Addressing Nigeria's rising crude production cost

Guardian Nigeria

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00:00A data by the Nigerian Upstream Petroleum Regulatory Commission shows that the cost

00:05of producing crude oil in the country has risen to about $40 per barrel.

00:11The data also shows that a higher cost has impeded production and export.

00:15Meanwhile, the Diangoite refinery has exported two cargos of jet fuel to Saudi Aramco.

00:21Oyemi Okere, partner at EO2 Law, joins me to discuss these stories.

00:25Oyemi, thank you for joining us today.

00:28Thanks for having me, Esther.

00:29Good afternoon.

00:30Good afternoon.

00:31Let's get right to it.

00:33Production costs of up to $40 per barrel, that's quite steep, especially when one thinks

00:39about where oil prices are right now.

00:41Brent, somewhere around $74 per barrel.

00:45Help us understand why the costs are this high, especially also when we think about

00:49what it costs Saudi Arabia, for instance, to produce crude oil, a barrel, at around

00:55what, $10 per barrel?

00:59Yeah, so to give a bit of perspective, $40 per barrel is about half of the, or more than

01:05half of the price of oil as of today.

01:11What that means is that for one barrel that is being produced, half of it in Nigeria goes

01:22to cost.

01:23And the question is, what is really the driver of cost?

01:26I can summarize everything to say, I mean, to put it in one word, security, right?

01:32We have a huge security problem in Nigeria that is driving up the cost of production.

01:40Now, security issues starts from drilling up onto production to evacuation.

01:48Now, one of the challenges we've seen that is rampant for onshore and swamp terrains

01:55is that the pipelines for evacuation of crude are virtually nonexistent.

02:00Not that the infrastructure is not there, but the challenge is that there's a lot of

02:04security issues around pipeline vandalism that has cost significant abandonment of those

02:14assets with producers looking to do what we call alternative crude evacuation, which may

02:23be either by trucking or by pipeline, which no doubt is more the pipelines.

02:33Right, what we've also heard the NUPRC say is that some of the equipment, I guess a good

02:45number of the equipment are quite old and require regular maintenance more than they

02:52should actually.

02:53That includes storage facilities and also the pipelines.

02:58Talk to us about this.

02:59And I know that not too long ago, there was something in the news, the government did

03:02talk about wanting to replace some of the aging infrastructure in the sector.

03:07Pardon me, I didn't get your question, perhaps because of my internet, I would appreciate

03:14if you can-

03:15Right, I'll take that again.

03:16So I was saying that the NUPRC, the sector regulator, did also talk about aging infrastructure,

03:22pipelines, storage facilities, the body said they're quite old and they require regular

03:27maintenance more than they actually should require.

03:31And so my question is, I know that the federal government did mention not too long ago that

03:38there will be a replacement of some of this aging infrastructure, what can you tell us

03:42about that?

03:43Yes, well, we have aging infrastructure, pipelines that are as old as 40, 50 years.

03:52But beyond that, we also need to look critically at ensuring that we are able to guarantee

04:00security of the infrastructure.

04:02Because it goes beyond me saying I want to have some type of infrastructure, it goes

04:08on to will the infrastructure be fit for purpose when I want to use it, will it be

04:15able to serve over the long period for which our investment has been committed.

04:19And you see that producers sometimes are looking at saying, we want to build a pipeline infrastructure,

04:25but vandalism is a disincentive.

04:28So we need to look at what with regards to security.

04:31Another thing is that from the data coming from the Nigerian Offshore Petroleum Regulatory

04:37Commission, you would note that in the months of November and December last year were the

04:43peak production in terms of average production rates, hovering at about 1,690,000 barrels

04:54per day.

04:55So the question also is that the regulator needs to look and see what was done right

05:00during those months.

05:02In the months of November, December, and January last year were the months whereby

05:07we had high or peak production at about 1.6 million barrels.

05:12Other months were about 1.5 million barrels.

05:15So the question would also be, what were the things that were done right by the various

05:21producers in those months in order to also look at increasing production.

05:26Right.

05:27So for these production costs this high obviously has implications for investment, attracting

05:33investments into the sector if, like you said, half of the profit goes to just producing,

05:40refining the commodity itself.

05:42And obviously, Nigeria is quite keen on driving significant investments into this sector this

05:48year.

05:49So where does that leave plans to attract investors into the country this year?

05:54Well, I mean, we will still continue to see demand for oil for some time, irrespective

06:02of the push for alternative source of energy.

06:05I think what we need to do as a nation is just to ensure that our security infrastructure

06:10and architecture is conducive to be able to drive investment into the sector.

06:17I think one of the terrain that actually has significant challenges is the land and swamp

06:22areas.

06:24Perhaps because of the fact that you can easily get to those terrains on the deep water assets

06:32that are relatively quote-unquote immune from vandalism and things like that.

06:39So my belief is that if we're able to sort out the challenges around security of infrastructure

06:47such that vandalism is significantly reduced, and I believe with the right fiscal regime,

06:54we would see the most needed investments into the sector.

06:58Right.

06:59So before I let you go, I want you to quickly comment on the Dangute refinery exporting

07:04jet fuel to Saudi Arabia's state oil company, Saudi Aramco.

07:08What do you make of this headline?

07:14I think the first set of cargo that was shipped out of Nigeria was the sale to BP of jet fuel

07:24as well sometime last year.

07:27I think what I make of the news is that gradually Nigeria is becoming a net exporter of refined

07:35products, which I believe is good for looking at the legal framework with regards to repatriation

07:42of export proceeds.

07:44What it means is that our foreign earning capacity will be significantly improved by

07:51transactions such as this.

07:53And I think what can be done is for government to continue to encourage investments such as this.

08:00All right.

08:01Oyeyemi, thank you so much for speaking to us today.

08:03We appreciate your time on the show.

08:05Oyeyemi Okere, partner at AO2 Law.

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