Mixed results: The marginal field business in NigeriaNovember 5, 2014
Eleven years have passed since Nigeria’s marginal field bid of 2003, yielding mixed results along the way, more than half of the fields awarded are currently not producing. Marginal producer Prime Energy Resources chairman and the former head of the Department of Petroleum Resources, Chambers Oyibo, spoke to TOGY about the unique nature of the marginal field business in Nigeria.
The experiences of local operators in marginal fields during the past 11 years has revealed operational challenges, as well as opportunities and approaches that are particular to these kinds of assets.
International oil companies that previously operated these fields deemed them marginal, and while most fields’ estimated reserves have increased significantly since the assets were taken over by national players, there are still small assets relative to larger oil mining leases. Small reserve bases tend to mandate lower production levels, which while related to reservoir pressure and productivity, must be managed to ensure that production is maximised through a total output measurement of daily productivity over time. Finding the right balance with this may mean that production from a given well doesn’t exceed 1,500 bopd.
Prime Energy Resources is a local exploration and production company that has succeeded in establishing production of between 1,500 and 2,000 barrels of oil per day (bopd) from their well in the Assaramatoru marginal field. “You do not necessarily want to do the full potential of a well because as you are just starting production and getting to measure the behaviour of the well. If you produce too fast, you can damage the formation of the well,” says Prime Energy Resources chairman Chambers Oyibo.
MINIMAL PROFITS: Low levels of daily production mean low levels of daily cash flow from the asset. Production of 1,500 bopd would, at global prices, lead to revenues of approximately $150,000 per day. This relatively modest cash flow leaves an operator susceptible to spikes in operational costs. While an onshore asset experiencing low levels of crude theft and low-cost logistics may be economically viable at this level of production, a swamp-based asset may not be.
“Production below 2,000 barrels of oil per day, while an achievement, is still not very profitable because we are producing in a swamp. After producing the oil, we must store it in a badge, then load it onto shuttle ships before it is transported to Amni’s offshore Ima terminal,” Oyibo said, regarding operations at his company’s Assaramatoru field.
PIPELINE NIGHTMARES: While oil transportation via pipeline is universally the cheapest option, security concerns related to militancy and theft in the swamplands can deter investments in this kind of infrastructure. Naval security boats must escort the shuttles, which is costlier than land-based security where the military can access the site with vehicles. Although these added logistics costs thin margins, Nigeria’s illegal bunkering industry has shown capacity to steal sums far greater than 2,000 bopd. Pipeline vulnerability is therefore too great of a risk.
LOCAL DIALOGUE: The strength of community relations around an asset is another external variable for costs. “For swampland operators with marginal fields near fishing villages, community members may put their nets across where they know the badges and shuttle ships will pass. If the nets get tangled up or tear, the onus is on the operator to remedy the issue,” Oyibo tells TOGY.
An advantage for these marginal field operators is their small structure. “Previously, with international oil companies, decision-making on a community issue had to go all the way up the ladder, which takes some time. With marginal field operators, the community has greater access to the decision-maker, which leads to a quicker turnaround in resolving disputes and allows for the decision-maker to explain the course of action in person,” says Oyibo. Community demands have tempered as marginal field operators, small in size, are seen as having lower finances than international counterparts.
FINANCIAL TRANSITION: With economic viability of land-based projects more common than swamp-based ones, operators of the former have found it easier to gain access to critical funding. Logistics and militancy are primary drivers of hesitancy from banks in funding marginal field operators in swamplands. “We had to go to private equity offer shares in exchange for funding. It is only now that banks are getting behind us when we are going into production. The initial funding was to prove that we could go into production, and so this funding will be needed to ramp up future operations,” Oyibo tells TOGY.
The banking sector’s ability to understand assets has improved. “Years ago, in our initial funding search, a bank asked us if the oil was still in the ground, since the field had first been drilled in the late 1970s and had not been touched since,” Oyibo explains. In 2014, banks hire external consultants to evaluate the reserves and the economic feasibility of assets. Post-production logistics and how an operator plans to transport its crude oil to market are of significance in their evaluation.
ON THE MOVE: As marginal field producers approach the expiration of the extension granted on their original five-year concession agreements, companies that have not yet reached production are at risk of having their assets seized by the government. For the ones that are producing, Oyibo stresses, “No company can survive on one marginal field due to the eventual decline in production from these assets. Those that want to keep progressing and stay in business must eye future bid rounds and divestments as a necessary means for growth.”