Stemming the tide of declining oil reserves

Offshore oil rig316 October 2016, Abuja – The continued depletion of the nation’s crude oil reserves has become a cause for concern, with stakeholders highlighting the need to revive exploration activity, ’FEMI ASU writes

Over the past few years, Nigeria has recorded a significant decline in oil reserves as the delay in the passage of the Petroleum Industry Bill and the prolonged period of depressed oil prices have continued to discourage investment.

Prior to the slump in global oil prices, which started in mid-June 2014, the regulatory uncertainty in the nation’s oil and gas industry had led to the suspension of some projects and reduced exploratory drilling activities.

The Minister of State for Petroleum Resources, Dr. Ibe Kachikwu, recently said that the nation was losing over $15bn annually to the non-passage of the PIB.

From a peak of 37.2 billion barrels, the nation’s oil reserves have fallen to around 35 billion barrels, signalling a drop in reserve replacement among the major producers, according to Ecobank analysts.

The Chairman and Chief Executive Officer, International Energy Services, Dr. Diran Fawibe, said, “There is no formula for increasing the reserves other than to explore for oil. There are three major terrains; we have the inland basins, onshore and deepwater.”

He said the shallow water and onshore had become unsafe for exploration activities and even for production operations because of militancy problem in the Niger Delta.

“So, the only area that is left is the deepwater, and the companies are not making serious commitments because of the fiscal regime, which has now been couched in the PIB and that is why many people have been saying the PIB must be passed so that the uncertainty regarding the fiscal arrangement will be removed,” he said.

According to Fawibe, stated that the depressed oil market has made most investors unenthusiastic about developing and going into exploration, adding that the oil companies tend to feel that when the government does not pay its cash call, it limits their ability and interest to go into exploration.

He added, “If we want to increase our oil reserves, we have to explore for more oil because there is a production and reserves ratio that has to be kept.”

Energy analysts at Ecobank Capital led by Mr. Dolapo Oni said in a recent report that the stagnation in the country’s output around the two million barrels per day mark was largely reflective of the drop in the level of drilling activity since the mid-90s, when drilling activity fell considerably compared to the earlier years.

According to the analysts, the bulk of the country’s discovered and undiscovered oil reserves lie offshore, and the dip in drilling activities has significant implication for reserve replacement, which can be less than 65 per cent industry-wide.

They said, “This is due to the low investment in exploration and appraisals by the International Oil Companies, who control over 80 per cent of production. Nigerian independents have also shown very little appetite for exploration due to their limited funding.

“Thus, Nigeria’s oil production outlook is incredibly constrained by several factors. While a steady decline in output since 2010 is likely to continue into 2019, the drop in field development drilling could accelerate the rate of decline from 2018, as older fields mature. But there aren’t enough new projects coming on-stream to replace them.”

According to the analysts, there is a real possibility of Nigeria’s crude production capacity dipping below two million bpd and remaining there for an extended period from 2018.

They said drilling activities had been affected by more than just oil prices, adding that the decline started since 2012 on fears that the PIB could impose uneconomic fiscal terms on offshore operations.

The analysts said, “More importantly, the weak funding for oil and gas has really constrained drilling activities in the country, even before the drop in oil prices. The Nigerian National Petroleum Corporation struggles to meet its cash calls on a monthly basis and is, thus, unable to plan for longer periods than a year. Its IOC partners have focused more on field development and secondary recovery programmes in the past decade.

“The lower oil prices, however, further complicated the situation with several field development programmes now postponed due to cuts to capex programmes. The NNPC needs to consider new options to improve the funding of cash calls and also introduce multi-year planning into the NNPC’s capex programme planning to ensure adequate drilling is funded. This is key to boosting oil reserves.”

Late last month, the Nigeria Extractive Industries Transparency Initiative called on President Muhammadu Buhari to take the lead and infuse urgency into the process of passing a new law for the Nigerian petroleum industry.

In its latest policy brief, NEITI expressed dismay at the inability of successive governments to enact a law for a sector that accounts for over 80 per cent and 90 per cent of its revenue and exports earnings, respectively.

It said the country had experienced huge losses to the tune of about $200bn due to failure to pass an enabling law for the petroleum industry, adding, “Some of these losses are projected investments due to regulatory uncertainty which experts have put at N120bn ($15bn yearly).”

The Group Managing Director, NNPC, Dr. Maikanti Baru, recently noted that the nation’s crude oil and gas reserves were fast depleting, adding that the NNPC was ready to cooperate with stakeholders and exploration companies to increase the nation’s oil and gas reserves and production.

He said, “Our national gas demand forecast to year 2020 — domestic plus export — indicates a rapid growth to 15 billion standard cubic feet per day, meaning current reserves level can only sustain that production for 35 years, if we do not increase the two bscfd gas reserves bases that require three trillion cubic feet to replace production yearly.”

Baru added that the country should increase oil production to four million bpd and meet the gas demand target of 15 bscfd per day by 2020 required for industrialisation and consumption.

In August, President Buhari directed the NNPC to commence exploration activities in the Benue Trough, a major geological formation underlying a large part of Nigeria, extending about 1,000km North-East from the Bight of Benin to Lake Chad.

The President had a month earlier directed the corporation to speed up its prospect for oil in the Chad Basin and Kolmani River, following the reported discovery of hydrocarbons by Shell near that area.

In May, Kachikwu said the Federal Government and the NNPC were committed to exploring for oil and gas in the inland basins, especially the Chad Basin and Benue Trough.

Kachikwu stated that the purpose of oil exploration in the Chad Basin was to increase Nigeria’s oil and gas reserves, add value to the hydrocarbon potential of Nigerian inland basin, provide investment opportunities, boost the economy and create millions of new jobs.

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