The oil production cut by the Organisation of Petroleum Exporting Countries (OPEC) and its allies OPEC+ to stabilise prices is not only hurting cash flow to the Federal Government, it is also threatening local content in the upstream oil sector by squeezing marginal field operators in the country, Lucas Ajanaku and John Ofikhenua report.
Worried by the free fall in oil prices, after days of protracted talks in April, OPEC+ agreed to the largest single output cut in history.
The record cut of 9.7 million barrels per day (bpd) started on May 1 but was subsequently scaled back to 7.7 million in August. The deal was agreed to support prices as demand has plunged by as much as a third due to global lockdowns to contain the spread of the COVID-19.
Russia and nine other non-OPEC countries have been working with the 13-member group to prop up oil prices in recent years. OPEC+ members control about 50 per cent of global oil production.
OPEC’s 13 members produced 25.21 million b/d in November, up by 670,000 b/d from October, while its nine partners, led by Russia, added 12.68 million b/d, a fall of 50,000 b/d, according to the latest S&P Global Platts survey.
Nigeria improved its compliance to 99 per cent, pumping 1.50 million b/d, as output from key grades such as Forcados, Qua Iboe and Brass River dipped. Brass River exports have been on force majeure since late November due to a pipeline explosion.
Africa’s largest oil producer entered recession after its GDP fell for two consecutive quarters as oil revenues shrank due to hefty production cuts along with the fallout from the coronavirus pandemic.
When two elephants fight, the grass suffers. Marginal field operators have been badly affected by this development.
Oil industry regulator, the Department of Petroleum Resources (DPR), defines a marginal field as a discovered resource that has been left unattended for more than 10 years.
According to the US Legal.com, marginal field refers to an oil field that may not produce enough net income to make it worth developing at a given time. However, should technical or economic conditions change; such fields may become commercial fields.
Desirous of promoting indigenous participation in the upstream oil sector dominated largely by international oil companies (IOCs), the Federal Government had withdrawn marginal fields from the big players and handed to local players after successful bid rounds.
Operators of the marginal fields are worried that the cut in daily oil production, which they described as adverse to their operation, may compel them to pull out of the business if the government fails to address the situation in the next three months.
It was gathered from some of the operators, who are mostly indigenous players, that since the government complied with the cuts, the investors in the marginal fields can no longer service their loans.
One marginal field operator who preferred to speak on condition of anonymity said: “We were producing 5,000 barrels per day. They have reduced our production to 2,500 bpd in the last three months. You have already killed the companies. We cannot meet our obligation to our creditors.”
According to the investor, operators now find it difficult to run the fields because of the minimal production volume.
“We have to shutdown service because the capacity is 5,000 bpd and you reduced it to half. It means that we only run the plant because they will be difficult to restart,” he averred.
Explaining that the marginal filed operators can no longer cope under the policy, he said, “therefore, we have to retrench.”
Despite the losses the companies incur consequent upon the production cut, the host communities have not pruned their demands for Corporate Social Responsibility (CSR) from the operators, it was also learnt.
According to one of the investors, the marginal fields are the onshore oil bearing areas that the International Oil Companies (IOCs) neglected because of their high cost of operations and low profit.
The grouse of the marginal field operators is that their businesses are worse hit since they are yet to stabilise like the international players.
He added that the marginal field operators have more of indigenous workers under their employment, noting that it is through their employment that money trickles down directly to the Nigerians, especially the people at the lowest rung of the ladder.
“It means you have killed them. It means that you have further killed the economy because they are the ones employing Nigerians,” he noted.
Lamenting the government’s directive has affected the weak more than the stronger (IOCs) players in the industry, another source said the directive should have been directed at those that have already built capacity and stabilised.
The operator said the policy ought to have spared the weak players in the industries that spend more on cost of producing from stranded fields.
“One would have thought that it is the marginal fields that would have been protected. It is the IOCs that produce 500,000 bpd, 200,000bpd that you should have been talking to. For instance, Shell and others have the capacity to survive the production cut.
“Some of the marginal filed operators have pulled out in order to reduce cost. Those that are in the stranded fields that the IOCs neglected are the ones that have been affected. The marginal fields are the areas that the IOCs have abandoned. Their cost of production is high. They managed to bring it down to $20 per barrel, so if you touch their volume of production, it means you have killed them,” the operator said.
Efforts to get the reaction of the DPR proved abortive. Its Head, Media, Mr. Paul Osu, when contacted on phone to state the government’s side of the story, only requested that questions be sent to him via text message. An hour later, his reply was “please in a meeting.” The Nation, however, waited for his response for 24 hours to no avail.
But there appears to be a silver lining in the horizon as OPEC and non-OPEC allies, after days of tense discussions, have agreed to increase production by 500,000 barrels per day beginning next month. This will bring the total production cuts at the start of 2021 to 7.2 million bpd.
– The Nation