Contracts cancellation looms over production cost padding

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    Head of Nigeria’s oil corporation reveals how oil companies swindle the system of millions of dollars through production cost padding, vows recalcitrant firms may be shown way out

     

    Nigeria, Africa’s biggest crude oil exporter, says it uncovered sharp practices by oil firms and contractors who pad oil production cost with frivolous claims and charges, fleecing the country of millions of dollars daily even before the commodity is produced.

    Oil production in Nigeria is between $18 and $23 per barrel compared to between $1 and $4 per barrel in Saudi Arabia.

    Group Managing Director, Nigerian National Petroleum Corporation NNPC, Mele Kyari, who indicted the oil producers and contractors during the third Webinar Series organized by Nigerian Association of Petroleum Explorationists, NAPE with the theme: “the Impact of COVID-19 on the Nigerian Oil and Gas Industry -the Way forward,” declared that fhe government would revoke contracts and cancel projects for any firm that would not adhere to production cost cutting to $10 per barrel.

    “The era of some of our partners producing at a very high cost will no longer be acceptable to us anymore. It is either they become more efficient at what they are doing by cutting cost or be ready to be shown the way out.

    ‘‘If they are not ready to be cost effective, then we may have no other option than to cancel those contracts and give them to those that can manage and produce at a relatively cheaper cost. This is business and we cannot afford to run same like a charity organisation,” he declared.

    The NNPC boss lamented that the high cost of production in the industry was unacceptable and was as a result of a number of factors, some of which included; structural inefficiencies that exist in the system and processes, environmental factors which every contractor factors in while doing business; be it risk as it relates to human resources and materials.”

     

    Kyari

    Describing some of the gimmick used by oil companies as “issue of environmental consideration,” Kyari said; “Contractors will factor all associated risks for doing business here in terms of human resources, materials or whatever you can think of. Every cost has a premium that’s related to our environment. Those premiums are so exaggerated, it is not true. Suppliers and contractors have taken advantage of it to hype the cost in this country and that’s the reality.”

    He continued; “What we did was to look at how we can address the issue. So we decided to look into projects together to see how we can work together to reduce cost, the conversation was going on then COVOD -19 came and threw the challenges at all of us that oil can now sell around less at $10 per barrel,” he stressed.

    “We cannot continue in business unless something is done about the cost and it became a very clear opportunity for us to hype our engagement with our partners. So we have an industry that knows that cost must come down. The result today is that there is structural shift from what we used to do to where we are going today”, said the GMD.
    According ton him, “When we took charge, we knew all along that our cost of production was very high. Such cost is not acceptable, as a result of lots of factors including structural inefficiencies in our processes.”

    The Corporation inisted on a $10 per barrel cost of production for all oil and gas producing companies in Nigeria noting that any company that refuse to cut down cost to this level will be shown the way out of the industry.

    “We have become transactional industry. People are bothered about putting contracts in place, without worry about what is the end value of this. To that effect specifically, regarding our local oil companies, they have the least governance structure, processes are not clearly significant and it has a way of wiping on the IOCs and the end result is what we are seeing today which is producing cost beyond its cost.”

    Insisting that the ideal cost of production should not be beyond $10 per barrel, Kyari said that measures are already in place to ensure that the current level of production cost in Nigeria, which he descrived as high, is reduced to around the $10 mark.

    This beomes imperative, according to the GMD because the recent oil price surge above $40 per barrel is cosmetic and driven by sentiments

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