Marginal Field Development in the prolific Niger Delta environment has taken on added significance since the Federal Government of Nigeria adopted an aggressive Reserve and Production Capacity development strategy as a launch pad for rapid economic development. The last few years have witnessed a number of developments in this area with the Government approving a new set of fiscal parameters for Marginal field development. Various strategies have been proposed to enhance the economic value from Marginal field Assets ranging from early production systems, to innovative least cost production strategies such as the use of a converted Jack Up Rig with subsea storage, to accelerating production through the use of horizontal wells. These strategies involve significant tradeoffs, sometimes quite sophisticated technologies and cost implications. This paper examines the economics of Marginal Field Development using the latest NNPC fiscal/regulatory terms of December, 2000 with a view to identifying the most significant variables impacting the economics. From knowledge of the economic variables and their impact, insights into potentially proactive strategies to improve Marginal field economics are developed. Preliminary studies inform that a much more aggressive production strategy be considered for marginal field exploitation since time value of money considerations have a disproportionately large impact in such economics and should be exploited. The production variable is treated as one of the main uncertain variables in the probabilistic model - Nigerian Oil Economic models are usually production dominated. The option of the Oil Majors taking equity participation in Marginal Field development and hence making available their technical expertise has very low probability of success. The main reason that these fields don't make it to the development stage in the budget allocation process of most Majors is economic. The current strategy in which the Majors negotiate an Overriding Royalty rate with the Marginal Field operator is likely to be the preferred option because it is less risky, does not involve any risk of their capital or other resources, particularly scarce human resources. Introduction Marginal Field Development in the prolific Niger Delta environment is of strategic importance to the Federal Government of Nigeria's drive towards aggressive Reserve and Production Capacity enhancement. Aside from the anticipated Revenue from an improved production base, the Government is also aiming at building up indigenous participation in the Nigerian Upstream Oil & Gas Industry. As at end of 2005, total production contribution of all the Indigenous E & P Companies was 100,000 bbls, 5% of total Daily Country production of 2 million barrels/day. In a sense, it is not only a drive to broaden the revenue base of the Country but also, a strategic imperative with the long term goal of establishing linkages to the broader Nigerian Economy and local content development.
The involvement of Indigenous Entrepreneurs and Host Communities in the Implementation of the Gas Master Plan will have far reaching effects on the Nigerian Economy. The consequences of the neglect of this crucial element in the Oil side of the business are well known – enclave nature of the Industry with no multiplier effect on the rest of the economy, virtual control of a strategic sector that generates over 80% of total revenue in the hands of competing IOCs with a multiplicity of interests, little technology transfer and minimal Human Capacity Development. Wide spread alienation and agitation for Resource Control manifested over time and the Country is just now struggling to contain the damaging effects on the Oil & Gas Industry. These mistakes need not be repeated in the Emerging Gas business. Three stakeholder Groups were identified in the consideration of opportunities for Indigenous participation: The Indigenous Entrepreneur, the Host Community Contractor and the Host Community Residents. The segmentation of the different Stakeholder Groups is deemed necessary in order to focus on the specific interests of each Group.
Oil and Gas investments are inherently risky, especially in upstream exploration where technical risk is predominant. Because of the large upfront expenditure required for these projects, it is imperative that investors in the business are well informed of the risk to which their capital is exposed. However, most commonly used performance measures focus on one aspect of what is a multidimensional problem. While expected value gives an indication of the amount of value created by the investment, the standard deviation gives an insight into the distribution of expected returns. The Performance Index combines these two insights into a single measure, value created per unit of variability (the standard deviation), which is a significant improvement over the one dimensional measures. However, the Performance Index, PI is based on total variance and does not reflect the uncertainty structure of the risky investment. PI does not distinguish between upside and downside variances and can sometimes give a lower ranking to a prospect with large upside variance (High gain situation) leading to the Paradox of aversion to incremental reward (PAIR). We show this flaw in PI in an expected value maximization context as well as in an expected utility maximization context. Semi-variance analysis gives an insight into the uncertainty structure of a risky investment. We use semi-variance analysis to propose a modification to PI to eliminate the problem of PAIR. Total variance is decomposed into upside and downside variances and the modified PI estimated based on downside variance alone. In decomposing the variance, we recommend using a threshold value to avoid the problem of a "shifting mean". We demonstrate through two examples (1) that though conventional PI may correctly rank risky prospects, non-recognition of the uncertainty structure does not accurately reflect the risk characteristics of an investment, and through a second example, a well drilling situation in which conventional and the modified PI lead to different ranking and investment decision recommendations.
The key challenge of Gas Pricing in the Nigerian Environment is the need to balance three seemingly conflicting objectives: Maintaining the required level of Gas Supplies to support Domestic Economic GrowthProviding Producers with sufficient incentives to continue to invest in Exploration & Development of New Gas Reserves andMaximizing Revenue from Exports At the current level of development of the Gas Industry in Country, the fundamental question of how to achieve economic pricing as the industry transits from a monopolistic market structure characterized by administered prices to a competitive structure, based on a market determined pricing mechanism will have to be addressed. We present a simple model to determine the appropriate price of Gas to be paid at the wellhead. The Model focuses the different End Users towards the ultimate price – Opportunity Cost pricing as proxied by the netback Gas Export Price or Export Parity Pricing (EPP). There will be a Transition period to full Market Pricing – determined by how quickly the Market develops. A Scalar factor is used to achieve the level of support deemed appropriate for the different sectors identified in the Gas Master Plan: Power, Export LNG and Commercial Sectors during the transition period. The Scalar factor will be a fraction during the transition period and reach a value of 1.0 at the end of period (or Sector Pricing will equal Export Parity Price). The magnitude of the Scalar factor and its rate of change will reflect a combination of Policy Objectives and Market Responsiveness thereby ensuring the needed dynamism into the Pricing Model.
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