$48 per barrel production cost drowns 60% of Nigeria’s oil earnings

• Six-month production cost hits $11.4 billion
• Stakeholders raise concerns as production soars to record-high
• Iledare asks NNPC to consider selling equity in JVs
• Country spends $48 to produce a barrel of crude

The cost of oil production per barrel, which the Nigerian National Petroleum Company Limited vowed three years ago to reduce to $10, has soared above expectations to $48 as the country spent a whopping $11.4 billion on operating costs in the first half of 2024.

While all the operators in the country made about $19.5 billion in the first half of the year, rising corruption, inefficiency, logistics, overhead, dual regulatory challenges, widening project cycle and high cost of funds pushed production cost to revenue ratio to 58.46 per cent.

In the first half of the year when Nigeria’s estimated oil revenue for the entire operators stood at $19.5 billion from the 235.9 million barrels of crude oil produced, the cost of production was $11.4 billion, meaning that Nigeria’s average cost of oil production against revenue stood at about 58.46 per cent in the first half of the year.

While Nigeria’s oil industry alone incurs about 7.4 per cent of the national budget in personnel and overhead costs, in 2020, Group Chief Executive Officer of NNPC, Mele Kyari, started a campaign insisting that Nigeria must drive down the cost of producing a barrel of oil to $10 and even lower if it would compete in global markets and sustain upstream activity.

But instead of achieving a reduction, the cost rather soared to one of the highest in the world.

Chairman of the House of Representatives Committee on Finance, James Faleke, said the $48 per barrel crude production cost in Nigeria is the highest in the world even as the chairman of the Federal Inland Revenue Service (FIRS), Zacch Adedeji, told lawmakers that oil companies operating in Nigeria gave tax authorities $48.71 as their average cost of producing crude oil per barrel.

Although stakeholders are projecting that the cost should hover around $35, they expressed worry about the fact that the tax body is dealing with the operators based on a $48.71 per barrel.

While Libya is a highly attractive oil producer due to extremely low production costs, as low as $1 per barrel in some fields, Angola’s production cost is $20 per barrel. In Brazil, improved well productivity has reduced the breakeven cost for pre-salt fields from $70 per barrel in 2014 to $35 in 2022. Saudi Arabia’s production costs have hovered between $2 and $8 per barrel.

In January, Nigeria’s average daily oil production was 1.42 million, bringing the total average production for the month to 44,020 million barrels. Given that the average oil price stood at $80.12 in January, the total production was sold for an estimated $3.5 billion. The cost of production was $2.1 billion. This implies that 60 per cent of the money went into production.

In February, the country’s output slid to 1.322 million barrels per day, bringing total output, which was sold for an average $83.48 per barrel for the month to 38.3 million barrels. The total average revenue was $3.2 billion and $1.9 billion was used in producing it. In a place like Saudi Arabia where the production cost per barrel is less than $8, the total production would be $306 million. That is about a whopping $1.6 billion in savings. If production was efficient in Nigeria and the cost per barrel was in the region of $10, in less than two months, between January and February alone, Nigeria would have made as much as the $3.3 billion that the NNPC borrowed from Afrimexbank.

In March, Nigeria’s average daily production dropped to 1.23 million barrels. This brings the total for the month to 38.1 million barrels. The total sales for the period were $3.2 billion going by the average oil price of $85.41 per barrel. The average cost of production stands at $1.8 billion, representing 56.25 per cent of the total revenue.

In April, when average daily production stood at 1.28 million barrels, Nigeria produced 38.4 million barrels for the month and sold it for $3.4 billion with a production of $1.84 billion. This is 54.12 per cent of the production revenue.

In May, when the average daily crude oil production fell to 1.25 million barrels, Nigeria’s total output stood at 38.7 million barrels and sold for $3.1 billion as oil price averaged $81.75 per barrel for the month. The cost of production for the month was $1.86 billion representing 60 per cent of the revenue.

In June, the average production was 1.25 million barrels per day and the total output for the month was 38.4 million. It was sold for $3.1 billion and produced for $1.9 billion, which is 61.29 per cent of the revenue for the month.

With dual regulators, the Nigerian oil industry is dealing with multiple cost elements and variables in the local environment. The cost of capital in the Nigerian hydrocarbon sector is notably high, and operating expenses (OpEx) are unusually high and vary significantly across production fields. Additionally, low production outputs prevent Nigeria from benefiting from the scale advantages in asset optimization that countries like Saudi Arabia, Russia, and the USA enjoy.

While NNPC released its audited financial reports last week, there were obvious indications of serious cost pressure as the company’s general and administrative expenses amounted to N2.99 trillion in 2023, soaring by over 70 per cent from the N1.70 trillion recorded in 2022. Also, salaries and other benefits to NNPC employees in 2023 rose sharply to N583.79 billion from N266.92 billion in 2022.

Renowned energy expert, Prof. Wunmi Iledare, who noted that the average calculation could be misleading, said the expectation for a $10 per barrel technical cost remains elusive because it was unrealistic at conception.

“To some extent, the technical cost determinants remain stochastic and no evidence to suggest the existence of any cost management and control instruments. What is easily observable are rising direct cost of operations with inefficiency written over it as Niger-Delta basin matures and easy-to-produce reservoirs are diminishing,” Iledare said.

He lamented that external oil field services come with premium costs apart from too many institutions targeting the oil and gas for one thing or the other.

While the Petroleum Industry Act (PIA) created the Nigerian Upstream Petroleum Regulatory Commission (NUPRC) and Nigerian Midstream Downstream Petroleum Regulatory Authority (NMDPRA), Iledare, like other stakeholders, said the development added to the rising cost of governance of the sector.

“The way to go is to implement the intent of the PIA and limit the unnecessary regulation for agency fees. Secondly, gold plating needs to be penalised. Finally, to the extent possible, NNPC needs to review its JV portfolio of assets and perhaps let indigenous companies buying divested IOC assets buy NNPCL equity in those divested assets,” Iledare said.

Energy expert, Dan Kunle, noted that the cost of time to deploy hydrocarbon production engineering facilities in Nigeria logistically has become very prohibitive since the coronavirus pandemic.

According to him, the development has punctured Nigeria’s competitive advantage in average production cost per barrel.

Coming at a time when Nigeria is already finding it hard to attract investment, Kunle expressed worry over what he described as the wishful thinking amongst industry managers to see a barrel of oil production at $10.

“Even the most important ingredient to achieve that, apart from the cost of money, which is integrity, high-level managerial skills and honesty are in huge deficits in Nigerian government-owned oil companies.

“It appears we have lost the race in the oil and gas industry to other players in Africa and the USA. The golden era of oil is fast giving way to agricultural productions and development in Nigeria,” he said.

Another critical stakeholder, Henry Adigun, said the higher cost of oil production indicates a decline in revenue from the barrel and increased inefficiency in the sector.

Expressing worry over the development, Agidun said it remained disturbing that the issue of the high cost of oil production persists in the oil and gas industry.

Extractive industry expert and Director of the Centre for Democracy and Development, Garuba Dauda, said it was laughable when the campaign for a $10 rate of producing a barrel of crude oil started in Nigeria.

“How was that going to happen in a country where the cost of doing business is ever rising, infrastructure is in comatose, credit rating very low and now further compounded by forex instability? I am aware that there has been a general increase in the cost of producing crude globally since COVID-19, but the Nigerian situation is much more than COVID-induced,” Dauda said.

He noted that while the average cost of producing crude for most oil-producing countries at the moment is between $20 and $35 per barrel, Nigeria is doing poorly because of the inherent challenge of the high cost of doing business in the country, which, beyond poor infrastructure and credit rating, includes corruption.

According to him, it is sad that things are not looking up for Nigeria on all fronts and sectors, stressing that there is a need to sit up and roll our sleeves for work.

Former President of the Chartered Institute of Bankers of Nigeria (CIBN) and professor of economics at Babcock University, Segun Ajibola, said the restive Niger Delta region is necessitating huge costs of security architecture, of surveillance over operations as well as transparency in the costing process.

“It is desirable to pursue the best cost reduction efforts and drive strategies that can help work towards a $10 cost per barrel target. It is also desirable to benchmark global best practices and learn from the template of countries running the most cost-efficient crude oil production process. But a lot needs to be done by Nigeria to relieve the overburdened crude production process arising from the challenges enumerated above,” he said.