Major oil and gas projects worth about $1.5 billion scattered around Nigeria may face more uncertainties as delays in the execution or sanctioning of these projects are expected to severely impact local companies who are expected to benefit from billions of dollars of subcontracting opportunities.
Nigeria is desperate to increase its oil revenue as a fall in foreign direct investment has put some strain on the country’s oil and gas sector, after the country sank into its second recession in less than five years, due to the effect of the pandemic-induced lower oil prices.
With the country in need of a miracle to solve its worsening economic situation, low hanging fruits such as major oil and gas projects which are expected to create thousands of new jobs, spur domestic gas demand, generate electricity, strengthen the country’s revenue base and turn Nigeria into a dominant geopolitical player in Africa using its gas resources – just like Australia, Russia or Qatar – are still awaiting Final Investment Decision (FID) despite huge economic challenges.
The projects include Bonga South-West Aparo with 630 million boe (barrel of oil equivalent) operated by Shell, Etan-Zabazaba with a capacity of 510 million boe operated by Italian ENI, Preowei field with a capacity of 145 million boe operated by French major Total and HA gas project with a capacity of 210 million boe operated by Shell Petroleum Development Company of Nigeria Limited (SPDC).
Most risk experts and chief financial officers (CFOS) say these million-dollar projects expected to boost Nigeria’s oil production by as much as 875,000bpd and revenue by about $1.5 billion may all face funding crisis as a result of the slower economic activities and other macroeconomic challenges.
“Lower oil price, higher inflation, volatility in the exchange rate, policy uncertainties, and economic recession are fundamentals that pose serious risks to these projects. It’s impossible for any major oil fields to breakeven with these challenges,” one senior CFO familiar with the matter told BusinessDay.
Another source told BusinessDay that while the outcome of many large-scale projects remains unknown as companies continue to review their portfolios, few projects remain on track, either because they are considered low cost due to the size of the fields involved or because of capital-intensive infrastructure has already been laid.
“There is no economic sense in taking FIDs on Bonga SouthWest Aparo, Etan-Zabazaba, and Preowei oil fields now because of the current economic challenges,” said Charles Akinbobola, an energy analyst at Sofidam Capital.
He noted that although there is a weak recovery of oil prices over the past few weeks, it’s not enough to change the big companies’ calculations while “slow bureaucracy of tedious regulatory process means we might not see any concrete decision on major oil fields this year”.
For the time being, most oil companies are moving to slow the pace of production, seeking to expand storage capacity and attempting to market their crude oil with the best sales and purchase agreements and financial hedging instruments possible. However, most major companies have yet to finish reviewing their portfolios and declined to provide details about the impact the catastrophic economic downturn will have on their African projects.
Already, Eni and Total, the two international oil and gas majors with the largest presence in Nigeria, have already signalled 25 percent cuts to their investment in exploration and production projects in 2020.
According to independent energy research and business intelligence company Rystad Energy, the start-up dates of Nigeria’s major hydrocarbon developments are projected to be postponed by between one and three years.
Although Rystad noted that nothing is official yet, timeline delays for project start dates vary from one to three years depending on the case.
“The investments for major planned oil and gas projects will now see a timeline shift or even spending cut altogether, which will ultimately impact production levels in this region,” said Siva Prasad, a senior upstream analyst at Rystad Energy, in a note. The government’s many failings with attracting foreign direct investment, most especially in the oil and gas sector, have meant Nigerians have grown poorer as economic growth is slower than population growth.
Already the country based its 2021 capital budget on plans to produce 1.86 million barrels (inclusive of Condensates of 300,000 to 400,000 barrels per day) at a crude price of $40 per barrel.
Specific details of each field include Bonga SouthWest Aparo (Break-even oil price $60). Further analysis revealed taking an FID on $10 billion Bonga South West Oil field (Bonga II) planned by oil major Shell might be difficult because its breakeven price of $60 is above the current market price of $48. The field has a capacity of 630 million boe and is expected to increase Nigeria’s total oil output by 10 percent with an additional 200,000 barrels of crude oil daily.
Etan-Zabazaba (Break-even oil price $51.95)
Zabazaba and the Etan fields located in oil prospecting lease (OPL) 245 operated by Italian oil firm ENI have a breakeven oil price of $51.95 which is above current market realities of $48. The Zabazaba and Etan fields are estimated to hold a combined total of 510 million barrels of oil equivalent (Mboe).
Preowei field (Break-even oil price $53.30)
Total is working up the Preowei structure in the vicinity of the Egina field. However,
taking FID might be a challenge with a break-even oil price of $53.30 Preowei oil field is located on OML 130, about 25 km North of Egina field in water depths of 1,150 meters. Preowei is the third producible field on OML 130, the other two are the Akpo and the Egina.
HA gas field (Break-even gas price $6)
The HA field is located in Shell Petroleum Development Company of Nigeria Limited (SPDC) SPDC’s shallow offshore acreage OML 77, approximately 20 km south of the eastern Niger Delta coastline. The HA gas project with a capacity of 210 million boe operated has a break-even gas price of $6 is 72 percent above the current market price of $2.8.
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