Cost of Oil Production & Profitability

Oil price is very volatile, it could be at all time high one moment and then drop drastically over a couple of months or year. A major determinant of oil price is global supply and demand, which is if demand is high and supply is low then oil price is high and vice versa.

The Organization of Petroleum Exporting Countries (OPEC) has always tried to regulate supply (at least for member countries) by apportioning a certain oil production volume per country just to avoid oil glut (excessive supply than demand). The little caveat to this is that not all Oil producing countries belong to OPEC and one of such countries that have consistently been known for pumping so much oil into the world system with no consideration of OPEC regulations is the United State of America. Well this write up is not to talk about global oil supply (that would be a discussion for another day) but about a very important and crucial factor in profitability of oil production for countries and organizations alike. COST!!!

Typical of any business, especially when the business model has somewhat reached maximum profitability and little or insignificant growth in the profits generated, one of the ways to increase profitability is to reduce cost where possible. Depending on level of cost reduction, profit scales up once again.

In the same context, it is same principle for oil producing countries. Oil prices are the same around the world at any given time for the same type of crude, even in this same condition, some countries are far much profitable than others in doing the same production of same volume. Country A and Country B could produce the same volume of oil per day but country A’s cost of production might be $10 while country B’s might be $20. Even though they have the same oil price and same production quantity, country A would be more profitable due to lower cost of production.

Why is cost so important to Oil & Gas production? This is because as said earlier, oil price is very volatile and sometimes totally unpredictable. The one factor at producing countries control is cost all things being equal. In June 2008 Brent oil sold as high as $136.31, sold at about $112 per barrel in early 2014 but came as low as $27.67 in 1st and 2nd quarter 2017. A country producing oil at $30 dollar would be profitable in years 2008 & 2014 but would struggle to keep up in 2016, whereas a country producing at $10 would be profitable regardless of drop in oil price in all three years.
Saudi Arabia has one of the lowest costs of oil production; they produce at approximately $10 per barrel. This low cost is possible first and foremost because there is no tax whatsoever on oil production and also the oil produced in this region is found at quite shallow depth and does not require intense drilling as would be required in many other oil producing regions. Russia produces at about $19 dollar tax factor included. Nigeria produces at $28.99, obviously not maximizing the returns that could be gotten from oil production and being one of the most expensive oil producing country in term of cost in the world.

The Minister of State for Petroleum, Dr Ibe Kachiku has strongly advised that producing companies drop cost of production to $19 per barrel. A few major factors I believe would drive down the cost of production in Nigeria would be:
• A thorough and research driven industry open to a lot of innovation and infusing a lot of technology in the overall process of production
• A lot of regulation should be in place to monitor and regularize the operations of organizations in the industry, which has already been kick-started in form of Petroleum Industry Bill (Implementation is key for this to work)
• Competent workforce (a larger percentage of Nationals for technical positions than expatriates) that would drive efficiently and effectively best practices that could either be new innovations altogether or an adaptation of previous technologies and methods gathered from years of meticulous understudy of competent professionals and practice.

New frontiers require new thinking, $19 cost production per barrel is not only feasible, and it is very achievable. I would be talking in more details about how practical these factors are and how it can be narrowed down to actual reduction of production cost. Till then, cheers and feel free to share your thoughts on how feasible it is to achieve $19 production cost per barrel and would appreciate you follow up by justifying your opinion.