Indigenous and marginal field oil producers are taking advantage of low oil prices to drive down their cost of production per barrel. Though low crude oil price poses a huge challenge at the moment to the oil and gas sector, industry experts say that some indigenous oil companies are using the low price environment to prune down their production cost to sub-$30 per barrel.
“It is of no use selling your crude oil for $50 per barrel when your production cost is in the range of $40 to $48 per barrel. What every oil producing company should do is to look inwards and find those areas where one can reduce cost and things you can do without and at the same time maintain high technical and safe production level”, said Wole Adefila, Operations Director, Frontier Oil.
The ability of indigenous oil companies to cut cost also depends on the operating environment, Adefila said.
Marginal field operators also do not operate in deep water, where costs are higher. Speaking exclusively to BusinessDay, an oil and gas analyst said “because they are smaller, their costs are lower. They are local, everything is localised; they do not have expatriate costs, because they are indigenous, they can navigate the security environment better, cost of government relations is low, they do not have to retain foreign security companies and they can handle community issues at much cheaper costs than their international counter parts.”
Speaking at the Oil and Gas Council West Africa Assembly, held under Chatham House rule in Lagos recently, an industry expert said that “indigenous oil producers have low cost profiles and their understanding of the terrain will contribute to ease of doing business which will put them in an advantageous position over the multinationals”. However, the problem for some of the marginal field operators is that they financed their businesses with high cost loans.
“Even with the difficulties encountered in doing business in Nigeria, the country cannot be ignored, as there are opportunities for anybody that has appetite for exploration, especially outside the Niger Delta Basin”, the industry expert said.
He said that the success of exploration in the Niger Delta made oil firms to neglect all the other basins in Nigeria with equally huge potential, adding that the significant oil discovery offshore Dahomey Basin in Lagos located on the Oil Prospecting Licence, OPL 310 offshore Nigeria, which was touted as one of the world’s largest oil discoveries of 2013 has proved that other basins in Nigeria have huge potentials.
Geological studies indicate that the Dahomey Basin is a combination of inland/coastal/offshore basin that cuts across some West African countries including Nigeria as well as South-eastern Ghana, Togo and the Republic of Benin. The basin is said to be separated from the Niger Delta by a surface basement popularly called the Okitipupa Ridge.
“Though Nigeria cannot be ignored within the sub-Saharan region, it has to be competitive with other emerging African countries by adjusting fiscal terms to the new reality of low oil prices of sub-$50 per barrel”, he added.
One of the challenges listed by the experts at the conference is the uncertainty engendered by government changing the goal post and not respecting the sanctity of contracts.
“Changing the goal post is a nightmare. Sometimes it comes in form of overnight taxation”, the expert said.
Other challenges include prohibitive cost of doing business in Nigeria, security, which has also drastically contributed to the increased cost of doing business in the oil industry and non-governmental organisations (NGOs) who influence government against the oil companies without first interfacing with the companies.
Amidst all the challenges, “it is time to think outside the box. Gas will be the game changer and climate issue will support the uptick of gas”, said an expert at the conference.
Between June 2014 and now, oil prices have crashed by more than 60 percent from $114 per barrel to sub-$50 at present and there are forecast that the price may hit sub-$30 per barrel in 2016.
FRANK UZUEGBUNAM
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