Nigeria cuts rig rates easing pressure in low oil price environment

Nigeria is recording remarkable success in cutting costs associated with crude oil exploration through renegotiating deep offshore rig-rates. Constructing rigs in deep offshore presents some of the most challenging aspects of drilling and accounts for a large share of costs.

Recently, the Nigerian National Petroleum Corporation, (NNPC) announced that it has successfully renegotiated its deep offshore rig-rate from a staggering $580,000 to $164,000 per day, saving the country a 71.7 per cent cost of executing a similar operation in the past. Similarly, the national oil company has achieved a 35 per cent downward review of rig rates per day for both swamp and land operations in its portfolios.

A rig rate is a major cost element incurred by an exploration and production (E&P) company in the course of drilling for oil or gas in deep offshore, shallow offshore, swamp, land areas or basins.

Maikanti Baru, NNNPC boss speaking in Lagos said the various reductions serve as an incentive for investors to grow reserves, increase profitability and improve Return-On-Investment (ROI), adding that they also boost government revenue, thus improving government’s commitment to developmental projects across the country.

Baru said NNPC’s UTC has significantly dropped from above $70 per barrel in 2014, to about $27 per barrel, as at year end 2016.

At a time when discoveries of new oil and gas fields have dropped to almost 60-year low, as companies put a brake on exploration and large fields have become harder to find, cutting costs associated with developing fields seems like a pragmatic policy.

In 2016, there were only 174 oil and gas discoveries worldwide compared to an average of 400-500 per year up until 2013, according to IHS Markit research group. This slowdown is especially pronounced in OPEC countries as low oil prices forces revaluation of investments decisions and projects that progress to FIDs.

IHS Markit reports that discoveries hit a six-decade low in 2015, and then dropped again last year to about 8.2bn barrels equivalent of oil and gas. The slowdown reflects both the cyclical cuts in exploration made by companies struggling to stay afloat after the drop in oil and gas prices since 2014, and the structural shift in the industry towards onshore shale and similar reserves, especially in North America.

Shale oil producers, assisted by technology have been ramping up rig activity while same has declined in OPEC nations. Shale well onshore can cost $4m-$10m and be brought into production in weeks, as opposed to five or more years for deepwater discoveries where costs for a single well can be as high as $150m.

Spending on exploration fell from $100bn in 2014 to $40bn last year, according to Wood Mackenzie, another research company. The progress of new fields like Owowo discovery by ExxonMobil is highly contingent on costs.

Dip in crude prices last year forced OPEC nations and some non-OPEC countries including Russia to agree to shave off 1.8 million barrels per day production to shore up oil prices even then shale producers were seen as threats to the bargain.

Shale producers have a breakeven cost of $20 – $55 and the use of advanced fracking technologies means that they mobilise to their platforms in half the time it initially took them. This chiefly account for over 190 bn barrels equivalent of oil and gas added to North America’s resource base for the past 10 years.

As major oil firms delay investment decisions in new fields in Nigeria and other West African countries, the need to cut rig rates and other cost associated with drilling and exploration activities becomes even more important.