Third Party Tariff: A Key Input to NOV Projects Decision Analysis & Decision Quality

Abstract

The paper seeks to find the optimum solution on how to develop some portion of a unitized field. The case study involves two fields straddling across four oil mining leases (OMLs), in Niger Delta, Nigeria. Each field were operated independently by JV-A and JV-B until mid-2016 when the operatorship of the straddling reservoirs (SRs) in the unit was granted to JV-B by the regulators, as it is a law in Nigeria that all straddling reservoirs should be developed as a unit under a single operator. The decision on whether JV-A should grant JV-B the right to also operate the non-straddling reservoirs (NSRs) in the unit will depend on the amount of tariff imposed. JV-A will be required to pay hydrocarbon transportation and processing tariffs if it flows its share of the produced hydrocarbon through JV-B's existing facility. The exact amount of tariff is unknown and will be negotiated. Additionally, four feasible evacuation routes exist and will be considered for this evaluation to decide the most profitable and capital efficient investment option. The result shows that the opportunity is very sensitive to hydrocarbon handling tariff; necessitating JV-A choice of evacuation route. In addition, the paper demonstrates how using appropriate project framing and considerations of who will operate the JV-A's non-straddling reservoirs, relied heavily on different hydrocarbon transportation and processing tariffs. It is hoped that this paper having highlighted the importance of tariff charges and the role of proper framing on decision quality will encourage decision makers to adopt this approach during decision analysis and ultimately improve the quality of investment decisions particularly for Non-operated venture (NOV) projects.