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Energy

FG reveals the current average total cost of crude oil production

The Federal Government has revealed that the current average total cost of production for crude oil is below $30 per barrel for Joint Venture agreements and below $20 per barrel for the Production Sharing Contract.

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Gas is the new petrol - FG to Nigerian car owners, intervention fund, NCDMB, output cut, Petroleum Industry Bill to be passed by mid-2020, says Sylva, FG discovers crude oil in north, says there’s more , OPEC, non-OPEC countries to meet as Saudi, Russia price war affects Nigeria’s budget, FG considers fuel price reduction, OPEC deal: Nigeria to generate additional $2.8 billion revenue as FG reacts

The Federal Government has revealed that the current average total cost of production for crude oil is below $30 per barrel for Joint Venture (JV) agreements and below $20 per barrel for the Production Sharing Contract (PSC).

This is as the implementation of cost reduction policy in oil exploration and production activities will help the country deliver on its growth aspirations of 40 billion barrels of crude oil in reserves and daily oil production of 3 million barrels per day.

This disclosure was made by the Minister of State for Petroleum Resources, Timipre Sylva, at the launch of the Nigerian Upstream Cost Optimization Programme (NUCOP), in Abuja, on Tuesday, February 9, 2021.

READ: Nigeria’s crude oil output exceeds benchmark as daily production hit 2.323 million barrels

What the Minister of State for Petroleum Resources is saying

The Minister said the country needs to optimize its unit cost of production in order to sustain its way of doing business.

Sylva, in his statement, said, ‘’Currently, the average total cost per barrel is below $30/barrel for Joint Venture (JV) agreements and below $20.barrel for the Production Sharing Contract (PSC). We need to optimize our unit cost of production in order to sustain our way of doing business.

‘’Today’s engagement with industry stakeholders, under the Nigerian Upstream Cost Optimization Programme (NUCOP), is part of the resolve of this administration to confront this challenge (high production cost). I expect robust discussions and a realistic roadmap to achieve the cost optimization objectives.’’

READ: NNPC denies allegation of under payment to Federation Accounts

On his part, the Group Managing Director of the Nigerian National Petroleum Corporation (NNPC), Mele Kyari, said that they are leveraging on the laudable initiative of NUCOP launch on the background of the directive of the Federal Government to the Minister of State for Petroleum Resources with the mandate that cost of crude oil production must be cut down.

What you should know

  • It can be recalled that the NNPC had in June 2020, said that it was taking some measures to bring down the cost of crude oil production to $10 per barrel or below.
  • The corporation said it was looking at such variables like logistics, security and transportation with a view to reducing the cost of production.

READ: Shell’s OML 11: FG ordered to renew licence for 20 years

 

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Chike Olisah is a graduate of accountancy with over 15 years working experience in the financial service sector. He has worked in research and marketing departments of three top commercial banks. Chike is a senior member of the Nairametrics Editorial Team. You may contact him via his email- [email protected]

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Energy

How Nigeria can make more money from Oil?

A hedged economy might create additional revenue needed for the country to rebalance its reserves.

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Crude oil still remains a major source of revenue for Nigeria despite a tumultuous 2020 for oil prices. The commodity contributes 90% of our export earnings and will still be a major revenue generator for the foreseeable future.

With this in mind, it is high time Nigeria explores other forms of revenues that can be derived from oil. 200 million Nigerians cannot be catered for with the proceeds of a country that has a production capacity of 1.4 – 1.9 million barrels per day (depending on the quota with OPEC). In contrast, Saudi Arabia has a production capacity of 11 million barrels per day and a population of 30 million.

This article does not only relate to the issue of macroeconomic stabilization, but highlights if the Nigerian government can make use of financial instruments ‘hedging’ to diversify and provide the government with added flexibility and additional tools to make more revenue.

Most countries who do not partake in this hedging programme, either have lower costs of production like Saudi Arabia and Russia, or do not want to take the risks associated with the programme.

Case Study: Mexico

Last year, when oil prices crashed and entered negative digits, Countries dependent on oil were adversely affected by the crash. But somehow, Mexico for the fourth time, cashed about $2.5 billion from its oil hedge program.

For over two decades, Mexico has guaranteed oil revenue via options contracts purchased from oil companies and Wall Street investment banks. Mexico’s hedging experiences of its oil exports is often used as an example for other countries to follow.

In 2009, after the financial global crisis, Mexico made $5.089 billion from it’s hedging position. In 2014, when oil prices plummeted and countries reliant on high oil prices were affected, Mexico was “unbothered”. The Ministry of Finance had purchased put options with one year maturity to hedge 228 million barrels of oil, about 28 percent of production, at a strike price of US$ 76.4 per barrel — US$ 31.1 above the actual average oil price in 2015. Mexico earned $6.4 billion from that hedge. In 2016, Mexico earned $2.7 billion from its hedging.

Since Mexico began running the hedge program in 2001, it has made a profit of $2.4 billion — payouts brought in $14.1 billion while the costs of running the programme cost $11.7 billion in fees to banks and brokers.

Last year, people argued that Mexico’s hard stance during the OPEC+ talks in April is directly related to the fact that it had a hedging programme in place. I must add that hedging gives you an edge in the markets but It’s far more technical, risky and in a few cases profitable. Sources within the NNPC say that the Nigerian government has not executed a hedging program yet.

So how does this programme work?

Mexico, a big exporter of oil and a member of OPEC, hedge their oil against declines that may occur in the market. Take for example, last year as a result of the pandemic and an unsuccessful OPEC meeting due to Russia and Saudi Arabia’s oil supply war, oil prices dropped to negative digits.

A government like Mexico, who hedges their oil with trading schemes would have been benefited from the drop. In this case, for every drop below the “strike price” (A strike price is the set price at which an oil derivative contract can be bought or sold when it is exercised) revenue is being made.

Hedging works both ways. It depends on who the hedger is. In the case above, Mexico is an exporter of oil, so it hedges against drop in prices. However, a country like Egypt, which announced it had executed its own hedging programme last year is a net importer of oil. Primarily, it hedges against the rise in prices. As oil prices rise, Egypt generates money despite naturally preferring low prices as an importer.

Additionally, the downstream sector needs to improve. This is another avenue Nigeria can take to make more money from Oil. The Nigerian downstream sector which involves petroleum product refining, storing, marketing and distribution has much room for development and can improve the fortunes of the millions of Nigerians. Oil accounts for 9% of Nigeria’s GDP and if we look at that, it’s very minimal if we take into context how important Oil is to our economy.

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Conclusion

As I wrote in the earlier premise, this is not as straightforward as it sounds. There are insurance premiums to consider (the cost of the hedging programme), timing of the execution and general oil market outlook to examine.

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For example, it appears that investors are going long on oil. All commodity analysts and banks are also favouring high oil prices as a result of vaccine availability and global supply cuts. Goldman Sachs forecasts oil to be $70 by Q2 2021 and Morgan Stanley also sees Oil at $70 by the third quarter. It would be highly risky to hedge against declining prices in this environment. (Recall prices going in the opposite direction doesn’t favor the hedger).

A hedged economy might create additional revenue needed for the country to rebalance its reserves.

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PS. I am willing to discuss further with interested stakeholders on the possibility of carrying hedging operations for Nigeria.


 

Dapo-Thomas Opeoluwa is an Investment Banker and Energy analyst. He holds a degree in MSc. International Business, Banking and Finance from the University of Dundee and also holds a B.Sc in Economics from Redeemers University. As an Oil Analyst at Nairametrics, he focuses mostly on the energy sector, fundamentals for oil prices and analysis behind every market move. Opeoluwa is also experienced in the areas of politics, business consultancy, and investments. You may contact him via his email- [email protected]

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Energy

NERC to review 2018 Meter Asset Provider Regulations, calls for stakeholders’ comments

NERC commenced the process of reviewing the Meter Asset Provider Regulations 2018 to end the perennial challenges with estimated billing in Nigeria.

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Electricity, Buhari moves against Discos and agents that collect money for prepaid meters

The Nigerian Electricity Regulatory Commission (NERC) has commenced the process of reviewing the Meter Asset Provider Regulations 2018 to end the seemingly perennial challenges with estimated billing in Nigeria.

This was disclosed by NERC via it’s Twitter handle on Wednesday.

It tweeted, “@nercng is in the process of reviewing the Meter Asset Provider Regulations 2018. The link below is for the consultation for comments from stakeholders and members of the public.”

READ: Electricity: FG approves one year waiver of import levy on meters

READ: NERC says electricity consumers will be refunded for meter payment

What you should know

  • In December 2017, in its bid to end the seemingly perennial challenges with estimated billing in Nigeria, NERC released the Draft Meter Asset Provider Regulations 2017 (“Draft Regulations”).
  • Thereafter, following extensive consideration of comments from and reactions to the Draft Regulations, as received from relevant stakeholders, the Board of NERC eventually approved the updated Draft Regulations.
  • Consequently, on March 8, 2018, the Meter Asset Provider Regulations 2018 (“MAP Regulations”) was finally issued under the common seal of NERC and became effective as the governing framework for the metering of electricity consumption in the NESI.

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