The future of carbon-based energy seems very bleak, as the markets continue to face a supply threat from vast discoveries made during the boom era of the commodity super-cycle.
Exploration companies who have made huge oil finds, in harder-to-reach places, which led to the adoption of unconventional but expensive drilling methods like oil ‘fracking’ and horizontal drilling, will be in a race to sell proceeds from those finds as they will become even more uneconomical over the years as prices remain unattractive.
“In the next 30 years, people will realize that a lot of oil has already been discovered that cannot be drilled”, says Professor Paul Collier of the Harvard business School in BusinessDay’s CEO Nigeria forum. “A lot of oil has been discovered in the last 10 years and the world is now awash with carbon-based energy”.
The implication of this is that a lot of the oil finds “will become stranded or ‘useless’ assets. The effect of this will become more adverse on the market as companies become more conscious of this.
As drillers begin to worry that their assets might become stranded in future, they will become desperate to get it out of the ground now, which will cause prices to dip even further.
“This is basically the future of carbon-based energy”, Professor Collier says.
Over the boom period of the commodity super cycle however, Nigeria was one of the few countries that did not benefit from a new wave of investment in oil extraction as a result of too much uncertainty and lack of clarity on the PIB.
Big companies like Shell instead, decided to cut down capital expenditure in deep water exploration. Shell, along with other IOCs have also in recent years, sold off significant parts of their interests in Nigerian oil fields to mitigate their global risk profile.
This is despite the fact that Nigerian deep water oil has one of the lowest production costs per barrel.
“Nigerian deep water production is still significantly less than $65 a barrel”, said an Oando representative at the event.
According to Collier, the realization of fact that the era of big oil is over should be the starting point for the new government, and this fact will be the corner stone in repositioning Nigeria’s economy going forward.
More than 65 percent of government’s revenue comes form oil receipts, and as a result, the government sector is expected to face a huge shock on its own, as it tries to balance its books.
The positive points for the economy however is that both the government and the oil sector are small parts of the economy. In other words, “there are big shocks to small parts of the economy”, says Professor Collier.
The oil sector accounts for about 15 percent of the economy, while “Nigeria’s government sector is one of the smallest in the world”.
EDOZIE IFEBI
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