Economics of Exploiting a Marginal Heavy Oil Field in Nigeria: Deterministic and Stochastic Approach

Abstract

When an oilfield is a marginal field, it creates the impression of low revenue to investors because possible recoverable hydrocarbon may fall below 50MMSTB; the issue with marginal heavy oil fields is that the investor is saddled with a burden of low heavy oil price and high CAPEX. This is because the price of heavy oil is discounted by approximately 50% the price of light/medium crude oil. The question the investor would ask is “venture or not to venture?” This paper looks at a shallow water field of 42 meters depth that is both a marginal field and a heavy oil field. It explores the implications of the Nigerian marginal oilfield fiscal policy (royalty and tax rates), heavy oil price and the high cost of recovering heavy oil on the overall field economics. Discounted cash flow model was employed to carry out a deterministic analysis on the field’s production profile. The stochastic model has oil price, tax rate, royalty rate, overriding royalty rates to the farmor and capital expenditure are the input variables while the contractor’s take, host government take and farmor royalty deductions are the output variables. The results show that the investment is sensitive to changes on the input variables like tax rate, heavy oil price, royalty rates and capital cost. We suggest that modifications be made on the marginal oilfield fiscal policy to encourage more investments on marginal heavy oil fields.