Nigeria’s alarmingly high cost of oil production 

The National Upstream Petroleum Regulatory Commission (NUPRC), recently made a curious announcement that inadvertently explains the lack-luster attitude of the international oil companies (IOCs) to investment in Nigeria’s oil fields.

The industry regulator warned that the cost of production in Nigeria’s oil fields was catastrophically high. The bad news is that it takes a princely sum of $40 to produce one barrel of crude oil in Nigeria. In Saudi Arabia the production cost of a barrel of crude oil is a scant $10.

The danger is that if for any reason, crude oil price drops below $40, the IOCs in Nigeria will simply abandon the business because they will be operating at colossal losses. 

The regulator lamented that the high cost of production in Nigeria was responsible for the number of IOCs fleeing the nation’s oil fields. The truth is that the profit margin in Nigerian oil fields is too slim to attract investors.

At the current oil price of $78 per barrel, Nigerian oil producers make just $38 profit per barrel when their counterparts in Saudi Arabia rake in anything from $65 per barrel.

The NUPRC lists the causes of Nigeria’s high oil production cost to include aging facilities which collapse regularly and require instant fixing, pipelines vandalisation, crude oil theft and discontent by oil producing communities, among others. 

The pipelines and storage facilities in Nigeria are very old and they are poorly maintained as a result of inadequate funding which is caused by an odd combination of corruption and mismanagement on the part of the industry regulator.

The aging pipelines on their own burst regularly and cause avoidable oil spills that pollute the environment and cause untold losses to the producers and the Federal Government of Nigeria which depends on crude oil exports for 90 per cent of the foreign exchange it earns annually.

Pipelines vandalisation adds to the cruel torment inflicted on Nigeria’s oil producers by aging facilities. 

While some of the pipelines burst due to age and poor maintenance, some are vandalised by mega crude oil thieves and the pocket size thieves who operate hundreds of condensation-and- evaporation refineries in the creeks of Niger Delta.

The pocket size thieves constitute an insignificant threat to the industry because they cannot refine more than a few hundred barrels of stolen crude oil in a day.

The mega thieves are the major problem of the industry because they ferry stolen crude oil in barges to the international waters for sale at a discount to criminals waiting to benefit from their loots. 

They repeatedly break into the pipelines causing damage that must be repaired by the oil producers. In a normal day of operations, the mega oil thieves steal a minimum of 450,000 barrels of crude oil from Nigerian oil fields.

Some of the mega thieves are so sophisticated that they tap the oil from the well heads. They get their oil before the IOCs get anything to the export terminals.

There are fears that some of the mega thieves operate in collaboration with the IOCs. Pundits contend that the thieves have no way of connecting their pipes to the production well head without the knowledge of the producer.

The Nigerian National Petroleum Company Limited (NNPCL) takes a chunk of the blame for the ease with which the mega thieves operate in the oil industry.

Two years ago, the NNPCL announced the discovery of a nine-kilometre long pipeline that takes oil from the IOCs pipelines to where the thieves tap oil for sale in the international waters.

The big question that NNPCL is yet to answer is how the giant bull dozers digging the earth to bury the diversionary pipelines could operate for nine kilometres without anyone in NNPCL’s surveillance team spotting them.

NNPCL’s inappropriate response to that query suggests internal collaboration with the mega oil thieves.

The Nigerian military, particularly, the Nigerian Navy, had all along been fingered as a major collaborator with the mega oil thieves.

The Navy patrols Nigerian waters with ships whose sole responsibility is to arrest tankers with stolen crude oil. No one in the Navy has been able to explain how the barges operated by the mega thieves slip through the Navy’s tight maritime security without being spotted.

Perhaps, the most disturbing aspect of the causes of the high cost of oil production in Nigeria are the activities of indigenes of the oil producing communities. 

Hostilities by oil producing communities raise production cost for the oil companies even as some of the oil companies have been very liberal in their provision of basic amenities to the oil producing communities.

Shell lost its drilling facilities to such community discontent in Ogoni land. Shell has abandoned its rigs in Ogoni because of the difficulty in resolving the crisis.

Last month President Bola Ahmed Tinubu summoned Ogoni community leaders along with the governor of Rivers state and appealed to them to give way to peace to facilitate the return of Shell to the community.

It is yet to be seen how far the president’s appeal will go in resolving the crisis to allow Shell to return to its abandoned oil rigs.

The federal government also takes a chunk of the blame for the discontent by the oil producing communities. While the oil companies owe the oil producing communities a measure of corporate social responsibilities by way of providing them with basic amenities, it is the duty of the federal government to provide them with good roads, electricity and pipe borne water from the tax revenue of the oil companies.

Government’s neglect of the oil producing communities is directly responsible for their hostility to the oil companies. The hostility can only end when government provides them their basic needs.    

From all indications, the journey to a modest oil production cost is a pretty long one. It will start when government reduces poverty in the oil producing communities. No one knows when that will happen.