NCDMB, NNPC contend on either sides of cost balance

Sopuruchi Onwuka

The two key agencies of government with mandates on value derivation from the petroleum industry are pulling industry players towards different and separate dividend propositions, creating position gaps that pose compliance puzzle for investors.

Whereas the Nigerian National Petroleum Corporation (NNPC) has remained persistent and strident with calls for cost reduction and enhanced revenue to government, the Nigerian Content Development and Monitoring Board (NCDMB) warns the industry that cost reduction must not truncate policy targets at stimulating domestic productivity with increased industry patronage.

Group Managing Director of NNPC, Mallam Mele Kyari, had early 2020 called on players that operate different production agreements with the corporation to devise strategies for cost reduction in order to deliver resource dividends to the Nigerian population at a time of low price cycle.

The call from Mallam Kyari followed steep plunge in oil prices in 2020 when raging coronavirus pandemic and global lockdown measures inflicted demand destruction on the oil market.

Since then, Mallam Kyari has sustained the narrative of strong balance sheet in the operations of the industry, vowing to harness resource dividends from players in a responsible and transparent for onward delivery to the government.

He has also maintained that the only way to generate optimum profit from commercial operations was to produce at the lowest cost per unit.

He pointed out that cost of production in the country was prohibitively higher than in other producing countries with similar sedimentary structures as Nigeria. He accused players of overemphasizing local operational challenges to justify high operating cost templates.

He advised them to beat down production cost below $10 per barrel, warning that government might consider stringent options in enforcing reduction in the industry.

But operators in the industry argue that the local operating environment, not geological structure of the sedimentary basins, has remained the biggest cost driver in the industry. From infrastructure deficit to rising insecurity, production losses to thieving syndicates, multiple taxation, facility breaches, forced downtimes et cetera, the operators demand government to make the domestic operating environment cost efficient.

In a position paper by industry investor groups seen by The Oracle Today, they tasked the NNPC to advance its own templates for cost reduction in order to appraise realistic cost cap for operators in different production terrains.

However, our checks have shown that some companies like Seplat Energy Plc have since operated below the cost cap even before it was announced. Other companies have also reviewed their operating models to drive cost below the new ceiling. Yet others have used the cost mandate as justification for exporting jobs to cost heavens in order to meet compliance.

Under the Nigerian Oil and Gas Industry Content Development (NOGICD) Act of 2010, all industry goods and services must be sourced in-country except in cases where they are not available in the domestic environment. But the rush for cost reduction appears to have driven some of the companies beyond separate local content limits set by the NCDMB.

Whereas the NNPC is revenue earner for the government, providing over 85 percent foreign exchange income; the NCDMB seeks to trap down over 70 percent of the annual $20 billion budget in stimulating domestic industrial, commercial and manufacturing development through sustained and guaranteed patronage.

Key achievements of the NCDMB in recent years include development of local capacity for job execution, growth of the nation’s gross domestic product (GDP), enhanced job creation for mass employment, displacement of imports with local products, production infrastructure development, alternative funding for project execution, amongst many others.

Executive Secretary, Mr Simbi Wabote, however regrets that the emerging demands of cost reduction in the upstream petroleum industry have been seized by some operators as excuse for flouting the NCDMB Act and implementation guidelines.

At an industry conference in Abuja, Mr Wabote accused some international oil companies operating in the country of sabotaging the job creation programme of the government by using the cost reduction mandate as the justification for exporting jobs on Nigerian projects for offshore execution.

Mr Wabote, an eminent industry engineer, made it clear that the Nigerian Content objectives present greater economic development opportunities than mere operations cost savings.   

“What I see is a constant battle with some of the IOCs who believe that the only place to carry out their work must be China and not Nigeria,” he lamented, insisting that seeking marginal cost savings at the expense of greater economic development imperatives was counterproductive and inimical to realization of broader policy mandates.

“And I’ve said it severally that nobody can compete with the Chinese: not the Europeans, not the Americans. You cannot compete with them when it comes to cost,” he noted.

He stated: “In a country where perhaps you have almost 35 per cent unemployment rate, with bulging youth population; what will you benefit if you take the jobs out of this country to China and then leave that youth population? I can assure you that when you finish your project you cannot operate it.”

He declared that the international oil firms operating and making huge profits from Nigerian operations also owe the country the corporate responsibility of aligning goals with the host government. “But I don’t see it in some of the IOCs that operate in Nigeria.”

Mr Wabote argues strongly that companies would make greater cost savings by helping develop local capacity for long term job delivery. He cautioned the industry not to perceive local content policy cost builder but enabler for long terms cost efficiency.

“We in local content believe in balancing cost in whatever we do. But for those who argue about cost, you must also balance the cost discussion with stability in the country. This is because you must balance the social needs of the people with your craze, crave and drive for cost reduction against the survival of a nation.”

In balancing disapproval with approbation, Mr Wabote pointed out that companies like Total Energies have displayed high level of support for realization of government’s policy mandates for the industry, pointing at Total’s Nigerian Content legacies in its recent deepwater development projects.

In holding up the Egina deepwater field development project as evidence of cost benefit of Nigerian Content, Mr Wabote pointed out that Total exceeded existing local content performances and set new standards for local job delivery and cost efficiency.

Mr Wabote who monitored the local content implementation in the Egina project stated that Nigeria was able to develop its fabrication capacity from 60,000 metric tons to 200,000 metric tons.

For other companies flouting the Nigerian Content implementation guidelines, Mr Wabote warned that the agency is not weak in applying stringent measures, adding that its current strategy of persuasion would soon give way to penal measures.

“Let me highlight that we are not helpless or oblivious of what to do as a regulator when it comes to dealing with recalcitrant defaulters. We are very pragmatic and only resort to the deployment of our powers when all efforts to bring the offending parties to compliance fail,” he counseled.

For industry players in explorations and production as well as the upstream service sector, government must come up with a harmonized position on how to achieve the twin objectives of local content development and low cost operations.

Managing Director of Shell Petroleum Development Company (SPDC) Limited, Mr Osagie Okumbor, stated at a conference in Abuja that operators are happy to deploy Nigerian content if it would enable them also meet to NNPC target of cutting cost.