Issues in Exploration and Production of Oil

1. Issues in Exploration and Production of Oil By Ulasi Joshua Ikechukwu

2. Abstract Exploration and production of oil in Nigeria, which started in the 1950’s have generated more revenue to the government, provided the much needed foreign exchange, and attracted other businesses with their associated income and employment effects. However, Nigeria has also witnessed serious negative effects associated with oil exploration and production. The paper highlighted several environmental, health and economic issues resulting from oil exploration and production in the country. Data used in the paper were published secondary data, which were analysed using the Excel statistical software.

3. 1. Introduction • Oil exploration and production activities in Nigeria are mainly concentrated within the Niger-Delta area. This area is located in the Atlantic coast of Southern Nigeria, and is the world’s second largest delta (Awosika 1995). The delta consists of the following states: Abia, Akwa Ibom, Bayelsa, Cross River, Delta Edo, Ondo, Imo and Rivers. • Last year, oil was discovered in Aguleri-a town in Anambra State. Production in this new area is yet to begin, though.

4. 1. Introduction (continued) • The fact that Nigeria is a major oil producer --with recent oil discoveries made --should serve as good news. However, in Africa, history has shown that some countries’ natural resources, which should have served as a blessing, have rather left most citizens with many woes. • Oil production generates income needed for economic development, but it also leads to a whole lot of issues including environmental degradation, health hazards and issues over resource control.

5. 2.A brief History of Oil Exploration in Nigeria • Oil was first discovered in Nigeria by the then Shell British Petroleum Company (now Royal Dutch Shell)in 1956 in Oloibiri, a village in Bayelsa state (Anifowose 2008). • Commercial production began in 1958 with an output of 5,100 barrels per day (Uyigue and Ogbeibu 2007). • Other foreign companies were granted the rights to explore oil within the Niger-delta region in 1960, and in 1965, another oil field was discovered by Shell in Warri.

6. 2.A brief History of Oil Exploration in Nigeria • The 1970’s marked the period of the oil boom, and Nigeria had attained a production level of over 2 million barrels per day by this time. • The country joined the Organisation of Petroleum Exportin Countrues (OPEC) in 1971, and established the Nigerian National Petroleum Company in 1977. • Currently, Nigeria produces between 2.4 to 2.5 million barrels of oil per day, and oil production and export account for about 90% of her earnings.

7. 3. Gains from Oil Exploration and Production Rent and Factor Income: • Gains from the exploration and production of oil are of two folds: The rents and royalties paid by the oil companies to the national governments, and factor incomes to capital and labour. • Given the low level of development in many sectors of most African economies, gains from oil production is predominantly in the form of rents and royalties paid to the national governments. • In industrialized countries, however, where sophisticated skills and massive capital are possessed by nationals, the gains from oil exploration and production both as rents to the government and as factor incomes to private oil firms.

8. 3. Gains from Oil Exploration and Production Availability of Foreign Exchange • Oil production will definitely affect the external position of the exporting country since foreign exchange will be injected into the country by the foreign oil companies. • Usually, these companies will have to exchange foreign currency for the local so as to pay for local expenses such as accommodation, food and wages. These transfers do not always have a cancelling out effect, as the drilling equipment are purchased with foreign currency. (The opposite would be the case if heavy equipment were imported, thus putting a downward pressure on the local currency.

9. Gains from Oil Exploration and Production Exchange Rate Stability • The availability of foreign exchange can also help policy makers to maintain both external and internal balance in a fixed exchange rate regime. This happens when Central Banks purchase local currency with foreign exchange in the international market so as to prevent further depreciation of local currency. • In a flexible exchange rate regime, however, having a surplus supply of foreign exchange, thanks to oil revenue may not help so much in local exchange rate stability.

10. 4. Issues in Exploration and Production of Oil Increasing Difficulty in Exploration Oil extraction may be seen to be somewhat unsustainable because crude oil is not renewable source of energy. Published data shows the demand for oil has increased over the years while reserves are slowly becoming depleted. The implication is that oil companies need to find new sources of oil, or at least, alternative sources. Sources of oil once considered too difficult to drill, such as the continental shelves, are now being targeted for possible oil rigs. Distant parts of the planet, such as the Antarctic and inaccessible areas have also been considered as existing oil supplies begin to run dry.

11. Issues in Exploration and Production of Oil Increasing difficulty in exploration (continued) Oil extraction is expected to become steadily more difficult going forward.

12. Issues in Exploration and Production of Oil Oil Spillage • Oil extraction and transportation comes with a risk of oil spills. As oil companies begin to exploit more difficult resources, such as off-shore oil reserves, and transport oil longer distances, the chance of a spill increases. For instance, 2010's Deepwater Horizon oil spill stemmed from a problem on an off-shore oil rig. • According to Santa Clara University, only 5 to 15 percent of any oil spill can be recovered, leaving a large amount of oil in the environment. This oil can kill plants and animals, disrupt local ecosystems and cause serious damage to local businesses and tourism. • Reliable data on oil spillage could not be obtained for the most recent periods. However, Adati’s publication of 2012 contains figures on oil spills for the periods 1976 to

13. Issues in Exploration and Production of Oil2000 as seen below.

14. Issues in Exploration and Production of Oil Enviromental Degradation Petroleum drilling can release not only oil into the environment, but an assortment of other dangerous substances, such as heavy metals. Drilling fluid and drilling mud often contain cadmium, mercury, arsenic, lead, radioactive materials and other hazardous waste. If allowed to escape, this waste can have serious environmental effects.

15. Issues in Exploration and Production of Oil Health Hazards Workers on oil rigs, both on land and off-shore, are routinely exposed to health and safety hazards. For instance, rigs drilling for oil often encounter pockets of pressurized gas which create an event called a blowout. Blowouts can cause fires, create an explosion and scatter drilling waste a significant distance. The 2010 Deepwater Horizon spill began with an explosion on the drilling rig which killed 11 workers and injured several more (ehow, 2010).

16. Issues in Exploration and Production of Oil Health Hazards • In water, oil film on the water surface could prevent natural aeration and lead to the death of trapped marine organism. In some cases, fish may ingest the spilled oil or other food material impregnated with oil and as such become inedible and unpalatable. • Oil spill on the land could lead to retardation of vegetation growth for a period of time and in extreme cases, to destruction of vegetation. It could also create potential fire hazard, as in the Oyakamo oil pipeline spillage which render the soil unfit for cultivation and polluted about 360 km of salt marshes as reported by Royal Society of London in 1982.

17. Issues in Exploration and Production of Oil Gas Flaring • Statistical data associated with gas flaring are notoriously unreliable, but an online source (Wikipedia, 2010) has published that Nigeria may waste up to 2 billion US dollars per year by flaring associated gas. • Flaring is done as it is costly to separate commercially viable associated gas from the oil. Companies operating in Nigeria also harvest natural gas for commercial purposes, but prefer to extract it from deposits where it is found in isolation as non-associated gas. Thus associated gas is burned off to decrease costs.

18. Issues in Exploration and Production of Oil Gas Flaring (continued) • The international community, the Nigerian government, and the oil companies have made serious efforts to curtail gas flaring which was declared illegal in 1984 under section 3 of the "Associated Gas Reinjection Act" of Nigeria. • Public opinion shows that both gas flaring and oil spillage has reduced significantly in the country.

19. Issues in Exploration and Production of Oil Security Issues • The state of insecurity in some parts of Nigeria, especially the Boko Haram menace may threaten the efforts of the Nigerian National Petroleum Corporation (NNPC) to explore crude oil in the inland basins of Sokoto, Chad, Bida, Gongola, Yola and others. Issues Over Resource Control • In a Federal system like Nigeria, revenue accruing from resources obtained in some states are based on certain principles, like the Derivation Principle. This gives the state from which the resource is obtained a commensurate proportion of the derived revenue. In most cases, the oil producing states would demand for a higher share of the oil revenue. Nigeria has however overcome most of the resource control issues of the 1960’s and 1990’s.

20. Issues in Exploration and Production of Oil Oil Price Volatility • Oil prices are volatile and their path is deeply unknowable (Collier, 2012). It was published that in January 2008, the bounds of the 95 percent confidence interval for the twelve month market-based forecast for the world oil price were around $210 and $65. However, the actual price for that year was $37. • Oil revenue constitute more than 50% of earnings in most low-income oil exporting countries. A wrong forecast of future oil prices will distort the budgets of the countries which base their budgets on expected earnings from oil exports.

21. 5. Conclusion • Oil production has provided earnings in foreign exchange to Nigeria. • However, several sectors of the economy, especially the agricultural sector has suffered many setbacks thanks to the discovery of oil. • The challenges facing oil exploration and production efforts include: Insecurity, Oil price volatility, resource control, oil spillage, environmental and health hazards. • Public opinion shows that Nigeria has put some measures in place to overcome some of these challenges. • Insecurity and oil price volatility are issues that still need to be seriously addressed, though.

22. References • Adati A. A. (2012) Oil Exploration and Spillage in the Niger Delta of Nigeria. Civil and Environmental Research ISSN 2222-1719 (Paper) ISSN 2222-2863 (Online) Vol 2, No.3, 2012. www.iiste.org.  • Anifowose, B (2008) Assessing the Impact of Oil & Gas Transport on Nigeria’s Environment. U21 Postgraduate Research Conference Proceedings 1, University of Birmingham UK. . • Awosika, L.F (1995) Impacts of Global Climate Change and Sea Level Rise on Coastal Resources and Energy Development in Nigeria. In: Umolu, J.C., (Ed). Global Climate Change: Impact on Energy Development.DAMTECH Nigeria Limited, Nigeria.

23. References Cont’d • Collier P. (2012) Managing Ghana's Oil Discovery. Centre for the Study of African Economies, Department of Economics, Oxford University. • eHow.com (2010) The Disadvantages of Drilling for Oil. http://www.ehow.com/list_7147109_disadvantages-drilling-oil.html#ixzz2GvwptkYP (assessed February 2013).  • Uyigue, E. and Ogbeibu A.E (2007). Climate Change and Poverty: Sustainable Approach in the Niger Delta Region of Nigeria. www.2007.amsterdamconference.org/....AC2007_uyigueogbeibu.pdf.  • Wikipedia (2010) http://en.wikipedia.org/wiki/hydrocarbon_exploration#external_links. (assesses February 2013).