Cost reduction in oil production initiative raises hope

Efficiency in operational cost and profitability of businesses are two elements every thriving enterprise will never take for granted.

Reason being that there are two ready ways to keep an organisation going strong. First is to make more money through improved profitability. The second option is to efficiently reduce cost of operation.

In the oil and gas industry, analysts insist that  operators plenty of firepower to develop multiple revenue streams and reduce productional cost will keep winning.

For the Nigeria National Corporation of Nigeria (NNPC), adopting diverse revenue stream and reducing cost of operation remain priority.

For instance, NNPC Group Managing Director,  Mele Kyari announced that the corporation was working on reducing its cost of production per barrel of oil to $10 by 2021.

Stakeholders have described the plan as ambitious but plausible, given the many benefits that will come with reduced cost of production per barrel of oil.

Providing more details on how the scheme will be implemented, NNPC Chief Operating Officer, Ventures and Business Development, Roland Ewubare said the $10 crude oil production cost mentioned as production cost is an aspirational figure.

“We look at where we are coming from in terms of cost and what the larger cost drivers are for us in the industry. Against that backdrop, the conversation about cost becomes an imperative and urgent one. You have to understand that at the macro-economic level which you focus on a lot on your programme, crude oil is the backbone of our economy,” he said.

Explaining further, he said its contribution to the Gross Domestic Product (GDP) is  between seven and 11 per cent depending on the year in question, but as a contributor to the foreign exchange earnings and national budget is massive.

“Whenever you have a price regime like we have right now, where commodity prices are low, the only way we are able to squeeze out some reasonable cushion in terms of cash and financial gains to the federation is by containing and constricting our costs,” he said.

Ewubare said the corporation’s costs are driven by a multiplicity of factors, including personnel, as the the oil and gas industry in Nigeria probably pays the highest salaries, higher than than banks renumeration.

“That is a huge part of what we spend money on. The environment in which we operate, our primary production base in the Niger Delta, still have issues around security, militancy and all of that. So, all of those add an extra layer of cost to production. There are many countries in this world where their citizens don’t vandalise national infrastructure. So, they don’t have the added cost that we have,” he said.

For NNPC to move equipment to an offshore location, it needs mobile policemen loaded with weapons and that comes with added cost. “But to address that question, $10 is an aspiration. When are we getting there? We are looking very actively at hitting that threshold before the end of quarter four of 2021. It’s an aggressive target for sure”.

Ewubare, said the current cost structure was a fallback from the high commodity cost regime a few years back of about 100 to 110 dollars per barrel.

“Some of the projects that were sanctioned at that time used that price point based on certain assumptions. Now that prices have gone down, it will take a while for the industry to recalibrate and readjust to a more reasonable cost regime. It’s a work in progress, but we are certain that at the end of next year, we will be able to get to $10 per barrel as our operating cost. For our technical costs, they are a separate matter,” he said.

In area of research and development, he said the NPDC, the flagship Exploration and Production company’s peers are Shell, ExxonMobil, Chevron and such other indigenous companies.

“So, when we talk about reducing cost, if we tell the International Oil Companies’ to reduce cost and then our own in-house Exploration and Production company carries a cost profile that’s exaggerated, it’s not sustainable. So, the same tactics and pressures we apply to those major partners, we apply to Nigerian Petroleum Development Company-NPDC  as well”.

“Technology and innovation is key and interesting, but for now we are not using research and innovation to try and cut down our cost. In my initial remarks, I said the costs we have are a relic of the days of high prices, a relic of the environment in which we operate. Yes, we can use technology to address some security issues in the Niger Delta, for example,” he added.

“But there is only so much technology you can use to reduce headcount and human beings in a country where we have high unemployment in terms of our critical workforce and our talent pool.  We have very limited places where we can apply the hammer and trim some excess fat. We have ideas in place in NNPC to sort of diversify our income stream so that we are better able to manage this boom and burst circle which characterises the oil and gas sector”.

“The oil and gas sector as you well know works in a boom and bust circle and many of our competitors and service companies set up other businesses to manage them. So, when you have low oil prices, you make some money from somewhere else”.

Also speaking, Professor Emeritus of Petroleum Economics, Louisiana State University (LSU)  Energy Studies, United States,  Wumi Iledare,  said said, NNPC’s move to reduce crude oil production cost is good for the economy and should be supported.

He said the corporation has what is required to achieve targeted $10 per barrel lifting cost, which will enhance revenue for the country.

Prof. Iledare said the corporation has the potential to achieve the reduced production cost plan.

He said Nigeria has made a lot of investment, and now is the time to to ensure that its operating cost does not cross certain threshold.

He said that Nigeria’s oil lifting or production cost  has been high, adding that achieving $10 target will be of great benefit to the economy.

Prof. Iledare, who is also National Petroleum Corporation (GNPC) Research Chair in Petroleum at the University of Cape Coast  Oil and Gas Institute,  Ghana, said maintaining a good efficiency ratio in crude oil production has many benefits, including more revenue earning for the corporation.

He said that technical  cost used to be about $4 per barrel and lifting cost about $2 per barrel in the 70s and 80s, on average before they rose.

Additionally, he said low cost efficiency ratio relative to price and indirectly low cost per barrel increase profit that government take because every dollar saved is taxable.

He advised government to monitor cost and benchmark it along with adaptation to global best practice. “One the factor affect cost dynamics is administrative cost! Reducing inefficiency in the governance of the sector is important.  Some trimming of unproductive activities of some departments may be inevitable,” he said.

Asked if such excise is timely, given the softened crude oil prices, he said:”This should be part and parcel of the way to do business. Cost management strategy is critical to maximize returns on investment. More so when the price of oil is low and market is soft”.

Lagos-based Energy expert, Stephen Abiodun, described the  corporation’s move as aggressive but necessary step needed at promote economic growth and development.

He said with the drop in Nigeria’s foreign exchange earnings, there was need for agencies to find new ways to earn money for government. “The NNPC will make more savings and revenue as it begins to reduce cost of its operations and crude oil production cost per barrel,” he said.

According to him, the NNPC’s plan to create other streams of revenue that might help during downturns will be positive for the economy through improved earnings.

Cultivating Other Revenue Streams

On other ways the corporation want to make money from, Ewubare said the NNPC has a seismic company, IDSL, in Benin for example, which I was Managing Director of, it was a very small company six to seven years ago, but last year the company posted revenues in excess of $100 million.

“That’s still not too much money, but in an environment where you are looking for every penny to run the national budget, it is critical. We have an engineering company in Lagos called National Engineering & Technical Company Limited (NETCO), that’s the national engineering and technical company. NETCO historically couldn’t pay staff salaries, but because of the work we have done in revamping all these businesses, NETCO only last year did over $150 million in revenues”.

“Now, they are totally independent and paying their own salaries and are able to contribute and stream dividends into the NNPC and to the federation. So, there are different ideas and plans we have in place to diversify the income base of the corporation for the greater good of the nation and over the next few months you will see these things rolling out. Covid-19 has slowed us down a bit, but we are sure that we will get back to business’s.”

If you take a historical timeline of oil and gas, you will know it’s a boom and bust cyclical waves. So, what most operators do is to create other streams of revenue that might help during downturns.

New projects raise hope on operations

NNPC Group Managing Director, Mele Kyari said the $2.8 billion AKK gas pipeline project is scheduled for completion in 2022.

The corporation, said it won’t sanction a $2.8 billion without doing basic due diligence around environmental assessment and feasibility.

“The Ajaokuta Kaduna Kano (AKK)  is a massive project. It’s a 620 kilometre gas line that’s going to run from Ajaokuta to Kaduna and into Kano. When it is completed, it can transport a fully loaded two billion quantity of gas on a daily basis. It’s massive and the whole idea is to have that whole gas infrastructure in place. Wherever you have gas or energy, development follows”.

“That means that northern Nigeria corridor will now be open for significant expansion in terms of industrial capacity. The line is going to service various gas-based industries, but it’s primarily for three major power plants in Abuja, Kaduna and Kano”.

“Abuja is 1,350 megawatts, I believe, Kaduna the same size and then Kano is 900 megawatts or so. So 3,600 megawatts of electricity will come from these and you add that to national grid and you begin to see the multiplier effect on industrialisation and impact on the lives of people. It’s a major investment and it should be up for commissioning in 2022 by our current aspiration”.

Source: The Nation

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