Oil and gas firms are looking for ways to achieve operational and fiscal efficiency. With the era of high oil price gone, industry analysts warn that operators that fail to exit high production cost risk running out of business. Already, Nigeria, Africa’s biggest oil producer, is battling to bring down its cost per barrel production to remain relevant in the market. Assistant Editor EMEKA UGWUANYI examines the implications of high production cost for the oil and gas industry and the economy.
The dynamics of the global oil and gas industry are changing. Oil-producing countries and oil companies are seeking production cost-reduction by all means possible. This became necessary for companies to remain afloat and make profit while producer-countries make huge earnings from their hydrocarbon resources.
The drive for lower production cost is further heightened by the belief that the era of oil price at $100 per barrel is gone. Therefore, to remain competitive, the cost per barrel of crude has to be cheap or attract the required investment in the case of an oil-producing country.
However, Nigeria is still ranked among countries with one of the highest cost per barrel production. Available data on 13 oil producing nations, including United Kingdom (UK), Brazil, Nigeria, Venezuela, Canada, United States (US) shale, Norway, US non-shale, Indonesia, Russai, Iraq, Iran and Saudi Arabia, showed that in 2016, Nigeria was among the first on the list of countries with the highest production cost per barrel. She came after UK with $44.33 per barrel (bbl), Brazil -$34.99/bbl and Nigeria, $28.99/bbl. The last three countries on the list, Iraq, Iran and Saudi Arabia had the lowest production cost per barrel of $10.57, $9.08 and $8.98 respectively.
From the data, Gulf countries have the cheapest barrel of oil and are among the countries with highest output. For instance, Saudi Arabia’s daily oil production is about 12.3 million barrels; Iraq–4.8 million barrels daily and Iran, 3.8 million barrels daily, while Russia has about 11.4 million barrels production daily. This development has put countries with high production cost at very difficult situation, especially Nigeria that does not only depend on oil proceeds for the sustenance of her economy, but on imported refined petroleum products to power her commercial and industrial activities.
Challenging situation
Since the swing in oil price from end of 2014, the Federal Government has been emphasising the need for oil firms to consistently strive to drastically bring down their cost of production per barrel. The emphasis and anticipated action have become inevitable. Revenue due to the government from oil exports had significantly dropped due to low oil prices in the international market.
Besides, the volume of oil in the market is more than demand, leading to significant number of unsold cargoes of different oil grades in the market. Oil traders’ reports often show different grades of Nigerian oil begging for buyers, a situation that signals an urgent need to think outside the box on how to steer away from undue dependence on oil revenues to drive the economy.
The Minister of State for Petroleum Resources, Dr. Emmanuel Ibe Kachikwu, aptly put the disadvantaged state in which Nigeria is in the league of oil producing countries when he spoke at the inaugural Nigeria International Petroleum Summit (NIPS) in Abuja. He said considering that Nigeria’s over 50 years in oil business, it should be a model to other emerging oil producing countries in Africa.
However, Africa’s biggest oil producer still battles with a couple of challenges, which has kept its oil production cost far higher than most of its contemporaries. He said: “We are the largest oil producing country in Africa and perhaps, the largest gas producing country in Africa and have been into oil and gas business for nearly 50 years. We have had our ups and downs and need to set good examples for other African countries looking up to us for leadership in this sector.
“There are snapshots of what we need to achieve as an oil producing country to make our oil production efficient and profitableas well as be outstanding as we ought to be. The reality is that today if you cannot produce cheap cost oil, diversify the processing of your oil, look frankly into internalising and externalising the investments to your people and your foreign investors in the sector, capture the requisite technology skills that will help you operate efficiently, you are lost before you start.”
The Minister noted that in another 15 years, export of crude oil will be a shameful habit for any country that is doing it. “If you look at the movement in the Gulf and United States that have exited, quite frankly, the high production cost of oil, the drive to cut your production cost becomes more glaring. Everybody is coming at it in a different angle, shale in the US and diversification in the Gulf,” he added.
The clean energy focus, according to him, is beginning to make almost irrelevant the vast crude oil reserves that Nigeria has in the ground unless she can turn them into things that are clean.
“So, the challenge for oil companies operating in the country and Nigerians, who are in this sector, has changed. Historically, our business was to find the oil, sell it to earn foreign exchange, but it has got to be better than that now. Oil has got to provide work for our people, the resource to power this country, provide the operational environment that is transparent enough for others to take Nigeria serious.
“Oil has got to provide the technical and human skills set that are essential for us to export people out into other African countries and become major investors in other African countries, something the banking sector has tried to do over the last six to seven years,” Kachikwu noted.
Degeconek Oil and Gas Limited Managing Director/Chief Executive Officer and the immediate past president of the Nigerian Association of Petroleum Explorationists (NAPE), Mr. Abiodun Adesanya, however, disagreed that Nigeria has one of the world’s highest production cost per barrel of oil. He said owing to the country’s matured basin, it should have one of the cheapest barrel production costs in the world.
According to him, corruption and security issues, militancy in the Niger Delta region, among others, largely contributed to inflation of cost of oil production in Nigeria, but in the real sense of it, cost of producing a barrel is cheap in the country. He said: “1 wouldn’t agree that Nigeria’s cost per barrel production is among the highest in the world. A couple of factors outside oil substantially contribute to this. To be honest with you, I will say that cost per barrel is a function of cost of services. It is a function of wastages in the system (corruption, among others). But there is the actual cost per barrel. We don’t have any business in having a high cost per barrel given the matured and long history of exploration and production that we have had in Nigeria.
“If we move to new areas and try to develop them that will be understandable, but, there is a lot of amortised infrastructure that have been built a long time ago and they have paid for themselves already and are just being utilised. But if you are going to a new area, for example, Aje field production, they need a lot of new infrastructure such as floating production, storage and offloading vessel (FPSO), among others. So, we have gone past that point. Our cost per barrel has no business being high.”
Adesanya said because Nigeria had been in recession and the industry had been challenged by oil price, service cost has also come down. He said there were elements that had nothing to do with oil and gas on the technical side that were also exacerbating the cost per barrel. These include the non-technical cost, cost of joint taskforce (JTF), navy patrol vessel, cost of providing security and community issues.
‘’There is also the cost of repairing in a cyclical way the damaged infrastructure because all those costs are eventually shared and passed on to the cost per barrel. So, there is a technical cost that we know – cost of drilling, logging a well and seismics. There is cost of naval patrol vessel, gun-boat rental, repairing Trans Forcados multiple times, which can easily be avoided. By the time you add these on to the technical cost, you have this bogus cost per barrel. So, if we can try and address those issues and bring them down, I think we will be alright,” Adesanya reasoned.
What Nigeria is doing
Nigerian National Petroleum Corporation (NNPC), Group Managing Director Dr. Maikanti Baru, said the Corporation can produce crude oil at around $20 a barrel, but noted that there are plans to bring this lower to $15 a barrel. Baru in 2017 said the unit technical cost for producing oil has dropped from $70/barrel to $27/barrel in about two years, noting that this development was monitored from 2014-2016. He said with reduced cost of production, government’s share of economic revenue will improve, which means reduced budget deficit and that Nigeria will no longer import petroleum by 2019.
The NNPC has driven down the cost of crude oil production from $78 dollars per barrel as at August 2015 to $23 per barrel, representing 70.5 per cent reduction.
National Petroleum Investment Management Services (NAPIMS), Group General Manager, Mr. Dafe Sejebor, also confirmed the development. NAPIMS is an arm of NNPC
Speaking at the inauguration of the Anti-Corruption Committee of NAPIMS, last year, Sejebor said the country had saved a minimum of $3billion per year as a result of production cost cut. He said NAPIMS arrived at the figure after looking at the difference between the $78 and $23, which represent the old and new cost of production in relation to the daily average production.
“If you knock down your cost of production from $78 per barrel to $23, take the difference and multiply by the average daily production, you will discover that we are saving a minimum of $3billion in the upstream for both Production Sharing Contracts (PSCs) and Joint Ventures (JVs).” he said, adding that the target was to bring the cost of production to between $17 and $19 for onshore and offshore production.
Also, Baru, this month, confirmed that the corporation was working to bring down production cost to $15 per barrel from $20 per barrel. He said: “The NNPC has been innovative and efficient in its various operations to drive down the cost of production of crude oil and gas. Science and technology are the bedrock of the oil and gas industry and the NNPC had succeeded in domesticating engineering, procurement, construction and most of the major activities of the oil and gas industry. We are working hand-in-hand with the Nigerian Content Development and Monitoring Board (NCDMB) to get Nigerians who are willing to invest and innovate to propel this country going forward to go into the ventures of fabrication where we spend the big chunk of the money in the industry.
“In other words, we have gone far to domesticate procurement and there were fabrications going on in the areas of valves, line pipes, and also fabrication of vessels. NNPC would continue to support all sorts of innovations in the upstream, midstream and downstream sector.”
According to him, the more Nigeria brings down the cost, the more the money that comes to the Federal Government and into the pockets of state and local governments.
Nigeria has pledged to keep its oil production at 1.8 million barrels daily after the Organisation of Petroleum Exporting Countries (OPEC) asked it to join the production cut deal between OPEC and non-OPEC . This was aimed at stemming global oil over-supply and shoring up crude price. The production tab, though commendable as it holds price at reasonable level, limits Nigeria’s production and export, especially the Niger Delta is calm and production rapidly ramping.
Finding solution
Total Exploration &Production Nigeria Limited Managing Director/Chief Executive Mr. Nicolas Terraz said crude oil producers should learn to operate with a lean budget, cut down the cost of producing a barrel of crude to effectively manage the impact of the downturn on the global oil industry. To him, operators can also achieve this through infrastructure and facilities sharing.
He noted that his company had adopted measures, which allow it to optimise the barrels of crude it produced. Speaking on “Growth outlook and strategies for staying competitive after a global downturn,” at the maiden Nigeria International Petroleum Summit (NIPS) held in Abuja, Terraz said: “We need to work differently. We should have worked in a lean manner and kept looking at operational efficiency. We must always optimise lower cost per barrel. When you reduce cost, it means less expenditure, more profits. We can do more in terms of sharing amongst operators, that is, more synergies. But that also means you have to give up some of your autonomy.
“Maintaining investment capacity is important for the industry. With the downturn, we had many companies not investing, but it’s not the case for Total. Oil firms should use technology to create value, up operational efficiency and profitability. Total invested in Smart Room, this is an investment that saves cost and gives us more operational efficiency.”
He also said oil companies must continue to work on reducing cost as the future is not just about cost reduction, but about having a cost culture to remain cost-efficient, which includes renegotiating cost with contractors. “It does not mean we want to squeeze the contractors but rather, we want to pay the right price for goods and services. There is no reason why oil companies should pay a different price from other sectors for the same goods or services.Cost efficiency is also about reducing unnecessary waste or processes; this saves time and money, he added.
Terraz added that there is need for operators to focus on doing just what they need to do. “In all of these cost reductions, Total did not lose its workers and they are our greatest assets. This is because we believe that the downturn is cycle and things will improve again. We spent a lot of time cutting cost. Now, we spend the same amount of time maintaining a cost-efficient culture,” he said.
NNPC represents the Federal Government’s interests in upstream operations especially in exploration and production activities. It represents government interests in joint venture and other production arrangements. In the past two years, the oil firm has been working with international oil companies (IOCs) and local independent E&P firms operating in the country to cut cost.
Kachikwu noted that firms may still be working and producing crude with the mindset of the days of oil price of $100 per barrel, but urged the oil firms to face the realities and drastically cut costs.
At a forum last year, he said: “At the present low price of crude oil, it makes economic sense to cut cost. Consequently, the cost, which the National Petroleum Policy put at $28.99 per barrel, would be reviewed downward with the IOCs to arrive at an acceptable cost. The nation needs to review the current high cost of producing oil. It does not make sense to produce oil at such high cost, especially now that crude oil price has dropped from over $100 to $50 per barrel. It will not make sense to produce at high cost anymore. We will sit with the IOCs to look at the cost elements in order to take a better decision. It is in the best interest of everyone to bring down the high cost of producing oil in Nigeria.”
Continuing, he said the National Petroleum Policy gave a breakdown of the production cost as follows: $8.81, $13.19, $4.11 and $2.95 as production costs, capital spending, gross taxes and administrative/transport per barrel.
The policy, which identified Nigeria as one of the most expensive oil provinces in the world, added that oil price has been very unstable in recent times. There has also been extreme volatility of oil and gas prices since around 2005, at levels not seen since the 1860s. Prices went down dramatically as US shale production took off.
As Kachikwu said: “Two clear messages for Nigeria are that it has to broaden the economy towards a gas based industrial economy; and within the oil sector, Nigeria has to move downstream into the value added sectors of refining and petrochemicals.”
Kachikwu also noted that the high cost of oil production at $32 per barrel makes the cost of Foreign Direct Investment (FDI) very expensive, adding that the Federal Government was making efforts to bring down the cost per barrel to $15 per barrel to significantly bring down the cost of FDI.
FDI flows are at high cost. An example is the high cost of production of oil at about $32 per barrel. But initiative to reduce the cost of crude oil production to $15 per barrel are ongoing.
‘’Initial consultations have been held with stakeholders and cost drivers have been identified.The outcome of this initiative will be a win-win for investors and the nation.”
He said the Federal Government has tackled the insecurity and funding gap in the Joint Ventures and in refinery rehabilitation and take-off of new refinery projects.
