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Strengthening Nigeria’s quest for cost reduction from barrel to pump

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Until the COVID-19 pandemic, the formula for reduced, competitive, and sustainable production cost scheme in Nigeria seemed evasive. With the reality of low oil prices and uncertainty about energy demand, producers are beginning to turn their safety valve beyond production quota.

At a production cost of $93 a barrel, the Federal Government believes the norm has to be reversed, hence the need for a National Oil and Gas Excellence Centre (NOGEC) infrastructure that will drive the efficiency and profitability of the industry. FEMI ADEKOYA writes.

Defying projections, the global oil and gas industry has been under revenue and costs pressures in the last one year, with some Exploration and Production (E&P) oil firms halting or slowing down their production operations, while others are exploring alternative outcomes with renewables.

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The situation is however dire for Nigeria that operates at a very prohibitive cost compared to its global peers, therefore pushing many operators, especially indigenous firms near bankruptcy when oil prices dropped below the $10 mark.

With Nigeria’s oil industry incurring about 7.4 per cent of the national budget in personnel and overhead costs, alongside other costs like logistics, direct handling and lifting of crude, it became apparent that operators may have to do more to achieve the $10 per barrel production cost benchmark set by the Federal Government.

According to stakeholders, Nigeria’s operating costs 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 per barrel, higher than Angola’s $45, and Uganda at $44 per barrel.

By encouraging safety, value and cost efficiency through its National Oil and Gas Excellence Centre (NOGEC) infrastructure, operating under the supervision of the Department of Petroleum Resources (DPR), the Federal Government hopes to improve earnings from the nation’s oil and gas sector.

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According to President Muhammadu Buhari, the country’s renewed drive in economic diversification through the oil and gas industry is aimed at expanding government’s revenues, boost local products and create employment opportunities to eradicate poverty in Nigeria.

Indeed, the centre is expected to serve as an integrated resource complex to drive cost-efficient solutions in the industry­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­-another milestone in the oil and gas sector and for the greater good of the country.

Buhari at the presidential launch of NOGEC, said: “On our part, we will spare no effort to ensure that Nigeria benefits hugely from its natural resources. We will continue to leverage on oil and gas for development and pursue our economic diversification drive.”

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NOGEC as a necessity
The Director and Chief Executive Officer, Department of Petroleum Resources (DPR), Sarki Auwalu, said the journey to NOGEC began with the express mandate of Mr. President for the industry to reduce cost, improve efficiency and create employment.

He pointed out that based on these directives and the ministerial delivery priorities, the DPR identified five key initiatives that will help to achieve the intent of Mr. President’s mandate.

Buhari, who also doubles as the Minister of Petroleum Resources at the inauguration of NOGEC, said the centre has been carefully designed to support the achievement of the ministerial priorities – significant amongst which are cost reduction, increase in production, and value maximization in the industry.

The Centre, according to him, will leverage the existing capacity of the National Data Repository (NDR), as the principal data warehouse of the industry to drive initiatives that will enhance safety, value and cost efficiency across all operations in the Industry.

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Buhari, who was represented by the Minister of State for Petroleum Resources, Timipre Sylva, said the establishment of the NOGEC is not only a response to a safer, cost-efficient and sustainable oil and gas industry but also a strategic move to position Nigeria as a regional and global leader in cost efficiency, breakthrough solutions and value-added services for the industry.

“The establishment of NOGEC is not only a response to a safer, cost-efficient and sustainable oil and gas industry but also a strategic move to position Nigeria as a regional and global leader in cost efficiency, breakthrough solutions and value-added services for the industry.”

Accordingly, and to achieve the afore-mentioned three-prong value drivers of safety, value and cost efficiency, the integrated NOGEC complex encompasses five units. These include Search, Rescue and Surveillance (SeRAS) Command & Control Centre, National Improved Oil Recovery Centre (NIORC), Oil and Gas Alternative Dispute Resolution Centre (ADRC), Oil and Gas Competence Development Centre (CDC) and Integrated Data Mining & Analytics Centre (IDMAC).

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Buhari highlighted the main elements of each of these centres to underscore its role in driving cost reduction, increasing production and enhancing value for the Industry.

According to him, SeRAS is a flagship programme of the centre designed to enhance safety management, emergency preparedness and response and routine transportation for bed space management.

SeRAS, he said, will therefore drive cost reduction and improve operational efficiency across the industry. Conservatively, he said it is projected that upon full implementation of SeRAS, the annual industry expenditure for offshore and remote locations flight logistics and emergency response will reduce by 50 per cent – a significant gain towards Nigeria’s target reduction of cost-per-barrel across our operations.

NIORC on the other hand is designed to promote the implementation of improved and enhanced oil recovery technologies/methods to arrest the incidences of production decline and resultant high cost in many assets, especially in the matured Niger Delta Basin.

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In essence, Sylva explained that NIORC will trigger secondary and tertiary recovery operations in the industry. The Centre will collaborate with operators, global technology centres, international oil and gas regulators and other relevant parties to leverage experiences and best practices for application in Nigeria.

“Expectedly, the foregoing measures will result in reserves growth, production increase, field life extension, improved asset life cycle cost and reduced cost-per-barrel, all with positive impacts on the national economy and investors’ profitability.”

For ADRC, he disclosed that it is created to arrest the prevalent value erosion attributable to sub-optimal development or non-development of oil and gas assets due to lingering disputes in the industry.

The ADRC, he said, shall offer arbitration, mediation and conciliation services utilising industry’s technical experts who will provide fair and balanced resolutions of industry-related disputes from an informed position. The Centre, he added, will take advantage of resources of the National Data Repository (NDR) to ensure alternative dispute resolutions that result in value optimisation in terms of resource growth and global competitiveness.

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Similarly, he explained that the other two units namely; IDMAC and CDC are structured to position Nigeria as a top-tier destination for credible, bankable and investment-grade data in oil and gas and to serve as a regional hub for competence development respectively.

‘‘These centres will provide cost-effective data and analytics solutions for investors, financiers, operators as well as resources for oil and gas capacity building and training.

“I wish to assure all that NOGEC represents a state-of-the-art, integrated facility that will provide the oil and gas sector with the much needed technical and resource capabilities for stability, growth, safe operations and cost efficiency for the benefit of all stakeholders.

“We are confident that this Centre will support the attainment of Mr. President’s clear development imperatives for sectoral growth and the industry performance targets set by the ministry for a fortified oil and gas sector”, Sylva explained.

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DPR explains mandate
Director of DPR, Sarki Auwalu, in his presentation at the inauguration ceremony commended the Nigerian Oil and Gas Industry for its tenacity and resilience in the face of several challenges.

Anwalu said NOGEC encompasses industry-focused programmes that will drive strategic mediation in operations, skills and competence development, use of Big Data, Internet of things (IoT), and Artificial Intelligence (AI) for decision making, deployment of proven technology for secondary and tertiary oil recovery as well as a coordinated response for an emergency.

“Today, we have concluded the framework and implementation modalities for the successful take-off of these programmes within the NOGEC due to imminent commissioning.

“Your Excellency, sir, we have no doubt that the industry now has the resource and platform to interact, cooperate and collaborate on salient industry issues that remain impediments to cost reduction, safe operations and optimum value optimisation,” he said

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In-country experience
Indeed, the journey to NOGEC is sequel to the revelation by the Group Managing Director, Nigerian National Petroleum Corporation (NNPC), Mele Kyari, who disclosed that the highest personnel cost in the oil and gas sector remained in Nigeria, a development, which he said, was unacceptable.

Many operators in the country spend 50 per cent of their cash flow on personnel costs, thus accounting for why some operators still produce at a high rate of $93 per barrel, 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,” he said.

Nigeria, according to the Oil Producers Trade Section (OPTS) of the Lagos Chamber of Commerce and Industry (LCCI), is among the top 10 countries with the highest cost of oil production.

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A breakdown of associated costs in the industry showed that of the 70 per cent operating costs, HR services account for 38 per cent, Logistics 19 per cent, 13 per cent direct handling, and nine per cent direct lifting among others.

The Group General Manager, National Petroleum Investment Management Services (NAPIMS), Bala Wunti, had at a NAPE forum, stated that while Nigeria has no control over oil prices, it can decide on its cost and volume of production.

Beyond taxes, he noted that high costs are driven mainly by high personnel costs, logistics and handling costs push the unit operating cost of oil to $20 per barrel.

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.

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Citing different data sources, the Chief Executive Officer of Seplat Production Development Company, Roger Brown, said in 2019, direct production costs and gross taxes constituted the highest portion of Nigeria’s cost 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 per cent to 100 per cent affect capital costs.

In terms of production costs, he noted that OPTS identified the operating cost premium in Nigeria at between 15 and 65 per cent 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.

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Brown also noted that security issues of 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 the 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 said.

To address the production cost challenges, NNPC’s Kyari had last December at the Central Bank of Nigeria’s (CBN) round table expressed the Corporation’s readiness to put in place measures that will reduce the cost of crude oil production in Nigeria, to create a market for the country’s crude.

He noted that due to the uncertainty of the global crude oil market, countries producing at the cheapest price would remain in the market, while those with the high cost of crude oil production would not be able to cope with the competing prices.

As conceived with the NOGEC, Nigeria is well on its way to achieving sustainable cost reduction across various oil and gas operations.

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