BusinessDay 28 Feb 2018

Wednesday 28 February 2018
08 BUSINESS DAY
C002D5556
WEST AFRICA
ENERGY intelligence
In association with
Cost of production key as Nigerian volumes task OPEC limits
talking points
ISAAC ANYAOGU
Ibe Kachikwu, minister of state for
petroleum resources in an interaction
with journalists at the inaugural Nigeria
International Petroleum Summit
(NIPS) in Abuja last week told journalists
that with about 500,000 bpd expected
Engina FPSO and Zabazaba fields, cost of
production has become critical to determine
which volumes goes to the market.
“We are still under the exemption, but the
expectation looking at our numbers is that
we should not exceed 1.8mbd. We have said
that it covers pure crude, it does not cover
condensates. A combination of both what
we are producing today, which is in excess
of 1.76mbd and the condensates which is in
the region of 400,000 barrels will take us to
the 2.2mbd. We are slightly below that and
we will like to be able to move that.
“Challenges will come when you then
hit 2.5mbd. Egina has 200,000bd in the next
couple of months (which is) the last quarter
of this year, Zabazaba potentially late end of
next year, another 250,000bd. So, you begin
to struggle with what you do with those volumes
and that is why I said today that it is a
signal to oil companies that we are going to
be watching cost.
“I will hate to take a costly barrel to the
market when I have a cheap barrel. So, what
it means is that everybody needs to begin to
drive down to that $15 (per barrel) concept
that we have set as the ideal cost of production
in this country, not $22 or $23. Like I
said two of the companies have met that and
we will like to get other companies to begin
to do that. So, there will be incentives both
in terms of your access to the market, our
willingness to produce and also incentives
in terms of what we are going to give to you
for being a least-cost producer. We are going
to work that out.”
But the challenge is what becomes of
the extra volumes the minister is proposing
not to take to the market on account of their
cost? Nigeria has one of the highest cost of
production among OPEC peers and this
largely due to risks involved in producing the
volatile Niger Delta, regulatory uncertainties
and multiple conflicting regulatory agencies
which makes business planning impossible.
It would seem pragmatic to deal with these
issues first.
The minister is proposing domestic utilisation.
“Once we begin to hit the 2.5mbd, if
these agreements were foreseeably to last
for five years – I hope not, I hope the market
would have become that tight that there
would be need for agreements and we can
produce freely. But assuming that it doesn’t
and shale continues to surge and maintain
the sort of equilibrium misbalance, then
obviously, what we need to do is to begin to
look at how do we process a huge amount
of our oil.
“Exporting crude is like exporting raw
materials for our agricultural products, it is
not the way to go. I will like to see a policy
whereby oil companies begin to refine heavily,
process heavily and take out their finished
products. I am hoping that by the time we
begin to hit those challenging numbers, local
processing and refining would have improved
to a level where in fact that is no longer an
issue to us,” the minister said.
However the challenge with this is a policy
on petrol subsidy that makes it meaningless
to produce locally. The critical action is to
remove these subsidies and allow marketled
pricing structure which can encourage
domestic refining. While both strategies are
sensible, but they cannot solve the problem
because of the challenging operating environment.