Modelling the Impact of Oil Price Volatility on Investment Decision Making in Marginal Fields’ Development in Nigeria

Abstract

This study investigated the impact of oil price volatility on investment decision making in Marginal fields’ development in Nigeria. The study also investigated the relationship between oil price volatility and marginal fields’ investment analysis in Nigeria. The marginal fields’ crude oil production was used as a proxy of investment analysis. Monthly data from October 2005 to April 2016 was used. The GARCH model, Johansen co- integration and Granger Causality tests were employed. Results showed a significant positive relationship between oil price volatility and crude oil production (P < 0.05). Moreover, Johansen’s co-integration analysis exhibits co-integration between oil price and oil production indicating long term equilibrium relationship. Finally, Pairwise Granger causality test reveals that oil price Granger causes the uncertainties in the oil production since the p-value is small (P<0.05) while there is an absence of an influence of oil production on the price mechanism in the market. This proves that the above cause and effect relationship is unidirectional and not bidirectional. The findings from this study show that the dip in global oil price reduces oil production from marginal fields’ in Nigeria. This is consistent with the law of supply which states that the lower the price, the lower the quantity supplied and vice versa. Hence, investment in marginal oil field development becomes unattractive. However, the need to diversify and utilise gas from these fields for industrial and domestic purposes instead of flaring becomes an imperative.