- Oil Producers to Shutdown Oilfields Amid Low Prices
Crude oil producers may start shutting down oil fields as the high cost of producing a barrel in Nigeria erodes profitability amid low oil prices.
The ongoing global pandemic and the disagreement between global oil giants, Saudi Arabia and Russia, plunged the price of Brent oil, against which Nigerian crude oil is priced, to an 18-year low of $22 per barrel on Monday.
While price has rebounded slightly to $24 a barrel, the cost of producing a barrel in Nigeria is between $15 to $17 while Saudi Arabia’s cost of production is between $4 and $5 per barrel. This explains why Saudi Arabia could afford to offer a $5 to $8 discount per barrel during this period of weak global demand.
Despite Nigeria offering as much as $5 discount per barrel, the nation still could not find buyers for over 50 cargoes as they prefer Saudi and Iraq huge discounts.
Goldman Sachs on Monday said oil well shut-ins rose to 900,000 barrels of oil per day but “the true number [is] likely higher and growing by the hour”.
“Given the cost of shutting down a well, a producer would be willing to pay someone to dispose of a barrel, implying negative pricing in landlocked areas,” the bank said in an investor note.
Alhaji Abdullahi Bukar, a former board member of the NNPC, said “If oil prices drop to around $10 or $15, there has to be a lot of efforts either to reduce some of the things we are seeing now that form part of the cost of operating the fields or a lot of production will go out.”
“The producers will continue to produce whatever they can but they will slow down in increasing or maintaining capacity. They will try to cut the costs of whatever they are doing, so that the operations remain profitable.
“They need the help of government, communities and other stakeholders to also cut down their demands so that they can keep people happy and working, and lower the unit operating cost of Nigerian crude oil so we can remain in business. It is a very tough time.”
Mr Bala Zakka, an energy expert, said oil companies would have to shut down their oilfields, adding that the small oil firms would be hit the most.
“The amount of work the small players may need to do to produce the crude oil may not be as complicated as that of the big players. But when it comes to availability of funds, they don’t have the leverage that big players have,” he said.
However, Diran Fawibe, the Chairman/Chief Executive Officer, International Energy Services Limited, said oil companies would incur more losses by shutting down production.
He said, “The situation is bad enough, but if you shut down, it is not at zero cost. So, do you now shut down and start to incur the costs associated with non-production? If you are producing, even though it is not economical, you may then have a reduced level of production.
“There are various scenarios about oil production level in the country depending on what happens. If the situation worsens and the price goes below $20 per barrel, then we will be talking about a new scenario completely. And I believe the government is monitoring the situation very keenly with a view to taking appropriate measures.”
