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Cutting the cost of oil production

Minister of State for Petroleum Resources, Dr. Ibe Kachikwu, had last week in a public event, indicated that the Federal Government is set to compel International Oil Companies (IOCs) to cut the cost of producing oil in Nigeria. He said the move was to cope with the current low price of crude oil in the international market.

Consequently, he stated that the cost, which the National Petroleum Policy put at $28.99 per barrel, would be reviewed downward with the IOCs in order to arrive at an acceptable cost. It no longer makes sense to produce at high cost in view of the challenges of the oil-based economy of the country.

The National Petroleum Policy gave a breakdown of the current production cost as follows: $8.81 for production costs, $13.19 for capital spending, $4.11 for gross taxes and $2.95 for administration/transport per barrel.

Nigeria has always been one of the most expensive oil provinces in the world. Industry sources even indicated that the $28.99/barrel benchmark is not the total cost as more cost is incurred in the sales network leaving the country with one of the lowest profit margins amongst oil producing countries.

We  stand by the minister’s position and urge quick action, and not just a wishful statement. We are aware of the enormity of  challenges and opposition inherent in  this position but it won’t do Kachikwu’s image any good just to make a statement of intent without commensurate action, knowing fully well that many powerful interests in the corridors of power are up in arms to shoot it down.

In this connection we raise three areas of action. First, the regulatory oversight in the oil production chain should be sanitised because it has entrenched those who know so well about the huge losses to the country from over-billings and leakages but choose to look the other way because their personal interests are served by the crime.

Second, we expect the oil ministry to invest in updating production monitoring technology such that the authorities no longer rely on the IOCs’ figures and claims. Finally, there is the need for political will to push the national interest. This is paramount because all successful oil-dependent countries like Nigeria deploy people who are zealous in putting their nations’ interest first.

This move is especially imperative in the face of not just the dramatic decline in oil prices but also a huge and continued drop in the cost of production across the world including the shale oil segment in the United States of America oil industry. The implication is that very soon Nigeria’s oil would become too expensive in the international market, thus compounding our thin margin.

Time for action is now.


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