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Nigeria slashes oil production cost to $23/barrel

By Marine and Petroleum Nigeria
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The Nigerian National Petroleum Corporation (NNPC) says that it has succeeded in further driving down the cost of crude oil production from $28.99 per barrel as at the end of 2016 to $23 per barrel in July 2017.

Nigeria first achieved a 68.5 per cent reduction in August 2015 when it cut its unit technical cost for oil production from $78 per barrel to $28.99 per barrel.

This latest reduction in production cost follows increased criticism of Nigeria's high cost of crude oil production per barrel, which has put the country at a disadvantage in the international market, resulting in its traditional trading partners opting for crude from cheaper sources.

Recall, recent reports stated that the United Kingdom, Brazil and Nigeria had the world's highest average cost of oil production put at $44.33 per barrel, $34.99/b and $28.99/b respectively. On the other side of the coin, Saudi Arabia, Iran and Iraq produce oil at $8.98/b, $9.08/b and $10.57/b respectively.

In a move that could impact negatively on Nigeria’s spot crude export market, India and South Korea, arguably two of Asia's largest importers of crude oil have reportedly diversified their crude sources in favour of the cheaper and attractive price offerings for US crude grade West Texas Intermediate (WTI).

Therefore, disclosing the latest development during the inauguration of National Petroleum Investment Management Services (NAPIMS) Anti-Corruption Committee, the unit's Group General Manager, Engr. Dafe Sejebor said by the action, the country had saved a minimum of $3 billion per annum.

Engr. Sejebor said NAPIMS arrived at the figure after looking at the difference between the $78 and $23 which represent the old and new cost of production in relation to the present daily average production in the country.

Production costs are calculated by including a mix of capital expenditures (CAPEX) and operational expenditures. CAPEX include the costs involved with building oil facilities, pipelines and new wells. Operational expenditures included the costs of lifting oil out of the ground, paying employee salaries and general administrative duties as well as transport.

According to a recent study by Rystad Energy, prior to the latest reduction in oil production cost, Nigeria’s CAPEX was put at $13.10 per barrel of oil, while it costs $8.81 to actually lift the oil out of the ground. Administrative costs, which include employee salaries and transportation were put at $2.97, while gross taxes cost a sum of $4.11 per barrel.

These figures reveal that CAPEX, production costs, admin/transport and taxes constitute 45.2%, 30.4%, 10.2% and 14.2% of the cost of producing one barrel of oil in Nigeria.

In a related study by the International Monetary Fund (IMF), statistics show that Nigeria needs oil to sell at $122 per barrel in order to break even. This is a major concern as the budgets of oil producing countries continue to suffer from oil price decrease along with its attendant challenges for meeting government exspenditure.

Particularly, the location of Nigeria's lucrative oil fields also contribute to driving its production costs up, as due to unrest in the NIgeri Delta, many newer projects are focuses offshore, where production is more secure but capital investment required is higher. Transportation costs rank averagely when compred to other oil producing nations such as Indonesia $3.63, Norway $3.12 and the UK $4.30. Finally, taxes paid to the federal government also influence the high cost of crude production in the country.

The GGM noted that the target was to bring the cost of production to between $17 and $19 for onshore and offshore production respectively.

“If you knock down your cost of production from $78 per barrel to $23, take the difference and multiply by the average daily production, you will discover that we are saving a minimum of $3 billion in the upstream for both Production Sharing Contracts (PSCs) and Joint Ventures (JVs)”, he said.

He commended the Federal Government for its support to the NNPC management in tackling the challenges in the petroleum industry, especially the cash call exit agreement signed in 2016 and the reduction of contracting circle from three years to six months.

On the new Petroleum Policy, Engr. Sejebor said it was necessitated by the increasing difficulty in operating the petroleum industry within the framework of the old Petroleum Act in the face of the delayed passage of the Petroleum Industry Bill (PIB).

He said the policy would restore investors’ confidence in the industry pending the full passage of the entire PIB by the National Assembly.

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