Effect of current crude oil price plunge on Nigeria Oil Industry

The steep drop in crude oil prices have put most Nigerian oil companies at risk, with industry experts saying oilfield shutdowns and job losses are imminent.

The Group Managing Director of the Nigerian National Petroleum Corporation, Mallam Mele Kyari, last month, put the cost of crude oil production in the country within the range of $15 to $17 per barrel.

The global oil benchmark, Brent crude, fell on Wednesday to as low as $15.98 per barrel, its lowest since June 1999, before rising to $20.87 per barrel as of 6.45pm Nigerian time.

“There is so much oil floating around in tankers that people can pick and choose, and ask for all sorts of discounts. This has serious repercussions for a country like Nigeria. Unfortunately for us, we are in a very nasty situation,” an energy expert and former board member of the NNPC, Alhaji Abdullahi Bukar, said.

Bukar also said some companies might shut the more expensive fields and leave the ones producing at “reasonably low-operating costs” to continue production.

The Chief Executive Officer of International Energy Services Limited, Dr Diran Fawibe, said the security cost and other charges imposed on operators had made the production cost in the country very high.

“So, in order to sustain that production level, the price must be high enough. We may see quite a number of projects being suspended, if not outright cancelled, until the price has gone up to a level where they can justify the economies,” he said.

2020 Nigeria Crude Oil Benchmark

Nigeria has not stopped producing crude oil but a persistent crash in oil prices may lead to a halt in production, the Nigerian National Petroleum Corporation has declared.

Nigeria recently slashed the oil price benchmark for its budget to $30 per barrel from $57 per barrel, but oil prices kept crashing since the outbreak of coronavirus as demand plunged.

On whether Nigeria had stopped oil production due to the persistent price crash, the country’s national oil firm said it had not.

Earlier this month, the Group Managing Director, NNPC, Mele Kyari, said Nigerian crude oil grades were not rejected, although stranded in the market.

Crude oil facts

Crude oil can be 'heavy' or 'light' & 'sweet' or 'sour.'  Sweet/sour refers to sulfur.  Sour crudes are full of sulfur which has to be removed from the oil. 

A refinery is designed around a specific type of crude and can't refine any crude oil.

Especially true about oil from the Bakken; very light.  Because pipelines have become such a political football, Bakken oil is often shipped by rail, where any subsequent derailment can then be catastrophic. The same people protesting against pipelines then rail againt railroadsAs you say; crude oil can be 'heavy' or 'light' & 'sweet' or 'sour.'  Sweet/sour refers to sulfur.  Sour crudes are full of sulfur which has to be removed from the oil. 

Other famously light (and sweet!) crudes - Libya and Nigeria.  Chart from the EIA and is a few years old .  

US Crude Imports

For the week ending April 17, the United States imported 4.9 million b/d of crude oil - that's on par with U.S. crude oil imports back in 1987..

Nigerian Navy Arrests 50 Pipeline Vandals, Recovers 6,000 Gallons of Stolen Crude

Chiemelie Ezeobi

The Western Naval Command (WNC) of the Nigerian Navy (NN) has arrested no fewer than 50 suspected pipeline vandals in an ongoing major operation at Majidun, Ikorodu area of Lagos State.

This is in addition to their recovery of about 6,000 gallons of stolen products siphoned from several vandalised Nigerian National Petroleum Corporation (NNPC) pipelines.

The naval taskforce had discovered the stolen  products stored in 25 and 50 litre kegs, which were covered with leaves and hidden in the belly of  the swamp as well as in some houses of the residents living in the area.

The products, suspected to be Premium Motor Spirit (PMS), also called petrol, which were carted away to the jetty of the WNC, Apapa, in 10 long trucks were estimated to be worth over N30million.

Code-named Operation Awatse, an Hausa word for 'scatter', the ongoing operation saw military personnel drawn from the NN and the Nigerian Army (NA), storm the riverine community in a bid to sanitise it and arrest the prolonged economic sabotage that had been going on around the community.

Addressing newsmen afterwards, the Flag Officer Commanding, Western Naval Command, Rear Admiral Samuel Alade said the suspects were in custody but would not be paraded so as not to jeopardise investigations.

He said the ongoing raid was in tandem with the determination of the Chief of Naval Staff (CNS), Vice Admiral Usman Jibrin's zero  to halt illegal bunkering and pipeline vandalism.

He said, "The operation was planned sequel to directives by the CNS last week. It has yielded successes so far and many arrests have been made.

"Also, products and wooden boats popularly called Cotonou boats were intercepted and destroyed by our personnel.

“The products would be handed over to the PPMC and the arrested suspects would also be handed over to concerned authorities that would prosecute them.

"At the end of the operation, the Nigerian Navy may consider establishing a Naval base so that we can sustain the gains recorded.

"I want to warn the perpetrators to seek legitimate employment instead of living on illegalities. I must emphasise that the CNS has zero tolerance to any form of illegalities within the maritime space.

"I would want to appeal to the general public to provide useful information that would help us sustain this fight. We really need cooperation from members of the public. There is need for residents around Majidun, Arepo and Ogolonto to provide us with information."

On the allegation that some of the oil thieves have the support of some traditional rulers in the area and some officials of the NNPC, Alade said they were not aware of that, adding that ongoing intelligence gathering would reveal the brains behind the ignoble act.

The petroleum products were afterwards handed over to the NNPC Area manager in charge of Mosinmi Depot, Mr. Remi Eluyefa by the commander of operation, Commodore Tekumo Okoli, who also doubles as the Commander, Nigerian Navy Ship (NNS) Beecroft.

Eluyefa while fielding questions from journalists, commended the navy for the major breakthrough it recorded in helping them tackle the huge economic sabotage and loss of products.

He said, "We are not security personnel so we have  always depended on security agencies to provide security on their pipelines. The security of the pipelines is not the work of NNPC.

"We depend on security agencies to provide us with security because most of us are engineers who do not know much about security. We are glad that the navy has delivered", he said.
persons of voting

Shell’s Forcados Terminal Achieves 14-year Safety Milestone

Ejiofor Alike
The Forcados Terminal in the western Niger Delta operated without a significant safety incident between September 2000 and September 2014, during which some 1.25 billion barrels of oil passed through the facility that is operated by the Shell Petroleum Development Company (SPDC) operated Joint Venture.

Shell’s Corporate Media Relations Manager, Mr. Precious Okolobo said in a statement at the weekend thatthe safety milestone translates into a daily average of 300 staff handling nearly two export tankers every week.

The Managing Director of SPDC and Country Chair, Shell companies in Nigeria, Mr. Mutiu Sunmonu confirmed that the feat was a significant achievement in a work environment that involves multi-disciplinary staff teams and contractors.

“Over the years, SPDC has improved work processes and trained staff leading to the introduction of the Goal Zero initiative on safety. We’re happy that the improvements continue to manifest not only at Forcados Terminal but also in other installations,” Sunmonu added.

Over the past 365 days, a number of high risk maintenance and engineering activities have also taken place at the Forcados Terminal, including rehabilitation of crude oil storage tanks, subsea repairs to the tanker loading system and upgrade to the jetty amongst others.

Okolobo said the asset did not record any disruptions relating to these multiple concurrent activities, which is also evidence of the sustained and proactive engagement of the host communities.

The Forcados Terminal was inaugurated in 1971, and was upgraded between 1994 and 1998. The terminal receives, treats, stores and exports crude oil produced by SPDC and other operators in the western Niger Delta, and has an installed storage capacity of 6.3 million barrels of product.

RenCap Sees Growth Potential in African Oil Stocks

African Oil Stocks

GoddyEgene

Analysts at Renaissance Capital (RenCap) have rated   African oil exploration and production (E&P) high, saying there are upside potentials in most of the companies that should necessitate investment considerations. The E& P companies covered by RenCap span 27 with a combined market capitalisation of $30 billion.

In the report titled, “African Oil and Gas, Think Local, Be Selective,” RenCap said  African E&Ps have tended to show more robust economics than their peers, breaking even at a $40 per barrel oil  price, while North American shale E& Ps require a $60-70  per barrel  price.

According to RenCap, they initiated coverage of eight stocks which include: Afren, African Oil, Caverton Offshore Support Group Plc, Eland Oil & Gas, Lekiol, Mart Resources, Oando Energy Resources, Savannah Petroleum and Seplat Petroleum and Development Plc.

Out of the eight, RenCap said its top  three picks from the pack are, Seplat,  Lekoil and Africa Oil,  adding  that  their target prices for the stocks  imply 50-100 per cent  upside potential.

“We see the greatest upside for Seplat coming from possible merger and acquisition (M&A) transactions, and believe it is strongly positioned to capture upcoming non-organic growth opportunities thanks to its indigenous status. Our investment case for Lekoil is based on an attractive and undervalued asset base offering both high cash returns and material exploration upside; strong delivery by management since its Initial Public offering and its indigenous status,” the firm said.

Speaking on   Africa Oil, RenCap said with its world-class discoveries and exploration portfolio, African Oil is one of the three top picks.

“Following a 50 per cent decline in the company’s share price since the end of last year, we now see the current share price as reflecting only the value of the Lokichar basin, implying zero value being attributed to its Ethiopian discovery and all other exploration prospects,” RenCap said.

On Lekoil, RenCap explained that they expect Lekoil to post one the highest returns in the medium term.

“Our positive investment stance on Lekoil is based on the combination of an attractive and undervalued asset base offering both high cash returns and material exploration upside; strong delivery by management since IPO; and indigenous status, which should allow the company to receive additional tax breaks and increases its chances for future asset acquisitions,” the firm said.

Giving more information on selection of Seplat among the top picks, RenCap said they see the biggest upside risk to its valuation from possible M&A transactions, believing Seplat is strongly positioned to capture upcoming non-organic growth opportunities and could possibly complete one or two deals in the next 12 months.

ExxonMobil, Tenoil Petroleum Commence Ata Field Drilling?

Tenoil Petroleum & Energy Services (Tenoil), a subsidiary of Heirs Holdings tuesday announced that it had reached an agreement with Mobil Producing Nigeria Unlimited (MPN), an ExxonMobil subsidiary, for the drilling of an appraisal well on the Ata Field.

The Ata Field was discovered in 1964 by MPN, the operator of its joint venture with the Nigerian National Petroleum Corporation (NNPC), and is located in block OML68, which borders Tenoil’s block OPL 2008.

Both blocks are located in shallow water offshore of the Eastern Niger Delta, Nigeria.

The drilling is expected to help evaluate whether there is an opportunity to jointly develop the Ata field.

A statement explained that the commencement of drilling at Ata Field represents a further milestone in Tenoil’s emergence as one of Nigeria’s leading indigenous field operators.

Together with the development of OPL 281, which Tenoil operates on behalf of Transnational Corporation of Nigeria Plc (Transcorp), these field developments are important steps in Heirs Holdings’ integrated energy strategy, encompassing power generation, oil production and refining, petrochemicals and fertiliser production.

Speaking on the feat achieved, the Chairman of Tenoil, Tony O.Elumelu commended MPN, saying: “This is an exemplary demonstration of genuine commitment by an international oil company to the development of indigenous capacity in Nigeria’s oil and gas sector.

“MPN is collaborating with Tenoil to provide technology expertise in the successful execution of this first drilling project.

“Our announcement, following the recently concluded US-Africa Leaders’ Summit in Washington, DC, is a step forward in a relationship that serves as a model for collaboration between African businesses and their US counterparts.”

On his part, the Chairman and Managing Director of Mobil Producing Nigeria Unlimited, Nolan O’Neal, noted that: “The agreement demonstrates the NNPC/Mobil Producing Nigeria JV’s continuing commitment to working with Nigerian companies to develop the country’s oil and gas resources.” 



Tenoil was incorporated in 2005 to serve as the platform to manage and operate Heirs Holdings’ investments across the energy value chain, as well as extractive minerals sector.

Shell Sells OML 29 to Aiteo, Taleveras Consortium

Shell logo

Ejiofor Alike with agency report 

Royal Dutch Shell has agreed to sell the prolific Oil Mining Lease (OML) 29 to a consortium led by oil-trading firms Aiteo and Taleveras Group in a deal wherein the consortium will pay $2.58 billion for the block and an associated pipeline.

Shell has been wanting to sell four of its onshore oil blocks - OMLs 18, 24, 25 and 29 - in addition to Nembe Creek Trunkline, which for years have been plagued by leaks stemming largely from oil theft.

The Wall Street Journal yesterday quoted two people said to be close to the deal as saying that the transaction had been consummated.

“This is a very good deal for Taleveras. OML 29 still pumps a lot of oil, and they can get the rents from the Nembe Creek pipeline,” said one of the people.

The journal also quoted Taleveras as saying that it was among the preferred bidders for block OML 29 but added that the company declined to comment when asked whether a deal had been finalised.

A Shell spokesman was also said to have declined to comment specifically on OML 29.

“We have signed sales and purchase agreements for some of the oil mining leases but not all that we are seeking to divest. In the event of a successful completion of the sales process, we shall make a market announcement,” he said.

Under the on-going divestment of four Nigerian oil blocks by Shell, Midwestern Oil & Gas Plc/Mart Resources/Suntrust Oil, under the Erotron Consortium, won the bid for OML 18, having offered $1.2 billion for the oil block.

OML 29, the most prolific oil lease under the current asset sale, and the Nembe Creek Trunkline were won by Aiteo/Taleveras in conjunction with four other companies in the consortium, having submitted a $2.58 billion bid for the assets.

The 60-mile Nembe Creek Trunk Line is one of Shell’s two key pipelines in the eastern Niger Delta, which the oil giant replaced in 2010 at a cost of $1.1 billion.

Pan Ocean Oil Corporation Nigeria Limited, operator of the NNPC/Pan Ocean Joint Venture, clinched OML 24 after submitting a bid of $900 million for the asset valued at between $500 million and $1 billion.

OML 24 currently delivers 25,000 barrels of oil equivalent per day from three fields and eight million standard cubic feet per day of gas (MMscf/d).

Lekoil, Crestar, Green Acres/CCC/Signet Petroleum, NDPR/SAPETRO and Essar submitted bids for OML 25. With a $500 million bid, Crestar won OML 25.

These successful bidders of the four oil blocks, which have paid 10 per cent of the bid price of the assets, have been given several deadlines to pay the balance but most of them have not met the deadlines.

Selling the Nembe Creek Trunk Line, which moves oil through the Delta to the Atlantic coast, would be Shell’s biggest move yet to exit onshore crude production in a region that has caused problems for decades.

Over the past year, the Nembe Creek line has had multiple punctures and closures, and at least one fire.

However, it is also a potentially lucrative source of revenue, given that other companies pumping oil in the region pay to use it to get their crude to the market.

The Shell-run entity that is selling the pipeline and oil blocks includes Shell, which has a 30-per-cent ownership stake, along with Total SA of France, which owns 10 per cent and ENI SpA of Italy, with five per cent.

The Nigerian National Petroleum Corporation (NNPC) retains ownership of the remaining 55 per cent in the four assets.

Meanwhile, the decision of the United States to stop the importation of Nigeria’s light blend crude oil due to the shale oil boom has exposed the country’s refineries to the dangers associated with the processing of lighter shale oil.

As a result of the increased domestic production of shale oil, the United States has slashed crude imports from a peak of almost 14 million barrels per day in 2006, to slightly above 7 million barrels per day.

Crude oil import from Nigeria, one of the principal sources of light crude, was also slashed from more than 1 million barrels per day in 2010 to zero in July 2014.

But the US refineries, Reuters has reported, are designed to handle medium blend crude as against the much lighter shale oil being produced in the country to replace imports  from Nigeria and others.

US refiners are said to have shown a strong preference for a medium blend, but almost all the oil being produced as a result of the shale boom is much lighter than the refineries could handle.

Reuters reported that while imports of medium-heavy and heavy grades of crude oil (with specific gravity of less than 30 degrees) have remained roughly constant at 4.5 to 5 million barrels per day since 2007, imports of medium-light and light oils have dropped from 6 million barrels per day to just over 2 million.

Imports of the lightest grades of oil, the closest substitutes for domestic shale production, have been reduced from 2.5 million barrels in 2007 per day to just 500,000 in the first seven months of 2014, according to US Energy Information Administration (EIA).

The sudden change in the grades of crude oil processed by the refineries are said to have threatened the capacity of the plants to blend the different grades to derive the required quality of crude.

The refineries are said to be conscious of the quality and density of crude oil as “crudes vary considerably in terms of density, acidity, type of hydrocarbon molecules they contain, and presence of impurities such as sulphur and heavy metals such as nickel and vanadium”.

For instance, if the crudes contain too much acid or salt, the refinery's equipment will be damaged by corrosion, while with too many heavy metals, the catalysts that aid refining will be poisoned.

Also if the crude oil is of the wrong density, it will be impossible to maximise the efficiency of the refinery's distillation tower and other units.

But according to EIA, US’ crude oil production forecast - analysis of crude types released in May 2014, “roughly 96 per cent of the 1.8 million barrels per day growth in (domestic) production between 2011 and 2013 consisted of ... grades with API gravity of 40 or above”.

To handle the lighter shale oil, the US refiners need to reconfigure their plants to handle a lighter average blend, but that would take time and also involve costly investment.

The simpler option, it was learnt, would be to lift the ban on crude exports and allow US refiners to continue to import and refine more of the heavier oils they prefer.

The Keystone Killer the Enviros Didn't See Coming

When it comes to oil, U.S. is king. Discoveries in North Dakota and Texas have pushed American oil production past Saudi Arabia and Russia this year. The new supplies have boosted the economy and dialed down the price of oil everywhere -- gasoline at $3 a gallon anyone?

The price of oil has fallen so low it’s threatening the feasibility of controversial and expensive drilling projects proposed in the Canadian Oil Sands and the Arctic. West Texas Intermediate, the U.S. benchmark for crude, is going for less than $90 a barrel. That’s approaching the break-even point for profitability at many of the very wells driving the American oil boom.

“If prices go to $80 or lower, which I think is possible, then we are going to see a reduction in drilling activity,” Ralph Eads, vice chairman and global head of energy investment banking at Jefferies LLC, told Bloomberg News reporter Isaac Arnsdorf. “It will be uncharted territory.” [Read the story here.]

At the current price of about $87 a barrel, cheap American crude undercuts many of the most aggressive oil projects under consideration by the oil majors. About $1.1 trillion of capital expenditures have been earmarked through 2025 for projects that require a market price of more than $95 a barrel, according to a May study by the Carbon Tracker Initiative, a London-based think tank and environmental advocacy group.

Investors representing $3 trillion of assets under management have been pressuring oil companies to reduce spending on speculative projects and return profits to shareholders. For the past few years, “stranded assets” has been a buzzword among environmentalists seeking to sway investors about climate policy. The argument goes something like this: As countries ramp up taxes on carbon pollution, the added cost will make the most expensive oil projects unprofitable, so companies shouldn’t be throwing away money on new decades-long boondoggles.

Today’s cheap oil must be a conundrum for environmental strategists, who for years have argued against the Keystone XL pipeline and other expensive and heavily polluting oil projects. In this case, prices aren’t being driven lower by carbon taxes or reduced demand from energy-efficient technologies. Instead, oil is cheap because there’s just so much of it.

Unmoved by oil export proponents, Americans still fear gasoline spike

(Reuters) - A year of increasingly vocal support for easing a decades-old ban on U.S. crude exports has failed to convince American voters that doing so would be a good idea, according to a new Reuters-IPSOS poll that highlights the political perils of opening the door to shale oil sales abroad.

Americans remain split 50-50 over whether drillers should be allowed to sell their crude abroad, just as they were in the first edition of the survey last November. The poll is the only ongoing effort to gauge public sentiment on the issue, which has become one of the year's most pressing energy policy questions, particularly ahead of the November mid-term elections.

The survey reinforced a deep-seated fear that exporting crude would result in higher gasoline prices, a notion that many proponents, economists and op-ed writers have sought to debunk. Almost two-thirds of respondents said they would be opposed to crude exports if it caused pump prices to increase.

Proponents say that allowing the growing abundance of U.S. light, sweet shale oil into the global market would actually reduce worldwide crude prices, which would feed through to lower gasoline rates that are primarily tied to world prices. Some refiners have raised concerns about fuel prices, seeking to maintain restrictions that have buoyed their bottom lines.

The poll helps explain why many Republicans, who otherwise support free-trade ideals, have been reticent to take a position on oil exports, especially ahead of the Nov. 4 elections. Only a handful of politicians, most prominently Republican Senator Lisa Murkowski from Alaska, have openly rallied to over turn the ban, or at a minimum exploit existing loopholes.

"These latest polling results are a reminder of the significant hurdle that opponents of the oil export restriction still face in persuading the American people that free trade in oil will not lead to higher gasoline prices," says Jason Bordoff, a former Obama administration advisor and director of the Center on Global Energy Policy at Columbia University.

"Despite recent studies demonstrating that oil exports will not raise pump prices, and indeed may even lower them, there remains a disconnect between how this issue is discussed and perceived by those in the energy sector and by the general public," says Bordoff, who reviewed the results for Reuters.

CHEERING REFINERS

The results may cheer U.S. refiners such as PBF Energy Inc and Alon USA Energy Inc which have banded together this year to forestall efforts to ease the ban.

The lobby group Consumers and Refiners United for Domestic Energy (CRUDE), which includes PBF and Alon plus two other East Coast refiners, commissioned a poll in early August that showed 70 percent of New Hampshire voters would be less likely to vote for an elected official who had backed crude oil exports if gasoline prices rose. That poll included 418 respondents.

The IPSOS-Reuters poll, which surveyed over 5,000 Americans over two weeks in September, found that 68 percent of respondents believe the United States should keep its booming shale oil production at home to lower gasoline prices. Only 16 percent said it should export the oil in order to boost the economy.

In questions that were asked of only half the respondents, 39.6 percent said they believed U.S. producers should be allowed to export overseas, while 38.8 percent were opposed.

Despite Americans' misgiving, a flow of academic research and op-ed pieces hailing the benefits of exporting oil have emerged from a variety of places this year, including non-partisan think-tanks like the Brookings Institution, free trade proponents like the Wall Street Journal opinion page and even less typically oil-friendly outlets like the New York Times.

Even some staunch Democrats have lent their support. Larry Summers, President Barack Obama’s former economic adviser, says the merits of exports are as obvious as "any significant public policy issue that I have ever encountered." Former Vice President Al Gore said exports are "almost inevitable," and the topic is not a priority for his environmental activism.

One of the few questions to show even a small measure of change involved how much Americans know about U.S. oil production. In September, 6.5 percent said they knew "a great deal" and 24 percent said "a fair amount," up from 5.8 percent and 20.8 percent, respectively, in November last year.

(Reporting by Jonathan Leff; Editing by Marguerita Choy)

Drilling Rig for 200,000bpd Egina Oilfield Sails to Nigeria

Ejiofor Alike

The drilling rig, christened ‘West Jupiter,’ which will be used for the drilling of all the oil wells at the 200,000 barrels per day Egina deepwater oilfield, being developed by Total Upstream Companies in Nigeria has sailed away from South Korea, thus demonstrating another milestone in the development of the $3.5 billion Egina project.

Speaking during the ground – breaking ceremony of the fabrication yard for local integration of the Egina Floating Production Storage Offshore (FPSO) vessel in Lagos at the weekend, the Managing Director of Total Upstream Companies in Nigeria, Mrs. Elisabeth Proust said the rig would arrive in Nigerian waters in November 2014 to start the drilling of the Egina wells in December 2014.

Proust said the Egina project had achieved almost 20 per cent performance of the expected works.

According to her, the ground-breaking ceremony is another milestone for the Egina project as it marked the first start of the in-country facility development, in which the modules built in Nigeria would be integrated onto the Egina FPSO in 2017.

“This is another milestone coming after many others already achieved in the past few months, such as the procurement of the drilling Tubulars, the gas export and Water Injection line pipelines; the first Well-Heads set; the steel cutting in-country for Living Quarters and subsea manifolds and finally, last week, the sail away of the drilling rig, West Jupiter to Nigeria,” she said.

Proust, who was represented at the occasion by the Deputy Managing Director of Total, in charge of Deepwater Manager, Mr. Charles Ngoka said Egina was a key project for Total in  Nigeria and a strong partnership with the Nigerian government, other international oil companies and local contractors.

Proust said her company had brought its expertise in this partnership and had also been able to increase local collaboration and Nigerian content in its operations through this initiative.

She said projects such as Egina empowered Total to further demonstrate its commitment to the Nigerian economy and her people.
“Total is fully committed to achieving the Nigerian Content Sustainability Target by ensuring teamwork between the international oil companies and local contractors. The main objective is to foster technology transfer, knowledge sharing and local skills development. As the first major project to be started under the Nigerian Content Act of 2010, Egina has overcome challenges with the LADOL initiative and created a landmark for the oil and gas industry in Nigeria,” she added.

Samsung and LADOL had established a new partnership called SHI-MCI Free Zone Enterprise to build Africa’s first FPSO integration and fabrication facility in LADOL free zone in Lagos.

Located 130 kilometres offshore in Oil Mining Lease (OML) 130 in deep offshore Nigeria, the Egina field development is a project to build FPSO for Total Upstream Nigeria Limited and the Nigerian National Petroleum Corporation (NNPC).

The FPSO would be one of the largest in the world, with a storage capacity of 2.3 million barrels of crude oil and a targeted production capacity of 200,000 barrels per day.

We're Sitting on 10 Billion Barrels of Oil! OK, Two

By Asjylyn Loder and Isaac Arnsdorf

Lee Tillman, chief executive officer of Marathon Oil Corp., told investors last month that the company was potentially sitting on the equivalent of 4.3 billion barrels in its U.S. shale acreage.

That number was 5.5 times higher than the proved reserves Marathon reported to federal regulators.

Such discrepancies are rife in the U.S. shale industry. Drillers use bigger forecasts to sell the hydraulic fracturing boom to investors and to persuade lawmakers to lift the 39-year-old ban on crude exports. Sixty-two of 73 U.S. shale drillers reported one estimate in mandatory filings with the Securities and Exchange Commission while citing higher potential figures to the public, according to data compiled by Bloomberg. Pioneer Natural Resources (PXD) Co.’s estimate was 13 times higher. Goodrich Petroleum Corp.’s was 19 times. For Rice Energy Inc., it was almost 27-fold.

“They’re running a great risk of litigation when they don’t end up producing anything like that,” saidJohn Lee, a University of Houston petroleum engineering professor who helped write the SEC rules and has taught reserves evaluation to a generation of engineers. “If I were an ambulance-chasing lawyer, I’d get into this.”

Experienced investors know the difference between the two numbers, Scott Sheffield, chairman and CEO of Irving, Texas-based Pioneer, said in an interview.

“Shareholders understand,” Sheffield said. “We’re owned 95 percent by institutions. Now the American public is going into the mutual funds, so they’re trusting what those institutions are doing in their homework.”

Mutual Funds

Investors poured $16.3 billion in the first seven months of the year into mutual funds and exchange-traded funds focused on energy companies, including drillers that create fractures in rocks by injecting fluid into cracks to enable more oil and gas to flow out of the formation. That’s almost twice as much as in the same period last year, bringing total assets to $128.2 billion, according to New York-based Strategic Insight.

U.S. oil production surged to a 28-year high in 2014, bolstering the companies’ sales pitch and contributing to a 20 percent drop in American oil prices since the end of June. U.S. output is expected to grow 12 percent next year, to the highest level since 1970, according to the Energy Information Administration of the U.S. Department of Energy. At the same time, U.S. consumption will shrink 0.2 percent this year, the EIA said.

Annual Accounting

Marathon’s Tillman, who was speaking at the Barclays Plc CEO Energy-Power Conference in New York on Sept. 3, said there are “risk and uncertainties that could cause actual results to differ materially from those expressed or implied by” his comments. Many company presentations remind investors that publicly announced estimates are more speculative than the numbers the drillers file with the SEC.

Figures the company executives cite during presentations “are used in the capital allocation process, and are a standard tool the investment community understands and relies on in assessing a company’s performance and value,” said Lisa Singhania, a Marathon spokeswoman. The Houston-based company’s shares have risen 1.6 percent in the last year.

The SEC requires drillers to provide an annual accounting of how much oil and gas their properties will produce, a measurement called proved reserves, and company executives must certify that the reports are accurate.

Resource Potential

No such rules apply to appraisals that drillers pitch to the public, sometimes called resource potential. In public presentations, unregulated estimates included wells that would lose money, prospects that have never been drilled, acreage that won’t be tapped for decades and projects whose likelihood of success is less than 10 percent, according to data compiled by Bloomberg. The result is a case for U.S. energy self-sufficiency that’s based more on hope than fact.

Judy Burns, a spokeswoman for the SEC, declined to comment on what drillers say during investor presentations.

A Rice Energy spokeswoman declined to comment on the difference between the numbers. A spokesman for Houston-based Goodrich Petroleum didn’t return calls and e-mails seeking a comment on the subject.

Predicting how much oil can be pumped out of shale has been controversial since the boom began about a decade ago. Companies combined horizontal drilling with fracking, or hydraulic fracturing. Fracking involves blasting water, sand and chemicals into deep underground layers of shale rock to free hydrocarbons.

Reasonable Certainty

Innovators such as Oklahoma City-based Chesapeake Energy Corp. (CHK) said that drilling vast expanses of oil-soaked rock formations is more predictable than the traditional, straight-down method of exploration. Regulators agreed and requirements were loosened starting in 2010.

A spokesman for Chesapeake Energy declined to comment on the rules for proved reserves.

To count as proved reserves to the SEC, companies must have “reasonable certainty” that the oil and gas will be extracted from existing wells and those scheduled to be drilled within five years. The forecasts are based on fuel prices, geology, engineering and the performance of nearby wells. Planned wells must be economically and technically viable.

For Harold Hamm, the billionaire founder, chairman and CEO of Oklahoma City-based Continental Resources Inc., the five-year rule is too constraining. It will take longer than that to extract a lot of his company’s petroleum, and he should be able to cite those resources in regulatory filings, he told the Senate Energy and Natural Resources Committee on Jan. 30.

“Those numbers are totally pessimistic,” Hamm said about proved reserves. Continental shares have risen 8.3 percent in the last year.

Lobbied SEC

Energy companies also lobbied the SEC to let them file more speculative estimates, known as probable reserves and possible reserves. Only three companies take that option, according to data compiled by Bloomberg. The rest report only proved reserves to the SEC and save their other estimates for public presentations, which the SEC doesn’t supervise.

The data include year-end 2013 SEC filings, the latest available, compared with 2014 marketing materials, press releases, company websites and executives’ speeches for the 73 shale drillers. The presentations rarely explain how the drillers calculated the figures. The numbers sometimes change from one presentation to the next.

Total Estimate

Many of the companies use their own variation of resource potential, often with little explanation of what the number includes, how long it will take to drill or how much it will cost. The average estimate of resource potential was 6.6 times higher than the proved reserves reported to the SEC, the data compiled by Bloomberg News show.

Several companies, including Sanchez Energy Corp. (SN), don’t provide a total estimate. Instead, they publish variables such as the number of well locations and the estimated output from each one. Analysts often use these figures to independently compute the total.

Even though Sanchez Energy provides the variables for analysts to calculate its resource potential, the Houston-based company doesn’t publish a total estimate. Executives debated whether to include one and decided against it, said Gleeson Van Riet, senior vice president for capital markets andinvestor relations.

‘Garbage Out’

“We don’t think that a lot of the guesstimates that go behind those sorts of things will ultimately be constructive to investors,” Van Riet said. “Put another way, garbage in, garbage out.”

Denver-based Cimarex Energy Co. is one company that doesn’t report a different number to investors than it does to the SEC. “We want to have things on the books that are part of our near-term drilling plans,” Karen Acierno, a Cimarex spokeswoman, said in an interview. “A lot of people appreciate our conservative nature, a lot of investors.” Cimarex shares are up 19 percent in the past year.

The investor presentation by Canonsburg, Pennsylvania-based Rice Energy shows 2.7 billion barrels. Rice, which went public in January, reported 100 million barrels to the SEC in March, records show.

At Pioneer Natural Resources, the number they cite to potential investors has increased by 2 billion barrels a year in each of the last five years -- even as the proved reserves it files with the SEC have declined.

The rising number is “a game changer for this company,” said Sheffield, the CEO. “It’s a game changer for this country.”

‘Great Resource’

Pioneer’s numbers aren’t misleading; they’re conservative, Sheffield said. He said he’s shared them with Senators Mary Landrieu of Louisiana and Lisa Murkowski of Alaska, the Democratic chair and Republican ranking member, respectively, of the Senate energy committee.

“Obviously it’s helped us in regard to making headway on convincing people to lift the export ban,” Sheffield said. “We want to convince them that we have this great resource. We don’t want it trapped here in the U.S. That’s for the public, the administration and Congress. So if we’ve got this great resource, why don’t you allow us to export it?”

The message is getting through. While Landrieu said she favors more study, Murkowski said she supports ending the ban.

A loosening of trade restrictions imposed after the 1973 Arab oil embargo would be worth billions to drillers such as Pioneer, Marathon and Continental because the price of oil on the international market in the past year has averaged 8.5 percent more than in the U.S.

Bakken Shale

“If you don’t allow the exports of this oil, they’re going to reinvest someplace else where they can market this oil,” Senator Heidi Heitkamp, a North Dakota Democrat, told CNBC Sept. 15. “And so it’s going to reduce the development and the dollars coming in.”

Joining her that morning was John Hess, the billionaire CEO of New York-based Hess Corp., who said, “We’re in a period of supply strength.”

Hess’s company told the SEC it had the equivalent of 659 million barrels of proved reserves in the U.S. The latest investor presentation said the company had 1.2 billion barrels just in the Bakken shale, in Heitkamp’s home state. Hess shares have increased 7.9 percent in the last year. A Hess spokesman didn’t return calls seeking comment.

Lee, the University of Houston professor, said in an interview that he’s alarmed by the inconsistent and overly optimistic estimates published by shale companies.

Shale Engineers

In August, Lee led a workshop in Houston on the best practices of reserves estimation. The audience in the ballroom of the Hotel Derek included engineers for shale drillers such as Marathon, Continental and Rice.

Pamela Allen, a senior reserves coordinator for Marathon, raised her hand and told Lee that she was worried that using outsized forecasts in public presentations would run afoul of the SEC and “come back to haunt us.”

Singhania, the Marathon spokeswoman, said she was unable to comment on Allen’s remarks without seeing a transcript.

“If a lot of people get burned -- and I think a lot of people can and will be burned -- by these numbers in the investor presentations, there may be a push by investors to get the SEC to do something about it,” Lee said during the workshop.

To contact the reporters on this story: Asjylyn Loder in New York at aloder@bloomberg.net; Isaac Arnsdorf in New York at iarnsdorf@bloomberg.net