- NNPC blames insecurity for high production cost
Emmanuel Addeh in Abuja and Peter Uzoho in Lagos
The federal government thursday proceeded with the full deregulation of the downstream petroleum sector with the removal of the existing cap on petrol price, urging marketers to import and sell the product according to the dynamics of the forces of demand and supply.
This is coming as the Nigerian National Petroleum Corporation (NNPC) yesterday blamed insecurity in the Niger Delta and other factors peculiar to Nigeria’s operating environment for the high cost of oil production in Nigeria.
The corporation, however, restated its commitment to achieve the target of cutting crude oil production cost threshold to $10 per barrel before the end of the fourth quarter of 2021.
With the latest development, it was learnt that petrol marketers can now import the product and sell at prevailing market prices, without the usual price band set by the concerned regulatory agency.
In a statement issued last night, the Petroleum Products Pricing Regulatory Agency (PPPRA), noted that henceforth prices would be fully determined by market forces.
The statement, which was signed by the agency’s Executive Secretary, Mr. Abdulkadir Saidu and backdated to March this year, noted that the agency would only continue to monitor trends in the crude oil market and advise the Nigerian National Petroleum Corporation (NNPC) and oil marketers accordingly.
“In exercise of the powers conferred on it by Section 7 and 24 of the Petroleum Products Pricing Regulatory Agency (Establishment) Act. No. 8 of 2003, and all other powers enabling it in that behalf, the Petroleum Product Pricing Regulatory Agency, with the approval of the President hereby states the following:
“Market-based pricing regime for premium motor spirit (PMS) using the pricing template of the Petroleum Products Pricing Regulatory Agency:
“The price cap per litre in respect of Premium Motor Spirit (PMS) is removed from the commencement of these regulations.
“From the commencement of these regulations, a market-based pricing regime for Premium Motor Saint (PMS) shall take effect. The agency shall monitor market trends and advise the NNPC and oil marketing companies on the monthly guiding market-based price,” it said.
It added that the new regulation may now be cited as the “Premium Motor Spirit (PMS) Market Based Pricing Regime Regulations, 2020”.
In the explanatory note to the regulation, it disclosed that the new regulation would complement and enforce the provisions of the 2003 Act and to notify the general public of the existence of a market-based pricing regime for the product starting from March this year.
Meanwhile, the Chief Operating Officer, Ventures and Business Development arm of the NNPC, Mr. Roland Ewubare, when he featured on The Morning Show, a programme on ARISE NEWS Channel, the broadcasting arm of THISDAY Newspapers, said insecurity in the Niger Delta contributed greatly to the high production cost.
According to him, oil companies have to pay for extra security to protect assets and staff from attacks by militants and pirates.
He also described the $10 production cost, also known as operating cost, as an aspirational and aggressive target of the NNPC that the national oil company is determined to achieve.
NNPC Group Managing Director, Mr. Mele Kyari, had last month expressed the oil corporation’s determination to cut production cost to $10 per barrel in view of the crash in oil prices to as low as $13 per barrel in the wake of COVID-19 that triggered a glut due to a sharp drop in demand.
Earlier, Kyari, at a roundtable meeting organised by the Central Bank of Nigeria (CBN) in March, tagged “Going for Growth 2.0,” had said: “Today, the best of our production system is $15 to $17 a barrel, there are many countries whose cost of production is $30 and we’re one of them. So, when the price now goes to $22 and we’re producing at 30 dollars, that means we’re out of business.”
Reacting to a question on the planned production cost cut yesterday, Ewubare said: “But to address your issue specifically, $10, yes, is our aspiration. When are we going to get there? We are looking very actively at hitting that threshold before the end of Q4 of 2021. It’s an aggressive target but we are sure we are going to meet it.”
Explaining why the operating cost for the NNPC has been high in a sharp contrast to what is obtained in other oil-producing nations, Ewubare attributed it to the peculiar nature of Nigeria’s operating environment and other issues.
He said: “The figure the Group Managing Director of NNPC, Mallam Mele Kyari, mentioned – $10 per barrel as our unit operating cost is an aspirational figure. You have to look where we are coming from in terms of cost and what the larger cost drivers are for us in our industry. And against that backdrop the conversation around cost becomes an imperative and urgent one.
“Now, you have to understand that at the larger macroeconomic level, which you focus on a lot in your programme, oil is the backbone of our economy. In terms of contribution to GDP, it is not that much between seven and 11 per cent depending on the year in question. But as a contributor to our foreign exchange earnings and as a contributor to the national budget, oil and gas hold an important role in terms of our nation.
“So, whenever you have a regime like we have now where commodity values are low, the only way we are able to squeeze out some reasonable cushion in terms of cash and financial gain to the federation is by containing and constricting our costs. Our costs are driven by a multiplicity of factors. You know staff, you and I know that the oil and gas industry in Nigeria probably pays the highest salaries; we even pay more than the banks. So that’s a huge chunk we spend money on.
“Now, the environment in which we operate: our primary production base is in the Niger Delta and you are well aware of the issues of security, militancy and all of that. All of those add extra layer of cost to production. And money comes in this world where their citizens don’t vandalise national infrastructure. So, they don’t have the idea of the cost that we carry around security.
“If I need to move Korean equipment to an offshore location, I need boat loaded with naval officers to an offshore location. That comes as an extra cost; all those things when you add them up, give you the cost of oil in Nigeria.”
He described the current cost structure as a fallback from the high commodity regime that Nigeria had a few years back when oil sold at over $100 per barrel.
He said some of the projects that were sanctioned at that time used that price point, stating that now that prices have gone down, it would take a while for the industry to settle to a more reasonable cost regime.
“So, it’s a work in progress but we are certain that by the end of next year we should be able to get $10 a barrel for our operating cost. Our technical cost is a separate matter,” he added.
