Stakeholders worry as Nigeria spends N18tn on crude production annually

Nigeria spends not less than N1.57tn on crude oil production monthly, translating to about N18tn annually, a development which industry operators described as too high, The PUNCH reports.

Data collected from different sources, including the Nigerian Upstream Petroleum Regulatory Commission, indicated that the minimum any oil producer spends in extracting a barrel of crude oil in Nigeria is about $25.

The country’s average crude production stands at 1.4 million barrels per day, which means about $35m is spent daily to produce crude oil.

This is also an indication that $1.05bn would have gone into the production of the black gold in a month if $35m is multiplied by 30 days.

At an average exchange rate of N1,500 to a dollar, the amount would translate to N1.575tn.

In a year, the country would have spent at least N18.9tn on crude production should it maintain the average oil production of 1.4mbpd. This will impact its gains from crude sales significantly.

It was gathered that the cost of crude production ranges between $25 and $40 in Nigeria, an amount considered too high when compared with other oil-producing nations like Saudi Arabia where the cost is around $10 per barrel.

If the cost was $40 per barrel, the country would expend N2.52tn on crude production monthly.

In 2024, the Chairman of the House of Representatives Committee on Finance, James Faleke, lamented Nigeria’s $48 per barrel crude production cost, describing it as the highest in the world.

Faleke put the cost of producing crude oil per barrel at $9 in Saudi Arabia, $21 in Norway, and $24 in the United States of America.

He added that the rise in production costs was hurting the nation’s revenue.

According to him, if crude oil was sold for about $80 on the international market, only $32 would be available to the government to share with oil companies.

Faleke spoke in March at a meeting between the House Committee on Finance and the management of the Nigeria National Petroleum Company Limited on the cost of crude oil production in the country and its impact on government revenue.

“It is important that Nigerians understand the impact of production costs on the available revenue accruable to the Federal Government to execute its programmes in the national budget. The higher the cost of extracting a barrel of crude oil from the ground, the less funds available to the government and Nigerians.

“The committee has been given a total cost figure of $48.71 per barrel by the Federal Inland Revenue Service for calculation of Petroleum Profits Tax and Hydrocarbon Tax and this will also be used for profit calculations.

“Over the years, Nigeria’s cost of oil production (both capital costs and overhead costs) has continued to increase reaching new unprecedented highs of over $48 per barrel,” he said last year.

The PUNCH reports that Nigeria’s crude oil revenue rose to about N50.88tn in 2024 as data obtained from the NUPRC confirmed that Nigeria produced a total of 408,680,457 barrels of crude oil in 2024.

If the production cost was truly $48 per barrel in 2024, it would mean that about N29tn was spent on the 408,680,457 barrels.

The Group Chief Executive Officer of NNPC, Mele Kyari, had blamed the high average cost of production per barrel on insecurity and other sundry issues.

“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, but what it does is that it adds a premium to the cost of production,” Kyari said 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.”

The NUPRC disclosed that one of its action plans in 2025 is to reduce the production cost to $20 a barrel.

“Efforts to reduce the cost of asset acquisition to help lower overall production costs have also been in motion. One of the primary targets is to reduce Nigeria’s average unit production cost from the current range of $25-$40 per barrel to below $20 per barrel, in a bid to make the oil sector more competitive and attractive globally,” the NUPRC said.

According to a 2017 report, the Wall Street Journal said the United Kingdom, Brazil, and Nigeria were the nations with the highest cost of oil production in the world with $44.33, $34.99, and $28.99 production costs respectively at the time.

The countries with the lowest cost of oil production were Saudi Arabia with $8.98, Iran, and Iraq, with $9.08 and $10.57 respectively within the same period.

It stated that the breakdown of the production cost in Nigeria as reflected in the National Petroleum Policy in 2017 showed that $8.81 was for production costs, $13.19 for capital spending, $4.11 for gross taxes, and $2.95 for administration/transport per barrel.

In a recent publication, the NUPRC said the rising production costs, coupled with volatile global oil prices, have made it increasingly difficult for Nigeria to remain competitive on the global stage.

“At an average of $25 and $40 production costs per barrel, the nation’s upstream oil production costs are among the highest in the world.

“This range is significantly higher than production costs in top oil-producing countries like Saudi Arabia, where efficient operations allow for costs as low as $10 per barrel,” the NUPRC said in the publication.

The commission worried that this discrepancy affects Nigeria’s ability to attract good investment and compete on a global scale, as high production costs can limit profitability for investors, particularly when global oil prices are low.

Our correspondent reports that if crude sells for an average of $75 per barrel, it means a producer might have spent more than half of the price on production.

The regulator noted that the country is not unaware of where the challenges lie.

“For a long time, it has identified many factors contributing to the high production costs. Many facilities, pipelines, and storage systems are outdated, leading to frequent maintenance needs and operational inefficiencies. Modernising infrastructure to cut down on repair costs, extend asset life and bolster productivity is therefore crucial.

“Oil theft and pipeline vandalism are another setback that impacts operational cost in the sector. Nigeria understands it must develop urgent solutions to curb these menaces and continue to show its determination to address them. The enactment of the Petroleum Industry Act in 2021 marked a pivotal point in this regard,” the commission said.

The NUPRC reiterated the efforts being made to reduce the production cost to $20.

“Since its emergence as the regulatory powerhouse in the upstream sector, the NUPRC has wasted no time in embracing the task of tackling existing challenges. In 2023, barely two years after its institution, it drew up a 10-year roadmap as a comprehensive strategy to revitalise and return the oil sector to its glory days.

“In 2024, in a shorter-term focus initiative under the broader decade-long Strategic Plan, the NUPRC effectively rolled out its Regulatory Action Plan with one of its key objectives being to lower the production cost per barrel of oil to at least $20,” the publication disclosed.

It maintained that an oil industry lacking production cost efficiency as a core strategy will undoubtedly struggle to open up avenues for investments, retain higher profit margins, improve resilience to market fluctuations, and attain broader economic growth.

With oil accounting for around 90 per cent of Nigeria’s export revenue and a large portion of government income, it was stated that a high cost of oil production poses risks to the country’s economic stability and growth.

The regulator posited that the stakes for Nigeria to achieve the objective are high and although it is not an easy task, the short and long-term benefits of a reduction in production cost cannot be overstated.

“Firstly, lowering production costs will make Nigeria’s oil sector a more appealing destination for foreign and domestic capital. This can inspire the country to compete more effectively with other oil-producing nations and retain a share of the global market. Similarly, by controlling oil production costs, oil companies can secure higher profit margins, even during periods of lower global oil prices.

“An increased profitability would ultimately benefit both operators and the sector, potentially leading to higher tax revenues and royalty payments. A combination of these factors can significantly boost Nigeria’s foreign exchange reserves and strengthen its resilience in the global oil market,” the report said.

Experts speak

The National President of the Petroleum Products Retail Outlet Owners Association of Nigeria, Billy Gillis-Harry, said the current crude production figure needs to be reworked, saying the cost should be far below whatever it is now.

He stated that every single production cost affects the economy badly if it is not accurate.

“Any single production process that does not give Nigerians the value that we should have affects our economy very negatively. What I suggest, and this, I’ve suggested for over 20-something years of my experience in the industry is that, we need to do an accurate review of what the true cost is by working on every comparative advantage that we should have, which, as of today, we are not using.

“The expatriates tell us what the cost is and we hardly make any inputs. That practice has to cease. We have enough Nigerians who are very knowledgeable about the industry and can tell us what the true cost of producing one barrel of oil should be. And in my opinion, it should be far less than $40 a barrel, which will give us enough advantage in growing our economy. The less we pay for the cost of crude oil production, the more profit we’ll make.

“So, regardless of how much crude oil is sold in the international market, we should be able to make the kind of money that gives us the value to consistently grow the economy. And I believe that President Bola Tinubu’s government should pursue it. The President is an accountant and he’s a businessman. So, there are a lot of expectations I have,” Gillis-Harry explained.

While expressing confidence that the Tinubu administration will change the narrative of the Nigerian economy, the PETROAN president said he expects the change to be drastic, calling on the Federal Government to engage in empirical findings to know the real cost of crude production.

“If there is a possibility of reviewing this, not just on an assumptive basis, but really seeking some empirical evidence to guide us how much one barrel of crude oil should be produced, it will help us to grow the economy of Nigeria,” he stated.

A Professor of Economics, Segun Ajibola, maintained that many factors affect the cost, saying Nigeria is a peculiar place compared with Saudi Arabia.

Ajibola mentioned that the major location for the production of crude oil in Nigeria, the Niger data, is challenged security-wise, so drilling and other forms of exploration would be highly expensive in keeping pace with the difficult challenges in those locations.

The don stated, “If you look at the topography of countries like Saudi Arabia, it’s not as difficult terrain as that of a country like Nigeria where drilling is taking place in swampy locations. You have to spend so much on environmental pollution and others. Environmental cleaning and all sorts of protection of the environment and the inhabitants of the location all cost money.

“We can only hope that the security issue will get resolved. Environmental degradation usually leads to protests and vandalisation. All this adds to the cost of production. When pipelines are vandalised, when facilities are destroyed, and when a lot of money has to be spent in settling the restive indigenous Indigenous people, they all add to the cost of production. So, the circumstances are not as friendly as it is in some other locations.

“We can only hope that with time and with all the commissions and other bodies being set up to see to all these problems of infrastructure, environmental pollution and so on, the rate and extent of protests, shutting down facilities, and vandalism will reduce, and this will ultimately reduce the cost of operation. It’s a work in progress and it will take a while to get to the kind of level and figure in Saudi Arabia,” Ajibola said.

He added that the oil majors and multinational oil companies spend a lot on seismic acquisition, data gathering, drilling, provision of facilities and security, repair of damaged facilities, and others, saying all this impacts the cost.