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Unfavourable Environment May Keep $50 Billion Oil Find Trapped in Reserves

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  • Unfavourable Environment May Keep $50 Billion Oil Find Trapped in Reserves

The Federal Government has been going cap-in-hand begging for loans around the world, without making much success because of the global financial crunch. Besides, Nigeria’s economic recession make such venture even less viable, even as the country needs to spend its way out of this doldrums.

To crown it all, latest attempt by President Muhammadu Buhari to borrow about $30million for infrastructure development to jump start the economy was vehemently opposed by the legislators on account of lack of details.

While the President struggles to provide for details on the proposed loan, perhaps there is the need to look inwards and the possibility of raising the required fund through creating an environment suitable for sustainable investments both local and foreign.

On October 27, the Nigerian unit of world’s largest publicly owned oil and gas company, ExxonMobil, announced a significant discovery with a potential recoverable resource of between 500 million and one billion barrels of oil on the Owowo field offshore Nigeria.

At an average price of $50 per barrel, the new field is worth $50 billion in potential revenues for the Nigerian oil and gas industry over the next few years, with a potential to rise higher if the international prices of crude rise. The potential revenue is almost twice of what the government is hoping to borrow from the international financers.

This was why the news was received with so much excitement, but also with some reservations because this will be the first major find in the country for years. Policy indecision and commitment to contract agreements have stalled investments in the nation’s petroleum industry, and in some cases, even pushed some companies out of the country.
Mobil find.

The Owowo-3 well, which was spud on September 23, encountered about 460 feet (140 meters) of oil-bearing sandstone reservoir.

Owowo-3 extends the resource discovered by the Owowo-2 well, which encountered about 515 feet (157 meters) of oil-bearing sandstone reservoir. The well was safely drilled to 10,410 feet (3,173 meters) in 1,890 feet (576 meters) of water.

“We are encouraged by the results and will work with our partners and the government on future development plans,” said President, ExxonMobil Exploration Company, Stephen M. Greenlee.

The Owowo field spans portions of the contract areas of Oil Prospecting License (OPL) 223, and Oil Mining License (OML) 139. The well was drilled by ExxonMobil affiliate Esso Exploration and Production Nigeria (Deepwater Ventures) Limited and proved additional resource in deeper reservoirs.

Mobil Producing Nigeria (MPN), the operator for OPL 223 and OML 139, holds 27 per cent interest. The Joint venture partners include Chevron Nigeria Deepwater G Limited (27 per cent), Total E&P Nigeria Limited (18), Nexen Petroleum Deepwater Nigeria Limited (18), and the Nigeria Petroleum Development Company Limited, NPDC (10).

Nigeria’s crude oil and condensate production has declined significantly from the beginning of the year till now due to continued attacks on oil pipelines and production facilities by militants in the Niger Delta.

This discovery will no doubt have a positive impact on the country’s crippled production and export operations. But before this can happen, a number of stakeholders have called on government to make the operating environment more favourable get ExxonMobil and other joint venture partners to invest more in exploration and production.

The development is also an encouragement to ExxonMobil, which together with other oil exploration companies, Shell and Chevron; lost over $7.1 billion, about 70 per cent of earnings in the first half of 2016 to militancy, low oil prices, and weak refinery margins.

A number of actions have been identified as a boost to bringing the reserves to production, including: Community stability and security of MPN operation sites important for continued production and revenue generation;Eliminating funding issues and other critical challenges that exacerbate operations decline, near term; Support of all stakeholders to assure near term business sustainability, and; Maintaining right environment/atmosphere through collaboration for long term business outlook and community interventions to remain positive.

Although the Nigerian National Petroleum Corporation (NNPC), whose subsidiary, NPDC holds 10 per cent stake in the Mobil JV, thinks there is still a long time to go to production, but the current economic woes call for quick actions.

The NNPC Group Spokesman, Mohammed Garba Deen, told The Guardian, “Talking about production is a little bit premature for now, we’re happy that it was found, we’ll tap into it.”

Pointing out that without incentives and sanctity of contract, the reserves may remain buried in the ground, he argued, “without incentives the discovery won’t have been made, and whatever contract we signed will be honoured and implemented to the letter.”

To underscore the importance of exploration and production in the current economic condition, the Buhari’s administration had reportedly allocated about N34 billion for the finding and commencement of oil exploration activities in the North. A development, many see as a desperate move to empower the region, which had passionately criticised the 13 per cent derivation allocation to oil producing states in the Delta Region of the South.

The NNPC Group Managing Director, Maikanti Baru, on July 25 said the President had instructed the Corporation to go into the frontier basin of Chad by Kolmani River in Bauchi State, where oil is reported to have been discovered and commence exploration activities in the area without wasting time.

But an industry expert, Nosa Omorodion, has a different view about the enablers that will buoy production at the Owowo field.

Noting that “It’s the biggest find in a long while and will add to our reserve base,” he added that “Production is guaranteed because partners plan how production will proceed and the fund will fall into place.”

On stakeholders’ concerns, Omorodion, who is the President, Nigerian Association of Petroleum Explorationists, NAPE, urged “Government to acknowledge there are issues with joint venture (JV) funding, and enable the companies to seek for alternative funding, because current JV funding arrangement cannot be sustained to boost exploration and production.”

He blamed the lull in the petroleum industry on the lack of passage of the Petroleum Industry Bill (PIB), saying: “the Bill has been delayed for too long and done the nation a disservice. We have enabling legislation in the Petroleum Act and the fiscal regime incentives needed to drive exploration campaign. The PIB lost track, it became a big monster and operators paused on investment.”

There are indications that the PIB, whether in its omnibus state or balkanised as being planned, may not be passed in this current legislative session. This is because, the legislators had already begun the deliberation of a five-part Bill, which had gone through second reading last week, while the executive is still harmonising its own copies, which it plans to send to the National Assembly soon.

As the Legislature and Executive decide what to do with the PIB, Omorodion insisted, “we need to let the industry run efficiently without interferences; regulators should play their roles because despite having all the natural resources, Nigeria is not the first point of call for investors. So we need security of investment.”

For this reason, he said the Niger Delta goes beyond the government alone but concerns all stakeholders, noting that “pipelines attacks cause pollution, loss of life and property, a long period of inactivity, and loss of jobs. Communities need to understand that despite that they have a legitimate reason to be angry; they are still ones that suffer the most from these attacks.”

Mobil investments in Nigeria

ExxonMobil subsidiaries in Nigeria currently account for over 30 per cent of Nigeria’s crude production, making it the biggest producer and top revenue contributor. It has contributed over N1 trillion in annual revenue to the Government since 2010, and more than N160 billion to the Niger Delta Development Commission (NDDC) since 2001.

CEO/Founder Investors King Ltd, a foreign exchange research analyst, contributing author on New York-based Talk Markets and Investing.com, with over a decade experience in the global financial markets.

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Oil Rises as Threat of Immediate Iran Supply Recedes

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Oil prices rose on Tuesday, with Brent gaining for a fourth consecutive session, as the prospect of extra supply coming to the market soon from Iran faded with talks dragging on over the United States rejoining a nuclear agreement with Tehran.

Brent crude was up by 82 cents, or 1.13%, to $73.68 per barrel, having risen 0.2% on Monday. U.S. oil gained 91 cents, or 1.3%, to $71.79 a barrel, having slipped 3 cents in the previous session.

Indirect discussions between the United States and Iran, along with other parties to the 2015 deal on Tehran’s nuclear program, resumed on Saturday in Vienna and were described as “intense” by the European Union.

A U.S. return to the deal would pave the way for the lifting of sanctions on Iran that would allow the OPEC member to resume exports of crude.

It is “looking increasingly unlikely that we will see the U.S. rejoin the Iranian nuclear deal before the Iranian Presidential Elections later this week,” ING Economics said in a note.

Other members of the Organization of Petroleum Exporting Countries (OPEC) along with major producers including Russia — a group known as OPEC+ — have been withholding output to support prices amid the pandemic.

“Additional supply from OPEC+ will be needed over the second half of this year, with demand expected to continue its recovery,” ING said.

To meet rising demand, U.S. drillers are also increasing output.

U.S. crude production from seven major shale formations is forecast to rise by about 38,000 barrels per day (bpd) in July to around 7.8 million bpd, the highest since November, the U.S. Energy Information Administration said in its monthly outlook.

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Oil Prices Rise as Demand Improves, Supplies Tighten

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Oil prices rose on Monday, hitting their highest levels in more than two years supported by economic recovery and the prospect of fuel demand growth as vaccination campaigns in developed countries accelerate.

Brent was up 53 cents, or 0.7%, at $73.22 a barrel by 1050 GMT, its highest since May 2019.

U.S. West Texas Intermediate gained 44 cents, or 0.6%, to $71.35 a barrel, its highest since October 2018.

“The two leading crude markers are trading at (almost) two-and-a-half-year highs amid a potent bullish cocktail of demand optimism and OPEC+ supply cuts,” said Stephen Brennock of oil broker PVM.

“This backdrop of strengthening oil fundamentals have helped underpin heightened levels of trading activity.”

Motor vehicle traffic is returning to pre-pandemic levels in North America and much of Europe, and more planes are in the air as anti-coronavirus lockdowns and other restrictions are being eased, driving three weeks of increases for the oil benchmarks.

The mood was also buoyed by the G7 summit where the world’s wealthiest Western countries sought to project an image of cooperation on key issues such as recovery from the COVID-19 pandemic and the donation of 1 billion vaccine doses to poor nations.

“If the inoculation of the global population accelerates further, that could mean an even faster return of the demand that is still missing to meet pre-Covid levels,” said Rystad Energy analyst Louise Dickson.

The International Energy Agency (IEA) said on Friday that it expected global demand to return to pre-pandemic levels at the end of 2022, more quickly than previously anticipated.

IEA urged the Organization of the Petroleum Exporting Countries (OPEC) and allies, known as OPEC+, to increase output to meet the rising demand.

The OPEC+ group has been restraining production to support prices after the pandemic wiped out demand in 2020, maintaining strong compliance with agreed targets in May.

On the supply side, heavy maintenance seasons in Canada and the North Sea also helped prices stay high, Dickson said.

U.S. oil rigs in operation rose by six to 365, the highest since April 2020, energy services company Baker Hughes Co said in its weekly report.

It was the biggest weekly increase of oil rigs in a month, as drilling companies sought to benefit from rising demand.

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FG Spends N197.74 Billion on Subsidy in Q1 2021

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The Federal Government has spent a total sum of N197.74 billion on fuel subsidy in the first quarter (Q1) of 2021, according to the Federal Account Allocation Committee (FAAC) report for May.

The report noted that the value of shortfall, the amount the NNPC paid as subsidy, in the March receipts stood at N111.97 billion while N60.40 billion was paid in February.

In the three months ended March, the Federal Government spent N197.74 billion on subsidy.

The increase in subsidy was a result of rising oil prices, Brent crude oil, against which Nigerian oil is priced, rose to $73.13 per barrel on Monday.

The difference in landing price and selling price of a single litre is the subsidy paid by the government.

On May 19, the Nigerian Governors Forum suggested that the Federal Government removed the subsidy completely and pegged the pump price of PMS at N380 per litre.

The governors’ suggestion followed the non-remittance of the NNPC into the April FAAC payments, the money required by most states to meet their expenditure such as salaries and building of infrastructure.

However, experts have said Nigeria is not gaining from the present surge in global oil prices given the huge money spent on subsidy.

Kalu Aja, Abuja-based financial planner and economic expert, said “If Nigeria is importing Premium Motor Spirit and still paying subsidy, then there is no seismic shift.”

“Nigeria needs oil at $130 to meet the deficit. In the short term, however, more dollar cash flow is expected and with depreciated Naira, it will reduce short term deficit.”

Adedayo Bakare, a research analyst, said that the current prices do not really mean much for the country economically.

He said, “The ongoing transition away from fossil fuels and weak oil production from the output cuts by the Organisation of Petroleum Exporting Countries will not make the country benefit much from the rising oil prices.

“Oil production used to be over two million barrels but now around 1.5 million barrels. We need OPEC to relax the output cuts for the naira to gain.”

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