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ABSTRACT: Exploration/Development Economics and Fiscal Trends in Nigeria

M. A. Ofurhie, M. C. Amaechi, A. O. Idowu

The allocation of funds among investment possibilities must of necessity include evaluation and ranking of possible alternatives. However, in order to carry out such investment resources, realistic evaluation of the initial capital investment, operating costs and revenue in the future must be available. Thus in the industry, an economic analysis of an oil and gas prospect is generally preceded by a geophysical/geological evaluation followed by a reservoir/production analysis. These analyses result in the prediction of recoverable reserves, reservoir performance, optimum economic method of development, and initial offtake rates.

An economic evaluation of typical Niger Delta medium-cost oil field (i.e, having about 100 MMBBL reserves) under the Royalty/Tax system reveals that it is difficult to develop such a field, being marginal particularly when located in an offshore environment. The revenues accruing from such a development are rather sensitive to fluctuations in the oil price. Case history situations in the Niger Delta involving smaller and bigger field developments are also examined from similar perspectives.

A review of reserve/production trends between 1977 and 1985 in Nigeria reveals that the nation's reserve growth rate was marginal in spite of fiscal incentives given to operating companies by the federal government in 1977 and 1979, respectively. Exploration and production of crude oil rose astronomically from the middle 70s to 1980 after which it declined steadily until 1985. The declining trend was later reversed from 1985 when exploration and production activity began to pick up, owing to profit incentives granted by the Memorandum of Understanding (MOU) for enhancing crude oil exports and encouraging investments in exploration and development activities. High and low levels of exploration and production activity from 1967 to 1987 are observed to correlate with high and low oil pri ing periods, respectively. The federal government's profit incentives given to the operating companies in 1977, 1979, and 1985 tended to gear up exploration and production activities in those years.

In view of the huge financial resources required to carry out exploration programs especially in the frontier areas, it is essential to introduce attractive conditions to guarantee reasonable return for the risk undertaken by new investors. It is necessary to constantly review fiscal terms in order to determine appropriate incentives that would be sufficient to induce existing operators to explore new oil so as to consolidate the nation's reserve base.

AAPG Search and Discovery Article #90097©1990 Fifth Circum-Pacific Energy and Mineral Resources Conference, Honolulu, Hawaii, July 29-August 3, 1990