What Would an Exit from Bonga South West/Aparo Mean for Shell?
In February 2016, Royal Dutch Shell plc announced in its fourth quarter 2015 financial statement that it was postponing the final investment decision (FID) on the Bonga South West/Aparo (BSWA) deep water project offshore Nigeria, in an effort to curtail spending amid the current low oil price environment.
Shell’s decision to postpone the FID on BSWA comes after Shell Nigeria Exploration and Production Company (SNEPCo) announced last year that it was committed to the project. In February 2015, the company’s managing director Tony Attah denied reports that the energy firm had stopped the development due to the slump in oil price and confirmed that it was progressing the tender for engineering, procurement and construction contracts related to BSWA.
Located in the Gulf of Guinea, BSWA straddles the OML 118, 132 and 140 block boundaries, in water depths of 3,805 feet to 4,396 feet. The development resides 11 miles south of the Bonga Main project, Nigeria’s first deep water venture which started its Phase 3 project production in October, and 22 miles south of the Bonga North West development, which came on-stream in 2014.
Under Phase 1 of the BSWA development, 24 wells would be drilled, of which 12 would be producers and 12 would be water injectors. Phase 2 would see an additional 20 wells brought online, 10 of which would be producers and 10 of which would be injectors. The project also includes the construction of a new floating production, storage and offloading (FPSO) facility with an expected peak production of 225,000 barrels of oil per day.
BSWA is operated by SNEPCo, which owns 44 percent of the asset, with Chevron Corporation, Esso, Eni S.p.A, Total S.A and Sasol holding 19.625, 16, 10, 10 and 0.375 percent interests, respectively.
Commenting in a company release at the time, Attah admitted that the project had encountered “some delays” but insisted that he was optimistic “for a final investment decision in the 2015/16 timeframe”.
In an apparent backtrack, SNEPCo now expects that a final investment decision in connection to the BSWA project won’t be made until 2017 at least. Speaking to Rigzone, Shell Spokesperson Bamidele Olugbenga Odugbesan said that the BSWA FID wouldn’t be seen this year in order to give the companies involved a chance to cut costs.
“The final investment decision on the Bonga South West project has been delayed to allow SNEPCo and its co-venture and government partners explore more efficient and cost effective ways of implementing the project. A final investment decision is now not expected before 2017,” he said.
The Effects of Stopping the BSWA Project
It’s unclear if Shell will decide to press ahead with the BSWA development. In September of last year, Shell announced that it was ceasing exploration activity offshore Alaska due to high costs, taking a financial hit worth billions of dollars in the process. The company also exited the Bab sour gas reservoirs project in the Emirate of Abu Dhabi in January after an evaluation of the project’s technical costs, and shelved an oil sands project in Alberta.
If Shell does decide to scrap the BSWA project, which is reportedly worth $12 billion, not only would it lose all of the money it has already invested in the development, its production figures, which dropped last year, would suffer as well.
In its fourth quarter 2015 results, released Feb. 4, Shell revealed a 4 percent decrease in oil and gas production for the full year, compared to 2014, with output coming in at 2.954 million barrels of oil equivalent per day. Assuming BSWA delivered on its target to hit 800 million barrels of oil over 25 years, as outlined in a SNEPCo presentation in March last year, the development would provide the co-venture partners of the project with an average of 32 million barrels of oil every year, or 87,671 barrels of oil per day (bopd). Based on an ownership interest of 44 percent in BSWA, Shell’s share of this output would be 38,575 bopd, which translates to over 1.3 percent of the company’s current yearly oil and gas production.
Ditching BSWA would also mean that Shell wouldn’t have access to the associated revenue from the output increase, at a time when the company is experiencing a significant income reduction. The firm’s full year 2015 results indicated that Shell’s upstream division lost $5.66 billion in 2015, marking a 136 percent drop from the profit of $15.84 billion registered the year before.
Although Shell tried to protect the BSWA development from the effects of the oil price slump early last year, further drops in Brent eventually forced it to delay the venture – an action which gave further credence to Wood Mackenzie’s report in January revealing Nigeria as one of the countries worst affected by delayed oil projects. Wood Mac believes the situation in Nigeria is about to get worse too, predicting that production is set to stagnate in the country as further investment cuts bite.
It’s difficult to predict how the BSWA development will progress going forward, but it’s safe to assume that commodity prices will play a huge role in what happens next at the Nigerian asset.
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