RISK AND UNCERTAINTY IN MANAGING OIL FIELDS IN NIGERIA

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RISK AND UNCERTAINTY IN MANAGING OIL FIELDS IN NIGERIA

ABSTRACT

Marginal oil fields are usually faced with difficulty especially during field development. This difficulty may be attributed to high levels of risks involved in developing the field (risks like, hitting a dry hole instead of a producer well). There is a possibility of failure or success in developing marginal oil fields in Nigeria. Consequently, critical risk assessment is necessary to quantify risks in order to increase the possibility of success for the chosen project. However, this study focusses on the identification of risk and uncertainties while developing marginal oilfields in Nigeria. also, a quantitative and qualitative method of risk evaluation was presented and implemented by employing the use of cashflow analysis with Net Present

Value. Basically, three marginal oil fields were considered; Land Onshore, Swamp and Coastal Offshore marginal oil field. Each field was evaluated for economic viability and sensitivity analysis was performed for critical risk assessment. Nevertheless, results from the analyses performed on the three projects revealed that, although all projects were economically viable, the probability of success for swamp marginal oil field project outweighs the rest because of its Internal Rate of Return (IRR) of 65%. In addition, it was observed that swamp marginal field took the least time to break even (1.6years) with a profitability index (PI) of 9.02. In addition, comparative analysis performed on the three projects using economic indicators (such as, PIR, PI, NPV, POT- Pay-out Time) proved favourably to swamp marginal oil field project. Invariably, twelve (12) risks associated with marginal oil field development were identified, presented and were briefly discussed.

CHAPTER ONE

1.0 BACKGROUND OF STUDY

1.1 Introduction

Marginal fields are oil fields that were awarded to major international oil companies upon discover by the Nigeria government for the purpose of exploring but are left undeveloped due to weak anticipation in production. As of 2013, 166 marginal fields had been identified containing a total reserve of more than 2.8 billion barrels of oil. In 2003 29 marginal fields were license to domestic companies with at least 51% ownership in hopes of expanding the country capabilities in oil and gas operations, but only accounted for 2.41% of the total oil production in 2014 with only 9 out of the 29 marginal fields awarded producing oil with output of around 54,000 barrels of oil per day(bopd) according to the Nigerian National petroleum corporation, this is due to the issue that active marginal field operators rely on foreign partners rather than local companies to provide technical support and funding but most limitations being face by marginal field operators is lack of adequate data and information that leads to improper planning marginal field project.(The oil & Gas year Nigeria.2015)

Marginal field operators are mostly faced with the challenge of developing their fields optimally to avoid the occurrence of massive loss in investment.  This challenge however, stems from insufficient planning prior to field development (Kenanah, 2016). An essential part of any field development planning operation is to identify risk and uncertainty – especially in the case of limited information. Moreover, precise evaluation of project downsides offers an extent of difficulty – as different development choices possess high chance of negative Net Present Value (NPV).

In addition, making the decision to invest in petroleum exploration and production projects is always a very complicated endeavor (Kenanah, 2016). These projects are impacted by many high risk factors associated with the petroleum industry, such as relatively high initial investment requirements, lack of funding, size of reserve, environmental concerns like insecurity when transporting hydrocarbon, non-availability of large data volume for precise analysis,  long term investment horizons (projects may be up to 20 years or more) and negative cash flow during the first few years, sometimes also during the last years of the project life. These factors, coupled with dangerously volatile oil price levels, makes the number of uncertainties in the data utilized in decision making to invest in petroleum projects very high, and this therefore weighs heavily on the minds of decision makers. Most petroleum companies make the decision to invest in a certain petroleum projects based on economics models, which are constructed as spreadsheets prepared by internal economists in the company or external experts based on data available from different sources (such as petroleum engineers, geologists). As a result, each petroleum company has developed its own economics models. These models are characterized by unclear definitions of input variables and the way they are related to the output parameters.

1.2 Statement of problem

It is impossible to overstate the importance of risk management, mitigation, and strategies in the upstream oil and gas industry. The more money needed to start a business, the larger the risk, and vice versa. The oil and gas industry faces uncertainties at all levels, from geological exploration to lifting and production. It’s also a capital-intensive enterprise to start. Because of the aforementioned factors, as well as the complicated nature of the oil and gas industry, it is perhaps the most risk-prone industry, necessitating a large variety of risk mitigation strategies to safeguard investors.

1.3 Aim of study

The major focus of this study is to review present feasible method(s) for assessing risk and uncertainty in managing marginal oil fields in Nigeria.

1.4  Objectives of study

The objectives of this study are summarised as follows;

  • To determine the risk associated in the upstream petroleum industry
  • To specify a method that can help with risk mitigation in marginal oil fields.
  • To perform cashflow analysis and sensitivity analysis as a means to quantify identified risks in marginal oilfields.

1.4 Significance of study

Managing risks and uncertainties when it comes to marginal oil field development in Nigeria deserves much attention due the huge amount of money cost on such projects. However, this study is important to stakeholders within the oil sector – such as; private investors, corporations and government bodies – who will benefit from this study as it would serve as a guide to ensure profitability and reduce possibility of massive loss.

1.5 Scope and Limitation of study

This study examines the current practices of risk and uncertainty assessment commonly used in the petroleum industry especially in Nigeria. It only focuses on the framework which is the commercial segment rather than getting into detail or depth on the uncertainty in each technical domain. HSE, and natural environment uncertainties in the petroleum project are not included in the scope of this work. Only commercial segment of petroleum upstream projects will be covered in this study.

RISK AND UNCERTAINTY IN MANAGING OIL FIELDS IN NIGERIA

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