Upstream operators to trim $46bn from offshore investments

Upstream operators in Nigeria will shave off $46billion worth of capital investments in the oil and gas industry within five years especially in deepwater fields as declining oil prices forces a review of their investment profile.

Slow recovery of oil prices is forcing operators to improve efficiency through streamlining project design. This has slowed the mergers and acquisition market as buyers and sellers are unable to agree on asset values due to price volatility.

A new WoodMckenzie report stated this adding that major oil companies who are heavily invested in Sub-Saharan Africa account for the bulk of cuts in capital expenditure spend.

Femi Oso, senior research manager for Sub-Saharan Africa at Wood Mackenzie, says: “Exploration cuts in the region will also contribute to a longer-term production slump as explorers have shied away from greenfield prospects, in favour of appraising known discoveries.”

Curiously, the WoodMckenzie analysts see a rise in deal activity if prices remain low for longer as companies opt to divest non-core assets.

“The confirmation of the giant Owowo discovery in deepwater Nigeria shows the quality of resources Sub-Saharan Africa still has to offer,” Oso said.

ExxonMobil announced a one billion barrels crude oil discovery in Owowo field in Bayelsa state on October 27. Industry experts project a five year wait period for development but call on government to be an enabler.

“Key for ExxonMobil will be developing the find and bring it to commerciality, years from now. The Owowo-3 well straddles both OPL 223 and OML 139, thus in the medium term likely developments could include the conversion of the OPL part into an OML.  On the government’s part it’s really about being an enabling partner,” Rolake Akinkugbe, head of energy and Natural resources at FBN Capital told BusinessDay.

Government can provide enabling environment by easing regulatory and fiscal challenges that have contributed to investor apathy in Nigeria’s upstream operations.

“Governments in Sub-Saharan Africa need to revive the upstream oil and gas industry by offering attractive fiscal terms rather than look to increase state revenues in the current climate,” says Oso.

The report finds that gas dominates recent exploration success, particularly in frontier basins such as the Senegal-Bove in Mauritania and Senegal.

Nigeria is pushing for increased gas investments with the 7big Wins policy which has created a $51billion investment opportunity in gas processing, transmission and general infrastructure in midstream, downstream operations.

But a critical success factor is developing a gas policy that will provide enabling commercial and fiscal terms, develop adequate infrastructure and repay outstanding gas invoice arrears owed gas companies.

“Nigeria has the world’s 9th largest gas reserves but ranks 17th on production demonstrating the vast untapped potential that exists in the country unlocking these potentials requires continued collaboration between key stakeholders and the government,” said Clay Neff, chairman of Oil Producers Trade Section.