Tough fiscal terms seen as major threat to IOCs’ exploration activities

Oil production platform and supoort ships Alaska

Tough government fiscal terms have been identified as the major challenge facing oil exploration by international oil companies (IOCs). This is against the background of the downturn in exploration activity in the oil and gas industry, especially in the deepwater, coupled with decreasing resource size and uncertain gas terms, according to industry operators.

To this end, government and other stakeholders have been urged to work towards restructuring the industry for effective production profile. This was echoed by oil giant ExxonMobil at the ongoing international annual conference of the Nigerian Association of Petroleum Explorationists (NAPE) in Lagos on Tuesday.

“Nigeria needs to create a stable and attractive investment climate, competitive fiscal terms to attract capital and develop clear regulatory and competitive policies that would enable her to realise the full potential of the industry,” said Elijah Whiite, vice president, ExxonMobil Production Company, adding that while Angola has progressively grown its oil industry, Nigeria has continued to see stagnation in recent times.

Speaking on the topic ‘Global Trends and Implications for Nigeria’s Position in the Global Market’, Whiite said, “Exploration drilling in Nigeria has declined substantially since 2006. This change in activity should be a source of concern.”

He noted that Nigeria and Angola began licensing their deepwater blocs in the early 1990s with most blocs awarded in 1993, adding that in the early 2000s, exploration in Nigeria was focused on high-volume targets in the emerging deep and ultra-deepwater plays. He said, however, that as Nigeria’s fiscal terms were toughened in 2000 and 2005, exploration became less attractive and activity started to decline.

“Angola’s higher drilling activity and capital invested have led to significant deepwater discoveries and production over the last decade,” Whiite said, adding that the flurry of exploration drilling activity in Angola is driven by the stable fiscal environment and identification of new plays.

For Nigeria, deepwater exploration spend in Nigeria in the last three years has been fairly low compared to other emerging deepwater provinces such as Ghana or offshore East Africa, he said. “Uncertainty over future royalty tiers and government share reduced the appetite for testing high-risk deepwater prospects, resulting in only nine deep- and ultra-deepwater wells completed in the second half of the decade, compared to 43 in the first half.”

Commenting on the dramatic growth in North America’s unconventional production of oil and gas, he stated that Nigeria must recognise that a significant resource shift has turned a key trade region into possibly a direct competitor.

“It has therefore become increasingly important to avoid creating barriers that may make her industry uncompetitive for investment. Coupled with the emergence of other resource basins in Africa and around the world, Nigeria must work to maintain her place as a key contributor to global energy supply,” he added.

Nigeria hopes to increase proven oil reserves to 40 billion barrels in the next few years; however, exploration activity levels are at their lowest in a decade and only three exploratory wells were drilled in 2011, compared to over 20 in 2005, according to the Energy Information Administration (EIA), the statistics arm of US Energy Department.

“For a while now, exploration drilling and exploration investment in the country have declined. Also, one cannot be unconcerned about the uncertainty that the PIB has brought to the oil and gas industry. The fiscal regime that is going to develop new discoveries is not clear,” Wumi Iledare, professor and director, Energy Information and Data Division, Centre for Energy Studies at the Louisiana State University, United States, recently told BusinessDay.

Describing government’s focus on restructuring the industry through the Petroleum Industry Bill (PIB) as timely, Whiite said it must be designed and implemented in a manner that both benefits and creates an attractive investment climate, stating: “In Angola, cluster developments allow smaller discoveries to be developed commercially due to cost-effective tie-backs. In Nigeria, however, discoveries tend to be more dispersed, and the average deepwater discovery size has become smaller. The higher the cost of a stand-alone development means that the commercial reserves threshold is much higher, and reserves replacement is becoming more and more challenging in Nigeria.”

Nigeria’s deepwater liquid production, he said, had averaged around 590,000 barrels per day since 2007, which means over 200 million barrels are produced per year, adding that discovered liquid volumes during this period have averaged only 74 million barrels. “This is not a sustainable situation. Fiscal terms must recognise attributes and high costs, otherwise many deepwater discoveries could be stranded,” he said.

Whiite said despite the fact that 20 deepwater exploration blocs have been awarded since 2005, higher exploration costs and a high oil price led some companies to shift their focus away from deepwater exploration and into appraisal and development drilling in the shallow water and onshore areas.

“It is noteworthy that all Nigeria’s final investment decisions (FIDs) have been made on 1993 production sharing contracts (PSCs). No final investments decisions have been made beyond 1993 PSCs. In addition, added security concerns, particularly in onshore and near shore areas, have discouraged further investment,” he said.

Nigeria’s deepwater project lead times are said to have increased averaging 14 years. The current portfolio of producing deepwater assets, such as Erha and Akpo, were developed within 7 to 10 years.

“We believe that urgent steps on promoting exploration drilling and sanctioning new projects are required to offset decline and fill the future production gap,” Whiite said.

 

[Business Day]

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