The Group General Manager of the National Petroleum Investment Management Services, Bala Wunti has said that the country needs to achieve a unit operating cost of $10 per barrel to be able to maximise more revenue from oil.
He said the competitive nature of the global oil market had made it more compelling for Nigeria to reduce its oil production costs.
Wunti while speaking at the National Association of Petroluem Exploration 2020 conference which was held virtually noted that achieving a lower cost of oil production is not a luxury, but a necessity if Nigeria’s oil industry must survive.
He said based on forecast, global upstream investment is expected to drop by 26 per cent or $140bn year on year by end of 2020, adding that the development is making large oil and gas companies to cut down expenditure.
For instance, Wunti said that Royal Dutch Shell had launched ‘project reshape’ to slash up to 40 per cent cost of production in the wake of covid-19, adding that Exxon Mobil had followed similar pattern by cutting jobs by 15 per cent.
While stating that Chevron may eliminate about 15 per cent of workforce, he noted that the development is not limited to the international oil companies as it is also affecting the national oil companies.
He added, “So across the globe, everybody is trying to manage its costs in such a way that that you can continue to be profitable.”
He said in Nigeria Unit Operating Cost hovers between $18 in 2014 to $14 in 2017.
However, he added that the NNPC is making significant effort to drive this down from the 2019 of level of $16 to $13, noting that “ $10 must be achieved to put this industry on a survival platform.”
He said, “We are operating in a very high cost environment and because the cost is very hash, it underpins our survival in the industry.
“We have to do what we need to do to bring it down otherwise it will bring us down. So the option is either we bring cost down or it will bring us down.
“The question is whether $10 per barrel cost price is realisable and sustainable and if its not sustainable what can the industry do to bring down this cost before the cost bring us down.
“We currently have an oil reserves of 36.89 billion and with the 2.1 million barrels per day oil production trend, Nigeria will be out of oil in 40 years time if we don’t increase the size of our reserves. So we need to generate enough money from oil so we can invest in other areas of the economy.
“The industry has no option than to be a price taker, The oil and gas industry must accept any price that the industry presents and we have seen it over time.
“We have seen $8 oil and we have seen $140 oil. But the key thing is that irrespective of what the price is, as a producer in the upstream, you must follow the price .
“The resilient and tenacity of the industry is dependent on our ability to manage of cost by ensuring that the cost is below our price. Why we don’t have control over the price, what we have control over is the cost and the production number we have to generate.”
He said due to high tax rates, profit margins is relatively low in Nigeria standing at about two per cent of price in Joint Venture arrangement and about ten per cent in Petroluem Sharing Contract agreement.
Speaking on the reason for the high operating costs in the industry, he said Human Resources, logistics and direct handling costs make up 70 per cent of the industry’s unit operating cost.
The remaining 30 per cent, according to him, is made up of direct lifting, service management, production maintenance, security, and administration costs.
He added, “We have to address all these things concurrently to reduce our unit operating costs. We are taking them one by one and focussing on the first three (Human Resources, logistics and direct handling costs) and we are engaging the industry to see how best we can achieve this.”
He noted that the Human Resources cost alone is about N785bn on less than 50,000 personnel and the national budget is N10.8trn for 200 million people.
This, he stated, this implies that less than 0.03 per cent of the country’s population share 7.3 per cent equivalent of the national budget as HR Cost.