Should Northern Nigeria begin oil and gas exploration?Written by admin , March 1st, 2016 // Oil & Gas
The Nigerian government plans to spend N39.4 billion to undertake geological and geophysical surveys in an effort to explore the prospect of oil and gas deposits in the inland basin of Lake Chad and upper Benue Trough. This is provided in the proposed 2016 budget, presently awaiting the National Assembly’s approval, and has so far provoked political reactions from some politicians. However, none have professionally reacted to it. This is a ticklish issue as it involves investing huge amount of scarce resources in uncertain ventures, and at a time when the oil and gas prices are below economic benchmarks. It will cost up to $15 million to drill a single exploration well, and you will need a number of them depending on the reserve spread. This investment will have to be recouped after development and production. What determines when to explore and recovery of investment cost is largely the oil price. Recently, Genel Energy PLC requested for extension of its exploration license in Ethiopia, so as to put off the exploration drilling and save some cash due to the dwindling oil and gas prices, which makes the exploration unviable at the prevailing oil price. This tells us that it is not the right time to start new exploration, and Nigeria being heavily reliant on oil revenue would of course want to reduce the supply to help push the oil price up. Similarly, with the growing poverty and scarcity within the economy, the Nigerian government does not need to spend a single dollar to explore new reserves. The oil companies shall be able to cover the prospect risk and pay for the exploration costs. This is practiced in many countries where oil companies fund the exploration cost as part of the joint venture agreement. So, in the joint venture or service agreements, if no commercial oil is found, the loss falls entirely on the oil company and the government does not lose anything. Similarly, the global energy investments are projected and recommended to be channeled toward efficient energy resources to achieve the ambitious goal to keep the global warming at bay and reduce anthropogenic greenhouse gas emissions to zero. This will mean that Nigeria will have to diversify energy investment toward renewable energies. With abundance of solar and wind energy, Nigeria would radically invest and subsidies the use of these renewable energies especially in residential, transport and commercial sectors of the economy. It should help create jobs and reduce cost of production in the real sector of the economy. So the opportunity cost is the 156 MW capacity wind farm that can be installed using the same amount. There is still a promising future for the fossil fuels across the world, and in countries like Nigeria, it will continue to dominate the energy mix up to 50 years to come. Therefore, careful decision has to be made on what, where, how and for whom to produce the oil and gas resources. The dependence on made Nigeria suffer from Dutch disease. The investment has to be redirected toward the manufacturing, industrial, agricultural and technological sectors to offset the demand gap in the currency market and boost productivity and investment. It is not the right time to spend on uncertain explorations especially of volatile resources. Oil exploration wells may not provide the exact estimate of commercial quantity of the deposits, which questions the oil investment viability. The market conditions may be unexpected because oil prices are known to be extremely volatile, and new discoveries from the shale reserves have already saturated the market. Any further discovery will push the supply curve outward, which may not be good for the poor oil producing countries. Similarly, due to the long lead time in petroleum exploration and development, when an oil field is brought online for production, the oil price may be lower than expected. On the other hand, the costs could be higher than expected because of inflation in engineering and procurement of raw materials and equipment, which explains the cost run-up in the past several years. Even if the Nigerian government will have to explore and produce more oil resources, it should not take the prospect and commercial risks absolutely, and should not explore at any oil price below $40 per barrel. The money should be redirected for diversification incentive, infrastructural development and social welfare for the development of the real sector of the economy.