Nigeria is inviting bids for marginal fields now so that producers can take advantage of the low oil prices to develop small oil fields that would not require much cost, says the head of the government’s oil industry regulatory agency.
“We have these fields that cost of production is definitely low, there is no exploration per say because of these fields are small and the cost of production is not as high as the huge oil fields that are being operated by IOCs so we thought it very wise to bring it at this time when it is very hard to get investments, when bigger projects that require millions or billions of dollars are on hold to see how we can now get small money to just produce the oil,” said Sarki Auwalu, director/CEO of the DRP by video conference on Thursday.
However, the challenge is that, even though this is a low price environment, Nigerian oil companies have the world’s largest costs of production with some companies reporting over $30 to produce a barrel of oil and there are no guarantee costs will fall simply because the fields are smaller.
The oil and gas operators that convened at webinar organised by Future Energy Leaders of the World Energy Council including Ademola Adeyemi-Bero, CEO of First Exploration & Petroleum Development Company Limited, a Nigerian indigenous firm, Bayo Ojulari, managing director of Shell Nigeria Exploration and Production Company and Mele Kyari, group managing director of the Nigerian National Petroleum Corporation (NNPC), on Thursday spent much time deliberating on how to cut costs, indicating that this is a serious industry concern.
“Companies spend more than 50 percent to pay for human resources, this is not sustainable and anyone that cannot be efficient will be irrelevant,” said Kyari.
Kyari accused some oil companies of piling on personnel costs in the form of huge disengagements costs, bonuses, regular raises among others to shore up personnel cost above 36 percent of cashflow rather than the industry average of 11 percent, which eats into available earnings for tax deductions by the government.
Kyari hinted that logistics or crude handling costs was also outrageous costing more to move things around Nigeria than shipping them to China. Others on the call highlighted that multiple, conflicting regulation, insecurity and inefficiencies play a role in raising cost for producers.
It is unclear how the problem of high cost of production would be solved by inviting bids for marginal fields.
“We looked at the cost of production as some of the fields and we asked what is the best way to harness them, as we know there will be reduction from OPEC, and in some of the fields, the cost of production is very high. So the oil is coming down and we ask what opportunities are there for the country to take advantage of,” said Auwalu.
But this argument confounds more than it enlightens. The 23-member alliance comprising members of the Oranisation of Petroleum Exporting Countries (OPEC) and some non members including Russia, have imposed a stern output curbs, gutting almost 10million barrels per day of global production.
Nigeria’s production was capped at 1.4million bpd a day but would be forced to make the cuts well into September because it cheated on its output restriction producing over 40,000 bpd above its supply cap in April.
The implication is that if investors win bids for the marginal fields and raise funding, to develop the fields, their production could be surplus to requirement as the agreement reaches into 2021.
According to the DPR boss the marginal field programme which started in 2003 offers local producers an opportunity to to enhance capacity but they also need a market for their production.
The 2020 marginal fields would be conducted electronically over the next six months involving five stages including: Expression of Interest/Registration, Prequalification, Technical and Commercial bid submission and Bid evaluation.
According to the DPR guidelines, there are at least 57 fields on offer. Marginal fields are those abandoned by International Oil Companies (IOCs) because they are judged not be commercially profitable.
Analysts say holding bid rounds when oil prices are unstable due to the effect of the coronavirus pandemic could present a problem but some say it was better than nothing.
“The implication is that the government may not earn as much it wanted but it seems it is better than nothing,” says Ayodele Oni, energy lawyer and partner at Bloomfield Law firm.
Yet, local investors will struggle to raise funding as loans to the sector constitute a significant proportion of bank’s non-performing loans.
