7 November 2017

Nigeria: OPTS - Costs of Nigeria's Oil and Gas Projects Higher By 100%

A new report released by oil and gas companies operating in Nigeria has shown the existence of a Nigeria-specific cost premium for the petroleum sector, with operating costs and projects costs significantly higher than in other countries by as much as 100 per cent.

The oil and gas producers stated that they spend five times more on security than their global peers, with over $500 million spent in 2016 on security services such as escort vessels, convoys and guards.

According to the operating companies, they also rely on costly transportation options for personnel and goods, such as helicopter transport and aviation as a result of the insecurity of Nigeria's waterways.

The report prepared by the Oil Producers Trade Section (OPTS) of Lagos Chamber of Commerce and Industry (LCCI) identified a cost premium of between 15 per cent and 65 per cent for operating costs, and 35 per cent and 100 per cent for costs of projects.

OPTS identified insecurity, overregulation and bureaucracy, as well as inadequate infrastructure as the major divers of costs in Nigeria.

The report noted that security environment in the country has remained volatile, particularly in the Niger Delta, adding that security challenges result in cost premium for the oil and gas sector, affecting both operational and project costs.

"Operational costs are impacted by incessant militant attacks and sabotage, illegal bunkering, piracvy, kidnapping and armed robbery. In June 2016, production dropped to its lowest level in 20 years following a series of attacks on petroleum producing assets, including the Forcados pipeline, Escravos 24-inch gas pipeline, and Qua Iboe export line," the report explained.

The report further stated that when security incidents occur, unforeseen costs and losses are incurred.

The oil and gas producers cited such unforeseen costs and losses to include; unplanned expenditure for emergency repairs arising from attacks and vandalism, as well as deferral of production and loss of income for the government and the operators as a result of disruption of operations.

On average, the report said about 400,000 barrels of oil equivalent per day was deferred in 2016 as a result of security challenges.

The report also noted that preventive costs to safeguard lives and property in Nigeria are significant, adding that Nigeria's oil and gas operators spend five times more on security than their global peers.

According to the report, over $500 million was spent on security services in 2016, while huge amount was also spent on costly transportation options for personnel and goods, such as helicopter transport and aviation as a result of the insecurity of the waterways.

On the issue of overregulation and bureaucracy, the operators argued that Nigeria's regulatory environment is fragmented, with duplicated agencies, overlapping regulations and overregulation, culminating in excessive bureaucracy.

The report stated that excessive bureaucracy results in increased costs for both the government and the operators.

The operators identified the Department of Petroleum Resources (DPR), Ministry of Environment, National Oil Spill Detection and Response Agency (NOSDRA) and the National Environmental Standards and Regulations Enforcement Agency (NESREA) as overlapping agencies with jurisdiction over the same aspects of the oil and gas industry operations.

The report also cited multiplicity of tariffs, levies and fees as some of the costs drivers.

According to the operators, the contracting cycle in Nigeria is about 36 months while it is only six or eight months in Angola, Saudi Arabia, Venezuela and Indonesia.

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