‘Impact of declining crude oil prices on marginal field operations’
Wole Adefila is the Operations Director, Frontier Oil Limited. He started his career as a Seismologist and working with a number of international seismic acquisition companies like Shell. He spoke with Roseline Okere at the end of facility tour to the company’s oil and gas fields in Eket, Akwa-Ibom State, on the impact of crude oil prices on marginal field operations. Excerpts…
How have you been able to achieve so much success within such a short period? Frontier oil Limited was established in 2001. We got our oil fields through a competitive bidding in 2003.
Of course, the journey has not been easy. When this block was won by frontier, we did not start any appreciable development until 2005, effective in 2006 and 2008. The reason was that as an oil field that has been abandoned by Shell for a long time, we had no information about the field. So, the first thing we had to do was to go back and collect information as much as we could from Shell.
Being an oil field, which was first drilled many years ago, data was not really forthcoming. What we did was to collect data from Shell in 2005, especially seismic data.
We could not really do much without the data and so we had to decision to go to the field and acquire our own data in 2006 and 2007. There are so many other companies who got licenses and did not have to go through what we encountered.
We didn’t have such opportunity. It was tough for us to get the seismic data and from there, we drilled two wells. For marginal field company like us, it is always a tough one.
It is always very difficult. What do you think is responsible for the inability of some companies to achieve such feat like Frontier Oil Limited? Some of the companies that won bid in that round actually don’t have the intension of drilling those wells.
This is why most of these companies are still not able to produce a single barrel as we are doing today. To succeed in marginal field operation, you need to understand the rule of the business.
You also need full commitment. Using Frontier for example, we have quite experienced number of people in the Frontier board who have been in the business for more than 40 years and they are very committed. You can imagine people who use their savings to finance the bid and fourteen years down the lane, we are still not making money.
It is not easy in Nigeria to find people who will put up their money and not making profit, but are still committed. Most of them are old and nothing is actually holding them from selling off the fields and make their money back.
Eng. Dada Thomas and I started Frontier Oil Limited in 2006 with a driver and corps member. The truth is that the board members are still not making money because we are not making profit.
They have stood by us all the way throughout 2008, this company did not do any serious work due to lack of fund. Funding has remained a major challenge to us. It is very important aspect of developing marginal field.
We have our own challenges too. My advice for the upcoming marginal field operators is that they need the commitment and expertise who understands the business.
The management of the fund is very important. When the fund is available is not managed effectively, the business will collapse. How have you been managing the Uquo Gas processing plant that was commissioned last year? We started operating that plant before the commissioning.
It is one of its kind in sub-Saharan Africa and is being operated by Frontier Oil Limited. It has not been easy operating the plant but with doggedness and commitment of the entire management, we have been able to ride rough waters.
Even though we are not making money, we are proud of what we have achieved so far. We have contributed immensely to improve power supply in the country.
In terms of operating the plant itself, we are also proud to say that we have various experienced hands. What we have been able to do is to tell the whole world that Nigerians can actually manage these assets.
We don’t have a single expatriate on site. Nigerians are capable of delivery effective results from oil and gas plant and that is what we have been able to achieve.
How have you been able to manage the relationship between Frontier Oil, Universal Energy Resources and Network Exploration and Production Nigeria? What makes a joint venture work is that there must be mutual trust by the parties.
Once trust is established, it will become a lot easier to manage the affairs in the companies. Once the parties are able to fulfill their obligations, the joint venture will surely succeed.
Funding is important and there should be mutual trust and respect. The joint venture companies should be work together collaboratively, because it is a symbolic relationship.
Mutual trust, respect and proper funding will make joint venture to succeed. Another opportunity, will you invest in marginal field operation? We are ready to do it again if there is another opportunity. We don’t want to be a one asset company. We are looking at taking up other fields around us.
We are even ready to partner with owners of the assets around us, which have not been able to make reasonable impact due to technical challenges. We are ready to provide the technical capability, which we know we have in-house to help them develop their fields and make the best out of them.
We are looking for additional opportunity. Oil prices have been plummeting since last year. How has this volatility affected your operations? Our gas price still remains as it was.
The gas business is not like crude oil. In gas business, there is an agreement, with the customer that last for 10 to 15 years. The price is fixed as at the time of that agreement so you don’t expect any change. If there is anything of such, the two parties normally come together to decide whether to increase it or not.
The declining oil price has affected our operations. We have been affected and we are still being affected. For example, our budget for last year was based on $80 to $100 per barrels and it is less than $40 recently, so it is difficult to manage a budget based on $80 per barrel with the reality of today of $40 per barrel.
We have been affected in respect to our service provider. We are having challenge in respect to making payments to our service contractors and that has affected us. We have decided to temporary suspend production from our well nine due to lack of funds.
So, you can imagine how much we would have made if we did not need to suspend that well in March this year as a result of paucity of fund. That is one of the major challenges of oil prices decline.
How long should a marginal field begin to make profits? You cannot put a timeline to it because there are numbers of factors to be considered. One of such factors in a country like Nigeria is finding a buyer for the gas produced. If you do not have enough costumers, you cannot make money to pay your bills and breakeven quickly.
In our gas plant, there is still space for expansion. It will be possible to make profit if there are off-takers and effective gas pricing mechanism. If the gas pricing is not right, it will definitely take you a longer period to breakeven. We do not have enough consumers of gas in Nigeria.
What we produce now is for power generation. We need more consumers to take our gas that is the only way we can make more money.
We have the capacity to expand up to ten trains as the demand for our gas increases. So if the demand is there and the pricing is right, we will expand. Oil prices have been plummeting since last year. How has this volatility affected your operations? Our gas price still remains as it was.
The gas business is not like crude oil. In gas business, there is an agreement, with the customer that last for 10 to 15 years. The price is fixed as at the time of that agreement so you don’t expect any change. If there is anything of such, the two parties normally come together to decide whether to increase it or not.
The declining oil price has affected our operations. We have been affected and we are still being affected. For example, our budget for last year was based on $80 to $100 per barrels and it is less than $40 recently, so it is difficult to manage a budget based on $80 per barrel with the reality of today of $40 per barrel. We have been affected in respect to our service provider.
We are having challenge in respect to making payments to our service contractors and that has affected us. We have decided to temporary suspend production from our well nine due to lack of funds.
So, you can imagine how much we would have made if we did not need to suspend that well in March this year as a result of paucity of fund. That is one of the major challenges of oil prices decline.
As a marginal field operator, what are your expectations from the new administration? The Federal Government needs to visit gas pricing and make it attractive to investors.
The present pricing regime is not really encouraging to investors. There is need for government to encourage local companies by improving on gas pricing and by also giving indigenous operators equal opportunities with the International Oil Companies to perform more.
We need more assets from the government. Company like Frontier Oil Limited has proved that Nigerians can do those jobs that were hitherto done by IOCs. We need encouragement from government. Our hope is that the government of the day will smile at us.
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1 Comments
Frontier Oil Ltd has proven that “people” are the greatest assets an organization has. Starting up, commissioning and operating the Uquo Field with no LTI to this moment (10m manhours and counting) is a big-time achievement. I wish the company and its associates all the best as they weather the difficult times now, expecting more rewarding future ahead.
We will review and take appropriate action.