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Dissecting Nigeria’s controversial oil production cost

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The gulf between the Ministry of Petroleum Pesources and the Nigerian National Petroleum Corporation (NNPC) has widened over the actual cost of crude oil production in Nigeria. ADEOLA YUSUF reports

The Nigerian Extractive Industry Transparency Initiative (NEITI), it was, which first alleged that Nigeria does not know the actual volumes of crude barrels it produces daily. Stating that this awkward situation started and had remained right from over 58 years of crude exploitation by the Africa’s biggest crude exporter, NEITI alleged in its 2008 audit that the country does not have an independent verification for figures of production slammed on it by the International Oil Companies (IOCs). And since figures remains sacrosanct elsewhere, they seem not to be Africa’s biggest economy, which depends largely on crude proceeds to service over 85 per cent of its budget.

Barely 24 hours after the Nigerian National Petroleum Corporation (NNPC) declared that it had crashed the cost of crude oil production in Nigeria to $23 per barrel, Minister of State for Petroleum Resources, Dr. Ibe Kachikwu, told a gathering of major stakeholders in the country’s industry last Thursday that the country’s cost of “production of oil remains at about $32 per barrel.”

To show that the figure announced by the minister at the annual conference organized by the National Association of Energy Correspondents (NAEC) was not a typographic error, he added that the government was determined to cut the cost to $15 per barrel unlike the $19 per barrel said by NNPC. It said that the “foreign direct investment flows into the country are at high cost.”

The NNPC’s stand point

On Wednesday, August 16, 2018, the NNPC claimed that it had crashed crude oil production cost to $23 per barrel, a $55 per barrel cut off, representing 70.5 per cent reduction on production for the country’s biggest revenue earner.

The production cost for crude in Nigeria, which is one of the highest among members of the Organisation of Petroleum Exporting Countries (OPEC), stood, according to the corporation in charge of crude production for the country, at $78 dollars per barrel as at August 2015.

It had, however, been crashed to $23 per barrel, Group General Manager of National Petroleum Investment Management Services (NAPIMS), a unit of NNPC, Dafe Sejebor, an engineer, disclosed this during the inauguration of the anti-corruption committee of the unit. He said the Corporation had saved a minimum of $3 billion per annum.

Figures verification

The NNPC appeared ready to defend its figure and it took adequate advantage of this in a statement issued by Group General Manager, Group Public Affairs Division, Ndu Ughamadu, in which it noted that NAPIMS arrived at the figure after looking at the difference between the $78 and $23, which represents the old and new cost of production in relation to the present daily average production in the country.

“If you knock down your cost of production from $78 per barrel to $23, take the difference and multiply by the average daily production, you will discover that we are saving a minimum of $3 billion in the upstream for both production sharing contracts (PSCs) and joint ventures (JVs),” he said.
The GGM informed that the target was to bring the cost of production to between $17 and $19 for onshore and offshore production respectively.
Commendation to FG on policy.

Ughamadu commended the Federal Government for its support to the NNPC management in tackling the challenges in the petroleum industry, especially the cash call exit agreement signed in 2016 and the reduction of contracting circle from three years to six months.
On the new petroleum policy, Sejebor said it was necessitated by the increasing difficulty in operating the petroleum industry within the framework of the old Petroleum Act in the face of the delayed passage of the Petroleum Industry Bill (PIB).

He said the policy would restore investors’ confidence in the industry pending the full passage of the entire PIB by the National Assembly.
On the NAPIMS Anti- Corruption Committee, Sajebor urged the management and staff to let the principles of accountability, integrity, honesty and transparency be their watchword. He charged them to generate positive ideas to help tackle the challenges facing the industry and help reverse its fortunes.

Sajebor admonished staff to key into NNPC management’s zero tolerance for corruption. It would be recalled that the Group Managing Director of NNPC, Dr. Maikanti Baru, while inaugurating the anti-corruption unit at the corporate headquarters recently, had directed all the Strategic Business Units (SBUs) and Corporate Service Units (CSUs) to establish their own anti-corruption committees.
NAPIMS was the first to comply with the directive.

Kachikwu’s figure
Dr. Kachikwu however, contradicted the NNPC on the cost of crude oil production, which had earlier said that the country had reduced cost of oil production to $23 per barrel.

The country’s cost of “production of oil is about $32 per barrel,” the minister insisted in a speech he presented to local and foreign delegates at the NAEC conference in Lagos.
He added however, that Initiatives “to reduce the cost of crude oil production to $15 per barrel are on-going; initial consultations with stakeholders have held and cost drivers have been identified. The outcome of this initiative would be a win-win for investors and the nation.”

Modalities for cost adjustment

The Federal Government, the minister said, set a new target of 10 years to attain 40 per cent divestments of its shares in the NNPC, maintaining that the Petroleum Industry Governance Bill (PIGB) is central to the achievements of this target.

Stating that the PIG bill, which has been passed by the Senate, stipulates that all oil assets previously held by the Bureau of Public Enterprises (BPE) would be managed by the National Petroleum Company (NPC) to be formed from the NNPC, the minister in a speech read by Deputy Director, Engineering Standard Division of Department of Petroleum Resources (DPR), Dr. Olumide Adeleke, stated, “divestments of shares by the government to the private sector will gradually increase from 10 per cent to 30 per cent within five years and 40 per cent in 10 years.
“With ownership spread to individuals and institutions and accountability would be given top priority and this would enhance performance because stakeholders will seek to protect their investments.”

This ownership concept, he said, “is also being introduced in the modular refinery initiative under the BigWin 4 (refineries and local production capacity) and is set to improve refining capacity in-country and faster peace in the Niger Delta.”

Role of PIB

Taking delegates and stakeholders at the conference down the memory lane, the minister said; “Recall that for the past ten years, the passage of the Petroleum Industry Bill has been an issue. However, this administration has succeeded where previous administrations have not given the passage of the PIGB in the upper House.”

The Ministry of Petroleum Resources, according to him, is currently working arduously with the lower house to provide an adequate pathway for passage of the PIGB and the Fiscals Bill at the lower House.

“The PIGB, which has been on the news headlines since its passage at the Upper house, is indeed in line with the Transparency and Efficiency key focus area of the 7BIGWINs initiatives- a roadmap of short and medium term priorities aimed at developing a stable and enabling oil and gas investment landscape, which was launched by His Excellency, President Muhammadu Buhari in October 2016.

“It portrays plans to create the governing institutions with clear and spate roles and establish frameworks for creation of commercially viable petroleum entities, that will eliminate bureaucratic bottlenecks, which discourage investors, hinder our growth, and prevent us from attaining the summit of performances.

“In other countries where oil revenues have been of humongous benefits, a single regular exists. This single regulator regulates the upstream, midstream and downstream aspects of its petroleum resources. A single regulator provides a one-stop shop for investors; it removes duplicate procedures and its associated costs and therefore attracts foreign direct investments in the nation’s oil and gas sector.” In Nigeria today, the situation, according to Kachikwu, is such that foreign direct investment flows into the country are at high cost. An example is the high cost of production of oil at about $32 per barrel.

“Initiatives to reduce the cost of crude oil production to $15 per barrel are on-going; initial consultations with stakeholders have held and cost drivers have been identified. The outcome of this initiative would be a win-win for investors and the nation.”

The link

Meanwhile, the Group Managing Director of the NNPC, Dr, Maikanti Baru, who also gave an insight into the oil industry post-PIGB, maintained that the Minister of Petroleum Resources shall be responsible for policy formulation and coordinating the affairs of the petroleum industry n behalf of the Federal Government.

“However, the bill proposes the removal of the discretionary powers provided under the Petroleum Act for Minister’s grant, aimed, revoke and extend oil prospecting licenses and oil mining leases to applicants that satisfy statutorily prescribed conditions. The Nigerian Regulatory Commission (NPRC) will now assume this role.”

Last line

The ministry of petroleum resources and the NNPC should hamonise their figures before going to press to avoid further embarrassment that their data disparities usually cause Nigeria.

Even though $32 and $23 look alike, there is a difference in physical appearances of $15 and $19. While the government should work hard by empowering the Department of Petroleum Resources (DPR) to get independent data verification, fact checking should also be seen as being sacrosanct by speech writers for both the minister and the NNPC.

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Energy

Nuclear energy to offer Nigeria stable electricity pricing

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The proposed plan by the Federal Government to construct a nuclear power plant would offer Nigerians a cheaper and stable source of electricity pricing – in the long run – borne out of lower operating costs.

Viktor Polikarpov, Vice-President, ROSATOM Sub-Saharan Africa, revealed this recently. Recall, the Nigerian Federal Government, last October, signed an agreement with ROSATOM – Russia’s state owned nuclear energy corporation for the construction of a nuclear power plant and research centre in Nigeria. This is with a view to diversify Nigeria’s current energy generation mix – which relies mainly on thermal and hydroelectric sources.

Throwing more light on how nuclear energy, offers lower operating costs – as opposed to other energy sources, Polikarpov explained, it’s is in view of the fact, the cost of uranium, which serves as nuclear fuel is comparatively low – when compared with fossil fuels, used in powering gas and coal turbines.

He further explained: “Even though the cost of constructing a nuclear power plant is quite high, the cost implications of operating them are quite low. The average lifespan of a modern nuclear reactor is 60-80 years. This variable, when taken into consideration, make the expense of delivering power from a nuclear plant quite low.”

If the cost of uranium doubles, for instance, the cost of electricity produced by nuclear, he stressed, will only increase marginally. This, he noted, cannot be said about conventional energy sources.

“However, if the price of coal doubles, it implies that the final cost of electricity will be 70 percent more; same applies to gas. However, the cost of uranium, which is produced on a nuclear power plant, has just a three percent implication on the cost of electricity. Even if the cost of uranium rises, electricity consumers may not even feel the little impact it would have on electricity,” Polikarpov pointed out.

This, he emphasized, portends huge benefits for electricity consumers in Nigeria. He shed more light: “If you have predictable prices for electricity for the next sixty years, which is the minimum time to operate a modern nuclear power plant, it really helps to grow the economy.

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Business

Shell’s annual contracts for Nigerians hit N230bn

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Oil firm, 7 banks earmark N690bn for local firms

 

The yearly contracts awarded by the Shell, biggest international oil firm in Nigeria in terms of assets and production, hit N230 billion in 2017, a 94 per cent of the total contracts in that year.

Seven Nigerian banks including Access Bank Plc, Skye Bank Plc, Zenith Bank Plc, Stanbic IBTC Bank, First Bank of Nigeria Limited, Standard Chartered Bank, and Guaranty Trust Bank, the company, said in a document obtained by New Telegraph, have also set aside N690 billion for Nigerian companies’ contract execution.

Some 290 Nigerian contractors, the document entitled; “2018 Shell Nigeria Briefing Notes” states, had also received loans worth more than N472 billion under the Shell Contractor Support Fund.

The fund was set up by Shell companies in Nigeria to help vendors and suppliers in the oil and gas industry secure funds at reduced interest rates, relaxed collateral requirements and quicker processing time.

Shell companies started their intervention in 2011 with the Shell Kobo Fund, which gave way to the Shell Contractor Support Fund the following year with seven participating financial institutions, which had since set aside more than N690 billion for contract execution by Nigerian companies. The lender’s are the seven banks listed above.

Nigerian ownership of key assets such as rigs, helicopters and marine vessels is also a focus, with Shell Companies providing technical and financial support to companies across a range of sectors including transportation, manufacturing and research and development.
Country Chair Shell Companies in Nigeria and Managing Director of The Shell Petroleum Development Company of Nigeria (SPDC) Ltd, Mr. Osagie Okunbo, according to the Briefing Notes, said: “We’re pleased to support Nigerian contractors to play greater roles in the oil and gas industry.

“As pioneers in the industry we have taken deliberate steps to award contracts to Nigerian vendors and worked with them to grow their capacity, cost efficiency and delivery timelines. “We discovered however, that access to finance has been a challenge, and the search for a solution led to the Shell Contractor Support Fund.”

On social investment, Mr. Okunbor said Shell companies had continued to work with the government, communities and civil society to fund and implement projects and programmes that have a lasting impact on people’s lives in the Niger Delta and Nigeria as whole. For example, he said since 2006, the SPDC JV has disbursed more than N41 billion to 37 active Global Memorandum of Understanding (GMoU) clusters in Rivers, Delta, Bayelsa and Abia states. A GMoU is an agreement that brings a group (or cluster) of communities together with representatives of state and local governments, SPDC and NGOs, with the SPDC JV providing five-year funding for communities to implement development projects of their choice.

Social investment activities of Shell companies focus on community and enterprise development, education, health, access-to-energy and since 2016, road safety. In 2017, SPDC JV, Shell Nigeria Exploration and Production Company and Shell Nigeria Gas spent more than N18 billion on direct social investment projects. Nigeria is the largest concentration of social investment spending in the Shell Group.

 

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Business

Nigeria’s energy sector: Disquiet over sack persists

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The number of sacked skilled and unskilled workers in Nigeria’s energy sector has exceeded 10,074 in the last two years. Adeola Yusuf reports how the sector, worst hit by last economic downturn, is contending with fresh sack fever.

 

 

It is not yet uhuru for some personnel in Nigeria’s energy space. The operators in the sector and government agencies under the Ministry of Petroleum Resources are mulling fresh sack and historic re-deployment of over 4,500 additional staff. This is aside the not cheery news of figure of staff disengaged in Nigeria’s oil and gas industry, which has exceeded 10,074 in the last two years.

 

Total and Addax, New Telegraph gathered, exclusively last weekend, had budget millions of dollars for emoluments and disengagement benefits for some of their senior staff penciled for disengagement in Nigeria.

Chevron, which was also involved in the industry sack of over 10,000 during the 2016 sales of assets in Nigeria, has registered its intention to continue the assets sale this year.

 

The Department of Petroleum Resources (DPR) and the Petroleum Products Pricing and Regulatory Agency (PPPRA) are, on the other hand, faced with workers’ sack and historic staff redeployment.

Market re-balancing, upstream document sighted by this newspaper at the just concluded Offshore Technology (OTC) in Houston, Texas, United States, showed, has been pushed back by at least six months from their projections because of higher-than-expected production from Iran and Saudi Arabia, coupled with the resilience of U.S. shale output.

 

Chevron had sold its stakes in OMLs 52, 53, 55, 83 and 85 in a string of divestments carried out by the International Oil Companies (IOC) within the two-year period.

 

Stating that foreign currency effects increased earnings in the 2018 first quarter by $129 million, compared with a decrease of $241 million a year earlier, Chairman and CEO of the company, Michael Wirth said: “In addition, we continue our asset sale programme.
“Sales and other operating revenues in first quarter 2018 were $36 billion, compared to $32 billion in the year-ago period.

 

 

The gale blows to DPR, PPPRA

While the need to right size led to the IOCs plans to sack more, the Petroleum Industry Governance Bill (PIGB) is fueling the planned disengagement and unprecedented redeployment of staff at the PPPRA and DPR, two agencies under the ministry of petroleum resources.

Spokesperson for PPPRA, Lanre Oladele and his counterpart at the DPR, Paul Osu, could not be reached by phone for comment, but a management staff of the PPPRA told this newspaper that the news of change that the PIGB would cause to the PPPRA has triggered an uneasy calm in the agency.

“There will be job loss on one hand and mass redeployment on the other, everyone here knows that these are what naturally follow the kind of regulations that come with the PIGB. The minister, Dr. Ibe Kachikwu, has even confirmed this,” he said.

Stating that lobbying and prayer sessions are on-going among some staff who are jittery by the impending crisis, he added; “I am sure that you don’t blame anyone who uses what he has to retain the job he treasures so much.”

 

Govt’s perception

The Federal Government would rather approve that the situation be addressed as redeployment, but not sack.

 

Minister of State for Petroleum resources, Dr. Ibe Kachikwu, who allayed fears over the sacking of workers of DPR and PPPRA, stated that workers of both agencies would be assimilated into the new petroleum industry regulator to be set up by the PIGB.

 

Speaking at a Round table on understanding the PIGB, organised by the Nigeria Natural Resource Charter, (NNRC) and the Media Initiative on Transparency in the Extractive Industry, (MITEI), Kachikwu, however, insisted that that DPR and the PPPRA would be scrapped and merged into the Petroleum Regulatory Commission, (PRC), as stipulated by the Bill.

 

Represented by his Senior Technical Adviser on Policy and Regulation, Mr. Adegbite Adeniji, the minister also stated that it would not be business as usual as key performance indicators, KPI, would be set for the Board, management and other employees, adding that any official found wanting in the discharge in his or duties would be sanctioned and shown the exit.

 

He maintained that the scrapping of the DPR and the PPPRA, apart from ensuring that no one is sacked, would provide an opportunity for new persons to be employed into the new entity to be set up, especially as new ideas are sought to fill in gaps that might exist in the company.

He said, “Where they are gaps in the manpower in there, it provides an opportunity for people to be appointed from outside, because again, you want to put in new ideas, fresh legs in the whole process. In that process, you preserve the jobs, and you also attract a pathway for the employment of other skills from outside to help energise the new system you are trying to build.”

 

For power, same sour taste

The power sector is not exempted from the mass sack. In the build up to the privatisation, which climaxed on Friday, November 1, 2013, in the sector, over 20, 000 skilled and unskilled staff of the defunct Power Holding Company of Nigeria (PHCN) were thrown into the labour market.

The Federal Government made it official by ordering the retrenchment of the staff ahead of takeover by successful bidders of its assets. The Bureau for Public Enterprises, BPE, issued the directive to the Chief Executive Officers, CEOs, of the then 18 successor companies to PHCN at a meeting in Abuja, to compile names and drastically reduce the 50,000 strong work force before the new investors take over. The new investors had, as expected of businessmen, demanded that the workforce must be pruned before the government hands off.

 

Oil workers battle ready

Rising under the auspices of the Petroleum and Natural Gas Senior Staff Association of Nigeria (PENGASSAN) and the National Union of Petroleum and Natural Gas (NUPENG), oil workers had declared readiness to fight the move they referred to as unjust and inhuman in this harsh economic situation in  the country.

The PENGASSAN branch of Total and Addax Petroleum had earlier grounded activities at the two companies into a total halt the week after they got the hints of the mass sack by the two companies.

The enraged workers of Addax, a company that produces 30,000 barrels of oil from its offshore and onshore locations in Lagos, Port Harcourt, Asaba, Warri, and Izombe in the Niger Delta, had locked their Senior Vice President/Chief Executive, Colin Klappa, out of his office when he arrived the 32, Ozumba Mbadiwe Avenue, Victoria Island, Lagos office of the company to resume work.

 

He met other top management staff outside, as all the entrances to the premises were firmly locked by protesting workers. A spokesperson of the company who is also the General Manager External & Government Affairs, Dorothy Atake, declined to react to the development.

 

The strike involved the 166 members of the PENGASSAN staff from the company and 98 others who are management staff. The workers’ action followed the expiration of the ultimatum the company’s chapter of PENGASSAN gave the management led by Mr Klappa over “some unresolved burning issues.”

 

Total, which in the same vein, said this in a statement, that its union disrupted activities over protest of alleged mass sack, added that the destruction by the workers included disconnection of communication facilities in crisis management rooms, which “exposed the company to grave risks in the event of emergency as normal means of communication with the sites were unavailable.”

Describing the action as illegal, Total said that the layers of Health Safety and Environment (HSE) safeguards to prevent accidents were reduced, thereby, increasing HSE risks in the environment.

 

These actions, Chairman of the Lagos unit of NUPENG, an umbrella body for the junior workers, Tokunbo Korodo, told this newspaper, would be a tip of the iceberg if the oil companies continue to disengage staff.

 

NUPENG, he added, was ready to join any moment a call of camaraderie is made by PENGASSAN, which would make the industry action to be total.

 

“The strike action is by PENGASSAN. I cannot make much comment on its development because they are yet to call for solidarity,” he said, adding that his group would answer the call for solidarity any moment it was made. The industrial action, which included total disruption of the company’s normal operations, had led to potential loss of value to all stakeholders.

 

 

Last line

The right sizing is an impeccable tool in business development. It should, however, be used with due consideration to the substantive labour law in the country. The employers and the employees should be on a round table to discuss issues on this and prevent it from dove-tailing into a major oil workers-employers’ war.

 

Nigerians have had enough of oil workers strike and the best way to avert this is to jaw-jaw, which is far better than to war-war.

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