I hate to be the bearer of bad news, but it is very unlikely this lofty and unrealistic target can be met. Even 2.5 million per day is unlikely. I will try to dissect the reasons why. It is critical Nigeria adopts a sober realization of the challenges facing the oil industry and to start to pivot to other sources of growth and foreign exchange for the economy.
There are approximately 1500 active wells in Nigeria today in close to 150 oil fields. A lot of these wells have an average age of 20 – 30 years some are as old as 40 years. The industry has suffered from under investment as the International Oil Companies IOC, reduced investments on land and shallow water assets. Faced with poor JV financing, insecurity, uncertain fiscal terms, Net zero obligations Environmental pressures and declining assets, they made a conscious decision to divest these heavily developed, aging assets to indigenous players.
So, why with all these wells, are we still struggling with oil production? Well this is a great point to explain the dynamics of oil wells. Developing and maintaining an oil field is analogous to climbing up a down escalator. As soon as you bring an oil well into production, the amount of oil produced follows a decline curve. Meaning the amount of oil you can get from the well reduces daily the longer you produce it. So like walking up a down escalator, to stay up, you need to walk as fast as it’s going down. If you stop walking, you will steadily go down to the bottom. So also you need to drill more wells continuously to maintain a production target. The lack of investments in new infill wells has lead to a steady decline in our oil production. So today we have hundreds of old wells with very low individual production, high water cut and sand production due to their age. This leads on to the next issue.
Aging surface infrastructure. The flow stations and pipeline networks are often times well over 30 years old. They are suffering from poor state of maintenance, with many critical equipment and capacities (e.g. well testing ) not functioning. Pipelines are badly eroded and with so many penetrations from crude theft, are no longer as originally rated. Repair and maintenance costs are incredibly high due to the amount of water being produced from the old wells and the sand, which erodes everything it, touches. This is a constant challenge. This raises the cost of production from these fields, which reduces their profitability.
How can the tide turn on our oil production? Investment! Huge investments. There are estimates that we need investments of $10 billion – $20 billion per 100,000 barrels of sustained production increase over the next 10 years. We need to replace a lot of the aging old wells with new ones. To do that we need lots of 3D and 4D seismic, massive drilling campaigns, Well testing, revamping of most flow stations, replacement of pipelines with buried ones to reinstate capacity and minimize access for oil theft, metering stations etc. So to get a sustained 1 million barrels per day increase from today, we need to find $100 billion – $200 billion to invest in our oil industry. That kind of money is not available to our oil industry. It’s questionable that the indigenous oil companies have the credit rating to raise that kind of money. The IOCs do not appear disposed to making such investments either, and they only seem inclined to making low risk token investments in tieback projects to exploit satellite fields around their deep water assets. These investments have very limited long term potential.
The other barrier to raising capital in today’s world is the march towards a low carbon economy. Many western countries have committed to zero carbon transport networks by 2035. So the future points towards lower hydrocarbon use. Major capital investments take time to realize, so it stands to reason most capital market operators will be reluctant to fund projects that will be realized when the world is consuming less hydrocarbon.
The final element is OPEC. Self-restrain on the part of OPEC has lead to close to 5 million barrels per day shut in by major OPEC producers. Production that can be brought on-line, very quickly. With such an over hang of low cost, easy oil, who would want to invest in high cost oil in Nigeria?
These odds are overwhelming and pressing. The most likely scenario one sees is that Local operators continue low level investments to try to maintain oil production at current levels for as long as is profitable. Foreign exchange earnings from the oil industry will hence be capped at current levels for a long time, while our needs will continue to grow as population grows.
This is the time for Government and policy shapers to start to pivot the economy to other sectors. We need to focus on high yielding sectors, Tourism, Services, Information Technology, Manufacturing, solid minerals etc. The current upheaval in the world trade system opens an opportunity for Nigeria to become a manufacturing hub for Indian and Chinese interests amongst others. Lets open the doors wide open for these great manufacturing powers to manufacture locally and supply Africa and the rest of the world. These nations are looking for places to circumvent tariffs and diversify their production base. Lets get pretty for them.
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The Sheikhs of the UAE read the tea leaves decades ago as their oil production capacity was in decline. They pivoted their economies into other more profitable ventures. If we do not read the tea leaves now and start investing in the right sectors, we will loose the capacity to in future. When our oil is no longer flowing out of the ground. Not because we run out of it, but because it is no longer viable to extract it. We need to wake up now.
…Agenmonmen, a 30-year oil industry veteran, writes from Lagos