A recent forensic analysis on the claim by the National Petroleum Investment Management Services (NAPIMS) regarding $5billion savings on the cost of production, has proven bogus and unverifiable. The claim further calls for scrutiny accrued revenue to the Federation in the same period. In August 2017, NAPIMS raised the hope of stakeholders in the oil sector amidst the oil price volatility stating the agency had driven down the cost of oil production from $78 per barrel to $23 per barrel, representing a 70.5 per cent drop in production cost. It also reported that during this period, the organization saved the country $3 to $5 billion dollars in cost of production
Though these assertions by NAPIMs suggested there was an end in sight for low production turnover and the incessant nonoptimal revenue of the country due to the high cost of production, NAPIMS, a subsidiary of the Nigerian National Petroleum Corporation (NNPC) provided no data to back up its claims. However, analysis done by DATAPHYTE to review the cost profile of the upstream sector and verify NNPC’s position about production cost reduction proved otherwise.
What is Unit Production Cost?
Production costs are made up of all the costs allowable for deduction in the computation of petroleum profits tax and company income tax under Nigeria’s extant laws. These costs divided by the volume of crude oil produced gives us the unit production cost (UPC). Also, UPC is commonly called Unit Technical Cost and still, is the combination of recurrent and capital expenditures incurred in the production of oil.
What is Gross Crude Oil Production and the Average daily production?
Also, the gross crude oil production value is the sum of production values of Joint Venture, Production Sharing Contracts, Service Contracts, Independents and Marginal Field Operators and Average daily production figure is the GCP divided by 365 days i.e GCP = PJV + PPSC + PSC + PI + PMFO
To achieve the goal of the analysis, our analysts obtained budget unit production cost and average annual production figures from Medium-Term Expenditure Framework and Fiscal Strategy Paper (MTEF) and Budget Implementation reports of the Nigerian Budget Office. Also, actual production and liftings data were sourced from NNPC annual reports. However, actual unit production cost data is not available in the public domain because the Nigerian National Petroleum Corporation (NNPC) does not publish this information.
A nominal comparison of the budget production and the actual production figures in the public domain raised the first red flag about the veracity of NAPIMS’ claim. According to NNPC reports, the total average budget (or planned) production figures from 2010 to 2017 in million barrels per day (MBOPD) were 2252, 2300, 2480, 2535, 2389, 2280, 2201, 2200, and 2300. Likewise, the total average actual production figures from 2010 to 2017 in million barrels per day (MBOPD) were 2447, 2373, 2330, 2193, 2187, 2119, 1831, 1890, and 1922. The table and chart below show the budget production and actual production figures from 2010 to 2018.
From the chart above, it is revealed that aside 2010 and 2011 where actual production performance was slightly higher than budget, the reverse was the case for the rest of the period. The consistent decline from 2012 to 2018 naturally results in the corresponding increased values of the unit production cost (UC) thus negating the notion of an eventful unit cost reduction that NAPIMS alluded to.
Further analysis was conducted to calculate the actual unit production cost to further verify the possibility that NNPC’s unit production cost was at $78 per barrel and that it declined to $23. The modelling used the available data – budget unit cost, budget production figures and actual production figures for both joint venture (JV) and production sharing contracts (PSC) to estimate the actual unit production cost from 2010 to 2018.
To arrive at the estimated actual unit production cost for each year (each for the operational cost and capital cost), the budget unit production cost was multiplied by budget production numbers, then divided by actual production numbers across the production regimes (JV and PSC). The result of this calculation is the normalised unit production cost. While the normalised does not provide the actual unit production cost, it, however, provides the closest approximation to the actual unit production cost publicly available.
Normalised JV Unit Production Cost
As shown in the table below, the annual budget JV production figures (in bbls) for 2010 to 2014 were 527123091, 536406932, 549753228, 557662960 and 471580000. For 2015 to 2018, the figures were 424130000, 396012000, 412085000, and 452902976. Likewise, the annual actual production figures (in bbls) for 2010 to 2014 were 530,703,945, 521,517,352, 464,979,329, 399,381,531, and 396,855,482 respectively. For 2015 to 2018, the figures were 372,184,605, 294,567,277, 305,585,099, and 330,135,060 respectively.
The budget Operating Expenses (T1) unit cost for the same period were $11.98, $9.20, $10.24, $9.84, $9.94, $10.19, $10.29, $10.43 and $10.37. Also the capital expenses (T2) were $17.23, $16.86, $17.58, $20.20, $21.86, $22.80, $15.57, $14.53, $15.47.
Given the following figures and using the formula, UCJVnorm = UCJVb x ProdJVb /ProdJVa,
The corresponding normalised JV Operating expenses (T1) unit production cost for 2010 to 2018 are $11.90, $9.46, $12.11, $13.74, $11.81, $11.62, $13.83, $14.06 and $14.23. For the respective JV capital expenses (T2), the normalised unit production cost for 2010 to 2018 are $17.11, $17.34, $20.78, $28.20, $25.98, $25.98, $20.93, $19.59 and $21.23.
The total unit or technical cost for JV are $29.01, $26.81, $32.89, $41.94, $37.79, $37.60, $34.77, $33.66 and $35.45.
Normalised PSC
As shown in the table below, the annual budget PSC production figures (in bbls) for 2010 to 2014 were 292000000, 300672505, 308592012, 362640250 and 319375000 respectively. For 2015 to 2018, the figures were 319740000, 321348000, 307695000 and 312841500 respectively. Likewise, the annual actual production figures (in bbls) for 2010 to 2014 were 316,887,117, 289,333,720, 320,434,163, 313,965,407 and 320,200,461 respectively. For 2015 to 2018, the figures were 320,626,072, 324,334,270, 303,951,834 and 289,596,012 respectively.
The budget Operating Expenses (T1) unit cost for the same period were $7.84, $8.69, $8.30, $8.36, $9.20, $8.17, $8.22, $8.85 and $8.70. Also the capital expenses (T2) were $11.94, $13.57, $19.68, $16.28, $18.46, $19.74, $19.62, $17.86 and $11.01.
With the UCPSCnorm = UCPSCb x ProdPSCb / ProdPSCa
The corresponding normalised PSC Operating expenses (T1) unit production cost for 2010 to 2018 are $7.23, $9.03, $7.99, $9.66, $9.18, $8.14, $8.15, $8.96 and $9.40. For the respective PSC capital expenses (T2), the normalised unit production cost for 2010 to 2018 are $11.01, $14.10, $18.96, $18.80, $18.41, $19.69, $19.44, $18.08 and $11.90.
The total unit or technical cost for JV are $18.23, $23.13, $26.94, $28.46, $27.59, $27.83, $27.58, $27.04 and $21.29.
Weighted Average JV & PSC Unit Costs
The final step is to arrive at the weighted average unit production which provides the closest estimated value that unit production costs of NAPIMS should accrue to. In calculating these values for 2010 through 2018, each normalised technical cost for JV and PSC is multiplied by its actual production, summed up and then divided by the sum of the actual production. I.e With the UCWeighted = {(UCJVnorm x ProdJVa) + (UCPSCnorm x ProdPSCa)} / ( ProdJVa) + ProdPSCa)
Findings: Based on the table above there is no verifiable evidence that the unit production cost was $78/bbl in 2015 neither is there any verifiable evidence that it was $23/bbl in 2017.
From our analysis, as well as publicly available records reviewed, it is revealed that the claim NAPIMS of cost reduction of $55/bbl between 2015 and 2017 cannot be supported by verifiable facts. Our findings, however, do suggest that actual unit production cost for 2015 and 2017 could be anywhere between $38/bbl to $34/bbl for the JVs and $28/bbl to $27/bbl for PSCs.
Based on the analysis by Dataphyte’s experts in the table above, the overall normalized weighted average unit production cost for 2015 and 2017 stood between $33/bbl and $30/bbl as against the $78/bbl and $23/bbl figures respectively, claimed by the NNPC.
To further confirm, the adjusted number for 2015 was compared to Nigerian cost data published by Statista to check for consistency. This internationally published information puts the unit cost for Nigeria at $31.6/bbl for 2015 as shown in the chart below
Given that the claims of production cost reduction cannot be verified independently, it is therefore not surprising that no revenue increase resulting from the purported reduction has been recorded.
…to be continued with the analysis of revenue implication