ENVIRONMENTAL COST AND CORPORATE PERFORMANCE OF OIL COMPANIES IN THE NIGER DELTA REGION OF NIGERIA

ENVIRONMENTAL COST AND CORPORATE PERFORMANCE OF OIL COMPANIES IN THE NIGER DELTA REGION OF NIGERIA (2013-2017)

ABSTRACT: The study examined the impact of environmental cost on the corporate performance of oil companies in the Niger Delta Region of Nigeria. The field survey methodology was utilized involving a selected sample of five oil companies. The multiple regression analysis was explored to test the hypothesis. An investigation was undertaken into the possible relationship between corporate performance and five selected indicators of sustainable business practices, community development cost (CDC) and Waste management cost (WMC). The study revealed that sustainable business practices and corporate performance is significantly related and sustainability may be a possible tool for corporate conflict resolution as evidenced in the reduction of fines, penalties, and compensations paid to host communities of oil companies. Therefore, the researcher recommends that the management of oil companies in the Niger Delta region of Nigeria develop a well-articulated environmental costing system to guarantee a conflict-free corporate atmosphere needed by managers and workers for maximum productivity and eventually improve corporate performance.

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CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND TO THE STUDY

Environmental sustainability involves making decisions and taking actions that are in the interest of protecting the natural world, with particular emphasis on preserving the capability of the environment to support human life. It is an important topic of the present time, as people are realizing the full impact that business and individuals can have on the environment. It is not simply about reducing the amount of waste you produce or using less energy but is concerned with developing processes that will lead to businesses becoming completely sustainable in the future.

According to (Ifurueze, et al, 2013), the quest for sustainability has caused an emergence of many global firms enunciating various A norms that guide human interaction with the environment. The increase in global environmental awareness and campaign for sustainable economic development is redirecting the attention of firms towards environmental costs. Environmental costs have been expanded to account for product design for sustainability recycling and disassembly; process design to reduce the environmental impact of operations, worker training, research, and development. The various government regulations, societal pressure groups, green consumer trends and recent developments reawakening corporate attention to strategic and competition role of a firm’s environmental responsibility to corporate performance

Corporate performance refers to the area of business intelligence involved with monitoring and managing an organization’s performance according to key performance indicators such as revenue, return on investment (ROI), overhead and operational costs. It is also known as business performance or enterprise performance. Corporate Performance Management software includes forecasting, budgeting, and planning functions as well as graphical scorecards and dashboards to display and deliver corporate information. Corporate performance is measured to assess whether or not the goals and objectives that were set in the planning phase have been achieved in the implementation phase.

Oil companies are business entities that engage in the exploration, production, refinement, and distribution of oil and gas. They are the backbone of the Nigerian economy. The benefits of crude oil in Nigeria are evident, it provides 90 percent of the country’s export revenue. Thus, Nigerian oil companies provide slightly more 1/5 of the oil amount per day extracted by such companies as Shell, Mobil, Chevron, etc.

Environmental management system (EMS) has emerged as a means to systematically apply business management environmental costs to enhance firms’ long-run financial performance by developing processes and products that simultaneously improve competitive and environmental performance (Stead and Stead, 1992). However, within the less developed countries, the understanding is different mainly because of weak government regulations and lack of organized pressure groups and consumer awareness to influence corporate behavior. Environmental expenditure in terms of effective organizational cost reduction is a highly viable approach toward managerial justification of environmental management system (EMS) expenditures.

The environmental cost thus provides a framework for environmental responsibility and corporate financial performance. The extent to which environmental cost influences corporate performance is determined by some variables, such as community development costs and waste management costs. We will examine in this study, the effect of these variables on corporate performance represented here by Return on total assets (ROTA) and Earnings per share (EPS).

1.2 STATEMENT OF PROBLEM

The increasing resource-conflicts and petro insurgency in the Niger Delta Region has attracted attention to its growing importance. The ecological devastation of the region has aggravated socio-economic impacts (Ite and Lemuria, 2006). In geographical items, the region is one of the largest wetlands in the world comprising of expansive mangrove forests and located around the tributaries of the River Niger in South-Eastern Nigeria.

The report conducted recently by the United Nations attested to the ecological devastation of the region and its severe lack of basic amenities such as the provision of electricity, potable water, and health facilities (UNEP, 2011). The study also noted that the Ogoni indigenes in the region suffer from enormous negative externalities engendered by oil extraction and production including oil spills and gas flaring that will take 30 years to remediate. The wasteland of degraded farmland and polluted water sources with carcinogens destroy local inhabitant traditional livelihood sources and endanger lives.

Environmental degradation associated with oil and gas exploitation is a major source of grievance in the region (Tenvve et al; 2012). This is inevitable since mining for energy is driven essentially for profit in the value chain of production that is shadowed by a vast chain of waste and destruction” on man and his environment (Hallowes, 2011, 108). According to the World Bank, the arrival of the oil industry, the population boom in the area and the failure of government policy combine to account for the woes of the region (World Bank, 1995). Since 1950s oil and gas production has resulted in enormous human and environmental costs (Watts, 2007; Ibeanu & Luckam, 2006; Doyle, 2002) mitigation of the ecological problems has largely been relegated fueling decades of community grievance and protests against the oil companies and the government.

Oil spillage has been identified as a major source of environmental degradation in the region. A new report by the amnesty international blamed the oil companies operating in the region and shell in particular as responsible for widespread pollution in the Niger Delta. The human rights body argues that “oil spills, waste dumping, and gas flaring are notorious and endemic” in the Niger Delta Region. Though shell refutes some of these allegations, it, however, shares Amnesty international concern and admits that the people of the Niger Delta Region have not benefited from oil extract as they should (Saturday Mirrow, 2009 p.2) kidnapping, hostage-taking and death has been a major tactic of the militant group with being Nationals working with oil companies as the primary targets.

Environmental issues were ignored in the past. However, the current campaign for sustainable development has transformed the present business environment such that sustainable business practices are the order of the day and have created room for competition in the business arena. In line with this development, corporate policies are also changing rapidly. Similarly, the conventional accounting policies of organizations especially those that interact with the natural environment are under serious challenges by the environmentalists, host communities and government about the operational activities of oil companies and their performance on environmental issues.

The environmentalists are demanding among another thing that organizations should ensure the safety of the environment and include the environment in their accounts and corporate reports to enable stakeholders to make informed decisions. The host communities and their youths, on the other hand, are demanding that multinational corporations should bear the cost of their operations to the society and satisfy their social responsibility such as cleaning up the polluted environment, payment of compensation, for ecological damages and displacement of households sources of income, provision of free medical facilities, provision of social infrastructure such as roads and bridges, electricity, pipe water and to assist the host communities in executing town projects. Accounting for environmental costs helps to support an organization’s development and operation of overall environmental management systems (EMS).

Therefore, organizations are under challenge to achieve new goals such as measuring and evaluating and reporting environmental cost on community development and waste management

1.3 AIM AND OBJECTIVES OF THE STUDY

The study aims to investigate the effect of environmental cost on the corporate performance of oil companies in the Nigeria Delta Region of Nigeria. The specific objectives are to:

1. Examine the extent to which community development costs affect the return on total assets of oil companies in the Niger Delta Region of Nigeria.
2. Examine the extent to which waste management costs affect the return on total assets of oil companies in the Niger Delta Region of Nigeria.
3. Examine the extent to which community development costs affect Earnings per share of oil companies in the Niger Delta Region of Nigeria.
4. Examine the extent to which waste management costs affect Earnings per share of oil companies in the Niger Delta Region of Nigeria

1.4 RESEARCH QUESTIONS

Based on the specific objectives the following research questions are addressed:

1. To what extent does community development cost affect the return on total assets?
2. To what extent does waste management cost affect the return on total assets?
3. To what extent does community development cost affect earnings per share?
4. To what extent does waste management cost affect earnings per share?

1.5 HYPOTHESES

From the research questions the following hypotheses were formulated:

H0_1: Community development costs do not significantly affect the return on total assets.

H0₂: Waste management costs do not significantly affect the return on total assets.

H0₃: Community development costs do not have a significant effect on earnings per share.

H0₄: Waste management costs do not have a significant effect on earnings per share.

1.6 SIGNIFICANCE OF THE STUDY

This study is significant in many respects. Specifically, it will be of immense benefit to the following stakeholders:

Government and its agencies: The government will have readily available financial data on the environmental performance of different companies interacting with the environment and will thus effectively perform oversight functions. Government agencies on environmental protection will use available financial data on the environmental performance of certain organizations that are not complying with the environmental protection regulations but pollute the environment and yet appear more economically efficient than others which incur costs to protect the environment.

Oil Companies: This study will help oil companies to manage their scarce resources in an environmentally friendly way and enjoy a significant reduction in their operational costs and environmental cost. Oil companies will also discover that environmental costs can be offset by generating revenue through the sale of products.

Investors: Investors are concerned about the environmental responsibility of oil companies they wish to invest in. This study will benefit them as they require financial data on environmental performances and future environmental liabilities of different companies.

Host communities: The study will benefit host communities since they require financial data on the environmental performance of oil companies operating in their communities to ask for compensation for ecological damages and request for sponsorship of community projects and provision of social amenities.

1.7 SCOPE OF THE STUDY

Content Scope: This study closely examines the relationship between environmental cost and corporate performance of oil companies in the Niger Delta Region.

Geographical Scope: To achieve the desired result of this study, this study was carried out using one geographical region which is the Niger Delta Region of Nigeria.

Unit Scope: The unit of analysis will be based on the secondary data sourced from the annual reports and accounts of selected oil companies in the Niger Delta Region of Nigeria over the period from 2013 to 2017.

1.8 LIMITATIONS OF THE STUDY

This study was besieged by difficulties including the non-availability of adequate research materials since the study is a peculiar deviation from the previous study in scope and little research work preceded this research work.

This study is limited to the examination of the effects of environmental costs and corporate performance in the Niger Delta Region of Nigeria. However, all the findings of the study apply to oil companies in the Niger Delta Region of Nigeria. This may not represent the oil companies in Nigeria.

1.9 OPERATIONAL DEFINITION OF TERMS

1. Corporate Performance: Area of business intelligence involved with monitoring and managing an organization performance,
2. Earnings per Share: This is the portion of a company’s profit allocated to each outstanding share of common stock. It serves as an indicator of a company’s profitability.
3. Return on Total Assets: This is a ratio that measures a company’s earnings before interest and taxes (EBIT) relative to its total net assets.
4. Environmental Cost: Costs incurred to comply with regulatory standards, costs that have been incurred to reduce or eliminate releases of hazardous substances.
5. Community Development Cost: Total costs incurred from initiation to implementation of a project in a community.
6. Waste Management Cost: These are costs incurred in all the activities and actions required to manage waste from its inception to its final disposal.

1.10 ORGANIZATION OF THE STUDY

The entire project is divided into five chapters;

Chapter one forms the introductory part of the study and contains the background of the study, statement of the problem, aim and objective of the study, research questions, research hypotheses, significance of the study, scope of the study, limitation of the study, operational definition of terms, organization of the study.

Chapter two covers a literature review in line with the research purpose.

Chapter three is the research methodology. It is mainly concerned with the research design, sampling procedure/sample size determination, data collection method, data analysis technique, etc.

Chapter four contains data presentation and analysis.

Chapter five contains the summary, conclusion, and recommendation.