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Nigeria has highest global crude oil production cost

Chairman, House of Representatives Committee on Finance, Abiodun Faleke yesterday said at $48 per crude, Nigeria has the highest crude oil production cost in the world.

He put the cost of production of crude oil per barrel at $9 in Saudi Arabia, $21 in Norway or $24 for US, adding that despite the increase in cost, the volume of production has continued to decline.

He alluded to the fact that the increasing cost of production is having negative impact on government revenue, adding that with crude oil selling at about $80 per barrel, only $32 dollars per barrel is available to government.

Faleke spoke at a meeting between the House Committee on Finance and the management of Nigeria National Petroleum Company Limited (NNPCL) on the cost of crude oil production in the country and its impact on government revenue.

Faleke said: "It is important that Nigerians understand the impact of production costs on the available revenue accruable to the Federal Government to execute its programs in the national budget. The higher the cost of extracting a barrel of crude oil from the ground, the lesser the funds available to the government and Nigerians.

"The committee has been given a total costs figure of $48.71 per barrel by the FIRS (Federal Inland Revenue Service) for calculation of Petroleum Profits Tax and Hydrocarbon Tax and this will also be used by the INCL for profit calculations. We need a detailed analysis of how this value was attained.

"Over the years, Nigeria's cost of oil production (both capital costs and overhead costs) has continued to increase reaching new unprecedented highs of over $48 per barrel. This implies that as crude oil now sells at about $80 per barrel, for us in Nigeria, with a cost of extraction of about $48, only $32 is left to be shared with the oil companies.

"Compare that with $9 in Saudi Arabia, $21 in Norway or $24 for US shale oil and we see that Nigeria has one of the highest costs of oil production in the world.

"If we look further at these costs, we see they have risen steadily in Nigeria from about $30 in 2014 to $48 in 2024. To enlighten Nigerians further, if we assume our oil production is 1 million barrels per day; every additional $1 cost per barrel translates to $1 million per day.

"So from 2014 to 2024 our costs have increased by about $18 million per day or $6.6 billion per annum over 10 years; and this has not led to an increase in either reserves or production. This further implies that for a production of 1 million barrels per day, we are incurring costs of $48 million per day or $17.5 billion per annum.

 "The committee has been reviewing oil sector figures closely since the beginning of this 10th Assembly and revenues accruing to the Federal Government and foreign exchange inflows to the country have not met previous expectations.

"In this regard, we have seen that major revenue losses to the government are caused by various factors including drop in available crude oil production. (due to oil theft, shut ins, lack of new investments, reduction in output from older wells etc) and pledged production volumes to offset loans and repayment arrangements taken by the NNPCL on their own behalf or on behalf of the Federation as well as higher costs of oil production.

"To show the importance of this on the well-being of the economy, the latest executive orders issued by Mr President last week touches on the issue of contracting costs and cost efficiency in the upstream oil sector.

"It is imperative that we, as a nation, endeavor to increase our production volumes and at the same time reduce production costs to increase accruals to the government.

"In alignment with these new executive orders, the Committee on Finance has resolved to closely scrutinize federation expenses charged to crude oil production by the NNPC and IOCs.

"It is imperative as these quasi-fiscal expenditures and commitments taken on behalf of the Federation affect both revenue accruing to government as well as creating a debt profile not monitored by the Debt Management Office."

Faleke said further that the committee has raised pertinent questions on the cost of operations of the nation's upstream petroleum sector.

The questions include why does each oil field operator have different opex and capex, why are costs increasing and production reducing? Is topography the only variable causing these higher costs or are there other factors?

"What are the production costs of PSCs and other partnership arrangements or do they form part of the $48.71 given by the FIRS? What is the historical cost of production computations from 2014 fill date, what is the status of the $3.3 billion forward contract executed by NNPCL?

"Has lifting repayments started? Has the whole funds been received? Have the funds been released to the Federal Government as advance payments for taxes, royalties, etc as explained during the justification of the loan."

He requested for a list and status of all forward contracts executed by the NNPC/NNPCL from 2014 till date as well as the assets used to secure all these contracts.

He stressed that "we have noticed that NNPCL has been transferring Federation crude from the Federation to NPDC/NEPL, thereby shifting Federal Government income from a daily profit oil to an annual dividends payment" while asking for the revenue implications to the government.

He said further that "according to NUPRC records, OML 24 was transferred to NNPCL/NEPC in 2019 for a signature bonus of $309,094,374.72 of which only $30,909,437 has been paid. This has left an outstanding of $278,184,937.72 due to Government from the NNPC/NEPL. This implies that this asset has been transferred from the Federation to the NNPCL/NEPL reducing the amount of oil accruable to the Federation while a signature bonus for the transfer has not been paid up".