On Why Cost Of Oil Production May Remain High In Nigeria
September 7, 2020 | News
ON WHY COST OF OIL PRODUCTION MAY REMAIN HIGH IN NIGERIA
Recent reports on the subject matter noted that, unless a pragmatic approach aimed at reducing operating cost is deployed, stakeholders have raised concerns that the cost of oil production in Nigeria will continue to be high compared to that of other oil-producing countries. For us, we believe this situation is not because the International Oil Companies (IOCs)/Domestic Oil Companies (DOCs) are inflating the cost of production. But it is because the staggering funds spent on Security for Soldiers by the IOCs/DOCs is adding to the cost of production. There was a time the amount of money spent by Shell (SPDC) on Security in Nigeria, was far more than the budget of Shell Group of companies around the world, which are in over 120 countries. In other words, the money spent on Security in Nigeria, is more than the funds spent in all the other Royal Dutch Shell companies put together. That is how serious the situation is.
While crude is produced in some countries for less than $8 per barrel, it is hovering around $28.99 in Nigeria according to reports. Several attempts to reduce the cost in the past have been unsuccessful. Though, the cost of oil production per barrel is highest in the United Kingdom (UK), where it stands at about $44.33, but this is based on geological reasons, and lowest in Saudi Arabia, at $8.98. Nigeria is believed to be the third-highest in the world, at $28.99 after Brazil, which is $34.99. In Iran, the cost is only $9 and $19 in Iraq. According to the report, what is important is the fact that, without any meaningful reduction of production cost, the bulk of revenue accruing from the sector would end up as operating cost thereby limiting economic development in the country, while also limiting returns for investors. With over $160b oil and gas projects already facing investor apathy across the country, the development may further delay the take-off of the projects due to a limited profit margin.
When we consider the fact that the oil and gas sector remain crucial to the country’s economy in terms of revenue generation, then we would realize that this issue seriously needs to be addressed. Crude oil exports alone account for 88 per cent of the country’s foreign exchange earnings and makes up about 85 per cent of government revenue. Though, experts have noted in reports that there are complexities regarding reasons why the cost of oil production varies across countries, and that some historical reasons include Technical, geological, terrain, safety, and others, but for Nigeria, we believe the issue of safety (security) is prominent.
It is no news that IOCs/DOCs spend a lot of money on Security provision, to guarantee the safety of their personnel from being kidnapped, harassed and molested in the process of their operations and productions. In some areas, oil companies are required to spend a lot in the provision of Portacabins, Huts, Houseboats, Escort Pick up vehicles, etc. for Soldiers/Security Operatives, including providing them with daily food and allowance for sustenance. Then there is also the high cost of Securing all the major oil and gas facilities and pipelines meant for the transportation of crude oil and condensate, from the illegal activities of vandals, illegal bunkerers and oil theft. This insecurity problem alone, cost the government and oil companies so much to address annually.
That is a whole lot of operational costs that obviously add to the overall production cost of a barrel of crude oil and cubic feet of gas. These are factors that are not prevalent in other countries where the oil production is low. And until the insecurity situation in the country is not holistically addressed, including the problem of oil theft and oil and gas facilities’ vandalization, we are certain that the cost of oil and gas production in Nigeria may continue to remain high.
Zik Gbemre.
December 16, 2019
We Mobilize Others to Fight for Individual Causes As If Those Were Our Causes
Recent reports on the subject matter noted that, unless a pragmatic approach aimed at reducing operating cost is deployed, stakeholders have raised concerns that the cost of oil production in Nigeria will continue to be high compared to that of other oil-producing countries. For us, we believe this situation is not because the International Oil Companies (IOCs)/Domestic Oil Companies (DOCs) are inflating the cost of production. But it is because the staggering funds spent on Security for Soldiers by the IOCs/DOCs is adding to the cost of production. There was a time the amount of money spent by Shell (SPDC) on Security in Nigeria, was far more than the budget of Shell Group of companies around the world, which are in over 120 countries. In other words, the money spent on Security in Nigeria, is more than the funds spent in all the other Royal Dutch Shell companies put together. That is how serious the situation is.
While crude is produced in some countries for less than $8 per barrel, it is hovering around $28.99 in Nigeria according to reports. Several attempts to reduce the cost in the past have been unsuccessful. Though, the cost of oil production per barrel is highest in the United Kingdom (UK), where it stands at about $44.33, but this is based on geological reasons, and lowest in Saudi Arabia, at $8.98. Nigeria is believed to be the third-highest in the world, at $28.99 after Brazil, which is $34.99. In Iran, the cost is only $9 and $19 in Iraq. According to the report, what is important is the fact that, without any meaningful reduction of production cost, the bulk of revenue accruing from the sector would end up as operating cost thereby limiting economic development in the country, while also limiting returns for investors. With over $160b oil and gas projects already facing investor apathy across the country, the development may further delay the take-off of the projects due to a limited profit margin.
When we consider the fact that the oil and gas sector remain crucial to the country’s economy in terms of revenue generation, then we would realize that this issue seriously needs to be addressed. Crude oil exports alone account for 88 per cent of the country’s foreign exchange earnings and makes up about 85 per cent of government revenue. Though, experts have noted in reports that there are complexities regarding reasons why the cost of oil production varies across countries, and that some historical reasons include Technical, geological, terrain, safety, and others, but for Nigeria, we believe the issue of safety (security) is prominent.
It is no news that IOCs/DOCs spend a lot of money on Security provision, to guarantee the safety of their personnel from being kidnapped, harassed and molested in the process of their operations and productions. In some areas, oil companies are required to spend a lot in the provision of Portacabins, Huts, Houseboats, Escort Pick up vehicles, etc. for Soldiers/Security Operatives, including providing them with daily food and allowance for sustenance. Then there is also the high cost of Securing all the major oil and gas facilities and pipelines meant for the transportation of crude oil and condensate, from the illegal activities of vandals, illegal bunkerers and oil theft. This insecurity problem alone, cost the government and oil companies so much to address annually.
That is a whole lot of operational costs that obviously add to the overall production cost of a barrel of crude oil and cubic feet of gas. These are factors that are not prevalent in other countries where the oil production is low. And until the insecurity situation in the country is not holistically addressed, including the problem of oil theft and oil and gas facilities’ vandalization, we are certain that the cost of oil and gas production in Nigeria may continue to remain high.
Zik Gbemre.
December 16, 2019
We Mobilize Others to Fight for Individual Causes As If Those Were Our Causes