What determines oil production? A case study of Nigeria and the United Kingdom

Abstract

Nigeria and the United Kingdom are leading oil producers within their region. Both countries are linked by their exploration and production maturity within their regions and the fact that they produce similar oil grades. Their institutional similarities and their economic status as developed and developing economies provide the platform upon which this study basis its comparative investigation. On account of the oil price phenomenon and oil supply concerns by way of reserves, this study investigates the effect of the Hotelling theory, the Hubbert theory and Engineering decline curve theory on actual production rates within Nigeria and the United Kingdom. It develops individual models for both countries, applying each theory to each country to analyse the individual effect and the effect in comparison to one another. The level of adherence of each country to these production theories is measured, following which a combination of all three theories is applied to both country cases to quantify the level of significance and relationship to actual production behaviour. The results leave us with the understanding that the Hubbert theory does indeed capture the behaviour of production in both countries even where it was not expected in the case of Nigeria. The reserve constraint remains a key factor in future production plans for both countries. The results of the empirical analysis provide evidence of strong support in the United Kingdom for the Hotelling theory and weak support in the case of Nigeria. Oil price also remains a key factor in production modelling, though less so in the case of Nigeria. The engineering modelling approach on the other hand failed to explain Nigeria’s production profile, while it captured that of the UK; indicating that production in Nigeria is yet to decline. This result is corroborated by the projected peak production date seen in the Hubbert forecast model for Nigeria, and the weaker support Nigeria shows for the Hubbert theory. The study concludes by developing a combined model using all three theories to quantitatively analyse which of them best explains the country oil production profile. The results lead us to conclude that despite the fact that there is weak support for a production theory; an empirical analysis of the data does show that the relationship may not be insignificant. The augmentation along with the combination of the production models sheds more light on actual behaviour as it provides a more in-depth understanding on actual oil production behaviour.