Government enforces review of projects costs

.Slashes Bonga deepwater’s by 50%

To demonstrate its resolve to cut down industry costs in Nigeria’s oil and gas operations, the Federal Government has directed all operating companies in the country to prune down costs, even if it means a total re-design and conceptualisation of projects.

Nigeria is reputed to experience the highest industry costs among oil producing countries, where joint venture costs are as high as $27/barrels, a development that made government to direct companies to cut down costs by at least 30 percent. The move is intended to bring down costs to as low as $13/barrel, to make industry operations more globally competitive.

The Minister of State for Petroleum Resources, Dr. Emmanuel Ibe Kachikwu, told The Guardian in an exclusive chat that “we (government) are seriously looking at our costs on all projects,” adding, “most costs have been reviewed downward.”

To this end, Shell’s offshore Nigeria deepwater project, Bonga South West Aparo, which was originally projected at $22billion will now be undertaken at half the price at $11billion.

Confirming the slashing of the Bonga budget, Kachikwu said: “Bonga is being redone, cutting down from around $22billion to about $11billion, and that meant a total re-design and conceptualisation of how it should be done without losing much of the barrel projections.”

Although Shell, in a text message response to The Guardian on Monday, insisted it did “not want to speculate”, but the decision to slash the budget may have been responsible for its suspending of the final investment decision (FID) on the project.

The FID suspension comes even as Tony Attah, the Managing Director Nigeria Exploration and Production Company (SNEPCo), operators of the project denied reports that it had stopped the development due to the slump in oil price. Rather, he said the project was progressing to the tender for engineering, procurement and construction (EPC) contracts.

Defending the rationale for the cost cuts, the minister disclosed that in its review of the business models in the petroleum industry compared to its peers, most of the Nigerian projects were seen as being high profile.

As a result, he insisted that government will no longer tolerate what he described as “boutique and fan fair type designs that just cost a lot of money, which the oil companies try to do with some projects.”

Kachikwu noted that the crash of oil prices at the international market, has forced a review of projects costs, saying: “The price of oil has dropped, so a lot of projects are being reviewed because government is asking, ‘why are you depleting the nation’s resources?’ We are doing a lot more critical analysis of some of the projects by NAPIMS (National Petroleum Investment Management Services), so we can decide whether to go on with some of these projects or not.

“We have to begin to look at designs, is that the best model to do it, and must we do it? We must ask those questions, if the numbers don’t look good why do it? We will focus on the low hanging fruits instead of gigantic projects. There’s still a lot of work to be done on cost of projects.”

The minister also disclosed that it is not only existing projects that will be affected by the costs review as even the new ones are at higher risks, because, “Today, if it’s a new project and the costs are not right then we won’t touch it.”