Oil companies suspend big projects amid falling prices

Bonga Northwest.

The jitters being sent by the continuing slide in the prices of crude oil in the international are being felt not only by the government but by the oil majors, which are unwilling to commit resource into big deepwater projects, ‘FEMI ASU writes

With a number of international oil companies choosing to maintain a disciplined and selective approach to capital spending this year after earnings slumped in 2013, a continued decline in global oil prices could stall some deepwater projects in the country.

Several IOCs are increasingly focused on expanding their footprint in the offshore areas of the Nigerian oil industry as a result of onshore risks, but the non-passage of the Petroleum Industry Bill has already led to the suspension of some of the projects.

Industry analysts, who spoke with our correspondent, said if the slide in oil prices continued, it would affect the investment decision of the IOCs, which are looking to move ahead with their bigexpensive offshore projects in the country.

International benchmark Brent crude, against which Nigeria’s oil is measured, slipped below $87 a barrel on Thursday as expectations that the US interest rates might rise sooner than expected pushed the dollar to its highest in more than three weeks. It hovered around $84 and $85 on Friday.

Among the major deepwater projects in nigeria is Total’s Egina field, which received its Final Investment Decision in 2013.

Shell had in March said it was pushing forward with the Bonga Southwest and the Erha deepwater projects, with the FID on the Bonga South West project expected by the end of this year.

The Bonga South West project is an expansion of operations at Shell’s Bonga field, which includes 19 new wells to be drilled at an expected cost of $12.35bn.

The FID has yet to be taken on the Zabazaba/Etan development operated by Italian oil major, Eni, which is expected to move into production in 2016, with proven reserves of over 500 million barrels.

The Vice-President, Nigeria & Gabon, Shell Upstream International, Mr. Markus Droll, was quoted to have said, “We are pushing forward to have the world-scale Bonga South West project FID ready by the end of 2014.

“Similarly, with our operator partner ExxonMobil, we are investing substantially in the further development of the important Erha field.”

In February 2013, ExxonMobil decided to move ahead with the Erha North Phase 2 project despite uncertainty caused by the non-passage of the PIB.

Chevron was reported to be investing $1.9bn between 2012 and 2016 to drill another 10 wells under the phase two of the Agbami development.

A significant boost to deepwater production, totalling more than 600,000 barrels per day in new capacity, is expected to come on stream if all the projects proceed as planned.

The Managing Director, Frontier Oil Limited, Mr. Dada Thomas, told our correspondent that the falling oil prices might affect investment, particularly big-ticket projects.

Thomas said, “If you are doing a deep offshore project, which is very expensive in terms of the cost of producing oil, and if oil prices continue to fall and have to go below $70 and approach $60, a lot of projects may not be viable any longer.

“It is the big, expensive projects that will be stalled if oil prices continue to drop the way it is going. An ideal oil price should be between $80 and $100 per barrel. But the way this decline is going is rather surprising. Oil price has dropped from over $110 to $85 under four to five months.”

He further said the oil companies would take a good, hard look at their projects, adding that expensive projects that they had not committed to already might have to be halted.

“If the FID has not been made, it will not be made,” Thomas added.

French oil major, Total, had said on Wednesday that its adjusted net income dropped slightly in the third quarter compared with the previous year as crude prices fell, while production declined by eight per cent.

A $10 drop in the price of oil per barrel would translate into a $1.5bn reduction in annual profit this year, the Chief Financial Officer, Total, Patrick de La Chevardiere, said.

The Chief Executive Officer, Falcon Petroleum Limited, Prof. Joe Ezigbo, noted that the investing capacity of oil majors would be affected if the prices of oil continued to fall, stressing the need for the passage of the PIB.

Nigeria, which aims to ramp up production to four million barrels per day and grow reserves to 40 billion barrels in 2020, has seen its reserves slump to 35 billion barrels from 37 billion barrels, according to the Department of Petroleum Resources.

The lack of reserves growth has been attributed to the fact that little or no significant investment has been recorded in oil exploration in the last five years and the number of wells drilled has also been on the decline since 2006.

An energy analyst at Ecobank, Dolapo Oni, said, “Projects that could be affected are deepwater projects, some of which require prices as high as $80/90 per barrel. But Nigeria is really a low-cost development region.”

The IOCs, under the aegis of the Oil Producers Trade Section of the Lagos Chamber of Commerce and Industry, recently said that Nigeria’s deepwater had the potential to generate $66bn of investments up to 2025, contributing additional 900,000 barrels of oil equivalent per day production in 2020 to offset natural decline.

“If oil prices fall below $80 towards $70, then some of the deepwater projects could be postponed. So, falling oil prices are unlikely to slow down investment if they stay above $80. This will happen if the decline persists for at least three months,” Oni said.

The Vice President and Head of Energy and Natural Resources, FBN Capital Limited, Rolake Akinkugbe, said, “The early victims of the current oil price slide – if protracted – will be exploration and production spending levels in the next 24 months. Capital expenditure budgeting in recent years for frontier hotspots in places like offshore West Africa and deepwater Brazil has been relatively conservative.

“That level of conservatism has meant that oil price volatility has had only a moderate impact on upstream spending, including in sub-Saharan Africa. Thus, the price at which most firms will begin to rein in on CAPEX is still significantly lower than the current levels, at around $74 per barrel on average.”

She, however, said going forward, some of West Africa’s big mega offshore projects, haunted by the twin impact of fiscal regime uncertainty and dipping oil prices, would inevitably consume a larger portion of many IOCs’ annual cash flows.

“Even small independents and juniors, are in some cases, juggling at least two mega projects at once. Thus, some portfolio rationalisation is likely in the months ahead and some assets may struggle to meet the threshold for investment,” Akinkugbe added.

This month, the international crude benchmark extended its decline and touched $82.60 per barrel on October 16, the lowest in almost four years.