Micro and Macroeconomic Impacts of Agbami Oil Project - Case Study Example

Running Head: Agbami Oil Project Micro and macro economic impacts of Agbami oil Project Name Institution Date Agbami Oil project Introduction Nigeria is termed as the highest oil producer country in Africa and is ranked as the eleventh largest in the whole world. It was in 1956 that oil was discovered in Nigeria by Shell-BP which was the sole concessionaire at that time. The discovery was made at a place called Oloibiri in the Niger Delta. In 1958, Nigeria joined the ranks of oil producers when its first oil field managed to produce 5,100 bpd of oil. The exploration rights in onshore and offshore areas which adjoined with the Niger Delta became extended to other companies in the foreign countries in 1960 after which the Shell BP discovered the East Africa Field in the shallow waters found in Southeast of Warri (Orubu et al, 2002). After the country amassing a lot of wealth from oil production, it joined the Organization of Petroleum Exporting Countries (OPEC) which stimulated the establishment of other well known oil companies. The production of oil comes with many detrimental consequences to the country. It is evident that despite the Niger delta producing energy which is supplied to the whole country and the world at large, most of the people living in the area do not have electricity in their houses. There was compensation of the people whose land was taken from them, and also those whose land was affected by oil spillages. This led to deterioration of the local economy and pollution of the environment was so pronounced. People in the area suffer from hunger since their land has been rendered barren by the process of gas flaring which scorches the earth. Scientists have proven that the incomplete combustion of the gas flares has led to falling of acid rain which in turn damages crops and makes drinking water unfit for consumption (Orubu et al, 2002). There are frequent spillages and rupturing of the pipelines which in turn destroy streams the farmlands and aquatic life. The sad aspect of oil mining is the increase in death of Nigerian citizens which is caused by pipeline explosions resulting from leakages. Nigeria has explored many sedimentary basins which are Niger Delta, Benue Trough, Chad basin, Anambra Basin and Benin basin which have formed the great oil reserves in the country. The wealth of oils in these oil basins has attracted foreign investors who bring development into the country. Nigeria has developed several petrochemicals industries which are as result of its substantial refining capacity. Due the main problem of corruption in the distribution and marketing chain, the company established Nigerian National Petroleum Corporation (NNPC) which had all the encompassing control of the industry through setting both the wholesaler and retail prices of oil as well as being shareholders in all the companies. The major oil project in Nigeria is niger delta project. The purpose was to promote the economic development of the country especially northern Nigeria. Communities along the proposed waterway in Niger delta have raised concerns about the project environmental, social, and economic impacts. Following the federal law (salu 2001) the community satets that they were not consulted by the IAIA-Nigeria in compilation of the report on the proposed projects or the report made available for public review and comments. CASE STUDY: AGBAMI OIL PROJECT. Macroeconomics of the Project 1) Host Country and Government of the Project Nigeria is the host country for the Agbami project. It is through the Nigerian government that the execution of this project has been allowed. This oil project is the largest deep water development in Nigeria and lies in OPL blocks 216 and 217, approximately 220 miles south –east of Lagos and 70 miles offshore of Nigeria, central Niger delta. The oil was proven in block 216 in 1998 by Texaco an independent Nigerian oil company and discovery extended later and was confirmed by Statoil’s Ekoli-1 having been granted the rights of exploration. The project was expected to take a duration of 2 years from 2007. 2) Historical Influences The Agbami project was started in 1999 with INTECSE being granted the contract. The installation contract was awarded to Technip France by chevron in 2005. This meant that the local community did not benefit much in the initial stages of the project since contracts were granted foreign companies. The FPSO (floating production, storage and offloading) vessel used in Agbami has a storage capacity of 2.15M and is the largest vessel ever built. This has resulted to the high production capacity. The project is owned by Chevron which is one of the leading world’s intergrated companies dealing with the production of energy. The company has at least 59 000 employees. 3) Government Policies and attitudes As it would have been expected, the community surrounding Agbami project has not benefited much from the project due to the government attitude towards them. For instance, local indigenous oil companies are denied contracts as it is claimed that they do not have the required skills, production capacity, capacity, manpower and technical expertise to compete with foreign companies. This means that the local content is very low and the poverty level continually increase as a result of this. This could have been attributed to low ability in project management, poor training, deficiencies in structure and capital and lack of team work (Ajomo, 1994). In addition, the commercial bank in Nigeria is not in a position to give loans to Nigeria’s indigenous firms and collaboration of these firms has to be fostered by the government and partnerships be made with multinational firms. This -denies upcoming and small firms the opportunities grow resulting to much of the oil benefits being reaped by the foreign companies. The low local content can hence be attributed to a climate that does not favour oil business in Nigeria, lack of existence of links between foreign companies that are technically competent and indigenous contractors, poor and inadequate infrastructure, incoherent and inadequate legislations/policies, inability of local financial institutions to fund projects and the country’s low technological capacity. The ‘Nigeria content’ which contained the new policies aimed at increasing local participation, increasing manpower, infrastructure development and increasing the participation of indigenous companies. The policies developed are aimed at ensuring that there is increased participation by skilled indigenous persons and that contracts are awarded to national companies that will benefit from multinational companies through partnership. However, it should be considered that these firms are strictly profit based organizations that seek to maximize on opportunities and the poverty level in Nigeria might continue to increase despite the existence of oil trade in the country. The fact that the government has been identified with corruption cases and poor regulatory mechanisms for the industry continually endangers both large and small industries exploring oil production. This means that the situation may worsen unless local content policies are developed and aided by a balance in strict regulations and incentives. 4) Taxation Issues The government aims at increasing local ownership of oil fields in Nigeria. As a result, the MFDP (Marginal field Development Program) provides the local companies with tax breaks. In addition, government incentives are also available for these companies hence benefiting the local community. It is targeted that by 2010, there will be a local ownership of the oil fields of 70% country wide. 5) Export and Import Imbalances and issues The Agbami oil project began exporting oil to other nations on September 2008. Increasing production in oil is still underway. With the increased oil output, Agbami oil field will increase its exports. Subsequently, it will meet the demands of both the domestic and the international market. Nigeria at first targeted the United States and Western Europe as potential buyers. Asia and Latin America are also becoming potential clients as well. Environmental regulations The Nigerian economy is sustained by petroleum mining although it having substantial social crises and environmental degradation which have impacted negatively on the Niger Delta and it potential. Environmental management and strategies and policies in Nigeria have been implemented to reduce pollution. There is a provision in the Nigeria constitution for healthy and clean environment to all Nigeria’ wild life. According to the constitution on the country section 20 Nigerian’ resource should be exploited in a sustainable way. The Federal Environmental Protection Acts of 1988 has created environmental agency within Nigeria to be accountable for the development and protection of the entire environment. Oil and gas mining being the largest industry in Nigeria have contributed a lot in environmental degradation. Its have impacts on the environment and people in various ways, through land and sea operation, climate change and through negative or positive impact on the Nation economy. Environmental protection should be integrated in every area of the company operation and it activities (Rigzon, 2008). This means that the company’s policy must ensure the protection on the environment and people. Chevron which owns Agbami project has received several awards for its good management and protection of the environment from governmental agencies, Nigerian Conservation Foundation and NGOs dealing with environmental protection and conservation activities. Healthy and safety issues Agbami, Oil and gas mining has caused various issues to human life the environment. some of the major issues sited are; oil spilling which has led to loss of soil fertility, death of aquatic life due to water pollution, poor health hence high living cost which is as a result of drinking polluted water, and social strife, oil spillage has also led to reduction of mangrove ecosystem Gas flaring has led to degradation of safe habitant, air pollution within the area, degradation of the wild life within the area. Other related healthy and safety issues are increase in crime and social vices within the area, population decrease, short human and animal life span, pressure on the existing resources which my led to conflicts, as well as pressure on the oil town There are a number of international and regional policies in Nigeria that give right to a healthy environment so as to address the above issues. The principle of environmental law in the legal instrument grants man right to equity, freedom and adequate life in a surrounding that gives him life of well being and dignity. Agbami have embraced this right to life so as to include the right to a healthy environment to it population. 7) Infra structure support and tax breaks The Agbami oil project has contributed to the economic growth and development of Nigeria in various ways. The Agbami project’s infrastructure and new facilities have been set up to support easy movement of the products across the country and also overboard to other continents. Agbami oil project is also subjected to the Petroleum Profits Tax (PPT). 8) International Relationships in the context of global context The Agbami oil project is deemed to link to the outside world in that energy supplies from this oil project will be sold to the international market. The existence of an energy source that is relied on by several nations promotes cohesion and good relations amongst these nations. This is attributed to the fact that these nations need one another. Therefore, the existence of an energy resource that is depended on by several countries promotes good and favorable international relations. There is need to build good relationship with other countries for the project to increase its market share in the global market. 9) Contemporary Issues The Agbami oil project has been largely involved in transforming lives of the Nigerian people. For instance, it has provided drinking water, power and installed electricity generators for the communities surrounding the project. It has also contributed through the establishment of educational, economic and health programs. One main contemporary issue is the escalated PPT by the Nigerian government. This move is considered to inhibit investment in the country. Statoil is one of the shareholders of the Agbami oil field. Unfortunately, the accounts of this company have been frozen due to conflict between Dr. John Abebe and company. Abebe is the younger brother to Stella Obasanjo, former first lady. The proposed action Oil leads to environmental degradation, destroys ecosystem and the way of life, and impoverishes the oil producing communities. To increase the awareness of environmental issues, recycling has been recommended as a means to reduce environmental pollution (Rigzon, 2008). Chevron is working hard to contribute to the lives of the community members by funding students through sponsorship and developing teaching programs. Micro economic of the project Companies/Stakeholders/Interest groups The field is owned by the terms of deepwater production –sharing contract (psc) between texaxo and famfa. The major stakeholders are chevron Texaco with 68.15% interest, followed by statoil which has an interest of 18.85% having obtained it on 2004 (Ebeku, 2003). The last stakeholder is Petrobas with an interest amounting to 13%. The Agbami unit is operated by Star Deep Water Petroleum limited in partnership with famfa oil limited, Nigeria National Petroleum Corporation and other stakeholders who are involved in funding, Texaco Nigeria Outer Shelf Inc., Petroleo Brasileiro Nigeria Limited, Statoil Nigeria Limited as well as numerous suppliers and contractors across the entire Governments or public finance The project is a $3Bbn project with its first completion in January 1999 to a depth of 12,400ft with a 420 net fee pay and oil quality of 35-35 API gravity and very low sulphur content. In January 2000 the well was drilled by Texaco using drillship glomar explorer to a depth of 15,683 ft with light oil, sweet crude (45o API gravity) and low levels of contaminants. The total field reserves are expected at around one-billion oil-equivalent barrels. $3.5B provided by Chevron Texaco was used to develop the oil field (Ebeku, 2003). Industry Analysis oil production capacity is on the rise both in Nigeri at the global level. The capacity to grow is attributed to diversification of the companies, development and discoveries of deep water production, the increased production of gas that results to overall increase in increase in the associated liquids, increased oil prices and invention of non-traditional and convectional crude supply. The Agbami project produces 250 000 barrels every day. This is in the data released in 2009. The company (Chevvron), produced 433,000 barrels of oil every day in the same year. This means that the project produces more than half of the company’s products. Any major technologies or Innovation The field development has an FPSO with an overall storage capacity of 2.15 million barrels of crude oil which secretly arrived in 2007 and is one of the largest facilities ever built. This has been enabled by the use of a modern technology known as 3-D visualization (Craig &Bloomer, 2009). This technology has made it easy to find hidden oil through ‘looking’ into geographical structures that are very complex. This technology has a very high precision thus reducing the time taken to do the work to be done. The technology was discovered by Texaco and has been used in Agbami oil project. In addition, the developed focused exploration program increases the chances of sure identification of oil resources. Texaco is commited to excellency in the development of technology and ensuring collaboration with community members to reduce resistance. Industry Analysis Agbami oil project stands 11th out of 40 projects that produce oil at the global level. Her productivity has the potential of increased. The production in this project remains the largest deep water oil producing project and has the capacity to grow. Government policy This report offers a concise overview of the developments in Nigeria's downstream sector and the emerging investment opportunities. No doubt, the Government is vigorously pursuing the deregulation of the downstream sub-sector sector of Nigeria's Oil & Gas; it has been reported that NNPC, the State's Oil & Gas Giant has directed existing oil E&P companies to refine 50% of their production locally. NNPC itself is undergoing structural transformation to enable it position as integrated Oil & Gas Company that is accountable and transparent (Craig &Bloomer, 2009). Opportunities exist for a wide range of upstream and downstream activities, including exploration, production, pipelines and storage, and for a large range of service companies, including equipment suppliers, providers of petroleum and environmental technical services, consultants, pipeline and storage contractors, banks and others wanting to finance major new developments. The Government's local content policy seeks more integrated, local companies in Nigeria's Oil & Gas sector. Health and safety issues There are increased cases of insecurity in Nigeria. These include takeover of oil facilities by the militant, kidnappings and vandalism. The oil workers in Agbami project like other oil workers in Nigeria experience insecurity as they are kidnapped for ransom. These has resulted to some companies pulling out of the country to seek business opportunities else where. Production issues The project has not been spared in the infrastructural issues that have been facing the oil industry in Nigeria. For instance, PENGASSAN (petroleum and gas senior staff association of Nigeria) held a strike that greatly affected the production process in the entire country. Other major disruptions in the production have been as a result of the instability experienced in Nigeria delta. Attacks that mainly target the oil infrastructure result to a low production as experienced in 2008 when the average production was 1.95M bbl/d instead of the expected 2.7 M bbl/d per day (Craig &Bloomer, 2009). Future trends world. There are intentions to expand the project in the future include completion of the subsea, an offloading FPSO (floating production storage), and a floating FPSO. This development will ensure increase production as FPSO’s combined production ranks the highest in the entire world. A development program to put up ten wells was begun in December 2009 and production of crude oil from these vessels is expected to commence in 2011 (Ebeku, 2003). This will increase the production capacity for cruide oil hence offsetting the field decline. Chevron has signed a GMOU (global memorandum of understanding) with development councils in Niger delta aimed at reduce conflicts, establishing stability and bringing peace (Craig &Bloomer, 2009). This will reduce insecurity cases hence increasing chances for community members to benefit from the project. Conclusion Though Agbami oil project has had positive impacts on the communities surrounding the project, it has also had very negative impacts like many other oil projects in the world. The goal is to reduce such impacts as Chevron works hard to provide a safe working environment for her workers. It has raised environmental concern on the role of the project in environmental pollution and global warming. This calls for the government to establish policies that will control the activities of different companies hence promoting a healthy working environment. References Ebeku, K., (2003). Judicial Attitudes to Redress for Oil Related Environmental Damage in Nigeria, RECIEL 12(2) 199-208 Craig, D. &Bloomer, ASME (2009). Agbami projet: people and partnerships delivering a world scale field development. The 2009 offshore technology conference in Houston Texas. Rigzon, Agbami project set to produce first oil in September. E & P news 2008, 30th July. Ajomo, M. (1994). ‘An Examination of Federal Environmental Laws in Nigeria’, in M.A Ajomo and O. Adewale (eds), Environmental law and Sustainable Development in Nigeria (Nigerian Institute of Advanced Legal Studies). Orubu, C.O; Fajingbesi, A., Odusola, A. and Magbagbeola,N. (2002). Environmental Regulations in the NigerianPetroleum Industry: Compliance Status of Compianceand Implications for Sustainable Development, ResearchReport, ACBF/NCEMA, Ibadan. Read More