New Policy Seeks Significant Drop in Oil Production Cost to $10/bbl

• Projects decline in oil output from 2020 unless new reserves are discovered

Chineme Okafor in Abuja

Contents of Nigeria’s new national petroleum policy recently approved by the Federal Executive Council (FEC) and obtained by THISDAY has revealed that the country would be seeking to significantly reduce the cost of producing a barrel of crude oil in her fields to $10 from the current $27, which it considers not quite competitive.

By doing that, Nigeria would be seeking to reduce her current production cost per barrel by about $17, and this could effectively make her one of the cheapest oil-producing destinations within the Organisation of Petroleum Exporting Countries (OPEC) group.

At the moment within OPEC, records indicate that Saudi Arabia and Kuwait have the lowest production costs at $10 and $8.50 per barrel respectively, while Nigeria, Libya, and Venezuela reportedly have the highest at $27; $23.80; and $23.50 per barrel, respectively.

Nigeria is however, behind the likes of the United Kingdom and Brazil in the production cost analysis. Both countries, according to a 2016 Wall Street Journal’s survey of 12 notable oil producers, produce a barrel of crude oil at $44.33 and $34.99 respectively.

But revealing the government’s intention about cost on production, the policy, which is now awaiting federal gazetting, stated that certain measures such as a restructuring of the Nigerian Petroleum Investment Management Services Limited (NAPIMS) would be undertaken to drive up efficiency in the management of upstream oil projects.

It described the NAPIMS, which was set up to manage the government’s interests in the various oil concessions as well as project proposals; joint venture budgets; and other key operating decisions in oil and gas projects in the country, as being quite inefficient in its operations, and so requires quick restructuring to drive down cost of producing oil in the country.

For instance, the policy noted that an expenditure of over $200 million per year by the NAPIMS in running its operations was unjustifiable especially at the current oil market conditions, adding that the costs when applied across the Joint Ventures (JVs) and Production Sharing Contracts (PSCs) make some of the government equity interests in the joint venture unprofitable.

Apart from restructuring NAPIMS to drive down cost, the policy also indicated that resolving the Niger Delta challenges would be useful in this regard.

“The petroleum policy considers that NAPIMS is incapable of reforming itself because of the internal organisation. Effective NAPIMS reform can only come from fundamental restructuring with commercial discipline, and reform must come from outside NAPIMS.

“NAPIMS will be substantially restructured and may ultimately become independent and with full autonomy from the NOCN (NNPC). The restructuring and reform process, to be led jointly by the Ministry of Petroleum Resources and the Ministry of Finance will include: A global level management consultancy to be hired to help with restructuring; a value – for ­ money audit; enable faster contracting cycles (3-6 months); priority focus on low cost oil operations ($9-10/bbl),” it said.

It added that the restructuring would lay emphasis on sustainable Brownfield projects, while standard commercial management practices will be introduced, in addition to an asset-wide budget monitoring practice, and development of cost benchmarking data and system, in a bid to optimise oil production.

Also, the policy indicated that Nigeria could begin to see its crude oil production begin to decline from 2020, which is three years from 2017 unless new reserves were discovered and brought into production.

According to the document, “Unless there are additions to reserves and those reserves are brought into production, Nigeria can expect to see absolute declines in production from around 2020. Oil Production expected to start from 3mmbbls/day in 2017 and decline by 2mmbbls/day by 2026. Bulk of production is expected from JV arrangements, around 67 per cent over the 10-year period.”

Meanwhile, the Minister of State for Petroleum Resources, Dr. Ibe Kachikwu, has ruled off worries derived from the government’s recent submission of a proposal to the OPEC and its allies to cap Nigeria’s oil production at 1.8mbd in a voluntary solidarity with the two groups’ attempt to stabilise price of oil by capping their respective oil production volumes.

Dispelling fears that Nigeria’s 2017 budget could be affected by the production cap, Kachikwu said in Abuja that the country would be fine with the proposal, adding that it had considered and adopted a smart approach to the challenge before approaching the oil producers group with its proposal.

He said: “First of all, the 1.8mbd has not gone into effect, I am meant to report back to them within the nine months timeframe where we were given exemption to confirm that we have stabilised production and stabilisation of production does not mean that we produce 1.8mb in one day then there is stabilisation.

“There is going to be a month-to-month analysis where we will get comfort that all things that prevented us from stabilising our production have ebbed and we can consistently produce above 1.8mbd.”

According to him, “Again, 1.8mbd refers to crude, it does not refer to our production, our production is about 2.2mb, we have not been asked to attack that, but 450,000 barrels of that is condensate, which are a separate number. We did a very careful work before this whole process began to ensure that OPEC recognise like other countries have done, that condensate weren’t part of the crude analysis and we’ve done that and taken it out.

“Really, in terms of its effects on the 2017 budget, there is really no effect because we are going to continue to use the 2.2mbd number. Baring all the other incidentals in terms of pipeline ruptures, or stoppage of work for one reason or the other, we are going to continue to run to those numbers, the 1.8mbd like I said is purely crude.”