Major oil producing African countries have been hit hardest due to falling oil prices, a situation which also affected new investments in the industry. Despite these grim facts, there is a light at the end of the tunnel for those determined enough to sustain production, argues Dr Soky Amachree, Managing Director & CEO of SIGMA Technical Agencies Ltd.
The Hydrocarbons Industries, as any other commodities industries, are subject to fluctuation of the offer-and-demand balance. The prices follow the same behavior. Price spikes stimulate the activities related to production in an attempt to satisfy the demand. The opposite happens in case of price drop that hampers the production activities to reduce the products availability.
The commodities prices affect different countries in different ways. Hydrocarbons Importers benefit from the low prices while the Exporter Countries generate less revenue from their export of Hydrocarbons. Both Importers and Exporters therefore need to adjust their relevant budgets to mirror the commodities price variation.
The cyclical changes of demand-and-offer on commodities’ availability are especially visible in the Hydrocarbons Industry. The storage of spare oil production in tank-farms while waiting for better price has limitation due to costly spaces in storing large volumes of liquids in metal tanks, and for the size of the immobilized capital.
The global oil and gas industry entered a challenging year (2015) based on the continued free fall, rock-bottom low oil prices and continues to show a great sign of uncertainty. Amid this instability and the continuous crash of oil price, however, the author strongly believes that the future of oil is not totally bleak. There is a likely possibility that by the fourth quarter of 2015, the market will start showing some positive signs of sustained oil price rebound culminating to around US$75/bbl. in early 2016 due to the cyclical nature of the industry, especially with the impending possible lifting of sanctions against Iran and other market events and fundamentals, the price of oil is most likely to go up. However, it must be emphasized that the decline in crude oil prices is not new to the industry as it has been witnessed in 1986, 1998 and 2009. This will therefore not be the end of the petroleum industry. This is therefore the time for the international oil and gas companies operating in Nigeria and other African countries to embark on more investment in technology and opening up of new frontiers in the nation’s oil and gas industry which will engender healthy competition towards unlocking the enormous potentials of the industry.
In retrospect, it is instructive to first analyze the reasons for this very unpleasant industry situation. The drop in crude oil prices to around US$47 a barrel at the beginning of the year and around US$65 a barrel in June 2015 from about US$105 a barrel in July 2014 reflects a number of factors. Such factors include the growing supply from non-OPEC countries, particularly the US; a slowing increase in global demand; and Saudi Arabia’s decision not to continue acting as OPEC’s swing producer.
Also, world oversupply is rapidly filling oil stockpiles; Total oil production in 2015 is projected to reach 9.35 million barrels per day. Currently, U.S. crude oil inventories are at the highest level in 80 years due to shale oil production.
To the expanded source of hydrocarbons, one needs to add the production of the small-to-marginal fields that are operated by producing countries’ indigenous small companies at reduced costs compared to the Major Oil Companies.
Impact on the Industry
Generally, due to this low price regime of around US$47 a barrel at the beginning of 2015, most of the lost revenue will continue to hit the Exploration & Producing industry’s bottom line, which will reduce cash flow needed for re-investment and negatively affect the industry growth and the global economy.
While the big oil companies like ExxonMobil, Shell, BG, CNOOC, Chevron and other International Oil Companies would have “safety net” to withstand the shock until the next resurrection of projected oil price back to US$75 per barrel, if the price of oil continues with this dismal trend, it would be right to say that 2015 would not be the best of years for most African Independent and Marginal field operators, especially in Nigeria.
It is important to state that the oil Majors have better economy of scale and financial strength to weather this waging storm, they were not totally taken aback by the recent somersault in the market since some of them already have readjusted their portfolios through divestment in their marginal and low profitable international assets, executing exit strategy in operations of highly politically tensed areas and outsourcing some non-core operations.
On the contrary, some emerging African independent National oil companies displayed their appetites to garner more assets through purchase of assets and incurring high cost in exploration and production because the price of oil and the economics at the time showed some meaningful profits.
Some of these African oil companies now know that the financial health of their companies pose much worry if the price of oil continues to collapse down to US$40 per barrel. African oil operators would be forced to ensure drastic retrenchment of their human capital, reduce capital expenditures of all sorts – possibly cut back on exploration and purchase of new assets for now.
Impact on Oil Economy
The policy of carving from the large leases, historically assigned in the past to the International Oil Companies, the small fields up to 10,000bopd production to privately owned indigenous companies that has been done some time ago in Nigeria, is bearing fruits with the addition of economically produced barrels of oil to the Producing Country total.
The present (2014-2015) oil glut is affecting also the Small Producers (Marginal Field Operators) but this type of operation can better weather the difficulties of this hard time by further compressing costs and preparing for the prices rebound to be better positioned for the recovery.
The industry Service Companies (both international and local) that were always adjusting their operations to satisfy the needs of the Oil Majors are now more available, and at a better cost, to assist the Small companies (Marginal Field Operators) on their operational needs.
The Exporting Countries national personnel that, following the market principles of chasing better salaries, went to work as expatriates in other countries and are now made free. They are now slowly returning home carrying with them an increased experience and a better readiness to contribute to the home industry.
Figure 1: Sub-Saharan Budgetary Prices for 2014-2015
Courtesy of International Monetary Fund
Survival Strategy for Smaller Producers (Marginal Field Operators) during the Glut
As the saying goes, “necessity is the mother of invention”. This is a period of prudence and increased management efficiency. It is only the agile companies with knack for innovation, proper cost management without sacrificing quality, safety and environmental protection and balanced appetite for risk that will remain afloat and continue to be in business.
This trying time has now thrown up opportunity for independents and national oil companies that are financially stable to engage in production at lower operating expenditure. Those that will be able to sustain production will reap heavily by 2016 and beyond.
To stay in business and be competitive, the Africa oil producers need to start adopting new approaches by exploring new ways of acquiring equity in projects, design of field development plans and then developing fields using better solutions with low risk, low cost and faster development solution options.
Panacea for the emerging African Independents and Marginal Field Operators
The experience of Del-Sigma Petroleum Ltd, one of the Marginal Field Operators in Nigeria that hit First Oil in the first quarter of 2015 is pertinent here. Del-Sigma and its partner for the development of the KE Marginal Field in OML 55 in the Niger Delta concluded funding arrangement in October 2014 based on projection of the price of crude oil at US$100 per barrel. If the deal had been delayed, the KE Field project would have been abandoned. This may have been the predicament of those marginal field operators who were not able to meet the March 14, 2015 deadline to put their fields on production. It would therefore be necessary and prudent for the Honourable Minister of Petroleum to put this challenge of crash in oil price while deciding the fate of the Marginal Field operators who could not meet their production deadline of March 2015 and therefore risk the revocation of their field licenses.
For Del-Sigma and its partners, after our initial operational challenges, we are now positioned despite the low crude oil price regime to operate and lead the way in cost leadership and operational excellence. To achieve our long term objectives, we had to consider a better method by working with new partners to use conventional and unconventional solutions that can enable the development of the field through reducing the Capital Expenditure and Operating Expenditure. These joint developed solutions have enabled us to continue to maximise economic recovery through cost reduction from the field.
Some of our approach includes a proven ability to unlock brown fields or aging assets, a track record and expertise in fast-track field asset development, a unique and proven community engagement strategy and the integrated approach to delivering energy solutions through modular associated gas facilities which reduce the levels of flared gas from our producing asset, whilst also deferring decommissioning liabilities.
Some of our other methods also include:
- Early production systems on larger fields, where our solutions can be used to achieve early production from a field while appraisal work continues enabling the partners to manage their capital risk;
- Hub and cluster arrangements where the re-deployability of our solutions can replicate existing hub and cluster arrangements for smaller fields
- Produce and Evacuate Test – Oil within 30~60 days from start of operation
- Optimize production to generate early cash flow
- Lay out medium term strategies for full field development
Need to Support Independent and Marginal Field Operators in African Countries
The Marginal Field Development Program in Nigeria, which is a laudable one, generally could be adjudged as successful, even though there is room for improvement. It is pertinent to mention here that both the Honorable Minister of Petroleum Resources as well as the staff and management of the Department of Petroleum Resources (DPR) have been very supportive of this initiative which is geared towards ensuring wider indigenous participation for the purpose of creating a vibrant and robust industry that will positively impact the capacity of indigenous Exploration and Production companies to contribute to Nigeria’s oil reserves.
However, to enhance the rate of success of the independent operators/marginal field program, the following recommendations are made:
- Government should promote greater indigenous participation in the Nigerian Oil and Gas industry and also assist indigenous Marginal Field and indigenous Operators through more favorable policies such as import duty waivers and tax breaks, etc. and also improved local bank involvement by reducing interest rates.
- Government should establish an ENERGY BANK, to be funded by 20 per cent of Excess Crude Account. Marginal Field and Independent Operators can thus access funds in this Bank rather than seeking for Investors/Technical Partners overseas at high premium in terms of giving out up to 40 per cent participating interest in the field.
- The Shell Petroleum Development Company Ltd (SPDC) in Nigeria has set aside US$5 Billion to support Contractors in partnership with Operators and Nigerian Banks to support Marginal Field Operators. Other IOCs should be encouraged to do same.
- Early passage of the Petroleum Industry Bill (PIB).
The above could be replicated in other African countries to stimulate the growth of indigenous operators in the oil and gas industry in the continent.