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Drilling unusual and payment uncommon!

By Kayode Adeoye   |   11 May 2016   |   3:15 am
Crude Oil Production

Crude Oil Production

The cost of crude oil has crashed for over a year now and doesn’t look like waking up soon. So bad is the crash that it appears the crude oil price is sleeping like a badly refined palm kernel oil! Rig count worldwide has crashed from its glorious times of 1,950 to less than 500, oil receipts are reducing, international oil companies, IOC’s are shutting down operations, Nigerian National Petroleum Corporation, NNPC owes ExxonMobil alone about $3.5B and the company is about to release its only oil drilling rig in Nigeria while the very few still in business are developing innovative cost cutting strategies including user-friendly packages to remain afloat. It is the focus of Drillbytes to encourage investors, particularly in Nigeria to continue powering the marginal field operations because at the current international market price of crude oil ($46/bbl), the marginal field operators are still making marginal profits. Same cannot be said of the IOC’s whose assets are mainly scattered in the offshore waters of Nigeria with cost of drilling almost twice that of the marginal field operators but it is hoped that the IOC’s can plough some of the humongous profits they have made over the years in keeping the business going pending when the price surges. What then, is drilling unusual and payments uncommon?

It is becoming increasingly turbulent for companies, particularly the marginal field operators to remain in the business of exploration and production without the requisite energy derivable from the availability of cash. Signing a contract with these companies is as easy as expecting a typical Nigerian politician to fulfill all his campaign promises. Expecting payments for a job very well done and contractual obligations very well fulfilled is even easier, the reason being that most of the marginal field operators make project money available only on paper! With the paper money, they proceed to mobilize and after commencement of drilling, they begin to look for money with which to sustain drilling and pay contractors thereafter and often times, long after the contractors has finished their contractual obligations, they never find such monies but find enough excuses. Most contractors believe it is better to be owed than out of business resulting in accumulated debts. This is drilling unusual.

The marginal field operators are producing some volumes of crude oil per day. It is the strong belief of DrillBytes that payment to drilling contractors, which normally forms the bulk of the drilling cost can be done with crude oil direct or indirect. By direct, an equivalent value corresponding to the rig rate can be used in paying the international drilling contractors or an agreement entered with them to take a volume of crude produced outside of Nigeria and refine to sell as end products to consumers. In the alternative, each of the marginal field operators in Nigeria can form a consortium to build a modular refinery or enter into partnership with one, send these refineries enough crude to refine from their production facilities. These refined products can thereafter be sold to end users and in the process reduce the perennial fuel scarcity as well as free enough cash for them to run their projects. This way, contractors will not be owed their dues longer than necessary and the few jobs remaining will be secured, at least, marginally. This is payment uncommon.

A modular refinery is a crude oil processing plant that has been constructed entirely on skid mounted structures. Each structure contains a portion of the entire process plant and through interstitial piping, the components link together to form an easily manageable process. These refineries are constructed in modules at the workshop/factory and then transported to the locations where it is needed. Some of these refineries can produce as low as 1,000 barrels of refined petroleum products per day while some can produce as high as 30,000 barrels of refined petroleum products per day. They can equally create employment of about a thousand persons either directly or indirectly. These refineries can be built close to the production facilities and moved as operation demands just like a drilling rig. The capital outlay for any 100,000 per day (bpd) refinery is about $1.5 billion while that of a 24,000 barrel per day (bpd) modular refinery is roughly $250,000,000.00. These refineries can be ready in under a year to about two years depending on the production capacity. Besides, the cost of energy in Nigeria is hardly a respecter of free market economics!

It is understood that about 28 modular refineries have been granted license by the Federal Government, This also implies that there is more than enough room for the marginal operators to maneuver in their business unusual and payment uncommon! If the marginal field operators can take this route in processing crude oil produced, it can bring lucrative returns on investment and free cash call payments for several contractors and consultants owed for work done for far too long. This is quite apart from creating employment, empowering people and halting capital flight badly needed to shore up the weight of the Naira and of course, guarantee the free flow of drilling unusual and payment uncommon in these turbulent business times of drilling for crude oil.
Kayode Adeoye is an energy analyst from Lagos.

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