Oil majors rush to Permian basin starves Nigeria of investment dollars

The giddy rush by International Oil Majors to buy stakes in the Permian basin, the world’s second biggest oil field located in the United States, is resonating in Nigeria in the form of dwindling investment dollars.

Nigeria has been responding in a cavalier manner, seizing their assets as in the case of Shell’s OML 11 oil field whose operatorship was taken over by the NNPC, and demanding US$20bn in back taxes and royalties – actions akin to receiving your suitor swinging a baseball bat.

Hence the Permian fields first developed in the 1920s have become an attractive proposition with production reaching 3.8million barrels per day in 2018 on the back of advanced hydraulic fracturing technology – a way to drill oil from rock formations.

Analysts at Wood Mackenzie, a global oil sector consultancy found that oil majors’ scramble for a piece of the Permian pie drove the value of M&A deals to an all-time high of US$60 billion, twice as much as each of the two prior years, accounting for 53% of global M&A activity. The Permian itself set a new record of US$29 billion.

BP, Chevron, ExxonMobil and Shell have staked their claims on tight oil platforms even though they are late arrivals.  “These four are among the biggest investors shaping the way the basin is being exploited,” said Simon Flowers, chairman and chief analysts at Wood Mackinzie, a global energy sector consultancy.

Chevron and ExxonMobil have announced big upward revisions to Permian targets that envisage oil production of at least 0.6 million b/d in five or six years’ time. Chevron also increased tight oil resource by 5 billion boe – the increase in production isn’t just about getting the oil out quicker, Flowers said.

The Permian basin demonstrates the power of technology to take a field struggling to produce 1 million bpd in 2010 to over 4million bpd currently even after it has been producing for 100 years.

“We expect an average of nearly 4 million b/d this year, 2 million b/d more over the next five years, and an eventual peak at 6.4 million b/d in 2034,” Flowers said.

At current production rate, it could well surpass Saudi Arabia’s Ghawar oil field producing 5 million bpd. This is because wells that had been dug and abandoned, perhaps due to unfavourable economics or absence of requisite manpower or technology are being restarted.

Over the past five years, oil producers have dug on average 5,316 wells per in the Permian but have only completed an average of 4,620 wells per year, Robert Rapier, an oil sector chemical engineer told Forbes.

The dizzying pace at which investment dollars move in search of opportunities has eluded Nigeria’s oil sector because those who manage it treat reality like an abstract concept. While Nigeria’s African peers are creating opportunities for investment dollars, Nigeria is building a barricade.

Last month, Shell said that Nigeria’s claims that it was owed billions in taxes could delay the development of 180,000 bpd Bonga South West oil field. Shell’s head of upstream Andy Brown told Reuters on the side lines of the International Petroleum Week conference that the claims dealing with PSCs terms lack merit.

Though it would be difficult to find worse royalty terms than Nigeria’s PSCs which gifted oil companies zero royalty in water depths below 1,000 meters where the bulk of Nigeria’s deep water finds have been located, but banking on successfully plugging a 14 year revenue gap in one fell swoop and unilaterally, is comforting delusion. Yet there is a yawning need to review Nigeria’s obsolete fiscal terms.

It is rather pragmatic to negotiate fresh terms and embark on reforms. This is an economic imperative as investments in big oil and gas projects have stalled over poor regulatory and fiscal framework, lack of reforms in the operation of the NNPC and operational risks associated with militancy in the Niger Delta.

 

ISAAC ANYAOGU