Cost of production key as Nigerian volumes task OPEC limits

Ibe Kachikwu, minister of state for petroleum resources in an interaction with journalists at the inaugural Nigeria International Petroleum Summit (NIPS) in Abuja last week told journalists that with about 500,000 bpd expected Engina FPSO and Zabazaba fields, cost of production has become critical to determine which volumes goes to the market.

“We are still under the exemption, but the expectation looking at our numbers is that we should not exceed 1.8mbd. We have said that it covers pure crude, it does not cover condensates. A combination of both what we are producing today, which is in excess of 1.76mbd and the condensates which is in the region of 400,000 barrels will take us to the 2.2mbd. We are slightly below that and we will like to be able to move that.

“Challenges will come when you then hit 2.5mbd. Egina has 200,000bd in the next couple of months (which is) the last quarter of this year, Zabazaba potentially late end of next year, another 250,000bd. So, you begin to struggle with what you do with those volumes and that is why I said today that it is a signal to oil companies that we are going to be watching cost.

“I will hate to take a costly barrel to the market when I have a cheap barrel. So, what it means is that everybody needs to begin to drive down to that $15 (per barrel) concept that we have set as the ideal cost of production in this country, not $22 or $23. Like I said two of the companies have met that and we will like to get other companies to begin to do that. So, there will be incentives both in terms of your access to the market, our willingness to produce and also incentives in terms of what we are going to give to you for being a least-cost producer. We are going to work that out.”

But the challenge is what becomes of the extra volumes the minister is proposing not to take to the market on account of their cost? Nigeria has one of the highest cost of production among OPEC peers and this largely due to risks involved in producing the volatile Niger Delta, regulatory uncertainties and multiple conflicting regulatory agencies which makes business planning impossible. It would seem pragmatic to deal with these issues first.

The minister is proposing domestic utilisation.  “Once we begin to hit the 2.5mbd, if these agreements were foreseeably to last for five years – I hope not, I hope the market would have become that tight that there would be need for agreements and we can produce freely. But assuming that it doesn’t and shale continues to surge and maintain the sort of equilibrium misbalance, then obviously, what we need to do is to begin to look at how do we process a huge amount of our oil.

“Exporting crude is like exporting raw materials for our agricultural products, it is not the way to go. I will like to see a policy whereby oil companies begin to refine heavily, process heavily and take out their finished products. I am hoping that by the time we begin to hit those challenging numbers, local processing and refining would have improved to a level where in fact that is no longer an issue to us,” the minister said.

However the challenge with this is a policy on petrol subsidy that makes it meaningless to produce locally. The critical action is to remove these subsidies and allow market-led pricing structure which can encourage domestic refining. While both strategies are sensible, but they cannot solve the problem because of the challenging operating environment.

ISAAC ANYAOGU