EXPLORATION COST AND PROFITABILITY IN OIL AND GAS INDUSTRY: A STRUCTURAL EQUATIONS MODEL APPROACH

Abstract

The aim of the study is to examine the relationship between exploration cost and other oil and gas cost on profitability of oil and gas companies. The sample for the study covers 4 oil and gas companies in the upstream oil and gas industry in Nigeria. The study focuses on these number of oil and gas companies in the downstream sector because of the challenges of getting secondary data for exploration companies in the upstream sector even for the public entities. The study covers variables such exploration cost (EXPCT), acquisition cost (ACQST), Production cost (PRDCT), Environmental cost (ENVCT) and financial profitability of oil and gas companies measured using ROE, ROA, EPS and Profit margin (PM). The path analysis indicates the existence of a positive (0.1109) and significant (p=0.001) relationship between environmental cost (ENVCT) and ROE, a positive (0.3796) and significant (p=0.00) relationship between environmental cost (ENVCT) and ROA, a negative (-0.3796) and significant (p=0.00) relationship between environmental cost (ENVCT) and EPS and a positive (0.2674) and significant (p=0.00) relationship between environmental cost (ENVCT) and EPS. The path analysis indicates the existence of a negative (-0.0395) and insignificant (p=0.154) relationship between production cost (PRDCT) and ROE, a negative (-0.110) and insignificant (p=0.065) relationship between production cost (PRDCT) and ROA, a negative (-0.1183) and insignificant (p=0.081) relationship between production cost (PRDCT) and EPS and a negative (-0.090) and insignificant (p=0.154) relationship between production cost (PRDCT) ) and PM. The study recommends the need for proper cost planning, forecasting and management to aid profitability of oil and gas companies