Stakeholders in the oil and gas industry say corruption and long contracting cycles are among factors responsible for the high unit cost of production per barrel of crude oil in the country.
According to them, most of the cost increases recorded in the sector are process induced, occasioned by the bureaucratic process within the Nigerian National Petroleum Corporation(NNPC) which is avoidably long and winding and overtaken by inflation.
According to the stakeholders, the prolonged contracting cycle induces contractors in the oil and gas industry to pad their cost because most times, by the time the final approval is given for a project, the cost price would have doubled or even tripled.
Wumi Iledare, a professor of petroleum economics, who spoke to BusinessDay at the recent Society of Petroleum Engineers Conference in Lagos, said the government knows what to do if she wants the unit cost per barrel of oil come down.
Iledare said it is true that the unit cost of crude oil per barrel is high, but to put a stop to the high unit cost of crude oil, the contracting cycle must be reduced significantly.
He also wants transparency and accountability in the industry, so it can attract investors.
Government should discourage oil companies from inflating their cost by promptly approving projects that are brought before her, he said.
Other stakeholders also say the cost can be brought lower if the government checks corruption in the system, as government officials who are supposed to oversee the projects, allegedly review their allowances upwards, against what the oil companies have put in place.
Emmanuel Emielu, managing partner, Oil and Gas Soft Skills limited, who also spoke on how the cost of production can be reduced, said even though insecurity is a factor, government needs to reduce the contracting cycle, so as to stamp out padding of the cost of projects.
Transparency in the sector is going to play a major role if the unit cost of a barrel of crude must be brought down.
Ibe Kachikwu, Minister of State for Petroleum Resources, had said International Oil Companies (IOCs) operating in the Nigerian oil fields must work hard to cut down their cost of producing a barrel of oil from an average of $32 per barrel to $15, saying repeated excuses of militancy as part of reasons for high production costs were no longer tenable.
Kachikwu explained during the signing of a Memorandum of Understanding (MoU) on the $200 million Nigerian Content Intervention Fund (NCIF) for projects, programmes and activities directed at increasing Nigerian Content in the oil and gas industry, that Nigeria’s target to produce a barrel of oil at $15 is a must.
He noted that it was on the basis of that, that the country would be able to compete with other members of the Organisation of Petroleum Exporting Countries (OPEC) for market share in the global oil industry.
“A lot of debates about the cost production is on; $32 was the figure quoted from me, and $23 which the NNPC has quoted. The reality is that production in our offshore is in excess of $32 per barrel, no doubt about that, and production onshore was ranging about $28.
“NNPC has done a good job of bringing it down to $23, but that is not over yet. Where we are headed is $15 and not $18, we must bring back down production,” said Kachikwu.
He further explained: “We must be able to look at our OPEC brothers in the face and be able to compete favourably. If you look at today, the rundown is that we are the second or third country with the highest production cost figure.
“The issue of militancy, among others, we can no longer explain that. We have had militancy for so long that by now, we must have alternatives in defence of that.
“Oil companies must rise to the challenges of producing oil in this country, and we cannot produce oil in an environment we are unable to with certainty-say what the pricing is going to be and continue to run a high cost model – it will not work. We must drive those numbers down. So for clarity on this issue, the target is $15 per barrel.”
He stated that contracting cycle for projects in the industry would have to come down to within a six-month band, to reflect on the production cost, adding: “I have been very frank from day one, that there is no reason why this country should have a contracting cycle that is in excess of six months.
“Today, we have moved it from 18 to 24 months, down to 13 to 14 – it is still struggling, but we must put speed to this because it costs money and has a direct linkage with my philosophy that we must reduce the cost of production.”
Olusola Bello
