John OFIKHENUA and Frank IKPEFAN, Abuja
The rising cost of oil production is now threatening jobs and profit in the sector, President Muhammadu Buhari and the Group Managing Director (GMD) Nigerian National Petroleum Corporation (NNPC), Malam Mele Kyari, warned on Friday.
The President and the NNPC GMD dropped the hint at the 6th Triennial National Delegates’ Conference of the Petroleum and Natural Gas Senior Staff Association of Nigeria (PENGASSAN) in Abuja.
They said that with the production cost hitting 46 per cent, it was inevitable for the oil sector stakeholders to meet with a view to fashioning out the way out.
Kyari said since there was need to cut down production, it meant that the industry had to reduce its activities which would translate to downsizing the workforce.
The NNPC boss said since oil production cost currently stands at $35 and a barrel sells for $45 , it means that the industry actually earns $10 per barrel.
Kyari said that as Nigeria cannot raise production it is clear that fewer hands are required for production.
He said: “At a point, you can take a barrel of the Canadian mb and be given a cheque of a dollar. That means take it free and I will give you a dollar. And we also sold below $10 at the end of March and early April.
“So, when you sell oil at less than $, and when your HR cost, just one element of it, it will cost you $7 to a barrel, you know you are in trouble. So, there is no way you will continue to meet your HR customers and continue to meet your operations.
“Even as we speak today, we are selling oil $45 /barrel. That is not any company’s expectation. Most economics analyse or forecasts by industry players, are anywhere above $45 per barrel.
“So, today, the average cost of production is about $35/barrel across all aspects. So, when it costs you $35 to produce average, and you are selling at $45, it means you only have $10 to pay taxes, pay royalties. So, we won’t survive under this situation. So, what do we do ?
“We will engage our partners. We must do something. When you have this kind of situation you have to reduce your cost and increase you revenue. Increasing your production has its own consequences.
“We there is oversupply in the market the price goes down. So, you cannot even maintain the $45. So we all agreed that in the OPEC engagement that we will cut supply.
“That means that from the high level of 2.9 we were maintaining, when in April we had to come down to 1.7million barrel to meet with the conforming situation. That means we had cut close to 600 barrel to survive. Hence it will be like selling water which is like selling it for free.
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“It is better selling $1.7million at $45 than to produce 10million barrel and sell at $10. That is the very logical decision we have to make. That comes with issues. The issue is this: you are not going to add more production because you can’t sell it. You are going to cut down the activities.
“And many of activities you have to cut, is than you are going to need fewer people to get the work done. That is the reality. But it is unavoidable. It is either you pay less and keep them and not work or you cut down the number so that you can maintain the optimum number in this situation.
“That is why the engagement is required with the president of PENGASSAN. It is between the chicken and the egg and that is why the engagement must take place as far as this economic imbalance subsists.
“There must be a conversation around what do we do to keep this businesses right. There is no way of doing it than to have engagement where you can have an understanding of what the real things are. When your operating cost takes 46 percent of your net income you are in trouble.”
Buhari, who was represented by the Minister of State for Petroleum Resources, Chief Timipre Sylva, said all that needed to be said on the matter had been said my Kyari.
He said stakeholders in the oil sector must reach an understanding on the way forward.
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