Nigeria: Examining NNPC's Renewed Efforts to Lower Oil Production Cost

15 September 2020

Peter Uzoho writes on efforts by the Nigerian National Petroleum Corporation to realise the $10 per barrels oil production cost aspiration

The Nigerian National Petroleum Corporation (NNPC) is intensifying efforts for the achievement of its aspiration of cutting oil production cost in the nation's oil exploration and production business by next year. This is in furtherance to the determination of the national oil company to attain greater profitability by ending the regime of high production cost in the wake of dwindling oil revenues occasioned by the drop in oil prices due to the Coronavirus pandemic.

True to its words, NNPC has been engaging its partners and stakeholders at both private and public meetings to brainstorm on how to realize the target it had set.

Last week, at the Asset Management Operational webinar series, organised by the Integrated Data Services Limited (IDSL) of the NNPC, the corporation and the stakeholders in the nation's oil and gas sector re-echoed the need for operators to leverage digital processes for optimal efficiency in the oil sector.

The Concerns/Solutions

The Group Managing Director of the NNPC, Mallam Mele Kyari, had explained at a roundtable meeting organised by the Central Bank of Nigeria (CBN) in March, tagged, "Going for Growth 2.0", that "Today, the best of our production system is $15 to $17 a barrel, there are many countries whose cost of production is $30 and we are one of them. So, when the price now goes to $22 and we are producing at $30, which means we are out of business".

However, in a radical move to save the industry from the harsh effect of high oil production expenses, especially in the context of Coronavirus and oil price slump, Kyari had said the situation at the moment demands change of strategy, explaining that it would be profitable to produce at oil assets with cheaper cost of production.

The NNPC henchman had also set the end of 2021 as deadline for the attainment of $10 per barrel production cost benchmark, declaring then that the corporation would rally its partners to follow suit as it was no longer bearable to see companies producing even as high as $90 per barrel.

"Nigeria will cut production costs to $10 per barrel by the end of 2021. Costs have been too high for too long, he said, pledging that costs would fall or production stopped.

"Some companies are producing at $90 per barrel. This is unacceptable and industry must work together to bring this down. There are no subsidies for the upstream, if it is not economic it must shut down," Kyari had said.

He had emphasised the need for industry operators to focus on projects that generate more cash, produce more resources - and at cheaper costs, citing the adoption of new technologies as one way of doing things cheaper.

Kyari had added that the impact of Coronavirus was a "blessing in disguise" for Nigeria, noting that while prices had suffered, they would come back but the pandemic had offered a chance for a reset.

He had maintained that talks with contractors had been fruitful and that they had been given the option of agreeing to cuts of 20-30 per cent on prices and that most had accepted the reset.

With its current unit cost across all operating terrains averaging between $9 and $22 per barrel, the GMD had noted that the high oil production cost was a major concern in the face of the sharp decline in crude oil prices as a result of the impact of the Coronavirus pandemic on the global oil market.

In 2019, the full-year performance of the oil industry showed that the unit operating cost for all the joint venture operating companies was in excess of $10 per barrel, with data for the first quarter of 2020 showing a performance above the target.

On the other hand, the production sharing contract (PSC) operators recorded unit operating cost of between $10.67, $21.08 and $28.91 per barrel during the corresponding period.

With crude oil prices taking an unprecedented nose-dive from about $60 per barrel in February 2020, to less than $13 in April, Kyari restated the need to put a halt to the rising cost and begin to do things differently.

According to him, "Oil prices have gone down to sub $10 per barrel due to the economic impacts of COVID-19, resulting in crude oil supply and demand imbalances. Cost of production has always been a major issue for the NNPC. Without cost reduction, there will be no tax revenues and therefore the investments would not be worth the while, with unmet expectations."

However, stakeholders, who spoke at the IDSL/NNPC Asset Management Operational webinar, stressed the need for the industry to embrace innovations that would ensure optimal use of resources as well as reduce cost of operation to $10 per barrel.

In her remarks, the Manager, Production Technology, First E&P, Sophia Weaver, explained that the past few years had been challenging for the sector with so much volatility exacerbated by the Coronavirus pandemic.

Weaver said that continuing with the conventional model of operation would not yield the desired growth in the sector, stressing that there was need for operators to be more responsive to fluctuating oil prices and exert control over the rather high cost of operation to ensure process efficiency.

"Achieving operational excellence involves transforming the way we work and digitalize our processes in areas such as oil well and reservoirs management, drilling, logistics and supply chain management.

"Process digitalization involves the use of digital data and technologies to transform existing business process into more efficient, optimised, more profitable and value adding operations.

"There is need for us to begin to see data as the new oil, data is critical to the development of the sector," Weaver said.

She further said that achieving operational efficiency requires the re-engineering of traditional processes, optimisation of resources and reducing waste.

Contributing, the Managing Director, IDSL, Ayebateke Bariwei, stressed the need to address perennial issues associated with operational inefficiencies in the sector, noting that adopting digitalised process was key to enhancing productivity, reducing waste and improving system efficiency.

"Process digitalisation is about unlocking new value by using digitalised data to change the way things are done. Our objective is to ensure that we operate in the industry bringing the unit operating cost to $10/ barrel by 2021", Bariwei said.

Also speaking, the Chief Operating Officer, Nigerian Petroleum Development Company Limited (NPDC) Western Niger Delta, Edirin Abamwa, in his remark, advised that regulators must develop environment that encourages process digitalization and help operators thrive in the sector.

"The operation cost cannot decline in isolation, there is need for an enabling environment, incentives that enable operators modify their ways of doing business and I doubt it this current environment will make that happen.

"We still lack the adequate data to aid effective decision making by operators. We still are not traditionally set up to mitigate disaster shut down, until remedy is carried out.

"It is time to move away from the traditional ways, there are a lot if development that enable operators establish census and determine if machines are operating optimally, these are still lacking among operators today," Abamwa said

Notably, before his exit from the corporation, the immediate-past Chief Operating Officer, Ventures and Business Development arm of the NNPC, Mr. Roland Ewubare, had also explained that insecurity in the Niger Delta contributed greatly to the high production cost.

According to him, oil companies have to pay for extra security to protect assets and staff from attacks by militants and pirates. He also described the $10 production cost, also known as operating cost, as an aspirational and aggressive target of the NNPC that the national oil company was determined to achieve.

Reacting to a question on the planned production cost cut, during a broadcast programme, Ewubare had said: "But to address your issue specifically, $10, yes, is our aspiration. When are we going to get there? We are looking very actively at hitting that threshold before the end of Q4 of 2021. It's an aggressive target but we are sure we are going to meet it."

Explaining why the operating cost for the NNPC has been high in sharp contrast to what is obtained in other oil-producing nations, Ewubare attributed it to the peculiar nature of Nigeria's operating environment and other issues.

He said: "The figure the Group Managing Director of NNPC, Mallam Mele Kyari, mentioned - $10 per barrel as our unit operating cost, is an aspirational figure. You have to look where we are coming from in terms of cost and what the larger cost drivers are for us in our industry. And against that backdrop, the conversation around cost becomes an imperative and urgent one...

"So, whenever you have a regime like we have now, where commodity values are low, the only way we are able to squeeze out some reasonable cushion in terms of cash and financial gain to the federation is by containing and constricting our costs. Our costs are driven by a multiplicity of factors. You know staff, you and I know that the oil and gas industry in Nigeria probably pays the highest salaries; we even pay more than the banks. So that's a huge chunk we spend money on.

"Now, the environment in which we operate: our primary production base is in the Niger Delta and you are well aware of the issues of security, militancy and all of that. All of those add extra layer of cost to production. And money comes in this world where their citizens don't vandalise national infrastructure. So, they don't have the idea of the cost that we carry around security.

"If I need to move Korean equipment to an offshore location, I need boat loaded with naval officers to an offshore location. That comes as an extra cost; all those things when you add them up, give you the cost of oil in Nigeria."

He described the current cost structure as a fallback from the high commodity regime that Nigeria had a few years back when oil sold at over $100 per barrel.

Ewubare said some of the projects that were sanctioned at that time used that price point, stating that, now that prices have gone down, it would take a while for the industry to settle to a more reasonable cost regime.

"So, it's a work in progress but we are certain that by the end of next year, we should be able to get $10 a barrel for our operating cost. Our technical cost is a separate matter," he added.

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