Thursday, 15 October 2015

OPPORTUNITY COST OF DRILLING

The business of servicing the oil and gas industry, the world over, is losing patronage in arithmetic progression. With the crash in crude oil price, every other allied and associated business is going through diminishing returns! This is the major challenge facing the industry at the moment but then, there are opportunities waiting to be explored.

The number of active drilling rigs the world over, has nosedived since this price odyssey began. What this means is that a lot of drilling rigs, land, swamp, jack-up, semi-subs and drill ships are increasingly being stacked as a result of low patronage.

In economic parlance, supply is greater than demand! The international association of drilling contractors (IADC) is to the drilling companies what the organization of petroleum exporting countries (OPEC) is to petroleum exporting countries and it is doubtful if both organizations can do anything to arrest the situation. It is therefore logical to conclude that several professionals involved in the business have all had their income either halved or out rightly lost.

A typical example of stacked oil drilling rigs are the two offshore jack-up rigs owned by Oando PLC and stacked in the Marina in Lagos for over six months now. Those rigs, in good times should be generating about $250,000.00 per day for Oando PLC. This simply translates to, an incredible loss of money to the company, terrible loss of jobs to Nigerians and a commensurate loss of revenue to Nigeria. It is not a problem peculiar to Oando PLC but an industry-wide crisis. It is certain that Oando PLC will gladly accept a rate less than normal if approached by operators. This, at least, will save machine from wear and tear, create jobs for men and generate revenue for company and country.

It is gratifying that the Nigerian National Petroleum Corporation (NNPC) has secured $1.2B to further drive its equity participation in the industry with promises to pay accumulated cash calls of over $6B. It is cheaper to drill for oil onshore than offshore for reasons of logistics, rig cost etc. Majority of drilling operations are therefore, likely going to be conducted onshore.

If the operating companies can agree with drilling contractors either, international or local to cut the rates of their drilling rigs as they have earlier agreed with other service providers, it means exploitation of Nigeria’s major revenue provider will not be down to a crisis level but a manageable level. In other words, if there were forty drilling rigs operational before the crude oil price crash, an agreement can be reached by stakeholders to keep thirty operational rather than ten. Furthermore, now that the international market price of crude oil is trading for less than $50 per barrel from its glorious days of over a $100 per barrel, the onus is on the NNPC through its subsidiary; the Nigerian Petroleum Development Company (NPDC) to drive more projects along this line.

Since the oil price is down south, it is time to take advantage the market has to offer by increasing exploration/exploitation activities in oil mining leases at reduced rate or in local business parlance, “promo price”. This will help in further increasing the production capacity of the country, create more revenue base for the country, create more jobs and further boost the country’s economy.

What is the point of winning a keenly contested oil block after paying so much money to government through the Directorate of Petroleum Resources (DPR) for ten years duration without doing anything until the license expires? There are about 97 of such undeveloped fields in this regard. It is agreed that borrowing money from Nigerian banks to drive projects like these are tied into conditions designed to make the banks healthier than the borrower. If this is enough setback, it is time for local participators to look for foreign financial partners to collaborate with to drive their visions rather than have it locked up in a drawer. It is time for such “siddon-look” companies to synergize with others either at conferences like the yearly Offshore Technology Conference, Offshore Production Optimization Conference etc.

Nothing is bad for two or more operators, to come together and drive a drilling program. Chevron drove the Agbami project on behalf of Famfa Oil, ExxonMobil drove the first successfully drilled high pressure, high temperature, HPHT exploratory well in Nigeria on behalf of Total FinaElf and some other operators. Midwestern Oil and Gas is driving drilling projects on behalf of its co-venturers.

This is not the time to be passively redundant! This is the time, more than ever before, to be actively involved in the interest of business returns, men, machine, industry and country. Several companies in the industry are seeking to help operators cut cost with technology-driven solutions. If operators decide to wait till the market conditions improve before making a move, what is the guarantee that the market indices will be favorable after such a move has been made? If we look further, we will see further. Taking advantage of the challenge and transforming it into opportunities for ingenious business development is the way to go and going that way is the opportunity cost of drilling through a price crash. The road is open! (guardian)