Crude oil price volatility and its impact on the development of marginal fields: a case study from the Niger Delta Basin, Nigeria

O. I. Ayodele, S. O. Salufu (), O. R. U. Onolemhemhen and S. O. Isehunwa
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O. I. Ayodele: University of Ibadan
S. O. Salufu: Ambrose Alli University
O. R. U. Onolemhemhen: University of Lagos
S. O. Isehunwa: University of Ibadan

SN Business & Economics, 2024, vol. 4, issue 7, 1-27

Abstract: Abstract Oil prices have remained constantly volatile for some time. It is a source of uncertainty regarding investment decisions. It affects the field development planning of both marginal fields and giant oil fields. However, for marginal fields, its development planning is more sensitive to oil price volatility due to the low volume of hydrocarbon present. Hence, the marginal field operators aim to reduce their investments and expenses while maintaining a technological edge that helps achieve optimum production. However, this present study intends to explore economic indices to make the right decision on which of the marginal fields are viable to be selected for development, considering the impact of crude oil price volatility. The crude oil volatility was estimated from 2018 to 2029 and economic indicators such as internal rate of return (IRR) and Net Present Value (NPV) were used as sensitivity indicators to determine the viability of three cases due to crude price change. A hypothetical marginal field, "Field X," in the Niger Delta was generated with characteristics akin to the Niger Delta. The field was classified as Best, High, and Low Cases of recovery of initial oil-in-place. The Generalized Auto-Regressive Conditional Heteroscedasticity (GARCH (1,1) model was used in estimating the volatility from 2018 to 2029 as 45%, which linked up the observations of the Best Case (65% recovery), whose discounted profit was $473MM, a discounted payback period of 2.97 years, a profitability index (PI) of 2.62, and an IRR of 49.3%. The High Case (50% recovery) yielded a discounted profit of $371MM, a discounted payback period of 2.9 years, a PI of 2.65, and an IRR of 51.1%. In comparison, the low-case scenario (40% recovery) gave a discounted PI of $302MM, discounted payback period of 2.82 years, a PI of 2.68, and an IRR of 53.5%. The economic indicators showed that the best case was the most viable. The discounted profit generated for the best case was the highest, with the lowest IRR compared to others. The study showed that a volatile negative change in price would discourage the development of marginal fields, while a higher price of crude oil promotes development and thus influences investors' decisions. The novelty of this research is that it is simpler and easier to use economic indices to identify marginal fields with good returns on investment than using technological edge.

Keywords: Marginal field; NPV; Crude oil price fluctuation; Niger Delta; GARCH (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s43546-024-00672-z

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