Oil production: Firms fight back over $10pb cost ceiling



NNPC disagrees, insist current cost not acceptable



Some oil producers are enraged by the move to unilaterally cut the production cost in Nigeria below $10 per barrel and have begun underground move to scuttle the plan, New Telegraph gathered exclusively at the weekend.


The Nigerian National Petroleum Corporation (NNPC) had earlier indicted the oil firms of production cost padding, threatening mass cancellation of contracts with the erring firms.



This newspaper gathered that the oil firms were specifically unhappy with what they described as a double-faced posture of the NNPC for stating that most of them are responsible for cost padding.



Group Managing Director, NNPC, Mele Kyari, who indicted the oil producers and contractors during the third Webinar Series organised by Nigerian Association of Petroleum Explorationists, Nape, with the theme: “The Impact of COVID-19 on the Nigerian Oil and Gas Industry -the Way Forward,” declared that the government would revoke contracts and cancel projects for any firm that will not adhere to production cost cutting to $10 per barrel.



“The era of some of our partners producing at a very high cost will no longer be acceptable to us anymore. It is either they become more efficient at what they are doing by cutting cost or be ready to be shown the way out.



‘‘If they are not ready to be cost effective, then we may have no other option than to cancel those contracts and give them to those that can manage and produce at a relatively cheaper cost. This is business and we cannot afford to run same like a charity organisation,” he declared.



Two members of managment in two of the companies with over 40 contracts with the government, however, told this newspaper in separate interviews at the weekend after their anonymity was guaranteed that the NNPC was the biggest shareholder in all contracts for crude production in Nigeria, “and it should be partly culpable for the crime if there is any.”



Besides this, the Nigeria Petroleum Development Company (NPDC), a fully owned subsidiary of NNPC, one of the IOCs representatives said, “has also not been producing at the so called $10 per barrel. Have you asked why this is so?



“Truth is that the $10 per barrel is possible but most of the contracts were signed at a rate above $10 due to a lot of factors peculiar to Nigeria.”



According to him, “some of these problems are the infrastructural issues, another is environmental issue.”



Corroborating his view, the second representative of IOC noted: “You will also need to ask how many times do you hear a report of pipeline vandalism or crude theft in Saudi Arabia, for instance?



“All these are partly responsible for the peculiarity of the Nigerian situation.”



The NNPC boss, however, lamented  that the high cost of production in the industry was unacceptable and was as a result of a number of factors, some of which included structural inefficiencies that exist in the system and processes, environmental factors which every contractor factors in while doing business; be it risk as it relates to human resources and materials.



In a document submitted to the Senate, the corporation, this newspaper gathered, declared that the average cost if production in Nigeria was $21 per barrel.



Describing some of the gimmick used by oil companies as “issue of environmental consideration,” the corporation said: “Contractors will factor all associated risks for doing business here in terms of human resources, materials or whatever you can think of. Every cost has a premium that’s related to our environment. Those premiums are so exaggerated, it is not true. Suppliers and contractors have taken advantage of it to hype the cost in this country and that’s the reality.



“What we did was to look at how we can address the issue. So we decided to look into projects together to see how we can work together to reduce cost, the conversation was going on then COVOD -19 came and threw the challenges at all of us that oil can now sell around less at $10 per barrel.”



“We cannot continue in business unless something is done about the cost and it became a very clear opportunity for us to hype our engagement with our partners. So we have an industry that knows that cost must come down. The result today is that there is structural shift from what we used to do to where we are going today,” said the GMD.



According to him, “when we took charge, we knew all along that our cost of production was very high. Such cost is not acceptable, as a result of lots of factors including structural inefficiencies in our processes.”




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