Nigeria Achieves $10 Per Barrel Production Cost.

 Nigeria Achieves $10 Per Barrel Production Cost.

With the negative impact of the Coronavirus pandemic on global economy which had led to an unprecedented decline in the global price of crude oil, cutting the cost of oil production by Nigerian oil companies had become imperative.

Based on official statistics, Nigeria is one of the oil producing countries that has the highest cost of oil production.

For instance, while it costs an average of $8.38 to produce a barrel of crude oil in Saudi Arabia, it costs Iran and Iraq about $9.08 and $10.57 respectively.

According to the Group Managing Director of the Nigerian National Petroleum Corporation, Mele Kyari, it costs Nigeria about $17 to produce a barrel of crude oil.

With the negative impact of the Coronavirus pandemic on global economies, the price of crude oil dropped to an all time low of about $21 per barrel in April from $46 in February this year.

But while the global crude oil market has started experiencing a rebound in activities, thus making the product to sell for about $44.94 per barrel, experts have said that it had become compelling for the Federal Government to, as a matter of survival, cut the price of oil production.

The Federal Government had in a bid to reduce the impact of revenue decline in the 2020 budget proposal revised downward the revenue projection for the 2020 by N3.3tn from the initial approved amount of N8.41tn to N5.08tn.

The reduction in revenue projections was due to the negative impact of the Coronavirus pandemic,which had led to unprecedented drop in global crude oil prices.

So far, in Nigeria, the very visible impact of the pandemic has been huge, especially in relation to government finances, capital flow reversals and loss of income to businesses and households

Based on the revenue parameters upon which the revised budget proposal was made, the Federal Government had reduced downwards the oil price benchmark from $57 per barrel to $28 per barrel.

Similarly, the oil production volume was cut from the initial 2.18 million barrels per day to 1.7 million barrels per day.

Before the revision, the Federal Government had projected to generate about N8.42tn revenue to fund the budget, while debt service was estimated to gulp about N2.45tn.

These developments have heightened fears about the ability of the government to finance its expenditure for the current fiscal period.

It is understandable to see how frustrating the current high production cost must be for Nigeria, a country whose main source of income is oil revenue.

Not only are oil prices low, the country’s production cost is high and the country is battling to produce more than two million barrels of crude per day.

According to the World Bank forecasts, crude oil prices would rise gradually from an average of $42 per barrel in 2021 to $44.5 per barrel in 2022 and $47pb in 2023. It is also expected that Brent crude oil prices may average $41 per barrel during the second half of 2020 and $50 per barrel during 2021.

What this means is that there is slim possibility that oil price would rise above $60 per barrel.

The implication of this is that except Nigeria starts reducing the price of crude oil production to about $10 per barrel, it would be difficult to maximise revenue to be generated from sale of oil.

The NNPC GMD gave credence to this when he warned that unless oil companies reduce their cost of production, they may not have a business in the current low oil price environment.

He said with oil prices hovering around $40 a barrel, many oil companies in Nigeria reporting huge cost of production will not have a business as the industry re-adjusts to the new normal of low prices.

While speaking on the way forward for the industry, Kyari said local producers employ gimmicks including inflating the cost of associated risks and personnel costs which guts revenue available for taxation.

He threatened that the government would revoke contracts and cancel projects of any firm that would not adhere to the production cost of $10 per barrel.

He said with such high production costs, countries such as Nigeria might soon be out of business if eventually oil price drops to $30 per barrel.

The NNPC Boss said, “In a production environment like Saudi Arabia, it’s about $5 (to produce) a barrel. You can’t do it here. The best of our production system is at about $15 to $17 to a barrel.

“So there are many countries which cost of production is at least $30 and we are one of it.

“So when crude oil goes to $32 and you are producing at $30, you are out of business.

“And beyond that also, there are competition because people are producing at lower cost than you are.

“And then that depresses the potential of coming out of the impact of Coronavirus for a long while to come.”

There is no contending the fact that operating in Nigeria’s troubled Niger Delta region is fraught with risks. The kidnapping industry which Lagos-based SBM Intelligence firm said is worth over N7bn was birthed in the region as oil workers, especially expatriates became prime targets.

LTV

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