate to set the limitation of each
scenario by NPV vs. discounted rate profile. In this segment, the contractor has an NCF of 39600.4
million USD and 40797.8 million USD at zero discounted rate for scenarios 1 and 2

107
 FR
Economic Evaluation
 IRR The internal rate of return
• NPV VS discount rate for scenario 1 & 2
The internal rate of return (IRR) is the discount rate which reduced net present value (NPV) to zero. IRR is a measure of growth rate
and a measure of investment efficiency. From the NCF using various discount rates, the IRR for scenario 1 stands at 75.21% and for
scenario 2 stands at 75.23%. Therefore, this state further supports for scenario 2 which would be favoured for development as it
has higher IRR that makes it economic feasible project.

108
 FR
Economic Evaluation
 Sensitivity Analysis
1. Sensitivity analysis for scenario 1

109
 FR
Economic Evaluation
 Sensitivity Analysis
2. Sensitivity analysis for scenario 2

110
 FR
Economic Evaluation
Economic Evaluation Summary
From both maximum recoverable oil and economic point of view, scenario 2 was chosen as prioritized develop option. The decision to select
scenario 2 is decided as it gives a greater oil recovery factor with 38.7% and it has more presentable economic evaluation which has a higher
NPV and IRR than scenarion1. Furthermore, the production forecast of 20 years gives presentable NPV which met the requirement of 20%
WACC with IRR of 75.23%. The economic feasibility is very dependence on the crude oil price as analyses in sensitivity analysis.

111
 The phases of a project
management life cycle

Regardless of what kind of project you’re planning,

every project goes through the same stages. Although
each project will require its own set of unique processes
and tasks, they all follow a similar framework. There’s
always a beginning, a middle, and an end. This is called
the project management life cycle.
 The phases of a project
management life cycle

The initiation phase

The initiation phase is the first phase of the entire project
management life cycle. The goal of this phase is to define the
project, develop a business case for it, and get it approved. During
this time, the project manager may do any of the following:

Perform a feasibility study

Create a project charter
Identify key stakeholders
Select project management tools
By the end of this phase, the project manager should have a high-
level understanding of the project’s purpose, goals, requirements,
and risks.
 The phases of a project
management life cycle
The planning phase
The planning phase is critical to creating a project roadmap the
entire team can follow. This is where all of the details and goals are
outlined in order to meet the requirements laid out by the
organization.

During this phase, project managers will typically:

Create a project plan

Develop a resource plan
Define goals and performance measures
Communicate roles and responsibilities to team members
Build out workflows
Anticipate risks and create contingency plans
 The phases of a project management
life cycle

The next phase (execution) typically begins with a project kickoff

meeting where the project manager outlines the project objectives
to all stakeholders involved. Before that meeting happens, it is
crucial for the project manager to do the following:

Establish goals and deliverables

Identify your team members and assign tasks
Develop a draft project plan
Define which metrics will be used to measure project success
Identify and prepare for potential roadblocks
Establish logistics and schedules for team communication
Choose your preferred project management methodology
Ensure your team has access and knowledge of the relevant tools
Schedule the meeting
Set the agenda and prepare the slides
 The phases of a project
management life cycle
The planning phase
The planning phase is critical to creating a project roadmap the
entire team can follow. This is where all of the details and goals are
outlined in order to meet the requirements laid out by the
organization.

During this phase, project managers will typically:

Create a project plan

Develop a resource plan
Define goals and performance measures
Communicate roles and responsibilities to team members
Build out workflows
Anticipate risks and create contingency plans
 What is Risk Management?

Risk management encompasses the identification, analysis, and

response to risk factors that form part of the life of a business.
Effective risk management means attempting to control, as much
as possible, future outcomes by acting proactively rather than
reactively. Therefore, effective risk management offers the potential
to reduce both the possibility of a risk occurring and its potential
impact.
 Risk Management
Structures
Risk management structures are tailored to do more than just point
out existing risks. A good risk management structure should also
calculate the uncertainties and predict their influence on a
business. Consequently, the result is a choice between accepting
risks or rejecting them. Acceptance or rejection of risks is
dependent on the tolerance levels that a business has already
defined for itself.

If a business sets up risk management as a disciplined and

continuous process for the purpose of identifying and resolving
risks, then the risk management structures can be used to support
other risk mitigation systems. They include planning, organization,
cost control, and budgeting. In such a case, the business will not
usually experience many surprises, because the focus is on
proactive risk management.
 Response to Risks

Response to risks usually takes one of the following forms:

Avoidance: A business strives to eliminate a particular risk by

getting rid of its cause.
Mitigation: Decreasing the projected financial value associated with
a risk by lowering the possibility of the occurrence of the risk.
Acceptance: In some cases, a business may be forced to accept a
risk. This option is possible if a business entity develops
contingencies to mitigate the impact of the risk, should it occur.
When creating contingencies, a business needs to engage in a
problem-solving approach. The result is a well-detailed plan that
can be executed as soon as the need arises. Such a plan will enable
a business organization to handle barriers or blockage to its success
because it can deal with risks as soon as they arise.
Importance of Risk Management
 It empowers a business with the necessary tools so that it can
adequately identify and deal with potential risks.

 Risk management provides a business with a basis upon which it

can undertake sound decision-making.

 Assessment and management of risks is the best way to prepare

for eventualities that may come in the way of progress and
growth.

 Progressive risk management ensures risks of a high priority are

dealt with as aggressively as possible.

 The management will have the necessary information that they

can use to make informed decisions and ensure that the
business remains profitable.
Importance of Risk Management
 It empowers a business with the necessary tools so that it can
adequately identify and deal with potential risks.

 Risk management provides a business with a basis upon which it

can undertake sound decision-making.

 Assessment and management of risks is the best way to prepare

for eventualities that may come in the way of progress and
growth.

 Progressive risk management ensures risks of a high priority are

dealt with as aggressively as possible.

 The management will have the necessary information that they

can use to make informed decisions and ensure that the
business remains profitable.
What Is a Monte Carlo Simulation?

 A Monte Carlo simulation is used to model the probability of

different outcomes in a process that cannot easily be predicted
due to the intervention of random variables. It is a technique
used to understand the impact of risk and uncertainty.

 A Monte Carlo simulation is used to tackle a range of problems

in many fields including investing, business, physics, and
engineering.

 It is also referred to as a multiple probability simulation.

What Is a Monte Carlo Simulation?

 A Monte Carlo simulation is used to model the probability of

different outcomes in a process that cannot easily be predicted
due to the intervention of random variables. It is a technique
used to understand the impact of risk and uncertainty.

 A Monte Carlo simulation is used to tackle a range of problems

in many fields including investing, business, physics, and
engineering.

 It is also referred to as a multiple probability simulation.

Monte Carlo Simulation
 What is a Contingency?

A contingency is the chance occurrence that a future

event is likely to cause a negative impact on an
organization or person. It is a condition or a probable
future event occurring by chance, deliberately or not.

In addition, its occurrence and the resulting effects will

necessitate special or extraordinary measures to be
implemented.
 What is a Contingency?

A contingency is the chance occurrence that a future

event is likely to cause a negative impact on an
organization or person. It is a condition or a probable
future event occurring by chance, deliberately or not.

In addition, its occurrence and the resulting effects will

necessitate special or extraordinary measures to be
implemented.
The financial management of major capital projects
requires a substantial commitment of organizational
time and resources. Given their scale and cost, these
capital projects can represent a significant undertaking
for local governments. Consequently, governmental
entities should establish policies and procedures to
support effective capital project monitoring and
reporting to assist in the management of these
significant projects. Such efforts can improve financial
accountability, enhance operational effectiveness and
promote citizens’ confidence in their government.
1. Identify and incorporate legal and fiduciary
requirements into capital monitoring and reporting
processes. Because finance officials are typically
involved with ensuring that capital project activity is
consistent with applicable laws and organizational rules
and procedures, initial efforts should focus on
understanding requirements that relate to:

Auditing and financial reporting needs consistent with

generally accepted accounting principles and
jurisdictional accounting requirements.
 What is a Contingency?
 Any arbitrage regulations, bond covenants, and/or bond referenda
requirements related to long-term debt that may be used to finance
capital projects State and local laws, including such areas as debt
capacity limits, voter authorization, capital budgeting requirements, as
well as public bidding and reporting requirements.

 Capital project contract language and the jurisdiction’s contracting

practices.

 The relationship between each project and the jurisdiction’s planning

processes, including specific initiative plans, local master plans, and
any regional or state plans that may impact any planned projects.

 Grant administration and reporting requirements related to the

specific grant(s) to be used for capital projects.
 What is a Contingency?
 2. Identify relevant data for external and internal stakeholder
information needs. Finance officials may also be called upon to
compile cost and performance data for diverse stakeholders. With this
in mind, financial officials responsible for capital monitoring and
reporting should:

 Identify key stakeholders involved in capital projects, for example,

project oversight staff, project engineers, contractors, finance and
budget staff, executive management, bondholders, rating agencies,
grantors, elected officials, and constituents.

 Identify the business needs of key participants, including timing

status, cost activity, and project scope.
 What is a Contingency?

 Establish project milestones, performance measures and reporting

criteria based on stakeholder needs and legal and fiduciary
requirements.

 Collaborate with participants to determine the content of reports and

the preferred reporting tools of various stakeholders, including the
depth and frequency of information, established expectations and
notable variances. For example, larger entities with a substantial
number of similar routine capital projects may consider providing
information for routine capital projects at a program level, rather than
providing information for each individual project.
ENRON SCANDAL
One of the largest bankruptcies
in U.S. History: A failure of
Corporate Governance?
 The Enron Scandal
“Good days” - 2000
Stock price reached $90
Revenues of $101 bn

“Bad days” - 2001

Stock price fell to $0,30
Bankruptcy
A quick look in Enron’s history
Dec 2001: BANKRUPTCY

Oct 2001: Enron Scandal

2000-2001: Enron’s stock price skyrockets

’90’s: Enron’s diversification strategy

1990: Volatility of gas prices, Enron’s “gas bank”

Mid ’80’s: Deregulation of gas prices

1985: Foundation of Enron

 Strong foundation in Energy

 Enron was founded in 1985 through the merger of Houston Natural Gas
and InterNorth
 37.000 miles of pipelines
 With a wide natural gas distribution network

 Fast growth: Became the 7th largest company

in America
 Core business in energy
 However, much of phenomenal growth was occurring through its other non-
energy-related interests
 Profits were mainly coming from trading and brokering
 Gas deregulation opens opportunities
 Deregulation of natural gas in the 1980’s led to:
 Intensive competition
 Deregulated / lower prices
 Increased gas supply
 More flexible arrangements between producers & pipelines

 But also it brought high volatility in prices

 Increased use of spot market transactions
 75% of gas sales were transacted at spot prices

 Questionable market practices

 Failure in gas supply: fictitious shortage (no legal penalties)

 Involved high risk for both producers & consumers

Enron: a clever strategy
 Enron established a natural “gas bank” as an answer to the
increased volatility in gas prices
 Absorbed fluctuations & offered stable prices for the future (like a
financial banking institution)
 Earned profits from energy brokering & intermediation between
suppliers & buyers

 Enron secured stable long term prices through hedging against

prices fluctuations
 Offered long-term fixed price contracts with producers
 Used financial derivatives:
 Swaps, forward and future contracts
Enron moves away from pipelines

 Enron believed that heavy assets,

assets such as pipelines, were not a source
of competitive advantage
 Energy brokering & commodity trading were more attractive for growth
& profitability
 The key to dominating the trading market was information
 So, by late 2000, Enron owned 5.000 fewer miles of natural gas than in
1985
 Enron entered on line energy trading
 Established the first operational system for transactions via internet

“Heavy assets “Asset-light strategy”

strategy”
 Enron expanded in new markets & commodities internationally
Expansion with the same model
(diversification strategy):
 Electric power
 Coal
 Iron
 Paper & pulp
 Water resources
 Optical fibres

 Using the same trading model

 Acquiring some physical capacity in each market & then leveraging
investments through:
 the creation of flexible pricing structures & the use of financial derivatives for
managing risks
 By early 2001, Enron had evolved to the largest buyer/seller of natural gas
Enron in 2000
and electricity
 Revenues reached $101 billion
 Stock price reached $90
 21.000 employees
 1.500 salespeople
 1.800 different products

 1996 - 2001 “America’s most innovative company”

 Ranked among the 100 most appealing employers

in USA
 But what went wrong?

 Complex business model

 Reaching across many products & crossing national borders but with
reduced physical assets
 Was core competitive advantage thrown away with the sale of gas
pipelines?
 Fast expansion required huge capital investment
 $10 b yearly for financing expansion to new sectors
 New markets though provided low return (=yield)
 Financing problems
 Stretched the limits of accounting
 “Greed is good” culture …

 “Enron had a ruthless and reckless culture that lavished rewards on those
who played the game, while persecuting those who raised objections.”
(Journal of Business Ethics)

 “PLAY THE GAME, EXPECT THE PAY”

 Heavy use of stock option rewards to motivate managers towards the increase
of short term stock performance
 Appraisal based upon how much paper profit the employee had generated (not
on core values)
 Control from Performance Review Committee to force into line
 Lax creative accounting

 Hiding the true picture of liabilities

 By using Special Purpose Entities (SPE) to achieve better financial reporting &
attract investors
 Debt was not reported in balance sheet
 Liabilities were understated while equity & earnings were overstated
 Fictional sales to SPE with agreement to repurchase or sham swaps

 By providing minimal disclosure of its relation with SPEs

 By applying mark-to-market accounting

 Evaluation of assets in market prices
 Enron was allowed to count projected earnings from long-term energy
Accounting practices
contracts as current income
 In 1992, Jeff Skilling (then president of trading operations), convinced federal
regulators to permit Enron to use the "mark-to-market“ accounting method
 This technique was previously only used by brokerage & trading companies
 The current price of long term contracts was reported as current income in the
profit & loss accounts, even though this money might not be collected for many
years
 Results improved, so the stock prices remained high
 But the use of this technique, as well as some of Enron's other questionable
practices, made it difficult to see how it was really making money
Special purpose entities (SPE)
 Enron had been forming off balance sheet entities to:
 Move debt off of the balance sheet
 Overstate earnings
 Transfer risk to other business ventures

 These SPEs were also established to keep Enron's credit rating high
 As the company's stock values were high, Enron used the company's stock to
hedge its investments in these other entities
The collapse…
 The largest ever bankruptcy
 Immediate lay-off of 4.000 employees
 Employees also lost their pension funds and savings

 Share price fall from $90 to $0,30

 Loss of $70 b for stakeholders

 International-scale market “shock”

 Dissolution of Arthur Andersen, one of the five largest audit &

accountancy partnerships worldwide
Enron stock price:
DISASTER STROKE in December 2001
$90
$80
$70
$60
$50
$40
$30
$20
$10
$0

A $10,000 investment in January

2001 was worth $6.25 by December
Bankruptcy: events evolve fast
 On October 16, 2001, in the first major public sign of trouble, Enron
announces a huge third-quarter loss of $618 million
 On October 22, 2001, the Securities & Exchange Commission (SEC)
begins an inquiry into Enron’s accounting practices
 On December 2, 2001, Enron files for bankruptcy

 Enron investors and retirees were left with worthless stock

 Enron was charged with securities fraud (fraudulent manipulation of

publicly reported financial results, lying to SEC,…)
Investigative Findings
 1993-2001: Enron senior management used complex and murky
accounting schemes:
 to reduce tax payments

 to inflate income & profits

 to inflate stock price & credit rating

 to hide losses in off-balance-sheet subsidiaries

 to engineer off-balance-sheet schemes to funnel money to themselves, friends

& family
 to fraudulently misrepresent Enron’s financial condition in public reports
Corporate Governance
 On paper, Enron had remarkable corporate governance
in letter..
 Only 2 out of 14 members of BoD were insiders
 Compensation of managers by offering company’s shares
 Internal Audit Committee

 Exceptionable code for corporate ethics containing safeguards against

conflicts of interest and
self-dealing transactions
 Establishment of Performance
Review Committee
Corporate Governance in spirit..?

CG Failures .. in all fields:

BOARD OF DIRECTORS ROLE & INDEPENDENCE

AUDITING EFFICIENCY & INDEPENDENCE
PAY FOR PERFORMANCE
SHAREHOLDERS’ MANAGEMENT
 Independent
BOARD BoD members
OF DIRECTORS ROLEhad other “ties” with the firm
& INDEPENDENCE
 6 of the 14 outside directors had serious conflicts of interest
(Enron’s shareholders/ Shareholders of SPEs )

 BoD members’ incumbency had been long term

 They had become “natives” & reluctant to question practices

 Kenneth Lay was both the Chairman and CEO

 Concentration of power negates the possibility of the board to
control management
 AUDITING EFFICIENCY & INDEPENDENCE

 The Enron audit committee failed (didn’t challenge transactions)

 Internal Auditing – inefficient

 Dependent external auditors

 2 of the top accountants of Enron had come from Andersen
 Some of the auditors had been placed to Enron’s offices, becoming imbued
with the company’s corporate culture
 Auditors’ remuneration for 2000 reached $25 m for audit services and $27
m for consultancy
 PAY FOR PERFORMANCE

 Managers were compensated by stock options

 Managers aimed at rapid short term increase of stock price
 But they failed to create medium or long-term value

 Performance Review Committee

 Remunerate those who fall into line

 Persecute those who object

 DISCLOSURE – TRANSPARENCY – SHAREHPLDERS
MANAGEMENT

 Use of internal information from top management for own benefit

 Gaming with shares

 Investors community deception

 Certain information revealed to stakeholders

 Enron took full advantage of “accounting services” to portray a rosy

picture of its performance
 Use of substantial funds for politicians’ bribe
 $6 since 1990

“The company and its chairman, Mr. Lay,

may have been Mr. Bush's biggest financial
backers, donating nearly $2 million to his
campaigns”
 Results
 Corporate
2001 - Declaration of Bankruptcy
 Sale of Fixed Assets & of profitable subsidiaries to
competitors

 Financial
 Shock for international stock markets

 Social
 Millions of employees lost their savings, pensions & funds for
their children studies
Boss charged with fraud

Jeff Skilling and Kenneth Lay

have been charged in a federal
indictment released in June
2004 for fraud, insider trading
and giving false statements to
Auditors
 Jeff Skilling
Where Are They Now?
 Was convicted of 19 counts of conspiracy, fraud, insider trading and making
false statements
 On October 23, 2006, Skilling was sentenced to 24 years in prison

 Kenneth Lay
 Was convicted of 6 counts of conspiracy and fraud. In a separate trial, he was
also found guilty on 4 counts of bank fraud
 He died of heart attack on July 5, 2006, and a federal judge ruled that his
conviction was void because he died before he had a chance to appeal
Where Are They Now?
 Andrew Fastow (Enron’s CFO)
 Was behind the complex network of partnerships & many other questionable
practices
 He was charged with 78 counts of fraud, conspiracy, and money laundering
& he accepted a plea agreement in January 2004
 He was given a 10-year prison sentence & ordered to pay $23,8 million in
exchange for testifying against other Enron executives
 Enronomics - Enronitis
“Enronomics, is a fraudulent accounting technique that involves a parent
company making artificial paper-only transactions with its subsidiaries to
hide losses the parent company has incurred through business activities.”
Source: Investopedia.com

“Enronitis is the nervousness over a company because of

suspected accounting problems.”
Source: yourDictionary.com
 Considerations
Were these decisions just
poor business judgments
made within current laws
and accounting rules?

Or was the fatal flaw due to

the unethical behaviour of
the players?

Could the strict application

of ethical principles have
averted this financial
disaster?
Thank you for your
attention!
 What is a KPI Report?

A KPI Report is a powerful business-performance

analytics tool that helps companies recognize, measure,
and visualize their Key Performance Indicators (KPIs) to
track progress against specific objectives. Through its
fusion of graphical representations such as charts and
graphs along with tabular data, the report serves as an
indispensable resource for organizations aiming to
enhance performance.
What are KPI Reports used for?

Reports allow us to slice through this constant deluge of

data. They summarize the information to make it more
manageable and ultimately more usable.
A KPI Report is not only a more refined way to collate this
data; it visualizes KPIs and Metrics that specifically target
performance against objectives. They are the pinnacle of a
structured performance monitoring or improvement
process.
For example
if your objective for the next six months is to increase leads by
50%, simple KPI criteria might look like this:
Objective:
To Increase leads by 50%.
Measurement:
A combined total leads KPI - calculated by taking all
leads from all channels.
Activities:
Increasing the number of lead generation channels.
•Responsibility:
Who will be responsible for making sure these activities
are completed.
Time frame for success:
6 months.
Reviewed and communicated:
At the End of each month.
What are KPI Reports used for?

Reports allow us to slice through this constant deluge of

data. They summarize the information to make it more
manageable and ultimately more usable.
A KPI Report is not only a more refined way to collate this
data; it visualizes KPIs and Metrics that specifically target
performance against objectives. They are the pinnacle of a
structured performance monitoring or improvement
process.