Economics of Nigerian Marginal Oil Fields

Abstract

Abstract In this paper, a new contractual agreement is proposed for the development of marginal oil fields in the Nigerian prolific hydrocarbon sedimentary basins. The proposed agreement is a modification of the existing agreements taking into consideration the special nature of marginal oil fields. Detailed economic analyses were carried out to assess the feasibility of the agreement. The economic analyses involved cash flow modeling, project profitability analysis, project sensitivity analysis and risk modeling using available and generally accepted economic, financial and technical data about the Nigeria operating environment. The final results from this study show that investing in the development of Nigerian marginal oil fields is a worthwhile option. The results show that the proposed agreement leads to favorable return on investment for all the parties involved. Project sensitivity analysis shows that if the combined cost of seismic survey and signature bonus is increased by more than 10%, the project becomes uneconomic. Also, if the price of oil falls below US$18.07, the project would have to be re-evaluated because the discounted pay back period (DPBP) would exceed the expected project life. Furthermore, risk analysis shows that as the NPV (net present value) increases, the risk level associated with such NPV also increases. Options available for financing marginal oil fields development are also presented. Introduction The issue of marginal oil and gas fields scattered all over the Niger-Delta (Nigerian biggest and prolific sedimentary basin) has been generating a lot of controversies in recent years in the country. At one end of the controversies are the major multinational oil players in the Nigeria upstream sector and at the other end are the indigenous entrepreneurs. ‘Marginal fields’ comprise the small and abandoned fields, which have remained undeveloped by their joint venture operators (multinational oil companies) in Nigeria. Such fields contain reserves that are uneconomic when produced by the multinationals but might be profitable if operated by Nigerian (indigenous) entrepreneurs due to their low overhead and operating cost. A total number of 116 of such fields have been identified in Nigeria. They contain collective reserves of about 1.3 billion barrels, with 5 fields containing collective reserves of 291 million barrels, and another 20 fields contain between 15 million to 20 million barrels each1. The federal government of Nigeria released the information above in December 2000 after the study presented in this paper was conducted. So, most of the initial assumptions made in this paper, especially with respect to the excepted reserve, are quite reasonable. The development of marginal oil fields has become an important strategic issue in Nigeria. The interested parties in the development of marginal oilfields are the federal government, the indigenous entrepreneurs and the major oil companies. Most indigenous entrepreneurs believe the government should acquire such fields from the major oil companies and reallocate them to intending investors. They believe developing these marginal fields would be a long way in improving the country's proven and recoverable reserves. The major oil companies also argue that since these fields are their assets, legally acquired, the issue of acquisition and reallocation should not be an option for consideration. Seismic survey, one of the most expensive stages of oil and gas exploration and even drilling activities have already been completed on most of these fields. It might even be at the indigenous investors' disadvantage if the major producing companies give out these fields without any major consideration. If such fields were jointly developed, it would provide opportunities for the indigenous company to engage or make use of the pool of high level technical competent workers of the multinational oil and gas companies.