OIL AND GAS COMPANIES ADOPTING POLICIES

AIMED AT BALANCING ECONOMIC PERFORMANCE

WITH SOCIAL RESPONSIBILITIES
DR. ABDULLAH HAMOUD ISMAIL, ALYEMENIA UNIVERSITY, SANA'A, YEMEN

GLOBAL WARMING, ozone depletion, and environmental pollution are

environmental concerns that affect everyone. Global warming, for example, is
evidenced from different indications, such the notable heightening in global average
air and ocean temperatures, the extensive snow and ice melting, and the increasing
global average sea level.
Global temperatures also showed an increase that ranged from 1.0-1.6 degrees
Fahrenheit in the past century, and this increase is forecasted to continue to rise to
2.0-11.5 degrees in the current century (Jewell, 2007). Thus, more and more global
natural disasters occur, which alerts humans to the need to act responsibly with
regard to the environment. Consequently, environmental issues are receiving
increased attention worldwide at different levels (international organizations,
governments, environmental organizations and groups, the media, and the public at
large).

Awareness of the role of economic and business activities on the depletion of natural
resources as evidenced by global warming, greenhouse gas emissions and
deforestations, and social environments as evidenced by the rich-poor gap and
increasing poverty in developing nations is widespread around the global community.
So, among the largest consumers of natural and social resources, business
organizations have come under increased pressure to justify the nature and scale of
their consumption. Specifically, business organizations, particularly industrial
communities, are considered more and more as responsible for their impact on the
environment and society. Corresponding to this increasing attention, businesses are
adopting new policies that aim to balance their economic performances against their
social responsibilities. As a result, interest in environmental accounting and reporting
has grown rapidly, and environmental accounting and reporting occupy a significant
place within the strategy of many corporations.
ENVIRONMENTAL ACCOUNTING
Accounting is the language of finance and is a service activity. In the modern era,
accounting has witnessed rapid improvement and has become a means to serve the
society, rather than just to serve owners and managers of projects. The American
Accounting Association (AAA) has recognized the social dimension for accounting by
determining the accounting objectives including the social aspect. Based on the
statement of basic accounting theory prepared by a committee authorized by the
AAA, the objectives of accounting are determined as: "1) Making decisions
concerning the use of limited resources, including the identification of crucial
decision areas, and determination of objectives and goals; 2) Effectively directing
and controlling an organization's human and material resources; 3) Maintaining and
reporting on the custodianship of resources; 4) Facilitating social functions and
controls."
The past two decades have witnessed a gradually increasing demand for economic
and financial data regarding environmental and natural resources. Thus, accounting
has a key role in the reporting of environmental responsibility of various entities
(industrial, commercial, or service) at the entire levels (micro or macro). Accounting
has become involved in the achievement of new objectives like the measurement
and evaluation of potential/actual environmental impacts of projects and
organizations.
These objectives are of great significance in that they allow information users to
reach environmentally sound decisions. Thus, traditional accounting has extended to
cover a new type of accounting that focuses on the environmental impacts of an
organization's activities, which is known as environmental accounting. Environmental
accounting (also called ecological, natural resource, green accounting) has a key
role in facilitating environmental data to various users in all levels.

The US Environmental Protection Agency (EPA) defines environmental accounting

as "management accounting practices that enable the incorporation of environmental
cost and benefit information into business decisions." The Institute of Management
Accountants in the USA defines environmental accounting as "the identification,
measurement, and allocation of environmental costs, the integration of these
environmental costs into business decisions, and the subsequent communication of
the information to a company's stakeholders." It is also defined as "a subset of
accounting which involves activities, methods and systems; and deals with the
recording, analysis and reporting of environmentally induced financial impacts and
the ecological impacts of a defined economic system such as an organization, a
country or region" and as " a science looking on how the environmental aspects
affect the conventional accounting system and whether it is an effective tool to
measure and evaluated the environmental aspects of facilities."
There are many advantages for a company that adopts an environmental
accounting. The most important advantages are; obtaining clear information about
environmental costs for control and decision-making and meeting the ongoing
requirements of various stakeholders including the government, investors, lenders,
banks, non-governmental institutions, among others, detecting potential areas for
savings and environmental improvements, and proper management of resources in
an environmentally sound manner that will lead to direct returns including cost
savings and reductions, and/or indirect returns like superior organization goodwill
and reputation.
At the corporate level, environmental impacts are included in environmental
accounting records, measures, analyses and reports to add to the corporate
environmental strategy effectiveness. Corporate environmental accounting involves
"provision of environmental performance related information to stakeholders both
within, and outside, the organization." Thus, disclosing information relating to
environmental aspects is considered as one of significant issues in relations to
environmental accounting.
ENVIRONMENTAL REPORTING
Environmental reporting is defined by the Financial Accounting Standards Board
(FASB) as "the information that is required to be disclosed by regulatory rule or
because management considers it useful to those outside the enterprise and
discloses it voluntarily." It is also defined as "the set of information items that relate
to a firm's past, current and future environmental management activities and
performance" and "information about the past, current and future financial
implications resulting from a firm's environmental management decisions or actions."
Environmental reporting is "an umbrella term that describes the various means by
which companies disclose information on their environmental activities." It is also
defined as "a process through which companies often disclose environmental
information to their stakeholders to provide evidence that they are accountable for
their activities and the resultant impact on the environment," and "a set of information
items that relate to a firm's past, current, and future environmental management
activities and performance," or as "any written passage about company's
environmental issue and activity."
Environmental reporting, as a part of social responsibility reporting, first received
considerable attention in the 1970s, but slowed down in the 1980s because of the
attention shift towards economic issues like unemployment and recession. In the late
1980s, social reporting resurfaced with a concentration on issues regarding the
environment. It has had a rapid expansion in the 1990s and grew to develop into one
of the top significant reflections of interactions between business and environment.
Environmental reporting continued its diffusion and improvement as a result of the
governments' focus on heavy polluting industries and the introduction of some
related rules. In an oil and gas context, several environmental incidents such as the
Exxon Valdez Oil Spill in 1989 resulted in an increasing importance of environmental
reporting.
Environmental reporting occupies a prominent place within a firm`s reporting
strategy. Environmental information reporting is an attractive subject as information
itself entails living quality. Investors require environmental information for their
assessment of the effects of environmental risks upon future operations in terms of
finance and investment. Because cost implication - which has relevance to present
shareholders- could affect future earnings, new investors are aware of (among other)
environmental contingent liabilities. It was recognized that environmental reporting is
perceived as a mechanism used to improve image of the organization. Thus,
reporting on environmental performance helps organizations manage relationships
with their stakeholders. This reveals the importance of reporting of environmental
information for investors and organizations.
Consistent with an increase in public concern with environmental issues,
environmental reporting has taken on a more important role in recent years. To help
companies report on their environmental aspects, many international organizations
have issued guidelines and principles. For example, the CERES Principles laid down
by the Coalition Environmentally Responsible Economies in 1992, the PERI
Guidelines laid down by the Public Environmental Reporting Initiative in 1993, the
ISO14000 Standard established by the International Organization for Standardization
in 1996, and the Sustainability Reporting Guidelines established by the Global
Reporting Initiative in 1999 and reviewed in 2002 and 2006.
Corporate environmental reporting is a part and an important element of corporate
social responsibility reporting. Social responsibility reporting, including two
dimensions, namely environmental and social aspects, received considerable in the
1970s. Later on, in the 1980s, its role declined, and subsequently, it re-emerged in
the late 1980s with more focus on environmental issues. Since that time, social and
environmental reporting continued to grow. Nevertheless, from 2002, reporting of
social and environmental performance has been extended to cover another
dimension, namely economic issues. A new type of reporting, including all three
dimensions (environment, social, and economic), has emerged, which is called
sustainability, or triple bottom line (TBL) reports.
Thereafter, instead of publishing separate social or environmental reports,
companies started publishing sustainability reports. However, choosing to publish
pure environmental report, social responsibility report or sustainability report varies
from one company to another.
The environment is always seen as a distinct category of corporate social
responsibility (CSR), and corporate environmental reporting (CED) is also seen as a
subdivision of the larger area of corporate social responsibility reporting (CSRD), and
additionally, CED is a subcategory of sustainability reporting (see Figure 1).
Based on stakeholder and legitimacy theories, firms use social and environmental
reporting to improve their image in the eyes of different stakeholder groups and
public in general and in turn gain their legitimacy for existence. Thus, environmental
reporting is considered a tool which could help companies to influence society's
perceptions toward corporate operations.
Moreover, environmental reporting is considered an obligation and a stakeholder
right as this type of information is utilized by different groups of stakeholders to assist
their decision making. It is well recognized that environmental reporting serves a
firm's stakeholders purposes. Corporate environmental reporting enriches the
information quality of stakeholders, which in turn enables them to make more
accurate estimates. It also affects how they perceive its legitimacy. Environmental
reporting can be a significant factor in investor decision-making and a medium for
managing, negotiating, or manipulating stakeholders.
Prior studies evidenced several benefits a company can potentially gain as a result
of its environmental reporting. For example, competitive advantage has been
identified as one of the benefits that can be associated with the reporting of
corporate environmental information. It has been shown that investor reactions were
more favorable to companies with prior environmental reporting.
Several studies have revealed that social and environmental reporting has a
significant positive effect on corporate performance. There are many economic
benefits from environmental reporting. For example, eco-efficient and proactive
environmental strategies and activities have been found to lead to higher profitability
and greater corporate value. Specifically, studies have indicated that corporate social
responsibility reporting has a positive influence on corporate financial performance.
Moreover, it is evidenced that earnings quality is positively affected by social and
environmental reporting. It was found that higher quality CSR reporting translates
into economic consequences such as better pricing terms and lower cost of capital
and greater stock liquidity. In general, it is believed that those companies that ignore
the importance of CED/CSD are likely to see negative consequences in the future.
ENVIRONMENTAL ACCOUNTING, REPORTING IN
OIL AND GAS INDUSTRY
The oil and gas industry is among the industries with the greatest impacts on the
environment. According to the International Energy Agency, energy-related carbon
dioxide (CO2) emissions are the majority of global greenhouse gas (GHG)
emissions, while oil and gas are the largest source of fuel combustion emissions and
responsible for approximately 53% of global energy-related CO2 emissions in 2013.
Oil and gas is among the industries with the greatest impact on the environment. The
overall environmental impact of petroleum operations on the natural environment is
very high, as the operations of this industry can cause air pollution and water
pollution, both of which can be detrimental to the natural environment.
There can be adverse effects on the environmental at each stage of oil and gas
development - exploration, development, production, transportation, and refining.
Several environmental risks are inherent to oil and gas activity - natural resource
depletion, air emissions, interference in the territories, biodiversity impacts, and
waste disposal, to name just a few.
In addition, oil and gas activity has the potential to endanger the occupational health
and safety of people engaged in such activities. Environmental concerns have
increased worldwide as petroleum companies have expanded their activity in new
regions of the globe. Table 1 illustrates the environmental impacts of oil and gas
operations.
In addition to the environmental effects that result from normal oil and gas
operations, the effects may result in occasional events such as, oil spills and
explosions Environmental incidents such as oil spills, gas explosions, and fires often
can cause enormous ecological and human destructions. Several vital environmental
incidents that occurred in the oil and gas industry worldwide have revealed the
significant impact of this industry's activities on the environment, which in turn have
contributed to increasing concern of public and other stakeholders regarding oil and
gas companies' environmental impacts. As a result, oil and gas companies are
facing increasing pressure to disclose information regarding their environmental
performance.
During the last four decades, the oil and gas industry has witnessed several critical
environmental incidents, such as the Exxon Valdez oil spill offshore Alaska in 1989,
the Deepwater Horizon disaster in the Gulf of Mexico in 2010, which was considered
as one of the largest oil spill in history and the worst environmental disaster in the
US. Table 2 illustrates the most significant oil spills around world during the last four
decades.
In general, polluting industries spend a lot of money to decrease the environmental
impact of their operations. The adverse environmental impact of the oil and gas
industry affects the industry's economic performance, as this environmentally
sensitive industry is subject to costly environmental regulation.
Studies show that the risks arising from specific environmental incidents affect the
reporting practices of the particular company and of the other companies operating
in the same industry. For example, a study revealed that after the Exxon Valdez oil
spill off Alaska in 1989, companies affiliated with the oil and gas industry dramatically
increased environmental reporting. Another study indicated that the Gulf of Mexico
oil spill in 2010 raised questions about the extraction methods used by the oil and
gas industry as a whole. Subsequently, many oil and gas companies chose to
increase their environmental reporting. It is generally recognized that environmental
reporting for the petroleum industry is important because oil and gas activity has a
profound effect on the natural environment.
ABOUT THE AUTHOR

Abdullah Hamoud Ismail, PhD, is a budgeting and expenditures control manager at

the Ministry of Oil and Minerals in Yemen. He has more than 15 years of experience
in oil and gas accounting and finance. Ismail received a PhD in accounting from the
University Utara Malaysia. He is an assistant professor in the Department of
Accounting at Alyemenia University in Sana'a, Yemen.