Page 5 - AfrOil Week 24

AfrOil COMMENTARY AfrOil

During an online conference in late May, Kyari keep their expenditures in check, he said.
described high production costs as a handicap ‘‘The era of some of our partners producing
for the company. NNPC wants to bring this fig- at a very high cost will no longer be acceptable to
ure down to $10 per barrel on average by 2021, us anymore. It is either they become more effi-
as it cannot sustain a situation in which produc- cient at what they are doing by cutting cost or be
tion costs far outstrip the sale price of crude oil, ready to be shown the way out,” he commented.
he commented. As such, it hopes to bring the ‘‘If they are not ready to be cost effective, then we
average down to $10 per barrel by 2021, he said. may have no other option than to cancel those
contracts and give them to those that can man-
Bringing the numbers down age and produce at a relatively cheaper cost. This
Kyari struck a similar note last week, saying is business, and we cannot afford to run [it] like a
on June 10 during the first webinar in a series charity organisation.”
organised by the Nigerian Association of Petro- He also indicated that NNPC was not just
leum Explorationists (NAPE) that NNPC still concerned about its local partners. The com-
aimed to bring production costs down to $10 pany has also observed that some foreign inves-
per barrel. tors are conducting business in a way that drives
He indicated, though, that the company was production costs up, he said.
not just pursuing this goal because it hoped to
optimise its finances. NNPC is also trying to Is this the right direction?
ascertain why oil and gas production costs vary The NNPC chief is right to be concerned. Nige-
so widely in Nigeria, he said. ria’s oil industry is in a difficult spot, and it is “
“Some of our partners are producing oil at widely understood to suffer from just the sort Local and
$93 per barrel. It is impossible … [There] are of structural inefficiencies that drew criticism
assets that are producing as low as $9 per barrel,” from Kyari. international
he remarked. It is not clear, though, how much the focus on
He also said that this variance in production the excesses of NNPC’s Nigerian partners will companies have
costs appeared to show that there was a problem. help. Several representatives of international
“You cannot explain this gap between one com- and local companies said during the webinar pointed out that
pany producing oil at $93 per barrel and another that there were other factors driving costs up. other factors
at $9,” he asserted. “It means the one that is pro- They pointed out that problems such as high tax
ducing at $9 is the one subsidising. It is unac- rates and security risks, such as the attacks on are driving
ceptable. This cannot continue, and the industry pipelines and other infrastructure that resulted
must work together to bring this down.” in the loss of around 2.9mn barrels of crude oil in production costs
the first two months of the year, were also a drag
Payroll problems on their finances. up, such as high
According to the NNPC chief, high personnel Bayo Ojulari, the managing director of tax rates and
costs are one of the main factors making oil Shell Nigeria Exploration and Production Co.
and gas production so expensive in Nigeria. He (SNEPCo), also called on the Nigerian gov- security risks
pointed a finger at some of his company’s local ernment to introduce policies that gave oil
partners, noting that certain Nigerian compa- and gas operators incentives to optimise costs.
nies were devoting as much as half of their cash Abuja could take steps such as de-regulating the
flow to salary payments. domestic natural gas market in order to make
This is the highest figure reported for any oil- it more attractive to potential investors, he said.
and gas-producing state around the world, he Ojulari also joined Ademola Adeyemi-Bero,
said. It is also unsustainable, he stated. the managing director of Nigeria’s First Oil
“There is nowhere any company will spend Exploration and the chairman of the Independ-
50% of its cash flow on human resources and ent Petroleum Producers Group (IPPG), in say-
survive. It is not possible,” he declared. ing he was not sure that NNPC would be able
Under these circumstances, he added, Nige- to achieve its aim of bringing production costs
ria’s hydrocarbon sector could very well go out of down to $10 per barrel. Both said they did not
business if world crude oil prices remain below see this target as sustainable. ™
$30 per barrel for a long period of time.

Eye on local partners
Kyari did not appear to believe that NNPC had
a similar problem with personnel expenses.
Instead, he insisted during another webinar in
the NAPE series that his company would not be
laying off any of its staffers, despite the fact that
it had lost money because of fallout from the oil
price crash and the coronavirus pandemic.
He also indicated that NNPC would focus
its efforts on local partners that were overstat-
ing their costs in the areas of human resources,
materials procurement or environmental and
safety risk mitigation. The state-run company is
ready to cut ties with Nigerian firms that cannot

Week 24 17•June•2020 www. NEWSBASE .com P5