Nigeria is world’s second most expensive country to produce oil

It’s much cheaper to produce crude oil in war-torn Iraq, Saudi Arabia and Iran than in Nigeria, Africa’s biggest oil producer.

Nigeria is the second most expensive place to extract black gold after the United States’ shale oil patch.

The country’s oil and gas sector, which has generated a significant chunk of government revenue and foreign exchange earnings for many years, is teetering and in desperate need of rescue.

Zacch Adedeji, chairman of the Federal Inland Revenue Service (FIRS), told lawmakers last week that oil companies operating in Nigeria gave tax authorities $48.71 as their average cost of producing crude oil per barrel in Nigeria.

“As a tax man, I tax the difference between the selling price and the cost of production; what the oil companies will give me a tax man as cost of production is different from the cost of production NNPC will have,” Adedeji told the Senate Committee on Finance during his agency’s 2024 budget presentation to lawmakers on Tuesday.

“The oil companies know we tax the difference between the selling price and the cost of production which is why they gave us $48.71 as their cost of production,” he added.

Findings showed most oil companies have set aside massive budgets for the security of assets, settlement of community troubles, and multiple taxation, among others.

“While the impact of the security challenges in terms of oil production is being talked about at the highest levels, another part seldomly discussed is the wave of impact on companies who are now required to spend more on the protection of workers and oil facilities,” Chinedu Onyeka, an energy sector expert familiar with upstream business, said.

Last October, President Bola Tinubu renewed the contract of Tantita Security Services, owned by ex-Niger Delta militant leader, Government Ekpemupolo, a.k.a Tompolo, for the protection of the pipelines in Ondo State from vandalism but analysts are asking for more security for the oil infrastructure as this will open the sector for investments.

“The long-term competitiveness of Nigeria’s oil industry is waning. High production costs translate to lower profit margins, potentially deterring investment and hindering the sector’s growth,” Onyeka said.

A BusinessDay survey showed the cost of oil production per barrel of $48.71 ranks Nigeria among the countries with the highest cost of producing crude oil globally.

For instance, Saudi Arabia has some of the lowest production costs in the world, with estimates ranging from $2 to $8 per barrel. The country benefits from vast oil fields and low extraction costs.

Iran has relatively low production costs, estimated to be around $10 to $15 per barrel. However, the country has faced challenges due to economic sanctions.

In Brazil, the country’s pre-salt oil costs roughly $35/barrel to produce, according to Schreiner Parker at consultancy Rystad Energy,

The cost of producing a barrel of oil in the United States varies depending on the region. On average, shale oil production costs range from $35 to $70 per barrel, while conventional oil production costs range from $20 to $40 per barrel.

Russia’s production costs range from $15 to $25 per barrel. The country benefits from large reserves and an extensive pipeline infrastructure.

China’s production costs are estimated to be around $35 to $40 per barrel. The country has experienced growth in oil production but faces challenges related to its geology and ageing fields.

The cost of producing a barrel of oil in the United Arab Emirates ranges from $10 to $20. The country has significant reserves and benefits from low extraction costs.

Iraq has low production costs, estimated to be around $10 to $20 per barrel. However, the country faces security and infrastructure challenges.

The cost of producing a barrel of oil in Venezuela ranges from $15 to $30. The country has vast reserves but struggles with political instability and ageing infrastructure.

“The biggest factor for IOCs leaving Nigeria is the high cost of production they get compared with other countries like Guyana,” said Martins Agboola, an energy professional.

Security for oil assets, many operators say, has not been treated with the seriousness it deserves, considering that oil is responsible for much of the nation’s revenue. Militants routinely kidnap oil workers, especially expatriates and sabotage of oil pipelines occurs too frequently to absolve government officials including security personnel of collusion with criminals.

Mele Kyari, group CEO of Nigerian National Petroleum Company (NNPC) Ltd, 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, any country that you know there’s conflicts, 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”.

Nigeria is Africa’s largest oil producer, but frequent incidents of sabotage and oil theft have hindered the sector onshore.

Many newer projects are focused offshore, where production is more secure but the capital investment required is higher.

Kelvin Emmanuel, co-founder and CEO at Dairy Hills, said it’s cheaper for Nigeria to produce on offshore assets than onshore because offshore assets don’t have the same security and community issues.

Last month, the decision by Shell, a global energy giant, to sell its onshore business in Nigeria for up to $2.4 billion sent shockwaves through the country’s oil and gas industry.

The Norwegian oil corporation Equinor ended its three-decade partnership with Africa’s biggest economy in late November, announcing that it had sold its Nigerian subsidiary to a little-known local business called Chappal Energies. This news put an end to months of speculation.

This is not a unique occurrence. Italy’s Eni declared last September that it would sell its onshore division to the local business Oando. Before this, China’s Addax sold to national oil giant NNPC its four oil blocs during the previous year.