The issue of high cost of producing a barrel of crude in Nigeria again has come to the fore with the Nigerian National Petroleum Corporation (NNPC) saying that it would take decisive action against any company that may decide to maintain any cost above $10 a barrel or unit by 2021.
Mele Kyari, managing director of NNPC, had said the price was possible and alleged that some of the contractors included spurious costs in the jobs they presented to oil companies. He warned that companies that cannot bring their production cost to $10 per barrel at the end of fiscal 2021 should close down.
He said companies must learn how to be efficient, cost-effective and do away with expenditures that are not necessary, stating that there are costs embedded into projects by contractors that are not realisable.
According to him, the expectation of the industry is that the price of crude oil would be stable at about $42 a barrel by the end of the year.
The NNPC boss, who spoke on ‘the Impact of COVID-19 on the Nigerian oil and gas – the way forward’ at a Webinar conference organised by National Association of Petroleum Explorationists (NAPE), said that $10 per barrels cost of production is now the expectation of the industry by end of 2021. This he said is realisable as new cost structures are being put in place at the moment.
“Our vision is S10 per barrel, more efficiency in the industry, more cost consciousness, and realistic cost. The ultimate thing is cost reduction,” he said.
Currently, the cost of producing a barrel of crude oil in the country is between $17 and $30 depending on the terrain a company operates.
He bemoaned the apparent lack of efficiency among the operators and stated that it would not be business as usual as the industry is now focused on the cost that will give more revenue.
“Operational inefficiency will no longer be tolerated while technology adaptation for cost efficiency would be a major factor driving cost down. NNPC and its partners would pursue this aggressively. The situation where a company produces a barrel of crude oil at $93 is not acceptable. This means such a company is depending on revenue generated by others to survive,” he said
However, among the reasons contractors tend to pad contracts include the contracting circle, which means the time it takes to approve the contracts by the government which is a major issue to the contractors.
The contracting circle in Nigeria has just been reduced to about six months now. This exercise usually takes about 36 months from the beginning of the contract to time of execution.
The NNPC, through National Petroleum Investment Management Services (NAPIMS), has done great works over the years in the area of reducing contracting cycle which used to be a major factor responsible for high cost of production, stressing that the National Petroleum Investment Management Services (NAPIMS) achieved a six-month contracting cycle.
Other factors that contribute to increasing the cost of contract according to Roland Ewubare, NNPC’s chief operating officer (COO), Ventures and Business Development include terrain peculiarity which is also an important factor in determining cost, issues such as pipeline vandalism and crude oil theft, among others peculiar to the Nigerian terrain that drive up crude oil production cost in the country.
He said the NNPC was looking very closely at such variable as logistics, security and transportation with a view to reducing cost of production to $10 and below per barrel.
It was also gathered that because of the level of insecurity in the Niger Delta, the insurance covers for some of the personnel that work in these terrain are hiked.
COVID-19, he said, is a blessing in disguise; stating however, that the only bad thing about it is the loss of prices of crude oil which is currently coming back.
He further said that before the advent of COVID-19, the NNPC had already started a process which was put in place and was meant to reduce the cost structure and also cost attached to environment issues by contractors. He chided the local companies which he said have least governance structure. He disclosed that the NNPC has taken on the companies individually to discuss the way out of the horrible situation.
