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Why Oil Production in Nigeria Remains More Expensive

By Yange Ikyaa
Recently, the Organization of the Petroleum Exporting Countries (OPEC) advised the Nigerian National Petroleum Company (NNPC) Limited to increase oil production in the country in order to derive increased advantage from the $14 trillion investment opportunity in the global oil market.
OPEC Secretary General, Haitham al-Ghais, while making the call, said that despite the pushback on oil and gas production from different interest groups across the globe, the world would still require about $14 trillion worth of investments from now till the year 2035 to be able to meet global demand on the commodity.
The OPEC Boss further expressed that his Vienna-based organization remains in agreement with NNPC’s view of broad-minded perspective on energy, opposing the position being advocated in some quarters that considers certain energy sources as adverse. He reiterated OPEC’s commitment to working closely with the NNPC to achieve Nigeria’s aspirations towards attracting investments and growing petroleum production.
While al-Ghais’ advice to Nigeria to do everything possible to tap into the $14 trillion global opportunity by raising petroleum production volumes and continue to make oil and gas a reliable source of energy to the world remains in force; the high financial cost of heeding to it may constitute a hindrance to this national economic ambition.
This is because Nigeria has been labelled as the second most expensive nation in the world in terms of crude oil production, and second only to the United States’ shale oil extraction.
According to official figures, oil companies operating in Nigeria quote an average of $48.71 as their cost of producing crude oil per barrel in the country.
“The oil companies know we tax the difference between the selling price and the cost of production, which is why they gave us $48.71 as their cost of production,” said Zacch Adedeji, Chairman of the Federal Inland Revenue Service (FIRS), during his agency’s 2024 budget presentation to lawmakers at the National Assembly.
Much of this production cost is however said to stem from insecurity, commonly in the Niger Delta area of Nigeria, where crude oil production takes place in the country, leading to some arguments that, it is much cheaper to produce crude oil in Iraq, a war-ravaged nation, Saudi Arabia or in Iran than in Nigeria.
It is now common knowledge in Nigeria that oil companies operating in the Niger Delta routinely allocate huge budgets to militants in the area, who threaten the security of their assets. They are also faced with multiple taxations amidst other ancillary costs.
Not too long ago in the last quarter of 2023, President Bola Ahmed Tinubu renewed the contract of Tantita Security Services, owned by ex-Niger Delta militant leader, Government Ekpemupolo, popularly known as Tompolo, to protect oil and gas pipelines, as well as other petroleum assets in the creeks of the Niger Delta and also in Ondo State.
All these negative factors combine to make Nigeria a rather expensive country for oil production, with the $48.71 per barrel cost placing Nigeria among oil-producing nations with the highest cost of crude oil production anywhere in the world.
According to Rystad Energy, the South American nation of Brazil spends roughly $35/barrel on pre-salt oil production costs. Nearby in Venezuela, the cost of producing a barrel of oil falls between $15 and $30.
The cost of producing a barrel of oil in the United States varies by region, but shale oil production costs range on average between $35 and $70 per barrel, with oil production by conventional means costing about $20 to $40 per barrel.
Then, in Saudi Arabia, the country boasts of some of the lowest production costs in the world, ranging between $2 to $8 per barrel. Still in the Middle East, Iran has relatively low production costs, estimated to be around $10 to $15 per barrel, despite grappling with challenges relating to international economic sanctions imposed by the West on account of its nuclear programmes.
In the United Arab Emirates, the cost of producing a barrel of crude oil falls between $10 and $20; while Iraq has cheap production costs, estimated at around $10 to $20 per barrel.
For China, crude oil production costs remain relatively high, yet lower than what is obtainable in Nigeria, as the world largest market produces oil at an estimated cost of around $35 to $40 per barrel.
In Russia, crude oil production costs range between $15 and $25 per barrel, as compared to Nigeria’s $48.71.
Recently, the Group Chief Executive Officer (GCEO) of the Nigerian National Petroleum Company (NNPC) Limited, Malam Mele Kyari, blamed the high average cost of crude oil production in Nigeria on insecurity and other sundry issues.
His words: “Security means everything to the oil and gas sector. Insecurity doesn’t stop the oil and gas industry from operating. They (oil companies) operate in Afghanistan, any country that you know there’s conflicts, but what it does is that it adds a premium to the cost of production.”
The NNPC Boss made this assertion during a speech as a guest speaker at the 2024 Faculty of Science Lecture at the Obafemi Awolowo University, Ile-Ife, where he further noted that “in our country today, when businesses come here from other countries, they know that, what would cost $100 in one country, you probably want to add another $30 in this country.”
As a result of these challenges, more and more multinational petroleum companies are relocating to offshore destinations for their new projects, where production is more secure and insulated from armed militants; although this new trend requires enormous financial commitments.
Many big names in the industry are leading the way in these relocations to offshore drilling. The recent decision by Shell to sell its onshore assets in Nigeria for $2.4 billion is the most notable of these onshore departures.
In addition to the numbers, Italy’s Eni disclosed in the third quarter of 2023, its intention to sell its onshore division to one of Nigeria’s indigenous energy giants, Oando. But prior to this development, a Chinese firm, Addax, had earlier sold its onshore assets of four oil blocs to NNPC Limited.
Also, not left out in this goodbye spree to Nigerian onshore oil business is Norwegian petroleum company, Equinor, which terminated 30 years of energy dealings with Africa’s most populous nation and largest economy, late last year.
But the most shocking element of this disclosure was Equinor’s decision to sell its Nigerian subsidiary to a little-known company, Chappal Energies.