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N785bn yearly overhead, others spike Nigeria’s oil production costs



With Nigeria’s oil industry incurring about 7.4 per cent of the national budget in personnel and overhead costs, alongside others like logistics, direct handling and lifting of crude, operators may have to do more to achieve the $10 per barrel (bbl) production benchmark set by the Federal Government.
According to stakeholders, Nigeria’s operating expenses lack competitiveness as the country, in 2019, had one of the highest production costs with break-even price for major proposed projects hovering at $48/ bbl, higher than Angola’s $45, and Uganda at $44/bbl.

The revelation comes a few months after the NNPC’s Group Managing Director, Mele Kyari, disclosed that the highest personnel cost in the oil and gas sector remained in Nigeria, a development, which he said, was unacceptable.

Indeed, many operators in the country spend about 50 per cent of their cash flow on personnel costs, which is why some still produce at a high rate of $93/bbl, even in a low oil price regime.
“There is nowhere any company will spend 50 per cent of its cash flow on human resources and survive. It is not possible,” Kyari had noted.
Speaking during NAPE’s Pre-conference workshop, themed: “Levers for optimal costs reduction in Nigeria’s oil and gas production: Positioning for the new normal,” the Group General Manager, National Petroleum Investment Management Services (NAPIMS), Bala Wunti, said while Nigeria has no control over oil prices, it can decide on its cost and volume of production.
Beyond taxes, he noted that high expenditure driven mainly by high personnel, logistics and handling costs, push the unit operating price of oil to $20/bbl.
A breakdown of associated expenses in the industry showed that of the 70% operating costs, human resource (HR) services account for 38 per cent, logistics 19 per cent, 13% direct handling, and 9% direct lifting among others.
With deeper investment cuts being witnessed in the oil sector, Wunti argued that operators should remain disciplined in their operations, rather than returning to their usual practice once oil prices rebound.
Citing different data sources, the Chief Executive Officer of Seplat Production Development Company, Roger Brown, said in 2019 that direct production costs and gross taxes constituted the highest portion of Nigeria’s spending of production at 37 per cent and 33 per cent, respectively.
In his analysis of cost drivers, Brown noted that Nigerian projects cost about 69 per cent more than the global average, adding that project delays, rig rates, drilling costs and cost premium of between 35% to 100% affect capital costs.
In terms of production expenses, he noted that the Oil Producers Trade Section (OPTS), estimated the operating cost premium in Nigeria as between 15 and 65%, while crude and water handling costs are at an average of contractual price of $3.5/bbl for wet crude, and $2.8/bbl for dry crude for which actual handling is usually higher and up to $25/bbl with barging and trucking.
He noted that security issues relating to sabotage, crude theft, bunkering, and kidnapping add to these costs, adding that the contracting lifecycle of 36 months needs to be lower compared to other countries that have six to eight months.
“Driving down the cost of production to $10 a barrel and below requires active involvement of every player at every point. Realistic timelines need to be set. Delay costs, crude handling costs are key issues. Reducing costs also include exploring wells that give the best output.
“New AI techniques and technologies will help to address efficiencies and grow production. The industry needs collaboration to drive costs down. The industry is one in the global context contributing 2mbpd and therefore needs to cooperate”, he added.
NAPE President, Alex Tarka, noted that COVID-19 has impacted greatly on government’s revenue, adding that Nigeria’s estimated GDP loss during the lockdown stood at 34.1% or $16.4billion. He warned that resurgence of the coronavirus is a threat to the economy and calls for more action.
“To save the industry from the high oil production cost, it is imperative that there is a change of strategy. The GMD of the NNPC had in March said that production cost is at $30. The end of 2020 was set for the $10 production benchmark. We hope to use this workshop to address the challenges to optimal production,” he said.
Country Operations Partner PwC, Pedro Omontuemhen, disclosed that capital investment in the Nigerian oil and gas sector has been dwindling in the past 17 years since the delayed passage of the Petroleum Industry Bill (PIB).
“Expectation of the passage of the PIB has affected the movement of investment and decline of 17.9% has been recorded since 2015.”
A country seeking to attract investment needs to address the cost of production and disincentives to investment,” he added.


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