As oil producers scramble to outdo one another in offering bargain prices for crude oil, countries that will hurt the most are those with a higher cost of production like Nigeria, a situation it has failed to address over the years.
Over 40 percent of Nigeria’s crude oil production now happens at offshore fields which are very expensive requiring huge capital outlay. The rest happens in onshore terrains marred by militancy, oil theft, and brigandage.
In addition, oil companies are now required to pay punitive taxes and royalty rates upon the revision of a Deep Offshore Act when compared with Nigeria’s OPEC peers.
“Besides the high tax and fiscal regime, which is not the friendliest, there is also a high level of insecurity in the oil-producing areas which ensures that operators have to incur other miscellaneous costs that may be inapplicable in other regions,” said Desmond Ogba, an energy lawyer at Lagos-based Templars law firm.
Yet, the fiscal and regulatory environment is marked by instability carrying huge political and business risks which, when factored in, push Nigeria’s cost of production effectively around $30 a barrel, one of the highest in OPEC.
“Oil producers price the political risks and instability in Nigeria into their investments and this raises production costs in Nigeria,” said Ayodele Oni, energy lawyer, and partner at Lagos-based Bloomfield law firm.
The challenge for Nigeria is that it is entering into a price war with producers like Saudi Arabia whose cost of production hovers around $4 per barrel and Russia with over $560 billion in foreign currency reserves.
Nigeria’s foreign currency reserves are a paltry $37 billion, setting the stage for David vs Goliath-style confrontation absent the sling and stones.
However, the true cost of crude oil production in Nigeria often depends on which government official is reading a prepared speech.
“Let me go back memory lane. The technical cost of crude oil production in the 1980s/90s was around $4 per barrel. In early 2000, it was between $5 and $6 per barrel. Today, it is over $35 per barrel,” said Timipre Sylva, minister of state for petroleum resources, at a seminar on effective cost management in the oil and gas sector in Abuja last December.
At a consultative roundtable with the CBN governor in Abuja on Wednesday, Abba Kyari, group managing director, Nigerian National Petroleum Corporation (NNPC), said when your cost of production averages $30 and crude oil goes to $30-$32, “you are already out of business”.
Independents like Seplat are more efficient in managing costs and are able to be more resilient to periods of depressed oil prices. Seplat said operating costs per unit of production reduced 3 percent year-on-year in its 2018 financials to $5.77d per boe as a result of continued efforts to improve operational efficiency, helped by increased production.
This is not the same for the International Oil Companies (IOCs) which account for the bulk of Nigeria’s oil production. Analysts say the IOCs tag on crude production per barrel, too many costs including redundancies, political risks, and insecurity to arrive at a higher cost of production which significantly impacts Nigeria’s earnings from its crude.
Kyari in his speech on Wednesday highlighted some other troubling details in the ongoing price war. Not only are prices crashing, producers are offering discounts of up to $5 in the case of Iraq and $8 in the case of Saudi Arabia.
“So when your crude oil sells at $30 and you are dropping it by $8, this means that you are selling at $22 in the market,” Kyari said.
Already, the NNPC boss said traders report over 50 unsold cargoes as the novel coronavirus depresses oil demand, worsening a bad situation.
The Federal Government has responded by setting up a committee but the United States seems to offer a more practical response. It is considering buying over 78 million barrels to shore up its strategic reserves and lift oil prices.
North American shale oil producers are gutting spending and drilling cuts to cope with the price war unleashed by Saudi Arabia in response to Russia’s decision last Thursday to abandon a pact that has helped prop up prices.
Analysts say the Federal Government should recognise that a stable fiscal and regulatory environment inures producers against shocks in oil markets.
“Yes, there are other factors that are important including the quality of the crude and the terrain but without political risks, stability and rule of law, the costs significantly go up,” said Oni.
ISAAC ANYAOGU
