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Price slump, weak demand reduce oil production

By on January 11, 2015

Nigeria’s crude oil production, which has been going downward in the past few years, looks set to decline further this year amid the weak global demand, reduction in capital investment by oil companies on the back of low oil prices, among others.

Other factors, according to industry analysts, are the lingering regulatory uncertainty in the Nigerian oil and gas industry and political risks, much of which is associated with elections, with the February election “set to be the most competitive and unpredictable since the return to civilian rule in 1999,” according to Business Monitor International.

Rising oil theft was also identified as another factor. For 2014 oil production projection, the government applied a risk factor (production losses) of 300,000 barrels per day due to production shut-in resulting from activities of oil thieves and pipeline vandals in late 2012 and early 2013.

The Chief Executive Officer, Gacmork Nigeria Limited and ex-Chevron executive, Mr. Alex Neyin, said, “There is normal decline in production as the field is produced. If you are producing a field, today you are making 30,000 bpd out of it, it will get to a point that production will drop. The only way you can increase production is by doing work-over and making new finds. That means getting rigs to do work-over on the wells.

“How many of the international oil companies are aggressively doing well work-over? How many work-over rigs are operating in Nigeria today? With no work-over and all we are doing is opening the valve and producing, the field will decline naturally. The PIB is another major obstacle since no one will invest his or her money in an area with unstable ground rules.”

Moody’s Investors Service, in a new report, said the global oil and gas industry was entering a challenging 2015 based on stubbornly low oil prices, adding that, “ExxonMobil, Royal Dutch Shell and Total have announced spending reductions for 2015, while cuts at others, including Chevron and BP, look likely.”

“Among players, exploration and production companies will be hit first, while oilfield services and midstream energy operators will feel the knock-on effects of reduced capital spending in the E&P sector. Offshore contract drillers are likely to have their toughest year since 2009, and integrated oil majors are the best positioned to react to lower prices,” it added.

Moody’s said the drop in crude oil prices to around $55 per barrel reflected a number of factors, including growing supply from non- Oil Producing Economic Countries, particularly the United States; a slowing increase in global demand; and Saudi Arabia’s decision not to continue acting as OPEC’s (and the world’s) swing producer.

“If oil prices remain at around $55 a barrel through 2015, most of the lost revenue will hit the E&P companies’ bottom line, which will reduce cash flow available for re-investment,” the Managing Director, Corporate Finance, Moody’s, Steven Wood, said. “As spending in the E&P sector diminishes, oilfield services companies and midstream operators will begin to feel the stress.”

For 2015, the Federal Government is projecting oil output of 2.278 million bpd, which is 110,000 bpd lower than last year’s projection.

An energy specialist at Ecobank Capital, Mr. Dolapo Oni, who noted the significant downside risks posed by oil thefts, drop in investments by oil and gas companies due to the delay in passage of the Petroleum Industry Bill and the low oil price environment, said, “New International Oil Companies projects such as Ofon Phase 2, Bonga Northwest and Etim/Asasa, among several other projects by smaller independents are likely to add between 100,000 and 150,000 bpd of new output in 2015.

“Although output will likely be constrained by oil theft, the new projects could enable crude output rise to an average of 2.2 mbd in 2015 from 2.1mbd in 2014,” he said.

A former NNPC executive, who pleaded anonymity, said the country cannot produce up to 2.2 million per day this year as a result of several factors.

The source stated, “First is that the demand has reduced. Wells abroad are shutting in because they can’t be profitable due to the low oil prices.

 

[Punch]