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Reducing the cost of oil production

Cutting the cost of oil production reported by Nigerian oil companies, which is among the highest in the world after shale oil producers in the US, is now a matter of survival but the government’s firebrand approach neglects its own role in the problem.

Mele Kyari, the group managing director of the Nigerian National Petroleum Corporation (NNPC) has warned that unless oil companies reduce their cost of production, they may not have a business in the current $30 price environment.

With oil prices hovering around $40 a barrel, many oil companies in Nigeria reporting $30 as cost of production will not have a business as the industry readjusts to the new normal of low prices. So Kyari is right that they may not have businesses.

Kyari further alluded to a troubling situation among the local oil companies. In a webinar series with the theme: “The Impact of COVID-19 on the Nigerian Oil and Gas Industry – the Way forward,” Kyari accused local producers of employing gimmicks including inflating the cost of associated risks and personnel costs which guts revenue available for taxation.

He threatened that the government would revoke contracts and cancel projects of any firm that would not adhere to the production cost of $10 per barrel.

In reality operating in Nigeria’s troubled Niger Delta region is fraught with risks. The kidnapping industry which Lagos-based SBM Intelligence firm said is worth over N7 billion was birthed in the region as oil workers, especially expatriates became prime targets. Companies pay millions yearly to government’s security agencies to protect their personnel and facilities.

Community agitations over grievances real and imagined adds to the problem. People rupture pipelines in their own communities and some even prevent oil companies from carrying out repairs quickly in the hope they would extract more money by claiming damages. True, some oil companies have behaved irresponsibly but by and large they have become more responsive. Many still pay millions to keep the locals happy as well construct projects which governments have failed to provide.

Worse still, the multiple and sometimes conflicting regulations from half a dozen regulators raises operation cost for local oil producers. Some oil companies have paid twice for an Environment Impact Assessment on the same project and different agencies impose multiples levies and taxes for the same project.

There is also inefficiency at the ports which raises logistics cost and the sometimes-unrealistic standards of International Oil Companies (IOCs) for their lesser Nigerian counterparts pose a problem. A simple requirement that vendors run their own cafeterias, to be eligible for contracts with them, for example, could raise cost for struggling local producers.

Government intervention often ends at agitation for application of local content in materials and personnel but most oil companies have found clever ways around the problem, often loading the personnel roster with Nigerians who do most of the work that don’t really matter.

The fact that the threat to pull the contracts of operators who fail to produce at $10 is coming from the NNPC, speaks to the regulatory gaps in the sector. As a player and partner in joint venture agreements, the NNPC lacks the moral authority to issue threats when its own operations are not even efficient. It has run the refineries to the ground and does not even settle its obligation to its partners leading to cash call arrears. It lacks imagination to supply petrol to the market proclaiming an end to subsidy when government still controls pricing.

In any case, as a player, it should not be issuing threats, that is the role of the regulators if things were normal. Notwithstanding, oil companies need to be more efficient and re-examine costs especially fat bonuses and allowances top management is hurling home. These are mean times; everyone should get lean.

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