NIGERIA

Capital Budgeting and Beyond in the Nigerian Upstream Oil and Gas Industry

Table of Contents

2.1 Introduction3

2.2 The Oil and Gas industry and its characteristics3

2.2.1 The capital intensive nature of the industry4

2.2.2 The continuous need to search for, develop and produce oil and Gas reserves4

2.2.3 Single industry structure, international focus5

2.2.4 Long lead time from initial investment to positive cash flow5

2.2.5 Lack of correlation between the project cost and value of reserve6

2.2.6 Non-renewable resource6

2.2.7 Joint venture operation7

2.2.8 High risk and uncertainty7

2.3 Overview of the upstream oil and Gas Industry8

2.4 Budget and Budgeting9

2.4.1 Capital budgeting over view from several literatures9

2.4.2 Review of previous literatures on capital budgeting in the upstream oil and gas industries11

2.5 Review of capital budgeting techniques for investment appraisals12

2.5.1 Review if traditional capital budgeting techniques (under certainty)12

2.6 Summary and conclusion15

Capital Budgeting and Beyond in the Nigerian Upstream Oil and Gas Industry

2.1 Introduction

Nigeria oil and gas sector is one of the largest crude oil producers, currently Nigeria produces 2.5 million barrel of crude oil on daily basis. This level of production makes Nigeria tenth largest crude oil producer in world, and sixth largest exporter of crude oil among OPEC members. Moreover production capacity of Nigeria is around three million barrels per day, while country reserves around thirty five million barrels, whereas gas reserve is concerned, Nigerian natural gas reserves is around 185 TCF, it is world's seventh largest gas reserves. There are still undiscovered gas reserves ranging around 300-600 TCF. The quality of Nigerian gas is high, having less sulphur and richer in liquids. A large portion of Nigerian gas is flared. The amount of flared gas is enough for the generation of power for African region. Under the constitution of Nigeria, natural gas, mineral oils and minerals found in Nigeria need to be utilized for the benefits of Nigerians. Petroleum activities and operations are controlled by federal agencies, whereas some governments and state have set up regulations of effectively controlling the activities of Oil and Gas industry (NIGERIA. 1995).

2.2 The Oil and Gas industry and its characteristics

Oil production and exploration activities in Nigeria having an operation of more than fifty years, works at the efficiency level and standard of twenty first century, related to oil and gas industry, moreover the operating landscape, competitive and business environments in Nigeria have consistently changing for the last few years, in a way that oil and gas industry of Nigeria can no operate in a sustainable manner for a longer period. Oil and gas industry in Nigeria have continuously changed from its beginning. Internal restructuring, reforms and evolution in the public sector of the industry still require meeting the expectation of stakeholders and federal governments. Whereas the current structure of industry and legislation is no longer competent enough with the global standards. The upstream private sector industry of Nigeria, have operated and dominated the international oil and gas companies, although they have faced many obstacles and challenges with respect to funding and regional problems (ARIWERIOKUMA, S. 2009 Pp.176-190).

2.2.1 The capital intensive nature of the ...