A strategy for secure productionDecember 1, 2020
Ladi Bada, managing director and CEO of Shoreline Natural Resources, talks to The Energy Year about key E&P challenges in Nigeria from oil theft to production costs, as well as opportunities in the new marginal fields bid round. Shoreline Natural Resources, an E&P company, is a joint venture between Nigerian-owned Shoreline Power (55%) and Heritage Oil (45%).
What key challenges and opportunities do you see in the E&P sector?
While exploration today is practically nonexistent, production will continue. When planning for the future, reserve replacement is crucial but with low oil prices it has been left on hold. In terms of exploration in Nigeria, there are plenty of opportunities. For instance, the marginal fields that have been recently auctioned will produce many more opportunities as these areas are now at an appraisal or exploration stage.
Given the fact that there is limited control over oil price, cost reduction has been the strategy acquired by most E&P companies, which all aim to be efficient producers. Here a fundamental question arises: How do you successfully reduce your unit production cost? NNPC has aimed to reduce production costs to USD 8 or 9 per barrel. However, the reality is that there are many associated costs that make this goal relatively difficult.
What factors contribute to Nigeria having such high oil production costs?
Nigeria has one of the highest oil production costs in the world, with security being one of the reasons for this. In fact, Nigerian companies spend a significant part of their opex on security.
Moreover, these expenses refer to both what firms pay to secure their assets and also what they lose when they are targeted. Indigenous companies do not have the power to guarantee the production of a barrel at one place and its delivery at the other end of the pipeline. Issues such as bunkering [siphoning] and theft are major matters of concern, and we need strong government intervention in this area.
On the other hand, we have the issue of pricing. Companies have a limited ability to control that. There are hedging mechanisms that companies have in place, but given the situation, even if someone set up a fantastic hedge, it would only last as long as the stipulated low-price regime. USD 40 per barrel is the average price for Nigerian grades yet it is not the pricing local companies are looking for to profit.
How is Shoreline tackling the numerous security issues affecting its operations?
In the last 18 months, we have looked at security because we had actually lost more value from ineffective security than we had made from production itself. In other words, if we spend money on security instead of drilling, we will probably gain a higher net value.
Two to three years ago we were losing as much as 20% of our production in the Trans Forcados pipeline. Since then, we have changed our security plan, strategy and contractors. It’s all about changing the way we look at security and engaging the community within that security architecture. This is essential. As a consequence, we have reduced the losses from fuel theft to possibly 10% or less. However, we still have a long way to go.
What opportunities will the marginal fields bid round offer?
The marginal fields bid round is long overdue. We should have had the first one years ago. It is a fruitful opportunity for all Nigerian entities presently involved in the E&P sector but also for those who are not to acquire assets at a reasonable price. It has opened windows of opportunity for those firms that have enough technical skills and financial capabilities. The only concern is that some firms overestimate the value of some assets and in their desire to own them, they actually pay more than their true value.
As for Shoreline, we have not participated in the bidding round because we have a large asset and an array of fields which need to be developed. OML 30 is an area with several untapped fields and for this reason we would rather use our capex to develop them before stepping out and investing in other assets.
What production and dewatering strategies are you currently implementing?
A few years ago, we were producing 60,000 bopd. As of today, our production has decreased to around 45,000 bopd as we have tried to optimise our productivity. To this end, we have shut down wells producing a high water content as these represented large opex costs. This water had to be treated at the Forcados terminal, which made it uneconomical. As a result, we are now producing fewer barrels of oil per day but with better quality and at a cheaper price.
In parallel to this, we are now building a dewatering facility. This asset will serve OML 30, processing at least 100,000 barrels. The first stage of its construction will furnish the facility with a 50,000-barrel capacity, leaving the remaining 50,000 for the second phase. By dewatering in-field, we will reduce costs but we also expect to ramp up production, disposing of the water internally. The completion of this project is yet to happen – it might be delayed until Q4 2021 due to the Covid-19 situation.
In what ways have your synergies with the Nigerian Petroleum Development Company (NPDC) solidified while working in OML 30?
Last year [in 2019], we renewed our OML 30 licence, where we have a 45% participating interest, for another 25 years. NPDC has the remaining 55% and has been a great partner both technologically and administratively. It is a win-win JV where we both can learn and improve our performance. We have worked with them for nine years and although the first years were rocky due to our fundamental differences, we have managed to polish our operational synergies.
NPDC, as a state-owned company, takes a more holistic approach and is driven by macro-concepts such as oil security and government income. We, as a private company, are more motivated by commercial profitability and microeconomic elements. It is about reaching a middle ground and looking for what works best for the JV. We are both working on reducing cost per barrel and reducing contracting cycle approvals. Contracting cycles are not just days and weeks: They are equivalent to dollars and cents. Thus, we are working to achieve operational efficiency.
What is Shoreline’s business strategy and production target moving forwards?
Given the current scenario, we are performing in the most profitable manner possible by reducing costs. To do so, we are trying to manage manpower in a more effective way but we are also looking into automating some of our operations. The area of technology, especially AI, is one we are examining for the near future.
With an expected scenario marked by an increase of oil prices and decrease of costs, our plan is to ramp production back up to previous, 60,000-bopd rates and above. We would like to exit 2021 with production numbers hitting 75,000 to 80,000 bopd of highly efficient oil production.