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Dissecting Nigeria’s controversial oil production cost

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Dissecting Nigeria’s controversial oil production cost

The gulf between the Ministry of Petroleum Pesources and the Nigerian National Petroleum Corporation (NNPC) has widened over the actual cost of crude oil production in Nigeria. ADEOLA YUSUF reports

The Nigerian Extractive Industry Transparency Initiative (NEITI), it was, which first alleged that Nigeria does not know the actual volumes of crude barrels it produces daily. Stating that this awkward situation started and had remained right from over 58 years of crude exploitation by the Africa’s biggest crude exporter, NEITI alleged in its 2008 audit that the country does not have an independent verification for figures of production slammed on it by the International Oil Companies (IOCs). And since figures remains sacrosanct elsewhere, they seem not to be Africa’s biggest economy, which depends largely on crude proceeds to service over 85 per cent of its budget.

Barely 24 hours after the Nigerian National Petroleum Corporation (NNPC) declared that it had crashed the cost of crude oil production in Nigeria to $23 per barrel, Minister of State for Petroleum Resources, Dr. Ibe Kachikwu, told a gathering of major stakeholders in the country’s industry last Thursday that the country’s cost of “production of oil remains at about $32 per barrel.”

To show that the figure announced by the minister at the annual conference organized by the National Association of Energy Correspondents (NAEC) was not a typographic error, he added that the government was determined to cut the cost to $15 per barrel unlike the $19 per barrel said by NNPC. It said that the “foreign direct investment flows into the country are at high cost.”

The NNPC’s stand point

On Wednesday, August 16, 2018, the NNPC claimed that it had crashed crude oil production cost to $23 per barrel, a $55 per barrel cut off, representing 70.5 per cent reduction on production for the country’s biggest revenue earner.

The production cost for crude in Nigeria, which is one of the highest among members of the Organisation of Petroleum Exporting Countries (OPEC), stood, according to the corporation in charge of crude production for the country, at $78 dollars per barrel as at August 2015.

It had, however, been crashed to $23 per barrel, Group General Manager of National Petroleum Investment Management Services (NAPIMS), a unit of NNPC, Dafe Sejebor, an engineer, disclosed this during the inauguration of the anti-corruption committee of the unit. He said the Corporation had saved a minimum of $3 billion per annum.

Figures verification

The NNPC appeared ready to defend its figure and it took adequate advantage of this in a statement issued by Group General Manager, Group Public Affairs Division, Ndu Ughamadu, in which it noted that NAPIMS arrived at the figure after looking at the difference between the $78 and $23, which represents the old and new cost of production in relation to the present daily average production in the country.

“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.
The GGM informed that the target was to bring the cost of production to between $17 and $19 for onshore and offshore production respectively.
Commendation to FG on policy.

Ughamadu 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, 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.
On the NAPIMS Anti- Corruption Committee, Sajebor urged the management and staff to let the principles of accountability, integrity, honesty and transparency be their watchword. He charged them to generate positive ideas to help tackle the challenges facing the industry and help reverse its fortunes.

Sajebor admonished staff to key into NNPC management’s zero tolerance for corruption. It would be recalled that the Group Managing Director of NNPC, Dr. Maikanti Baru, while inaugurating the anti-corruption unit at the corporate headquarters recently, had directed all the Strategic Business Units (SBUs) and Corporate Service Units (CSUs) to establish their own anti-corruption committees.
NAPIMS was the first to comply with the directive.

Kachikwu’s figure
Dr. Kachikwu however, contradicted the NNPC on the cost of crude oil production, which had earlier said that the country had reduced cost of oil production to $23 per barrel.

The country’s cost of “production of oil is about $32 per barrel,” the minister insisted in a speech he presented to local and foreign delegates at the NAEC conference in Lagos.
He added however, that Initiatives “to reduce the cost of crude oil production to $15 per barrel are on-going; initial consultations with stakeholders have held and cost drivers have been identified. The outcome of this initiative would be a win-win for investors and the nation.”

Modalities for cost adjustment

The Federal Government, the minister said, set a new target of 10 years to attain 40 per cent divestments of its shares in the NNPC, maintaining that the Petroleum Industry Governance Bill (PIGB) is central to the achievements of this target.

Stating that the PIG bill, which has been passed by the Senate, stipulates that all oil assets previously held by the Bureau of Public Enterprises (BPE) would be managed by the National Petroleum Company (NPC) to be formed from the NNPC, the minister in a speech read by Deputy Director, Engineering Standard Division of Department of Petroleum Resources (DPR), Dr. Olumide Adeleke, stated, “divestments of shares by the government to the private sector will gradually increase from 10 per cent to 30 per cent within five years and 40 per cent in 10 years.
“With ownership spread to individuals and institutions and accountability would be given top priority and this would enhance performance because stakeholders will seek to protect their investments.”

This ownership concept, he said, “is also being introduced in the modular refinery initiative under the BigWin 4 (refineries and local production capacity) and is set to improve refining capacity in-country and faster peace in the Niger Delta.”

Role of PIB

Taking delegates and stakeholders at the conference down the memory lane, the minister said; “Recall that for the past ten years, the passage of the Petroleum Industry Bill has been an issue. However, this administration has succeeded where previous administrations have not given the passage of the PIGB in the upper House.”

The Ministry of Petroleum Resources, according to him, is currently working arduously with the lower house to provide an adequate pathway for passage of the PIGB and the Fiscals Bill at the lower House.

“The PIGB, which has been on the news headlines since its passage at the Upper house, is indeed in line with the Transparency and Efficiency key focus area of the 7BIGWINs initiatives- a roadmap of short and medium term priorities aimed at developing a stable and enabling oil and gas investment landscape, which was launched by His Excellency, President Muhammadu Buhari in October 2016.

“It portrays plans to create the governing institutions with clear and spate roles and establish frameworks for creation of commercially viable petroleum entities, that will eliminate bureaucratic bottlenecks, which discourage investors, hinder our growth, and prevent us from attaining the summit of performances.

“In other countries where oil revenues have been of humongous benefits, a single regular exists. This single regulator regulates the upstream, midstream and downstream aspects of its petroleum resources. A single regulator provides a one-stop shop for investors; it removes duplicate procedures and its associated costs and therefore attracts foreign direct investments in the nation’s oil and gas sector.” In Nigeria today, the situation, according to Kachikwu, is such that foreign direct investment flows into the country are at high cost. An example is the high cost of production of oil at about $32 per barrel.

“Initiatives to reduce the cost of crude oil production to $15 per barrel are on-going; initial consultations with stakeholders have held and cost drivers have been identified. The outcome of this initiative would be a win-win for investors and the nation.”

The link

Meanwhile, the Group Managing Director of the NNPC, Dr, Maikanti Baru, who also gave an insight into the oil industry post-PIGB, maintained that the Minister of Petroleum Resources shall be responsible for policy formulation and coordinating the affairs of the petroleum industry n behalf of the Federal Government.

“However, the bill proposes the removal of the discretionary powers provided under the Petroleum Act for Minister’s grant, aimed, revoke and extend oil prospecting licenses and oil mining leases to applicants that satisfy statutorily prescribed conditions. The Nigerian Regulatory Commission (NPRC) will now assume this role.”

Last line

The ministry of petroleum resources and the NNPC should hamonise their figures before going to press to avoid further embarrassment that their data disparities usually cause Nigeria.

Even though $32 and $23 look alike, there is a difference in physical appearances of $15 and $19. While the government should work hard by empowering the Department of Petroleum Resources (DPR) to get independent data verification, fact checking should also be seen as being sacrosanct by speech writers for both the minister and the NNPC.

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