Unless a pragmatic approach aimed at reducing operating costs is
deployed, stakeholders have raised concerns that cost of oil production
will continue to be high in Nigeria compared to that of other
oil-producing countries.
While crude oil is produced in some countries for less than $8 per
barrel, it is hovering around $28.99 in Nigeria. Several attempts to
reduce the cost in the past have been unsuccessful, but the Minister of
State for Petroleum Resources, Timipre Sylva has said that he is poised
to bring it down to $9 per barrel.
The cost of oil production per barrel is highest in the United
Kingdom, where it stands at about $44.33 (based on geological reasons),
and lowest in Saudi Arabia, at $8.98. Nigeria is believed to be the
third-highest at $28.99 after Brazil, which is $34.99. In Iran, the cost
is only $9 and $10 in Iraq.
Without a meaningful reduction in production cost, the bulk of
revenue accruing from the sector would end up as operating cost thereby
limiting economic development in the country, while also limiting
returns for investors.
With over $160b oil and gas projects already facing investor apathy
across the country, the development may further delay the takeoff of the
projects due to a limited profit margin.
The oil and gas sector remains crucial to the country’s economy in
terms of revenue generation. Crude oil exports alone account for 88 per
cent of the country’s foreign exchange earnings and makeup about 85 per
cent of government revenue.
There are complexities regarding reasons why the cost of oil
production varies across countries. Some historical reasons include
technical, geological, terrain, safety, and others.
Stakeholders, on their part, enumerate peculiar factors, particularly
long contract cycle, insecurity, governance bureaucracy, multiple
taxations and others as contributing to the high cost of production in
the country.
Professor of Geology and Nigeria National Petroleum Corporation
(NNPC) Chair in Basinal Studies, Nuhu Obaje, believes that the cloudy
nature of fiscal regimes in the country, especially the lack of passage
of the Petroleum Industry Bill has contributed to the high cost of oil
production.
Obaje, who decried the prevailing situation, believes that some oil
companies may be capitalising on the loopholes in the country’s oil and
gas sector to increase the cost and make more money off the country.
“The fiscal regimes for exploration and production have been a little
cloudy with the non-passage of the Petroleum Industry Bill. It meant
different regimes may have been applied in different situations such
that some producers may just have been inflating their production costs,
just as many of them did during the reserves addition bonus (RAB)
policy,” he said.
Obaje noted that since most of the country’s crude oil and gas
productions have moved into production sharing contracts (PSC), in which
the contractor or producer is considered the dominant player, there
could be situations where the cost per barrel is inflated.
According to him, even though oil producers work along with the
government (NNPC, DPR), the contractors put in all the monies for the
exploration and production (E&P) and recoup same when discoveries
are made, or during production, they may not be straight forward in the
accounting processes.
Obaje said: “In Joint Ventures, there are JV committees through
NAPIMS, but I am sure that many of our representatives in the committees
may not understand the complicated and complex formulae used by the JV
partners to recover their production cost.
“The cost of production may not be as high as it is presented in
Nigeria, but the many human factors in between may be responsible for
the recorded high cost,” Obaje stated, adding that there was need to
push all operators to have a well-guided and regulated environmental
mitigation and remediation measures, or policies that are deployable at
emergencies and at normal times to ensure that the bid to cut down on
per barrel production does not impact on the already polluted
environment.
Decrying the situation, PricewaterhouseCoopers’s Associate Director,
Energy, Utilities and Resources, Habeeb Jaiyeola linked the development
to inefficiency in production and the lack of adequacy of modern oil
production technology.
The Guardian recently reported that the (NNPC) and some International
Oil Companies (IOCs) operating in the country spend as much as N350.4b
for staff and assets’ protection yearly and still lose over N1.6t to oil
and gas theft every year.
Jaiyeola, while equally decrying the country’s high-security
challenges and the recurring vandalisation of pipelines, stressed that
these were some of the factors responsible for the increase.
Stating that the country’s poor fiscal regime was also adding to
these challenges, Jaiyeola said the development would surely affect
profitability.
“Adopting the latest technology is critical to reducing the cost.
There is a need to be able to monitor challenges either at the well or
across the pipeline. There is a need to reduce human intervention as
much as possible. The government must also reduce its bureaucracy and
also ease things for the oil companies,” he said.
He added that joint projects also require transparency to ensure that
details of the production cost do not include frivolous items while
canvassing for checks on the integrity of pipelines.
For Chair in Petroleum Economics and Management at the University of
Cape Coast, Ghana, Prof. Wunmi Iledare, the governance of the sector,
which contributes to delays in approvals among other factors, militate
against low production cost.
Like other stakeholders, Iledare listed contractual issues, technical
capability, insecurity, premiums that must be paid, as well as
production levels as some critical challenges that affect production
cost.
“If I am to deliver 5,000 bottles of water to a drilling rig, but I
have to hire security guards to guide the table water. And when the
price of a security is almost the same as the cost of a bottle of water,
that’s going to come from the barrel. So, those are the complications.
“There was a time in Nigeria when the operating cost was $2 per
barrel and Capex was $2 per barrel. So, the total technical cost was
about $4 per barrel.
Bringing the cost down to a single digit as currently being canvassed
by Sylva may end up as wishful thinking because there are so many
things that must be done before the cost would reduce, Iledare said.
“It begins with the governance of the industry; the approval process
that you go through. As long as you delay projects, you add to their
costs. What they need to do from the governance side, which is one of
the reasons why the cost is very high, is to reduce approval time of a
contract, and spending so much money to go on inspection,” he said.
Iledare also canvassed for the introduction of cost-efficient factors
across legislations to incentivise operators to reduce their costs.
This, to him, would ensure that operators are rewarded for being
cost-efficient, thereby reducing the cost gradually.
A partner with PWC, Cyril Azobu, linked the development to the high
cost of doing business in Nigeria, as well as the heavy burden of
corruption, insecurity, as well as general social unrest in the sector.
A geologist and publisher, Africa Oil and Gas Magazine, Toyin
Akinosho, believes that the key reason for the high cost of production
in the country remained security.
“You pay the Joint Task Force. You pay the ‘boys’ (referring to
locals, who influence to thwart business operations). To take your rig
to location for drilling, a task that used to be merely routine, now you
escort it with a gunboat in front and a gunboat behind. That’s cost.
“The pipelines still get damaged in spite of the settlement of the
boys and you have to repair and maintain them. If you opt for evacuating
your crude by barging, without the use of pipelines, there is a premium
to pay,” he said.
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