By Clara Nwachukwu

LAGOS — As oil prices continue on the downward slide, Nigerian oil firms may be producing at up to $5/barrel loss, as average production costs for independent and marginal field producers is between $30 and $35/barrel.

Oil prices, yesterday, resumed their free fall, with Brent crude, similar to Nigeria’s sweet crude grade, falling 2.6 per cent to $31.34 a barrel following a 10 per cent rise on Friday, while U.S. oil shed 95 cents to $31.24.

To compound the producers’ woes, a significant proportion of what is produced is lost to oil thieves and pipeline vandals, which they insist are even more dangerous than the bearish run oil prices
Industry chiefs, who spoke exclusively with Vanguard on phone, argued that the turbulence in the international oil market deserves urgent attention.

Specifically, they insisted that the Federal Government needs to be talking with Nigerian producers very fast, if it must save indigenous companies from running aground and plunging the economy into deeper crisis than it is in already.

Impact on producers
Speaking on the impact of the oil crash on the producers, Chairman, Petroleum Technology Association of Nigeria, PETAN, Mr. Emeka Ene, said:
“Current price is below Nigeria’s average of between $30 and $35 per barrel. Most marginal field producers are producing above $30/barrel, and with pipeline vandalism activities, costs will shoot up by another $10/barrel, so oil production now is not sustainable.”

Ene, who spoke against the backdrop of oil crashing to 13-year lows of below $28/barrel last week, noted that the bearish run may soon fizzle out, whether shale or conventional oil is being produced at above $25/barrel. As such, the southward run is not favourable to any producer.

He also revealed that “a lot of Nigerian companies are out of work because they cannot compete with the multinationals, so government needs to have a serious talk with stakeholders in the industry.”

Oil theft, pipeline vandalism
Whether oil prices go bullish soon or not, other stakeholders feel that the benefits of the rise will be lost on Nigeria, if the government does not deal decisively with the twin incidence of pipeline vandalism and oil theft.

The President, Nigerian Association of Petroleum Explorationists, NAPE, Mr. Nosa Omorodion, maintained that “government needs to address the issue of oil theft and pipeline vandalism very fast because, even if price stabilises tomorrow or whenever, we will still not be able to reap the full benefits of that rise.”

He further argued that “oil theft and vandalism remain recurring and very worrisome because these issues are much bigger than oil slide, which is mostly driven by speculation, while these activities affect planning and are more cankerous than price slide. Operators are risking their assets including human resources to produce the oil, only to have it stolen thereafter.”

Against this backdrop, Omorodion, whose association is responsible for finding and producing oil, revealed that NAPE is planning a national seminar this month end to holistically address the issue of oil slide.
He said: “We are going to assess the length and breadth of the oil and gas industry because the price slide is not only affecting petroleum, but also other sectors of the economy.”

Apart from the impact on cost of production, the NAPE boss noted that “The current price is affecting so many things, as nobody is drilling for exploration now, and no one is thinking about fancy technology to boost production. Also, exploration will suffer as no company is exploring for new wells to grow reserves, and many small scale producers, which are mostly Nigerians, will shut down.”

Going forward
Currently, most producers, both OPEC and non-OPEC including the U.S., Saudi Arabia, Russia, Iraq and a host of others are producing at optimal capacities, which indicates that the downward glide may not let up soon. Also, some analysts have predicted that price may glide to below $20 or even $10/per barrel before rebounding.

Furthermore, with Iran’s oil also up in the market and expected to be ramped up systematically, compounded by the melt down in demand being fueled by the crisis in China, crude prices are facing more pressures. But producers recognise that the global economy is in need of some succour but differ on the best ways to go about it.

Noting that Nigerian service companies, who are the hardest hit by the crashing oil prices and provide about 650 value services across the industry, Ene insisted that Nigeria has the weapon in these companies to cushion the market turbulence but has not fully appreciated it.

According to him, “Nigeria has a thriving local oil industry, and if properly supported, can push down cost of production to $10 per barrel. About 10 to 15 years ago, industry cost was below $10 per barrel and nothing much had changed.

On his part, Omorodion believes that now is the time for oil companies to be at the most cost efficient by prioritising between wants and needs, while government becomes more fiscally disciplined and diversifying the economy.

But Ene argued that the solution is not in prescriptivism, like the majors calling for as much as 40 percent cuts in cost of services thereby killing off the companies, adding that government needs to identify and reduce unrealistic economic toll gates.

In his opinion, “The whole system is heated up, and cost of borrowing is very high. So far, conversation has been restricted to major operators and has not included the service companies driving operations in the industry.

“If we must produce oil at $10/barrel, government needs to be talking to Nigerian companies, who have invested in people and technology and are not repatriating their profits.”

Furthermore, he noted that a lot of the systemic costs being borne by indigenous firms contribute to the high cost of production, such as what he described as “Federal Government agents charging unrealistic charges like asking for $10million for permits need to be looked into.”

Emekamex:
Why waste money on oil production if it is no longer profitable?

modath:



In the interim, what options are there in a country where past leaders refused to explore alternatives to a mono export economy, refused to allow the power sector to thrive, frustrated industries out of the country & also refused to save in the time of plenty.....

They "merried" yesterday believing today & tomorrow will take care of themselves...

Today is already crying & it will take miracles & superhuman effort to ensure tomorrow doesn't follow suit.....

Seems, you lots just like the sounds of your voices... mtcheww!

Emekamex:


Your answers and my question are really incompatible. I didn't get a single point in your response to my earlier question.

Emekamex:
Why waste money on oil production if it is no longer profitable?

Bevista:
Because you need to stay in the business and maintain your market share pending when prices rebound. If you exit now, you loose your customers to other producing countries.
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And as most oil purchase contracts are done upwards of 5yrs, it will be very difficult to come back and win customers if you exit now and prices rebound later.

Bevista:
Because you need to stay in the business and maintain your market share pending when prices rebound. If you exit now, you loose your customers to other producing countries.
---
And as most oil purchase contracts are done upwards of 5yrs, it will be very difficult to come back and win customers if you exit now and prices rebound later.

NavierStokes:
From the comments I am seeing so far, the emphasis is being put on the slide in the oil price while neglecting the attendant danger of lost crude. At the moment what we should be doing as a country is to lower costs by becoming much more efficient in our production. A break down of the costs of crude production reveals a relatively high operational cost, i believe our aim as a people should be on how to drive down that cost component, to still make a profit i the midst of this all.

In a downturm such as this the least efficient producers will be driven out of the business, more like a survival of the fittest.

NavierStokes:
From the comments I am seeing so far, the emphasis is being put on the slide in the oil price while neglecting the attendant danger of lost crude. At the moment what we should be doing as a country is to lower costs by becoming much more efficient in our production. A break down of the costs of crude production reveals a relatively high operational cost, i believe our aim as a people should be on how to drive down that cost component, to still make a profit i the midst of this all.

In a downturm such as this the least efficient producers will be driven out of the business, more like a survival of the fittest.

Emekamex:
Why waste money on oil production if it is no longer profitable?

djon78:
I am envisaging the direction energy business will go in the future. It will be more on adding value then market compared to direct selling of the crude that is done now. In addition total efficiency across the value chain or in another word integration of both the upstream and downstream sector into one entity.

personally I think that those in government must understand that the only thing that will save Nigeria in this present time is total elimination of wastage in the oil industry. when I mean wastage, I mean both theft, incompetence, and inefficiency. Moreover those that have no business being in the oil sector should be removed, because many in that sector have no business being there except because of godfather-ism and nepotism

Final word, there was never plans by successive governments to diversify. while other OPEC member nations were diversifying and investing, especially the Arab gulf states(Saudi Arabia saved over $750 billion that can last them next 20 years without selling, Dubai diversified into services and real estate, Abu dhabi and Qatar diversified into investments across the globe). Our leaders must understand the dilemma and precarious situation facing this nation at the moment and rise to the task before things go out of hand.

carpenter:


Good point mate.

However, costs are a function of several factors which includes terrain, expertise, getting required equipments, parts and a lot of others I am not privy to. Attached is a how much CNN analysts believe it costs to produce oil around the world...you would notice even the so called advanced countries that have a lot of factors in their favour are way more expensive becuase of other factors...only the ME is lucky to have more in favour than against.

I will look for the original article and post the link if I can find it.

***modified http://money.cnn.com/interactive/economy/the-cost-to-produce-a-barrel-of-oil/index.html?sr=fbcnni112515the-cost-to-produce-a-barrel-of-oil0425AMStoryPhoto&linkId=19035318

The only thing that truly sets up apart besides corruption is we depend too much on oil.

Standing5:
So what is driving our production cost up?

NavierStokes:


As you have rightly put up in the chart above, here in Nigeria most of the omshore oil fields had been developed a long time ago some almost half a century so the question of capex becomes pretty low for such fields. The important factor here becomes the opex, the opex used to be relatively low for us until armed robber salaries came into play, crude theft vandalisms and shut-ins, security etc. So my point is there should be a focus on the crude theft component, because thats exactly what Emeka Ene is after in this particular interview or article. The former government was well castigated by all of us on the issue of crude loss being about 400000 barrels a day, so we need to know the progress the current administration has made in that regard.

Picture this arbitrary scenario just from a purely opex perspective considering only salaries and crude theft:
If a company's wage bill is $1 million and annual crude production is 100000bbls then the opex costs per bbl is $10/bbl. Assuming you lose or are unable to produce half of that amount what happens, your opex goes to $20/bbl.

I do hope my basic explanation helps.

tobimillar:
Sounds like there will be massive job loss soon abi?? The oil sector and it's dependents is one of the highest employer of labour in Nigeria. Should there be massive job loss, the economy of Nigeria may likely go into full recession #prayfornigeria