The cost of producing a barrel of crude oil has risen to $40 per barrel in Africa’s largest economy as investments in modern equipment slow.
The Nigerian Upstream Petroleum Regulatory Commission (NUPRC) has identified rising production costs as a critical challenge and warned that it could hinder the country’s ability to sell its commodity.
At $40 per barrel, Nigeria’s cost of oil production is 300% higher than Saudi Arabia’s $10 per barrel, creating concerns over the country’s ability to compete in the global market.
The regulator noted that Nigeria’s upstream oil production costs, ranging between $25 and $40 per barrel, are among the highest in the world, limiting profitability, especially when crude oil prices fluctuate.
“At an average of $25 and $40 production costs per barrel, the nation’s upstream oil production costs are among the highest in the world. This range is significantly higher than production costs in top oil-producing countries like Saudi Arabia, where efficient operations allow for costs as low as $10 per barrel,” the NUPRC said in a publication.
The high production costs are attributed to multiple factors, including aging infrastructure, pipeline vandalism and oil theft. Many oil production facilities, pipelines and storage systems are outdated and require frequent maintenance and expensive repairs.
The regulator said “For a long time, it has identified many factors contributing to the high production costs. Many facilities, pipelines, and storage systems are outdated, leading to frequent maintenance needs and operational inefficiencies. Modernising infrastructure to cut down on repair costs, extend asset life, and bolster productivity is therefore crucial.”
Beyond infrastructure concerns, oil theft and vandalism continue to escalate operational expenses, reducing revenue for both investors and the government. The NUPRC acknowledged that these challenges must be tackled aggressively to restore the sector’s profitability and attractiveness to global investors.
“Oil theft and pipeline vandalism are another setback that impacts operational cost in the sector. Nigeria understands it must develop urgent solutions to curb these menaces and continue to show its determination to address them. The enactment of the Petroleum Industry Act in 2021 marked a pivotal point in this regard,” the commission said.
In response to these growing challenges, the NUPRC has introduced a 10-year cost reduction strategy aimed at bringing production costs down to $20 per barrel. The roadmap, which was launched in 2023, serves as a comprehensive framework for revitalizing Nigeria’s oil sector and ensuring cost efficiency.
“Since its emergence as the regulatory powerhouse in the upstream sector, the NUPRC has wasted no time in embracing the task of tackling existing challenges. In 2023, barely two years after its institution, it drew up a 10-year roadmap as a comprehensive strategy to revitalise and return the oil sector to its glory days. In 2024, in a shorter-term focus initiative under the broader decade-long Strategic Plan, the NUPRC effectively rolled out its Regulatory Action Plan with one of its key objectives being to lower the production cost per barrel of oil to at least $20,” the publication disclosed.
The regulator emphasised that reducing production costs is crucial for attracting investment, retaining higher profit margins and improving Nigeria’s resilience to global oil market fluctuations.
With oil accounting for about 90% of Nigeria’s export revenue, the economic implications of high production costs remain a major concern.
The NUPRC stressed the importance of making Nigeria’s oil sector more appealing to both foreign and domestic investors. Lowering production costs would enhance competitiveness, encourage more capital inflows and ensure greater revenue generation for the country.
“Firstly, lowering production costs will make Nigeria’s oil sector a more appealing destination for foreign and domestic capital. This can inspire the country to compete more effectively with other oil-producing nations and retain a share of the global market. Similarly, by controlling oil production costs, oil companies can secure higher profit margins, even during periods of lower global oil prices.
“An increased profitability would ultimately benefit both operators and the sector, potentially leading to higher tax revenues and royalty payments. A combination of these factors can significantly boost Nigeria’s foreign exchange reserves and strengthen its resilience in the global oil market,” the report said.
As Nigeria struggles to balance production costs with market realities, industry analysts believe the success of the NUPRC’s 10-year strategy will be key to determining the future of Nigeria’s oil sector and its position in the global energy market.
