• Wednesday, September 27, 2023
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Why Nigeria’s oil production cost of $22 per barrel is no cheer


The New Year day news of Africa’s largest producing country reducing its cost of producing oil leaves little to cheer as further investigation shows it’s much cheaper to produce crude oil in war torn Iraq, Saudi Arabia and Iran than in Nigeria.

At first glance it all seems like good news when group managing director of Nigerian National Petroleum Corporation (NNPC) Maikanti Baru said in 2018 Nigeria has been able to reduce production cost from $27 barrel to $22 barrel while listing milestones achieved by his team in 2018.

However at second glance, Nigeria’s cost of producing oil of $22 is still far higher than Iran and Iraq and OPEC’s kingpin Saudi Arabia.

According to data from energy industry consultant Rystad Energy, on average it cost Saudi Arabia less than $9 to produce a barrel of oil last year while other OPEC countries like Iran and Iraq can produce for around $10 per barrel.

Drilling down into what makes Saudi oil so cheap; Rystad Energy explained that Saudi Arabia only spends $3.50 in capital to pull a barrel of oil out of the ground. This amount includes money invested in drilling new wells as well as the associated equipment while production cost and administrative and transport cost stood at $3 and $2.49 respectively.

Luqman Agboola, head of energy and Infrastructure at Sofidam Capital said after making much money from crude oil in the past Nigeria got carried away with corruption, inefficiency and security challenges while other countries were consciously reducing cost of production.
“One major factor affecting Nigeria’s situation is the Niger Delta security condition which naturally increases cost of producing a barrel by nothing less than $5,” Agboola told BusinessDay by phone. “If we become very efficient Nigeria should be having a cost of production of between $12 and $15.”

Agboola explained that the second factor affecting cost of production is the Terrain.
“The likes of Iran, Saudi Arabia and Iraq produce in the desert which is naturally cheaper so they don’t need elaborate preparations to drill a well.”

An oil expert who pleaded anonymity told BusinessDay that the main problem facing Nigeria are issues concerning multiple taxes, government policies and insecurity. “Even Ghana and Tunisia are producing at $15 and $10 respectively.”

“Government needs to put the right fiscal policies in place and stop playing politics with the implementation just like the PIGB,” the expert told BusinessDay. “Until we get this out of the way we would not get a favourable pricing mechanism.”

Rystad Energy explained that Saudi Arabia also has low capital costs due to the fact that the country’s oil is located near the surface of the desert and pooled in vast fields, so it doesn’t need to invest that much in drawing it out of the ground. Contrast this with countries that have large offshore production bases like Nigeria, Norway and the United Kingdom, which incur significantly higher CAPEX costs of  around $13.76 to $22.67, respectively, due to the need to build large offshore production platforms.

Agboola admitted that it’s a bit complex when calculating cost of production because factors such as production per day or capacity to produce per day are always considered, while the size of a country’s oil reserves cannot also be taken into isolation.
“This is why we can easily see that a country with higher oil reserves have cheaper production costs,” Agboola said.

Rystad Energy looked at four data points when figuring out a nation’s average cash cost to produce a barrel of oil: Capital spending, production costs, administrative and transportation costs, and gross taxes.

Apart from Saudi Arabia, OPEC’s two top crude producers, Iraq and Iran have not only boosted oil production but have also run efficient systems to reduce cost of production, increase reserves and develop more oil wells while Nigeria continues to dillydally.

“The removal of US sanction on Iran in 2015 led to the acceleration in the rate of investments in the country’s oil and gas sector while Iraq has not experienced any major crisis in recent times as the relative peace in the country has led to the smooth running of the country’s oil and gas sector, thereby creating room for steady increase in the rate of investments in that sector,” Emmanuel Afimia, energy economist and CEO of Afimia Consulting Limited said.

In Iraq, the passing of a new constitution and the election of a democratic government, continued civil unrest, sectarian violence, together with a lack of political cohesion between the central and regional governments were major challenges the industry had to overcome to restore its output to pre-war levels and even higher.

Similarly, Iraq’s oil industry has demonstrated remarkable resilience in the face of destruction due to Gulf War II, which ended in 2003.
Iraq had two roads to travel as it sought to reform its oil industry; nationalize and scare away foreign capital by self-financed development through the Iraqi National Oil Company (INOC), or reform to attract new funds into its oil and gas industry.

Iraq chose the second option based on an economic analysis report, in 2004, by the Iraqi Trade and Information Centre (ITIC), which recommended the need for the oil sector to be more efficient and attract foreign investment into an expansionary plan to boost oil output to five million bpd.

For Nigeria, the storyline is different. Africa’s biggest crude oil producer’s ambition seems bleak as the fiscal and regulatory regimes that would activate this ambition experienced a major setback because President Muhammadu Buhari withheld assent to the Petroleum Industry Governance Bill (PIGB).

Abayomi Fawehinmi an expert in a Lagos based oil firm said Nigeria’s inability to attract investment to its oil fields is obstructing growth and efficiency in the sector.