Nigeria, Africa’s largest oil producer, is grappling with significant challenges in its oil industry as it emerges as the world’s second most expensive country to produce oil, according to recent findings. The revelation has sparked concerns among experts and stakeholders about the country’s economic future and its ability to compete on the global stage.
Oil and gas expert and associate professor of energy and natural resources at the University of Abuja, Olanrewaju Aladeitan, expressing worry about the upcoming operation of both the Port Harcourt and Dangote refineries, said the development may lead to a slight decrease in the cost of petroleum products, rather than a significant price crash.
He said the price of petroleum products might not significantly decrease to the extent of being termed a crash.
“The price may not decrease significantly considering the fact that crude oil and condensates supplied for the domestic market under the Petroleum Industry Act will be based on willing seller-willing buyer negotiations.
“And the fact that the supply of crude oil will be commercially negotiated having regard to prevailing international market price for similar grades of crude,” he said.
According to him, there is no specified percentage of crude dedicated to local refineries, indicating that international market prices, typically in dollars, would still determine the cost of the crude oil refined.
“Hence international market price which of course is denominated in dollars will still be the determinant of the cost of the crude oil that would be refined. So I do not see how the price of petroleum products will crash,” Aladeitan said.
On December 21, the federal government announced the mechanical completion and flare start-up of the Port Harcourt Refining Company Limited (PHRC), with phase two set to commence in 2024, as stated by the Minister of State for Petroleum (Oil), Sen. Heineken Lokpobiri. This development marks the beginning of petroleum product production following the Christmas break.
The PHRC consists of two refining units, with the old plant boasting a refining capacity of 60,000 barrels per day (bpd) and the new plant 150,000 bpd, totalling 210,000 bpd.
Also the chairman of the Presidential Committee on Tax Policy and Fiscal Reforms, Mr Taiwo Oyedele, raised similar alarm bells, warning that the resuscitation of Nigeria’s ailing refineries or coming on stream of Dangote Refinery may not result in cheaper petrol for Nigerians or alleviate the economic hardships stemming from the recent removal of subsidies.
Oyedele highlighted operational inefficiencies plaguing the refineries, suggesting that unless addressed, they could make Nigeria’s petrol the costliest globally.
The dire situation is further underscored by the staggering expenditure of over N10 trillion to maintain non-functional refineries, as revealed by Oyedele. He emphasised the need for a comprehensive reevaluation of strategies, urging Nigerians to consider selling the refineries rather than pinning hopes on their revival.
“Maybe you have not been following this story – the National Assembly said we have spent over N10 trillion maintaining our refineries even when they have not produced anything,” Oyedele emphasised, highlighting the inefficiencies and exorbitant costs associated with maintaining the refineries.
Oyedele’s sentiments are echoed by industry expert Mr. Yushau Aliyu, who, despite acknowledging potential short-term reductions in pump prices at NNPC Ltd.’s retail stations following refinery operations, remains wary of significant long-term benefits.
CEO of Nigerian National Petroleum Company (NNPC) Ltd, Mele Kyari, highlighted the pervasive impact of insecurity on the industry, attributing the high cost of production per barrel to security-related premiums.
“Security means everything to the oil and gas sector. Insecurity doesn’t stop the oil and gas industry from operating. They 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,” Kyari stated, as a guest speaker during the 2024 faculty of science lecture at the Obafemi Awolowo University, Ile-Ife.
He added, “In our country today, when businesses come here from other countries, they know what would cost $100 in one country, you probably want to add another $30 in this country.”
NATIONAL ECONOMY survey showed the cost of oil production per barrel of $48.71 ranks Nigeria among the countries with the highest cost of producing crude oil globally.
For instance, Saudi Arabia has some of the lowest production costs in the world, with estimates ranging from $2 to $8 per barrel. The country benefits from vast oil fields and low extraction costs.
Iran has relatively low production costs, estimated to be around $10 to $15 per barrel. However, the country has faced challenges due to economic sanctions.
In Brazil, the country’s pre-salt oil costs roughly $35/barrel to produce, according to Schreiner Parker at consultancy Rystad Energy.
The cost of producing a barrel of oil in the United States varies depending on the region. On average, shale oil production costs range from $35 to $70 per barrel, while conventional oil production costs range from $20 to $40 per barrel.
Russia’s production costs range from $15 to $25 per barrel. The country benefits from large reserves and an extensive pipeline infrastructure.
China’s production costs are estimated to be around $35 to $40 per barrel. The country has experienced growth in oil production but faces challenges related to its geology and ageing fields.
The cost of producing a barrel of oil in the United Arab Emirates ranges from $10 to $20. The country has significant reserves and benefits from low extraction costs.
Iraq has low production costs, estimated to be around $10 to $20 per barrel. However, the country faces security and infrastructure challenges.
The cost of producing a barrel of oil in Venezuela ranges from $15 to $30. The country has vast reserves but struggles with political instability and ageing infrastructure.
Coroborating NATIONAL ECONOMY findings chairman of the Federal Inland Revenue Service (FIRS), Zack Adedeji, added a crucial dimension, underscoring Nigeria’s exorbitant oil production costs compared to global counterparts.
He told the Senate Committee on Finance during his agency’s 2024 budget presentation to lawmakers.
According to him, it’s much cheaper to produce crude oil in war-torn Iraq, Saudi Arabia and Iran than in Nigeria, Africa’s biggest oil producer.
He maintained that Nigeria is the second most expensive place to extract black gold after the United States’ shale oil patch.
The country’s oil and gas sector, which has generated a significant chunk of government revenue and foreign exchange earnings for many years, is teetering and in desperate need of rescue.
Adedeji told lawmakers that oil companies operating in Nigeria gave tax authorities $48.71 as their average cost of producing crude oil per barrel in Nigeria.
“As a tax man, I tax the difference between the selling price and the cost of production; what the oil companies will give me a tax man as cost of production is different from the cost of production NNPC will have. 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,”he said, shedding light on the intricacies of taxation and production costs within the industry.
“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,” he added.
“The biggest factor for IOCs leaving Nigeria is the high cost of production they get compared with other countries like Guyana,” said Martins Agboola, an energy professional.
Nigeria, Africa’s largest oil producer, is grappling with significant challenges in its oil industry as it emerges as the world’s second most expensive country to produce oil, according to recent findings. The revelation has sparked concerns among experts and stakeholders about the country’s economic future and its ability to compete on the global stage.
Oil and gas expert and associate professor of energy and natural resources at the University of Abuja, Olanrewaju Aladeitan said the upcoming operation of both the Port Harcourt and Dangote refineries may lead to a slight decrease in the cost of petroleum products, rather than a significant price crash.
He said the price of petroleum products might not significantly decrease to the extent of being termed a crash.
“The price may not decrease significantly considering the fact that crude oil and condensates supplied for the domestic market under the Petroleum Industry Act will be based on willing seller-willing buyer negotiations.
“And the fact that the supply of crude oil will be commercially negotiated having regard to prevailing international market price for similar grades of crude,” he said.
According to him, there is no specified percentage of crude dedicated to local refineries, indicating that international market prices, typically in dollars, would still determine the cost of the crude oil refined.
“Hence international market price which of course is denominated in dollars will still be the determinant of the cost of the crude oil that would be refined. So I do not see how the price of petroleum products will crash,” Aladeitan said.
On December 21, the Federal Government announced the mechanical completion and flare start-up of the Port Harcourt Refining Company Limited (PHRC), with phase two set to commence in 2024, as stated by the Minister of State for Petroleum (Oil), Sen. Heineken Lokpobiri. This development marks the beginning of petroleum product production following the Christmas break.
The PHRC consists of two refining units, with the old plant boasting a refining capacity of 60,000 barrels per day (bpd) and the new plant 150,000 bpd, totalling 210,000 bpd.
Also the chairman of the Presidential Committee on Tax Policy and Fiscal Reforms, Mr Taiwo Oyedele, raised similar alarm bells, warning that the resuscitation of Nigeria’s ailing refineries may not result in cheaper petrol for Nigerians or alleviate the economic hardships stemming from the recent removal of subsidies.
Oyedele highlighted operational inefficiencies plaguing the refineries, suggesting that unless addressed, they could make Nigeria’s petrol the costliest globally.
The dire situation is further underscored by the staggering expenditure of over N10 trillion to maintain non-functional refineries, as revealed by Oyedele. He emphasized the need for a comprehensive reevaluation of strategies, urging Nigerians to consider selling the refineries rather than pinning hopes on their revival.
“Nigerians who say if only our refineries are working, they would be fine; nothing can be further from the truth than that. In fact, Nigerians should come together and say please make sure that our refineries don’t work. We should sell them. Maybe you have not been following this story – the National Assembly said we have spent over N10 trillion maintaining our refineries even when they have not produced anything,” Oyedele emphasized, highlighting the inefficiencies and exorbitant costs associated with maintaining the refineries.
Oyedele’s sentiments are echoed by industry expert Mr. Yushau Aliyu, who, despite acknowledging potential short-term reductions in pump prices at NNPC Ltd.’s retail stations following refinery operations, remains wary of significant long-term benefits.
“In addition, the new Nigerian National Petroleum Company Limited (NNPC Ltd.) is responding to the immediate solution for availability of PMS in the economy. We are expecting the NNPC Ltd.’s retail stations to reduce their pump price due to the absence of landing cost in the short-term effects,” Aliyu observed, cautiously optimistic about the potential short-term effects of refinery operations.
Associate Professor Olanrewaju Aladeitan adds a layer of nuance to the discourse, pointing out the complex interplay between international market prices and domestic petroleum product costs.
“The price may not decrease significantly considering the fact that crude oil and condensates supplied for the domestic market under the Petroleum Industry Act will be based on willing seller-willing buyer negotiations. And the fact that the supply of crude oil will be commercially negotiated having regard to prevailing international market price for similar grades of crude,” Aladeitan remarked, shedding light on the intricate market dynamics at play.
He pointed out that international market prices would continue to influence the cost of crude oil, which, in turn, affects petroleum product prices
Mele Kyari, CEO of Nigerian National Petroleum Company (NNPC) Ltd, highlighted the pervasive impact of insecurity on the industry, attributing the high cost of production per barrel to security-related premiums.
“Security means everything to the oil and gas sector. Insecurity doesn’t stop the oil and gas industry from operating. They 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,” Kyari stated, as a guest speaker during the 2024 faculty of science lecture at the Obafemi Awolowo University, Ile-Ife.
He added, “In our country today, when businesses come here from other countries, they know what would cost $100 in one country, you probably want to add another $30 in this country.”
Zack Adedeji, Chairman of the Federal Inland Revenue Service (FIRS), added a crucial dimension to the discussion, underscoring Nigeria’s exorbitant oil production costs compared to global counterparts.
According to him, it’s much cheaper to produce crude oil in war-torn Iraq, Saudi Arabia and Iran than in Nigeria, Africa’s biggest oil producer.
He maintained that Nigeria is the second most expensive place to extract black gold after the United States’ shale oil patch.
The country’s oil and gas sector, which has generated a significant chunk of government revenue and foreign exchange earnings for many years, is teetering and in desperate need of rescue.
Adedeji told lawmakers that oil companies operating in Nigeria gave tax authorities $48.71 as their average cost of producing crude oil per barrel in Nigeria.
“As a tax man, I tax the difference between the selling price and the cost of production; what the oil companies will give me a tax man as cost of production is different from the cost of production NNPC will have. 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,”
Adedeji told the Senate Committee on Finance during his agency’s 2024 budget presentation to lawmakers, shedding light on the intricacies of taxation and production costs within the industry.
“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,” he added.
Findings showed most oil companies have set aside massive budgets for the security of assets, settlement of community troubles, and multiple taxation, among others.
Chinedu Onyeka, an energy sector expert familiar with upstream business, underscored the multifaceted impact of security challenges on Nigeria’s oil industry. He noted that while discussions often center around the direct impact on oil production, there’s a critical aspect that receives less attention – the ripple effect on companies compelled to allocate greater resources to safeguard their workers and oil facilities.
“On one hand, there’s a tangible impact on oil production due to security challenges, but what’s often overlooked is the broader impact on companies’ budgets as they’re forced to increase spending on security measures,” Onyeka explained, shedding light on the broader implications of security concerns.
“The long-term competitiveness of Nigeria’s oil industry is waning. High production costs translate to lower profit margins, potentially deterring investment and hindering the sector’s growth,” Onyeka said.
Last October, President Bola Tinubu’s decision to renew the contract of Tantita Security Services, owned by ex-Niger Delta militant leader, Government Ekpemupolo, also known as Tompolo, for the protection of pipelines in Ondo State drew attention. Analysts have raised concerns, advocating for enhanced security measures for oil infrastructure to attract investments and bolster sector stability.
NATIONAL ECONOMY survey showed the cost of oil production per barrel of $48.71 ranks Nigeria among the countries with the highest cost of producing crude oil globally.
For instance, Saudi Arabia has some of the lowest production costs in the world, with estimates ranging from $2 to $8 per barrel. The country benefits from vast oil fields and low extraction costs.
Iran has relatively low production costs, estimated to be around $10 to $15 per barrel. However, the country has faced challenges due to economic sanctions.
In Brazil, the country’s pre-salt oil costs roughly $35/barrel to produce, according to Schreiner Parker at consultancy Rystad Energy.
The cost of producing a barrel of oil in the United States varies depending on the region. On average, shale oil production costs range from $35 to $70 per barrel, while conventional oil production costs range from $20 to $40 per barrel.
Russia’s production costs range from $15 to $25 per barrel. The country benefits from large reserves and an extensive pipeline infrastructure.
China’s production costs are estimated to be around $35 to $40 per barrel. The country has experienced growth in oil production but faces challenges related to its geology and ageing fields.
The cost of producing a barrel of oil in the United Arab Emirates ranges from $10 to $20. The country has significant reserves and benefits from low extraction costs.
Iraq has low production costs, estimated to be around $10 to $20 per barrel. However, the country faces security and infrastructure challenges.
The cost of producing a barrel of oil in Venezuela ranges from $15 to $30. The country has vast reserves but struggles with political instability and ageing infrastructure.
Energy professional, Martins Agboola, pinpointed a significant catalyst driving International Oil Companies (IOCs) away from Nigeria – the exorbitant cost of production compared to other oil-producing nations like Guyana.
Agboola’s insight sheds light on the overarching challenges faced by IOCs operating within Nigeria’s oil industry, prompting a reevaluation of their investment strategies.
Co-founder and CEO at Dairy Hills, Kelvin Emmanuel, echoed Agboola’s sentiments, emphasising the cost-effectiveness of offshore production compared to onshore operations in Nigeria.
Emmanuel highlighted the absence of comparable security and community issues offshore, making it a more viable option for oil production.
Last month, the seismic decision by Shell, a global energy giant, to divest its onshore business in Nigeria for a staggering $2.4 billion sent shockwaves through the nation’s oil and gas sector. This move signified a pivotal shift in Shell’s longstanding presence in Nigeria, marking a strategic realignment in its global operations.
Similarly, Norwegian oil corporation Equinor concluded its three-decade partnership with Africa’s largest economy in late November. Equinor’s decision to offload its Nigerian subsidiary to a relatively obscure local entity named Chappal Energies marked the culmination of months of speculation surrounding its exit strategy.
These divestments are not isolated occurrences; they reflect a broader trend within Nigeria’s oil industry. Italy’s Eni announced its intention to divest its onshore division to local business Oando in September, preceding China’s Addax’s sale of four oil blocs to the national oil giant NNPC the previous year. These strategic maneuvers underscore the evolving landscape of Nigeria’s oil sector, characterized by shifting ownership structures and changing investment dynamics.
“The biggest factor for IOCs leaving Nigeria is the high cost of production they get compared with other countries like Guyana,” said Martins Agboola, an energy professional.
Kelvin Emmanuel, co-founder and CEO at Dairy Hills, said it’s cheaper for Nigeria to produce on offshore assets than onshore because offshore assets don’t have the same security and community issues.
Last month, the decision by Shell, a global energy giant, to sell its onshore business in Nigeria for up to $2.4 billion sent shockwaves through the country’s oil and gas industry.
The Norwegian oil corporation Equinor ended its three-decade partnership with Africa’s biggest economy in late November, announcing that it had sold its Nigerian subsidiary to a little-known local business called Chappal Energies. This news put an end to months of speculation.
This is not a unique occurrence. Italy’s Eni declared last September that it would sell its onshore division to the local business Oando. Before this, China’s Addax sold to national oil giant NNPC its four oil blocs during the previous year.
