Economics of Nigerian Marginal Oil Fields - Identifying High Impact Variables

Abstract

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.

Marginal Fields Development in Nigeria: A Review of Extant Strategies

“…The economics of Marginal Field Development was investigated by Akinpelu and Omole in 2009, to determine the most important factors affecting the economy. The fiscal and regulatory terms of the NNPC for 2002 were used [61]. Because production typically dominates Nigerian Oil and Economic models, the production variable was treated as one of the main uncertain variables in the probabilistic model.…”

“…They suggested that future research should not restrict the variables to those that affect production and well costs. The cost management strategy should take into account additional expenses, such as investments in flow lines and jackets, barge costs, and operating expenses [61].…”

Subsea Processing: A Holistic Approach to Marginal Field Developments

“…A field that may not produce enough net income to make it worth developing at a given time; should technical or economic conditions change, such a field may become commercial 21 . b. A field with estimated average production capacity not expected to exceed 10,000 bbl per day 1 . c. The Nigerian Department of Petroleum Resources classifies fields with the following characteristics as marginal 1 .…”

A factorial analysis on the built-in risks influencing marginal oil field development in Nigeria

“…Similar studies consist of [7][8][9][10]. Others are: [11][12]. Extensive literature exist on the various approaches to handling risks in projects but very few studies appear to have addressed risks in marginal oil fields.…”