From indefinitely abandoning offshore drilling in Alaska, United States, after it failed to find enough oil and gas in the Chukchi Sea, to its withdrawal from the North Sea and subsequently backing out of an application to develop the Pierre River oil-sand mine in Northern Alberta, Canada, Shell has also recently halted a $2 billion Carmon Creek Canadian oil sands project.
The reason given by the oil company for the cancellations was that these projects would have been profitable when the oil price stood at $100 per barrel, as it did last year, but would now not be at the current $48 per barrel price.
According to Ben van Beurden, the Chief Executive Officer of Shell, “We are making changes to Shell’s portfolio mix by reviewing our longer-term upstream options worldwide, and managing affordability and exposure in the current world of lower oil prices”. Low oil prices have taken a toll on producers’ revenues and cash flows, resulting in a significant contraction in investments. Industry revenues are expected to fall by 22 per cent this year, but could start recovering next year. Indeed, from 2016 to 2019, revenues are expected to grow at an annual average rate of 14 per cent, driven by a combination of slowly recovering oil prices and increases in production. Likewise, investment levels are expected to drop significantly in the short term but to recover thereafter.
So, what do we have at stake for Nigeria as Shell is one of the major oil companies doing business in the country? Nigeria is Africa’s biggest producer of crude, and this accounts for about 80 per cent of government revenue. The country also imports about 70 per cent of its fuel needs because of inadequate refining capacity. Nigeria’s oil reserves are decreasing due to ageing fields that have passed their production peaks and investments in new projects are also slow with the non-passage of the Petroleum Industry Bill (PIB). This has stalled implementation of promised reforms in the oil and gas industry. Other issues which include widespread corruption and risks associated with oil theft and piracy are also making investing in the sector a lot less attractive.
Besides robbing the country of an estimated $6 billion yearly in lost revenue, oil theft causes pipeline shutdowns since the vandals sabotage lines before tapping the crude. The management of Shell Petroleum Development Company recently complained that an average of 37,000 barrels of crude oil were being stolen daily from the SPDC Joint Venture (SPDC JV) facilities in Nigeria’s Niger Delta area.
Afohron Sekobe, SPDC’s Head, Right of Way (RoW) Management, said that illegal interference with pipelines and other illegal activities such as theft of well head equipment occasioned the loss of an additional 110,000 barrels of crude oil per day. SPDC-operated JV recently also declared a force majeure on exports from Forcados Terminal, thereby shutting-in about 150,000 barrels per day. Precious Okolobo, Corporate Media Relations Manager, SPDC, said the force majeure followed a leak that was detected on the Trans Forcados Pipeline (TFP).
This is coming as indications emerged that Nigeria’s crude oil exports may fall by about 10 per cent in November. Sekobe has maintained that oil theft, equipment failure, sabotage, pipeline vandalism and illegal refining are the main causes of pollution, which has been a running battle between Shell, regulatory agencies and the Niger Delta region. In the past, Shell and some other international oil companies have had to sell their oil blocks in Nigeria due to increasing crude theft, oil spills, community challenges and their inability to renew the licenses of some of the fields.
To boost investments in the country’s oil and gas sector, the federal government needs to tackle the challenges of insecurity; issues related to funding of JV projects; provide a conducive operating environment and fiscal terms leading to competitive and attractive rates of return, in its attempt to encourage investment in the country’s oil and gas sector.