The Senate on Monday descended heavily on the Nigerian National Petroleum Corporation (NNPC) over the astronomical cost of production of the nation’s crude oil which peaked at $21.2 per barrel.
It therefore kicked against the $3 marginal profit being made on a barrel by the corporation and called on the federal government to get the nation’s economy diversified as quickly as possible.
Information on the high cost of oil production, which is $21.2 per barrel, almost equaling $25 per barrel oil price benchmark fixed for the N10.509 trillion 2020 revised budget, came to the fore when officials of the corporation appeared before the Senate Committee on Finance.
The production cost, according to the Senate Committee on Finance, is far higher than between $4 and $10 cost of production in other oil producing countries like Saudi Arabia and Russia.
The Senate Committee on Finance at a meeting with the Minister of Finance and heads of revenue generating agencies over the revised 2020 budget in Senate committee room 204 lampooned the NNPC over the unimaginable high cost of production of Nigeria’s crude oil.
The NNPC was put on the spot as its Chief Operating Officer (Upstream), Mr Yemi Adetunji, who stood in for the Group Managing Director of NNPC, Melee Kyari, was called upon by the Chairman of the Committee, Senator Olamilekan Adeola, to explain why the cost of oil production in Nigeria is far higher than those of other oil producing countries of the world.
According to Senator Adeola, while cost of oil production in Saudi Arabia is $4 per barrel and $3 per barrel in Russia, it is $21.2 per barrel in Nigeria, indicating very poor marginal profit of about $3 per barrel based on the new oil price benchmark of $25 per barrel.
He asked: “I want you to take us through why Nigeria’s cost of production per barrel of crude oil is the most expensive in the world and you give us the breakdown of what constitute those costs in to the variables and the technical cost and we want to know what you are doing as an agency of government to bring down this cost.”
The lawmaker also asked about who determines the production cost, saying: “With the benchmark of $25 as proposed, Nigeria is just going to have just $3 as its own return on investment as I begin to look at the oil revenue and the mineral revenue as proposed in the MTEF that has dropped from almost N8.86 trillion to N3.33 trillion. Are you saying that it is worthwhile investment for us as a nation?
“Going by the fact that the cost of producing one barrel is $21 and the benchmark is $25 for over 180 million Nigerians and all these cost you have listed, who determines them? How do you ensure that Nigeria is being charged the right cost on each barrel of oil? In Saudi Arabia, it is $4 per barrel cost of production, in Russia it is about $3 per barrel, Nigeria is $21, we are beginning to be afraid as to why we are channeling all our efforts to this oil and gas if the return on investment is nothing to write home about.”
The NNPC COO in his response, attributed the high cost of oil production to a series of peculiarities ranging from security to crude oil theft.
Adetunji explained that: “Security challenges are kind of peculiar to Nigeria, as in other climes, pipelines are on the surface. You hardly see them being tampered with, but in Nigeria, even when they are buried two metres to three metres deep, they are still being vandalised.
“In some cases, we are trying to take them to deeper levels but those ones will add to cost of production like going 10 metres to 15 metres deep. It will add to the cost about three or four times the cost of production as against putting the pipelines on the surface.
“We are working with security agencies to put in place new framework to ensure that all the hitches are brought down to the nearest minimum.”
On his part, another member of the committee, Senator James Manager, stressed that the high cost of producing Nigeria’s crude oil is no longer tenable.
According to him, “The reason given for the high cost of production per barrel I think they are not tenable because wherever oil is produced they have their own security challenges including even Saudi Arabia, Iran, Russia.
“So, how is our own so peculiar that our cost of production is up to $21 per barrel? Which are those administrative issues why are we different from the rest of the world? These are issues that as National Assembly we are supposed to take up.”
On his part, another committee member, Senator Shaibu Gumau, said: “I just believe even common sense cannot agree with this, not even the National Assembly, how could we expect a situation where cost of production of oil per barrel is $21.2 and the revenue is $25 per barrel? Yet other countries in the world not one, that their cost of production is not even up to $10 per barrel.
“It is difficult to understand and I don’t think it is only National Assembly, even the Executive themselves should sit down and ask themselves this question because we are watchdogs. Not because we are watchdog, that is why we are disturbed but it has got to an extent that they too should be disturbed and there should be a solution and if not, there should be an explanation that somebody can understand and agree but common sense can not understand this.”
Another committee member, Senator Jibrin Issa, also disagreed with the NNPC official over the high cost of oil production by aligning with his other colleagues.
According to him, “I am disturbed because I expected the NNPC to dwell more on fixed costs but surprisingly you are talking about administrative cost, security. These are variables and even the fixed cost on the long run are also variables which you can also work on them.”
The Minister of State for Finance, Clement Agba, however, interjected by explaining to the committee members that peculiarities cited as reasons for the high cost of oil production were real.
According to him, the North Sea production cost is higher than that of Nigeria, adding that as an insider, details of the $21.2 per barrel oil production is well calculated.
Apart from the high cost of oil production, the Senate committee also challenged the NNPC officials to be more opened with their federally funded projects, the totality of which N484 billion is voted for in the revised 2020 budget.