Nigeria’s Oil and Gas Sector Grapples with High Crude Evacuation Costs
Nigeria’s oil and gas industry is facing significant financial strain due to the high costs associated with crude oil evacuation. Industry operators are reportedly spending up to $12 per barrel to transport crude from production sites to export terminals, according to the Petroleum Technology Association of Nigeria (PETAN). This situation is severely impacting the industry’s profitability and competitiveness.
The High Cost of Evacuation
PETAN President, Engr. Wole Ogunsanya, highlighted that evacuation, rather than production itself, is the primary driver of costs in Nigeria’s upstream sector. This is largely due to the persistent challenges of pipeline vandalism, crude theft, and general insecurity, which force companies to rely on more expensive methods of transportation such as barges and vessels.
- Pipeline Vandalism and Crude Theft: The ongoing issues of pipeline vandalism and crude theft necessitate the use of alternative, costlier methods for transporting crude oil.
- Security Costs: The need for security escorts to protect these shipments further adds to the overall evacuation expenses.
These factors combine to create a situation where the cost of moving crude oil significantly inflates operational expenditures, impacting the industry’s overall financial performance.
Impact on Competitiveness
Ogunsanya emphasized that while Nigeria’s capital expenditure (CAPEX) for production remains relatively low compared to other African nations, the high evacuation costs distort the perception of the country’s competitiveness in the global oil and gas market.
- Low Production CAPEX: Nigeria’s production CAPEX is among the lowest in Africa, which should give the country a competitive edge.
- Inflated OPEX: However, operating expenditures (OPEX) are significantly increased by security and logistical concerns related to crude evacuation, negating the benefits of lower production costs.
The PETAN president pointed out that these inflated costs are not due to inefficiencies within the service sector but rather external factors such as security and logistics.
Local Content and Cost Efficiency
Ogunsanya also shed light on the positive impact of local content policies on reducing certain operational costs. He noted that contracting a land rig in Nigeria can be significantly cheaper than in other countries, such as India, thanks to local content initiatives.
- Cost Comparison: Renting a land rig in India can cost up to $60,000 per day, while the same service in Nigeria costs as low as $30,000.
- Local Content Benefits: This cost difference is attributed to the successful implementation of local content policies, which effectively subsidize oil and gas production in the country.
Addressing Fraudulent Practices
Ogunsanya also raised concerns about the activities of “portfolio companies” that engage in fraudulent practices, leading to inflated costs within the industry. These companies often obtain Nigerian Content Equipment Certificates (NCEC) and secure projects without possessing the necessary operational assets.
- Portfolio Companies: These companies exploit loopholes in the system to gain access to projects without having the required capabilities.
- Fraudulent Practices: Their involvement leads to inflated costs and undermines the integrity of the industry.
He lauded the Presidential Directive of March 24, 2024, which aims to prevent such portfolio companies from participating in the sector, calling it a step in the right direction. He also urged the Nigerian Content Development and Monitoring Board (NCDMB) and NNPC Ltd. to collaborate with PETAN in benchmarking global project costs to enhance accountability and transparency.
NCDMB Initiatives and Funding
Other speakers at the Townhall session addressed critical industry issues, including Nigerian Content Equipment Certificates (NCEC) and access to intervention funds. Engr. Abayomi Bamidele, the NCDMB’s Director of Capacity Building, announced the introduction of new “Guidance Notes” designed to simplify the NCEC application process. He advised companies to apply only in categories where they have demonstrated capacity, ensuring that certifications are awarded to qualified entities.
Regarding funding, the NCDMB clarified the scope of its various intervention funds.
- Nigerian Content Intervention Fund: The $400 million Nigerian Content Intervention Fund is not available for Research and Development (R&D) projects.
- Nigerian Content Research and Development Fund: However, R&D firms can access the separate $50 million Nigerian Content Research and Development Fund, which is specifically earmarked for supporting innovation and technological advancement within the industry.
