System Dynamic Modelling for Forecasting Crude Oil Reserves and Production Capacity: A Case Study of Nigeria

Abstract

Nigeria's crude oil reserves and production capacity growth have stagnated over the past decade leading to the apprehension of whether the country is running out of oil or running into it. Existing methods of predicting production capacity and reserves growth to address this apprehension have series of gaps which this research addressed namely inconsistent and optimistic peak oil predictions from several authors, over curve-fitting, lack of details on investment underpinning the forecast, non-relationship with international crude oil price dynamics, omission of structures of the system being modeled and non-flexibility for scenario modeling. This research offers a long term perspective to modelling and forecasting using system dynamics approach with reserves replacement ratio (RRR) as proxy for status of oil and gas industry in Nigeria. The research successfully formulated mathematical models, built Nigeria Upstream Petroleum Integrated portfolio system dynamic model (NUPIM), history matched the reference modes from 1958 to 2015 with quality of the match assessed by visualization and statistical method of multiple regressions. Then, the research forecasted Nigeria oil production capacity and reserves from 2018 to 2035 and performed economic evaluation under various growth policy scenarios to provide a long term perspective of the industry. International crude oil price dynamics was endogenously modeled, history matched and predicted in order to capture its dynamic impact on reserves and production capacity growth. Under the present state called the passive growth policy scenario where a modicum of investments are being made in exploration and development, RRR is estimated at 60% as at 2016,which is evidence of the running out of oil phenomenon. A radical investment policy of injecting some 10 billion USD annually for five years into exploration and development produces RRR > 100%, but this is short-lived. A more distributed fund injection of some 5 billion USD over 10 year period in the optimal investment policy scenario, stimulates growth and guarantees an RRR that is greater than 100% over a longer period of 8 years thereby reversing the crude oil running-out trend. The incremental economics under the present growth policy (passive state) returned negative NPV @12.5% of ca 3 billion USD suggesting the incremental investments in exploration/development to generate new reserves and capacity in the oil industry under the current passive growth policy are value destructive. Having closed identified gaps in knowledge from this research, it is recommended that government and investors should use the system dynamic approach, appropriate fund injection and exploration/development investment mix in addition to governance restructuring to reverse the apparent running-out-of-oil trend in order to drive desired growth in reserves and production capacity and to truly make the oil and gas industry the enabler of economic diversification in Nigeria in the long run.