Nigeria’s $10 per barrel production cost target requires new process

Operators in Nigeria’s oil and gas space have often pointed to the high unit cost of production as one of the major factors eroding value, particularly in a low oil price environment.

Nigeria is among the countries with the highest unit cost of production globally. Producing a barrel of oil in Nigeria costs between $21 – $30 per barrel, on average. Oil prices have trended downwards since January, from a high of $63 per barrel to $23 in April and $41 currently. This means to stay profitable, oil companies require lower costs of production per barrel of oil.

To address this, Mele Kyari, group managing director, Nigerian National Petroleum Corporation in June set the target of cutting down unit production cost to $10 per barrel by 2021.

Saudia Arabia and Kuwait can pump a barrel of oil for less than $10, on average. Iraq can produce oil for about $10.70 per barrel. Although experts have said the terrain on which the gulf countries operate is much easier. An operator only needs to punch a hole into the ground, which is often dry because of the desert location. But in Nigeria, swamps and deep-water operations are tougher terrains and logically cost more.

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Muhammad Ali-zarah, general manager, Supply Chain, National Petroleum Investment Management Services (NAPIMS) said the unit cost of production for a barrel of oil has been $21 per barrel. Of this unit cost, human resources represent 30 percent, that is, $6.90 and logistics 20 percent, that is, $3.90 to $4 per barrel.

Operators have blamed the high unit cost of production on obsolete systems and technologies. There is no continuous monitoring of oil well performance. This has been mostly sporadic and experience-based not data-driven. There are no direct means of knowing on a per-second basis how an oil well or reservoir is doing.

To attain optimal performance and bring down the cost of production per unit more sensors will be needed for surface operators, which enable the development of dashboards to monitor and improve oil wells and reservoir management.

“We need incentives to attain the $10 per barrel target. In the current environment, it is not possible, not to talk of it being feasible with the systems in place,” Edirin Abamwa, chief operating officer of NPDC/NDW OML 34 AMT said.

Similarly, to achieve the $10 per barrel production target, there have been suggestions to embed information technology in every process. Processes are themselves assets because they determine organisational outcomes. This implies borrowing heavily from information technologies approach to digital data management. This would enhance process optimisation, breakdown operational silos and democratise data. Digital technology becomes part of the corporate strategy in this sense.

Globally, oil companies lag behind other industries in terms of digitalisation. As recently as June 2019, the oil and gas industry failed to score highly on Deloitte’s digital maturity index – which showed the industry falling significantly behind Power & Utilities, Aerospace & Defence, Consumer Products, Telecoms and Automotive in quantifiable measurements of digitalisation advancements.

The problem, of course, is one of money. Despite the clear long-term benefits of implementing such systems, there are significant costs to developing digitalisation processes, integrating them with existing workflows and training workers. As long as existing processes are profitable, and as long as none of the other major businesses are gaining market share from digitalisation efforts, there is no incentive to change.