Senate queries NNPC over high cost of oil production - THE BUSINESS PACKAGE


Monday, June 1, 2020

Senate queries NNPC over high cost of oil production

Members of the Senate Committee on Finance Monday queried the Nigerian National Petroleum Corporation over what they described as “very high cost of oil production in Nigeria.”

Also Monday, the Minister of Finance, Budget and National Planning, Mrs. Zainab Ahmed, said even though recession is imminent as a result of the COVID-19 pandemic, the Federal Government is already working to minimize its harsh effects.

The Senators spoke when the Minister of Finance, Budget and National Planning, Mrs. Zainab Ahmed led heads of revenue generating agencies to defend the revised 2020-2022 Medium Term Expenditure Framework and Fiscal Strategy Paper (MTEF/FSP) submitted to the National Assembly last week.

The Senators expressed worry over a situation where the cost of oil production was put at $21.2 per barrel and the price of crude oil in the revised budget was put at $25, which suggest a marginal profit of $3 for the country.

Other revenue generating agencies at the session included the Nigeria Customs Service, Federal Inland Revenue Service (FIRS).

The Director General of the Debt Management Office, Patience Oniha and her counterpart in the Budget Office, Mr. Ben Akhabueze were also at the session.

The Minister of State, Finance, Budget and National Planning, Mr. Clement Agba was also part of the Minister’s team.

Trouble started for the NNPC when its Chief Operating Officer (Upstream), Engineer Yemi Adetunji, who represented the Group Managing Director, Engr. Mele Kyari, was called upon by the Chairman of the Committee, Senator Solomon Adeola (APC – Lagos West) to explain why the cost of oil production in Nigeria is far higher than those of other oil producing countries of the world.

According to Senator Adeola, while the cost of oil production in Saudi Arabia is $4 per barrel and $3 per barrel in Russia, it is $21.2 per barrel in Nigeria.

He said that this shows that Nigeria only earns a very poor marginal profit of about $3 per barrel based on new oil price benchmark of $25 per barrel in the revised 2020 budget.

The NNPC’s COO, Adetunji, in his response, attributed the high cost of oil production to series of peculiarities ranging from security to crude oil theft.

However, almost all the members of the committee disagreed with Adetunji’s claim even as they described as unacceptable.

A member of the Committee, Senator James Manager (PDP – Delta South) specifically said that the security issues referenced by the NNPC’s COO, was not tenable as similar problems exist in all other oil producing countries without high cost of production like Nigeria.

Manager said: “Even the reason that he gave for the high cost of production per barrel, I think they are not tenable because wherever oil is produced they have their own security challenge including even Saudi Arabia, Iran Russia, they have their own unique security issues. Why is our own so peculiar that our cost of production is up to $21 per barrel?

“You also mentioned administrative issue, which are these administrative issues? Why are we different from the rest of the world? These are issues that the National Assembly is supposed to take up.”

Another member of the committee, Senator Shaibu Gumau (APC-Bauchi South), insisted that the existing $21.2 per barrel high cost of oil production and $25 per barrel oil price benchmark does not make any economic sense.

Gumau said: “I can’t just believe and even common sense cannot agree with this. Not even the National Assembly. How could we expect a situation where cost of production of oil per barrel is $21.2 and the revenue is $25 per barrel?

“Yet, other countries in the world, there is no one that their cost of production is not even up to $10 per barrel. It is difficult to understand and I dont think it is only the National Assembly, even the executive themselves should sit down and ask themselves this question because we are watchdogs.

“Not because we are watchdogs that is why we are disturbed but it has got to an extent that they too should be disturbed and there should be a solution and if not there should be an explanation that somebody can understand and agree to but common sense cannot understand this.”

On his part, Vice Chairman of the Senate Committee on Finance, Senator Jibrin Isah (APC – Kogi East), also disagreed with the NNPC official over the high cost of oil production.

Senator Isah said: “I am disturbed because I expected the NNPC to dwell more on fixed costs but surprisingly you are talking about administrative cost and security and these are variables and even the fixed cost on the long run are also variables which you can also work on them.”

However the Minister of State for Finance, Clement Agba, intervened by explaining to the committee that peculiarities cited as reasons for the high cost of oil production, were real.

According to him, the North Sea production cost is higher than that of Nigeria and that as an insider, details of the $21.2 per barrel oil production is well calculated.

On his part, Adetunji explained that: “We are working hard to bring down this fix cost.

“Historically our total cost has been $30 per barrel so the objective of the new GMD Mr. Mele Kyari is that we have reduced the cost to $21 this year.

“We believe that once we have the new framework in place going forward in 2021,
we should even see lower cost of production. There are things we are targeting.

“Security challenges are kind of peculiar to Nigeria. In other climes pipelines are on the surface you hardly see them being tampered with but in Nigeria even when they are buried two meters to three metered deep they are still being vandalised.

“Is some cases we are trying to take them to deeper levels but those ones will add to cost of production like going 10 meters to 15 meters deep.

“It will add to the cost about three or four times the cost of production as against putting the pipelines on the surface.

We are working with security agencies to put in place new framework to ensure that all the hitches are brought down to the barest minimum.”

Beside high cost of oil production, the NNPC officials were also challenged by the committee to be more open in their federally funded projects, for which N484billion has been voted in the revised 2020 budget.

Meanwhile, the Minister of Finance, Zainab Ahmed while responding to a question, said that the Federal Government is taking proactive measures to mitigate the harsh effect of imminent recession in the country.

Ahmed said: “Very clearly the GDP (Gross Domestic Product) has been reduced because of the economic crisis that we found ourselves in but Nigeria is not alone in this. The global economy is predicted to be also slipping into recession.

“What we are hoping to do by our own collective efforts – the executive and the National Assembly – is that we minimize how far we go into recession.

“NBS (National Bureau of Statistics) has made an assessment that we will go into recession at the level of 4%.

“So some of the work that the executive is doing which is preparing a stimulus package is to remedy that, so that if it happens maybe we are going into 0.5% or 1% not going much lower. That is our unfortunate reality and the reality of the global economy.”

On the revenue projection N1.5 trillion for the Nigeria Customs Service which has now put at N950 billion in the revised 2020 budget proposal, the committee said that the new amount was too small.

The urges the Customs boss, Colonel Hammed Ali to worker harder to achieve a higher target.

They also urged the FIRS not to cut its revenue projection for stamp duty from N400 billion to N200 billion as contained in the revised budget

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