QUANTIFICATION OF UNCERTAINTY AND RISKS FOR DEVELOPING MARGINAL FIELDS IN THE NIGER DELTA

ABSTRACT

The Niger Delta is Nigeria’s and Africa’s most prolific producing basin and has some untapped oil resources because of their marginality. The development of marginal oil field in Nigeria has now become an important strategic issue. This is due to the vast availability of these fields scattered all over the Niger Delta. The Federal Government of Nigeria in a bid to kick-off indigenous participation in the upstream sector of the petroleum industry initiated the marginal field program. This was also to increase Nigeria’s crude oil production. Years after awards of marginal fields, only a few of the awardees have been able to see first oil production. This is due to various challenges that marginal field investors have faced over the years and these challenges were not properly planned for. An important aspect of any field development planning exercise is inherent in adequately quantifying risks and uncertainty, particularly when information availability is limited.

In this work, a risk management process was employed to quantify risk and uncertainty in developing marginal fields. This involved planning, identification, analysing, assessing, treating and monitoring these risks. A total of 15 risk factors were identified and these risks were screened to high loss risks in terms of NPV. These risks were lumped up to seven variables which were used as independent variables for Monte Carlo simulation used to carry out sensitivities on the investor’s NPV. Petroleum Profit Tax, Reserves, Oil Prices and rate of decline were identified as top risk factors on investor’s NPV. Fiscal terms, reserves, oil price, well production performance, reservoir performance and well integrity risk factors were discovered as the highest ranked risks in developing marginal oil fields. A set of guidelines was the formulated to support decision makers and improve the probability of success in developing marginal fields in the Niger Delta.

TABLE OF CONTENTS

ABSTRACT

CHAPTER ONE

1.0 INTRODUCTION

1.1 PROBLEM DESCRIPTION

1.2 STUDY OBJECTIVES

1.3 SCOPE OF THE STUDY

1.4 MOTIVATION FOR THE STUDY

CHAPTER TWO

2.0 BACKGROUND

2.1 MARGINAL FIELDS

2.2 OVERVIEW OF MARGINAL FIELDS IN THE WORLD

2.3 MARGINAL FIELD PROGRAM IN THE NIGER DELTA

2.3.1 History

2.3.2 Classification

2.4.2 Sensitivity Analysis

CHAPTER THREE

3.0 METHODOLOGY

3.1 INTRODUCTION 3.2 RISK MANAGEMENT PROCESS

3.2.1 Risk Management Planning

3.2.2 Risk Identification

3.2.3 Qualitative Risk Assessment

3.2.4 Quantitative Risk Assessment

3.2.4.1 Model Building

3.2.4.2 Monte Carlo Simulation

3.2.5 Risk Treatment

3.2.6 Risk Monitoring, Review and Control

CHAPTER FOUR

4.0 RESULTS AND DISCUSSION

4.1 INTRODUCTION

4.2 IDENTIFIED RISKS

4.3 QUALITATIVE RISK ANALYSIS

4.4 RESULT OF DETERMINISTIC NPV MODEL

4.5 PROBABILISTIC EVALUATION OF NPV MODEL

4.6 SENSITIVITY ANALYSIS OF THE NPV MODEL

CHAPTER FIVE

5.0     CONCLUSIONS AND RECOMMENDATIONS

5.1     SUMMARY AND CONCLUSIONS

5.2 RECOMMENDATIONS

REFERENCES

APPENDIX

CHAPTER ONE

1.0 INTRODUCTION

1.1 PROBLEM DESCRIPTION

The Niger Delta is situated in the Gulf of Guinea and has prograded south westward from Eocene to the present forming various depobelts. It is Africa’s largest and most prolific oil producing basin and also one of the world’s largest delta systems of tertiary age and covers an area of about 75,000 km². Several discovered marginal fields exist in the onshore delta area which provides attractive opportunity for development due to presence of multi stacked good quality reservoirs associated with growth fault related structures (Sahu et al, 2011). The development of marginal oil fields has become an important strategic issue in Nigeria. This is because government and indigenous investors both believe that, acquisition of fields which remained undeveloped or abandoned for a period of 10 years from major oil companies by government and re-allocation to intending investors would go a long way in improving the country’s proven and recoverable reserves. Marginal field operators have then been given fields to develop but majority of the marginal operators are facing challenges in developing such fields.

These limitations being faced by marginal operators mostly arise because of improper planning for field development. An important aspect of any field development planning exercise is inherent in adequately quantifying risks and uncertainty, particularly when information availability is limited. For marginal fields, accurate evaluation of the project downside becomes even more crucial, as different development options carry a substantial probability of negative net-present-value and project economic viability relies on oil field risk minimization.

Thus, it is essential to undertake a complete and detailed risk analysis in order to identify key contributors to uncertainty in field developments, and determine their combined effect and impact on field economics. If the risks and uncertainties are better understood, ability to make good development decisions will be greatly enhanced. These will then help to mitigate uncertainty and shift to the right and/or narrow the distribution of recovery and net presentvalue. The evaluation and quantification of the effect of key risk factors is sometimes a complex process because of the multiplicity of combinations in development options are most times represented by running simulations.

In general, quantitative risk and uncertainty is an important tool for the regulation of any industrial development, as well as the decision-making in oil field development investment. Uncertainty quantification creates value only to the extent that it holds the possibility of changing a decision that would otherwise be made differently (Bickel and Bratvold, 2008). Therefore quantifying risks and uncertainties help a great deal in decision-making. Various methods are currently used in decision-making in the oil industry. Some of them are: Worst Case/Best Case Scenario, Tornado Plots, Boston Grid, Expected Net Present Value, Decision Trees, Monte Carlo Simulation and Real Options. These methods are characterized by different degrees of complexity and specific theoretical assumptions. This work will utilise some of the methods used in decision making to formulate guidelines for understanding and managing risks for successful marginal field development in the Niger Delta.

1.2 STUDY OBJECTIVES

This study aims to aid successful marginal field development. The objectives of this study are

to:

• Present a methodology for evaluating uncertainty and risks for developing marginal fields in the Niger Delta
• Identify risks factors involved in marginal field development in the Niger Delta
• Quantify the degrees of these risks
• Provide ranking for these risks
• Formulate guidelines for mitigating risks to ensure successful marginal field development

1.3 SCOPE OF THE STUDY

The concept of marginal field in this work is based on the definitions given by the Department of Petroleum Resources (DPR) and the Federal Government of Nigeria and marginal field cases are restricted to the most prolific basin in Nigeria – the Niger-Delta.

Monte-Carlo simulation and sensitivity analysis are carried out using Crystal Ball add-in in Microsoft Office Excel.

1.4 MOTIVATION FOR THE STUDY

A lot of oil field developments are ongoing in the Niger-Delta because several marginal fields have been given out to investors in addition to others that are on the verge of being given to indigenous investors. If investors are unaware of the risks and uncertainty they are bound to encounter while developing these fields, it is likely that they end up with negative cash flows due to poor investment decisions. Evaluation and quantification of risks and uncertainties are therefore necessary. This will however not reduce the risk to be faced by the investor, but this will help in decision making and point towards the right choice of risk to be taken.

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