The Federal Government has inaugurated the Nigerian Upstream Cost optimisation Programme (NUCOP) to drive down the cost of crude oil production in the country.
The Minister of State for Petroleum Resources, Chief Timipre Sylva, at the inauguration on Tuesday in Abuja said that cost reduction of crude oil production would help Nigeria remain competitive in the global market.
“NUCOP is aimed at optimising our upstream operation expenses through process enhancement and industry collaboration.
“One of the top priority areas given to the Ministry of Petroleum Resources under the Next Level agenda of Mr President is the reduction of the price crude oil extraction cost.
“At the Ministry of Petroleum Resources retreat held in 2019, we identified some initiatives to tackle the challenging high cost of crude oil extraction in Nigeria,’’ Sylva said
He said that the major cost drivers identified as contributing to high crude oil production in Nigeria when compared with low production cost in other countries such as Iran and Saudi Arabia could be classified under five dimensions.
Sylva said that the five dimensions were capital expenditure items, operational cost, systemic cost factors, cost associated with contracting procedures and policy-related elements.
He explained that further diagnostic elements included lack of proper project definition, weak collaboration and standardisation, capacity and capability issues, security related issues, facility reliability and uptime limitations.
Others are financing and payment delays, single sourcing syndrome, high crude oil handling charges, high magnitude of crude oil loss , over-regulation, bureaucracy and multiplicity of tariffs, excessive expenses and bogus owners project management team cost.
“In line with the commitment of President Muhammadu Buhari’s administration to address these issues, he recently inaugurated the Oil and Gas Excellence Centre in Lagos.
“We have also put in place an industry standing committee to monitor compliance with cost production and tariffs, the committee will design template to collate unit technical and unit development cost of productions by operating companies and identify cost-efficient operators.
“They will institute a monitoring system with the Ministry of Petroleum Resource to track cost trends and track cost benchmark between Nigeria and other producing countries especially, those with production cost profile,’’ he said.
Sylva added that the committee would design protocols for interface with operating companies to monitor their compliance to cost production directives.
He noted that the creation of industry cost efficiency aimed at unlocking cost optimisation opportunities and supplying efficiency for inventory management, logistics, security, among others.
He noted that complying with all these efforts would help to drive low cost of production in the country.
Sylva said that the average cost of a barrel of crude oil was currently below 30 dollars for the Joint Venture (JV) agreement and below 20 per barrel for the Production Sharing Contract (PSC).
“We need to do a heavy lifting not only to get to the optimal unit of cost but also to sustain it as part of our way of doing business.
“Today’s engagement with industry players is part of this administration’s effort to tackle this challenge, I expect robust discussions and realistic road mark to achieve cost optimisation objectives,’’ he said.
In his remarks, the Group Managing Director, the Nigerian National Petroleum Corporation, Malam Mele Kyari, said that the country must cut down the cost of crude oil production for economic growth and development.
Kyari said that with the ongoing energy transition, consumers and investors have various choices to make across the world.
“We cannot produce 50 dollar oil and survive in the global market; you can do that in 2007, 2008 and survive, but today, it is impossible to operate with such cost and be competitive,” he said.
He said that for Nigeria to achieve reduction in cost, there was the need to have adequate security architecture, adding that conducive business environment remained important.
`In order to for us to remain competitive, to deliver our national objective of ensuring growth in our economy, we need to reduce crude oil production cost,’’ he said
Also, the Chief Operating Officer Upstream, Mr Adokiye Tombomieye, said that demand uncertainty and depressing oil price in the industry had called for every measure to ensure crude oil cost reduction.
“In view of the demand uncertainty and depressing prices, OPEC and its oil producing allies agreed on April 12, 2020 to cut production by 9.7million barrels per day, effective May 1, 2020 and taper to 7.7 million barrel per day from July 1 to Dec. 31, 2020 with further reduction to 5.8 million bpd from January 2021 through April 2022.
“The prevailing circumstances occasioned the need for the NNPC to cut down production cost for business continuity as crude oil at below cost, hence the GMD issued a directive for unit operating Cost to be reduced to 10 dollars,’’ he said.
He said that that human resources, logistics, security, direct lifting, operation maintenance and public affairs accounted for 80 per cent and 60 per cent of JV and PSC operating cost.
He noted that a road map for reduction of cost element would champion the nation’s resolve toward achieving an overall reduction of the unit operating cost.
Tombomieye said that there was the need for a wider industry engagement, adding that commitment would avail the NNPC the opportunity to cooperate with its partners in order to unveil NUCOP.
“This is with the sole objective of optimising upstream operation cost through process enhancement and collaboration within the industry.
“The successful implementation of this laudable initiative in 2021 and beyond will further support the `Executive Excellence’ drive to move from words to action,’’ he said.