Why cost of oil production may remain high – Experts

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.