Nigeria's leading finance and market intelligence news report.

Getting to First Oil: Cost Optimization opportunities for New marginal field Operators

It’s the dawn of another era in the Nigeria Oil and gas industry as another batch of new marginal field operators/Investors get awarded a marginal field acreage. DPR had mentioned that 57 marginal fields were awarded to 80 indigenous companies and as such expect that Barrel of oil production per day will increase as the operators ramp up to get their first oil.

Despite calls about the ambiguity of the process and the forced marriages of companies for the fields, DPR needs to be commended for having taken the bull by the horn in executing this long-awaited process, as there hasn’t been any such fully executed process in the past 20 years.

Marginal fields refer to discoveries which have not been exploited for long, due to one or more of the following factors: Very small sizes of reserves/pool to the extent of not being economically viable, lack of infrastructure in the vicinity, poor production profile, capital operating and expenditure requirements and brevity of profitable consumers.

There are notable companies who have succeeded in fully executing and turning around the fortune of marginal fields to become a veritable Exploration and Producing (E&P) companies in Nigeria. The story of NDPR and Energia would remain a reference point for new marginal field operators.

These companies having started with marginal field operations have now translated to become Nigeria’s foremost Vertically Integrated Energy Companies. As the New marginal field owners go home to commence work, it’s imperative that the critical path to first-oil will take preeminence. However, I’d like to mention that sequel to the New marginal fields bid-round, over 11 marginal fields asset were revoked by DPR, which claims non-performance of their field development program. Some of the first marginal field round winners were still battling with issues around governance structure and financing even after 15 years of bid award. It’s peremptory that these new marginal field operators learn from the purported failures and seek to better their lots.

One critical area to getting to first oil, especially with the issue of forced marriages of companies is to ensure a well-defined corporate governance structure of the New-Co (New Company) to be created by these unions. A governance structure that effectively maximizes the strength of parties within and in respect of the New-Co and takes cognizance of the improvement opportunities required to effectively starting-up and building a world class E&P Company. The idea of a New-Co rather than a JV or IJV structure would ensure that companies look beyond their individual strengths to harnessing a bigger corporate structure that can transcend generations.

Whilst many new marginal field operators would look up to IOC’s and existing independent structures to foster their chance of getting to first oil, I would recommend that these companies look in-ward as to how they can build capacity for the now and the future. The critical path to first oil in terms of operation is to understand the potential production capacity of the field and analyze supply chain gaps around the asset. It’s very important that new operators optimize supply chains by creating models that give them the least cost to achieve oil production. Cost centers around Drilling and Completions, Procurement, Catering, Logistics & Facility Management, Transportation and Third-Party Access for crude transportation should be critically mapped and reviewed. Operators must look at the best supply chain sustainability approaches that address needs pertaining to the Economic, Social and Environmental impact of their activities and be able to execute them within the ambit of optimized cost structure.

Government Agencies like the Department of Petroleum Resources, the Nigerian Content Development Monitoring Board (NCDMB), the Petroleum Technology Development Fund (PTDF), must create avenues and platforms that allow for information sharing and technology adaptation for these new operators. Issues around local technology that can be used in place of foreign technologies for FEED development, usage of in-country built software for Procurement such as SOURCERYTE and Finance software should be encouraged. The engagement of a qualified consultant would assist new entrants to effectively manage the process of getting to first oil.

One innovative potential that I would recommend to all marginal field operators is to access or create an Agglomeration Centre around a 100-200km radius of their asset. An agglomeration Centre or Co-location center is a management company that project-manages assets from different asset owners. It takes ownership of day-day operations of these assets with minimum cost and a people-centric structure. Such a Company would manage assets from Drilling campaigns, Procurement, Logistics to Decommissioning while asset owners oversee performance metrics and indices set for production.

There are obvious reasons why companies want to be at the center of their asset operations, however, to optimize the required value expected by stakeholders, one needs to look beyond the egocentric or Nigerian nature of “I own my business and call the shots.” It’s now time to look at alternative models that give real value to shareholders and Bankers alike. Whilst this idea has just been briefly described, there are huge opportunities marginal field operators can get with an effective design and execution of an agglomeration center. It’s important that whilst engaging a consultant to develop such models, an integrative approach that aligns all stakeholders expectation should be paramount.

Another area of thought is how do we manage spend structure for the set of activities that triggers first oil production? Do we spend on services that gives immediate value or build structures and systems albeit in modules that make us very competitive in the nearest future?

Lastly, which is more like a reinforcement – the best companies are companies with the best governance structure. Our new marginal field operators must spend ample time in developing the best governance structure for this business. A lot of the awardees do not have the experience of managing oil and gas assets, nevertheless these companies have shown tenacity and capacity in times past in their respective businesses in-country. I have recommended a New-Co Structure rather than JV structure to reduce the friction regarding who operates what asset and who has the capacity to fund projects. A New-co will have various partners on the Governance Board, appoint Management Executives and create a solid structure for the future of the business. It brings every partner to the table and allows for independent Directorship to balance views of varying parties.

It’s my view that these new marginal operators will provide the much needed value for the oil and the gas industry and provide the prosperity required to make Nigeria a better place.

Emeka Eboagwu is the Managing Partner for Nigeria’s Indigenous Supply chain consulting company – PEL Consult and writes from Lagos-Nigeria.

Get real time updates directly on you device, subscribe now.