With its current unit cost across all operating terrains averaging between $9 and $22 per barrel, the Nigerian National Petroleum Corporation (NNPC) says it has set an oil production cost target ceiling of $10 per barrel by 2021.
The Group Managing Director of the corporation, Mele Kyari, who announced this during a web meeting with news editors said 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 the unit operating cost for all the joint venture operating companies was 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 (the first time since 2015 crude oil price has dropped so sharply within so short a period), Mr Kyari said there need to put a halt to the rising cost and begin to do things differently.
“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,” he said.
Rising costs, declining prices
Despite the challenges of rising costs and declining oil prices, the NNPC boss said the corporation’s plans were on course towards realising his personal dream of an oil and gas industry that would become the major enabler to the Nigerian economy.
In spite of disruptions and slowed down economic activities as a result of the impact of COVID-19, he said the NNPC has managed to sustain its operations in line with business continuity protocol activated to connect with its partners’ locations across the business value chain.
Consequently, he said the NNPC was able to achieve about 2.4 million barrels per day during the current crisis period, the highest oil production level ever in about ten years, before dropping on the wake of the current Organisation of Petroleum Exporting Countries (OPEC) output cut deal.
Although he said the corporation was still reviewing the achievement to understand the factors responsible for such a phenomenal milestone during a crisis, observers have attributed it to the reduced activities of vandals and oil thieves, which may result in increased crude oil flow into the system during the period.
Besides, he said the corporation also adopted some business strategies that allowed it to pursue its programmes more effectively and efficiently, by engaging with its partners on the need to cut cost, reduce budgets, while asking for cost discounts of up to 40 per cent from contractors.
Mele Kolo Kyari, NNPC GMD
“When crude oil price goes down to as low as $13 per barrel, while the production cost is as high as $35.97 per barrel, it means producers are technically subsidizing crude oil production.
“What the NNPC did to bring down the high cost was to negotiate with its partners to cut down on contracts life cycle; selecting the right projects; engaging the right institutions to bring down the cost. Our ultimate target we have set for ourselves is to bring the cost down to at most $10 per barrel.
“This will come at a cost and huge challenges. What that means is that we will have to shut down some assets and confront very powerful people, who, either as businesses, individuals or institutions, and agencies, have entrenched interest in making sure this does not happen.
“With such people, the meaning is that we are paying about three times more than what we should. But, I can assure you, at any cost, we will take steps to bring this cost down so that our country will benefit and the oil industry will become a profitable business for the 200 million Nigerians, and not just a fragment of the society that is committed to spare nothing to frustrate our efforts,” he said.
Although he acknowledged constraints to its partners taking key investment decisions, Mr Kyari said the NNPC has taken in the challenges, engaged, drawn the action lines and changed the processes and procedures with the ultimate goal of achieving its objectives in the common good of all Nigerians.
Growing output amid constraints
On oil production, he said since January 2020, crude oil production has remained at an average of 1.81 million barrels per day, with additional production averaging between 250,000 barrels and 280,000 barrels per day from condensate.
OPEC [PHOTO CREDIT: Zero Hedge]
With Nigeria’s decision to participate in the OPEC+ output cut regime, he said the NNPC gave a commitment to cut down the country’s production to about 1.412 million barrels per day between May and June 2020.
In line with the programme, he said NNPC’s oil production would increase to about 1.495 million BPD between July and December this year, and about 1.579 million BPD between January 2021 and April 2022.
However, he said the country’s target was to hit an average of 3 million barrels per day, despite all constraints, including the challenges in OPEC output cut.
“Our projects are designed in such a way that many of them will come on stream between 2021 and 2022. We know that this will be the right time to kick in the 3 million barrels per day agenda. This is very possible and realistic.
“If we can make 2.4 million barrels during this crisis period and we have a clear sight on a number of projects to bring incremental volumes in excess of 600,000 barrels per day, then that is clearly achievable.
“We are looking at all the possibilities of resolving all the issues around the OPEC cut. We have some projections on how we can have some form of exemptions or any form of engagement.
“Otherwise, at the end of our commitment with the OPEC output cut deal in 2022 when most of the projects we have will come into operation, we expect to have an exponential jump in our oil production. We are very confident that we can swing it.
“Total oil production stood at 2.07 MBPD in January and February before dropping to 2.05 MBPD in March, it rose to about 2.16 Mbpd in April. Our projection is to increase production from crude condensate fields.
“Condensate are exempt from OPEC oil quota. We have a number of fields that are rich in condensate, we hope to increase production so that we can arrive at 3 million barrels per day without necessarily creating complications on our commitments to OPEC even in the short term,” he said.