- How High Oil Production Cost Impacts Producers, Firms
The dynamics of the global oil and gas industry are changing. Oil-producing countries and oil companies are seeking production cost-reduction by all means possible. This became necessary for companies to remain afloat and make profit while producer-countries make huge earnings from their hydrocarbon resources.
The drive for lower production cost is further heightened by the belief that the era of oil price at $100 per barrel is gone. Therefore, to remain competitive, the cost per barrel of crude has to be cheap or attract the required investment in the case of an oil-producing country.
However, Nigeria is still ranked among countries with one of the highest cost per barrel production. Available data on 13 oil producing nations, including United Kingdom (UK), Brazil, Nigeria, Venezuela, Canada, United States (US) shale, Norway, US non-shale, Indonesia, Russai, Iraq, Iran and Saudi Arabia, showed that in 2016, Nigeria was among the first on the list of countries with the highest production cost per barrel. She came after UK with $44.33 per barrel (bbl), Brazil -$34.99/bbl and Nigeria, $28.99/bbl. The last three countries on the list, Iraq, Iran and Saudi Arabia had the lowest production cost per barrel of $10.57, $9.08 and $8.98 respectively.
From the data, Gulf countries have the cheapest barrel of oil and are among the countries with highest output. For instance, Saudi Arabia’s daily oil production is about 12.3 million barrels; Iraq–4.8 million barrels daily and Iran, 3.8 million barrels daily, while Russia has about 11.4 million barrels production daily. This development has put countries with high production cost at very difficult situation, especially Nigeria that does not only depend on oil proceeds for the sustenance of her economy, but on imported refined petroleum products to power her commercial and industrial activities.
Since the swing in oil price from end of 2014, the Federal Government has been emphasising the need for oil firms to consistently strive to drastically bring down their cost of production per barrel. The emphasis and anticipated action have become inevitable. Revenue due to the government from oil exports had significantly dropped due to low oil prices in the international market.
Besides, the volume of oil in the market is more than demand, leading to significant number of unsold cargoes of different oil grades in the market. Oil traders’ reports often show different grades of Nigerian oil begging for buyers, a situation that signals an urgent need to think outside the box on how to steer away from undue dependence on oil revenues to drive the economy.
The Minister of State for Petroleum Resources, Dr. Emmanuel Ibe Kachikwu, aptly put the disadvantaged state in which Nigeria is in the league of oil producing countries when he spoke at the inaugural Nigeria International Petroleum Summit (NIPS) in Abuja. He said considering that Nigeria’s over 50 years in oil business, it should be a model to other emerging oil producing countries in Africa.
However, Africa’s biggest oil producer still battles with a couple of challenges, which has kept its oil production cost far higher than most of its contemporaries. He said: “We are the largest oil producing country in Africa and perhaps, the largest gas producing country in Africa and have been into oil and gas business for nearly 50 years. We have had our ups and downs and need to set good examples for other African countries looking up to us for leadership in this sector.
“There are snapshots of what we need to achieve as an oil producing country to make our oil production efficient and profitableas well as be outstanding as we ought to be. The reality is that today if you cannot produce cheap cost oil, diversify the processing of your oil, look frankly into internalising and externalising the investments to your people and your foreign investors in the sector, capture the requisite technology skills that will help you operate efficiently, you are lost before you start.”
The Minister noted that in another 15 years, export of crude oil will be a shameful habit for any country that is doing it. “If you look at the movement in the Gulf and United States that have exited, quite frankly, the high production cost of oil, the drive to cut your production cost becomes more glaring. Everybody is coming at it in a different angle, shale in the US and diversification in the Gulf,” he added.
The clean energy focus, according to him, is beginning to make almost irrelevant the vast crude oil reserves that Nigeria has in the ground unless she can turn them into things that are clean.
“So, the challenge for oil companies operating in the country and Nigerians, who are in this sector, has changed. Historically, our business was to find the oil, sell it to earn foreign exchange, but it has got to be better than that now. Oil has got to provide work for our people, the resource to power this country, provide the operational environment that is transparent enough for others to take Nigeria serious.
“Oil has got to provide the technical and human skills set that are essential for us to export people out into other African countries and become major investors in other African countries, something the banking sector has tried to do over the last six to seven years,” Kachikwu noted.
Degeconek Oil and Gas Limited Managing Director/Chief Executive Officer and the immediate past president of the Nigerian Association of Petroleum Explorationists (NAPE), Mr. Abiodun Adesanya, however, disagreed that Nigeria has one of the world’s highest production cost per barrel of oil. He said owing to the country’s matured basin, it should have one of the cheapest barrel production costs in the world.
According to him, corruption and security issues, militancy in the Niger Delta region, among others, largely contributed to inflation of cost of oil production in Nigeria, but in the real sense of it, cost of producing a barrel is cheap in the country. He said: “1 wouldn’t agree that Nigeria’s cost per barrel production is among the highest in the world. A couple of factors outside oil substantially contribute to this. To be honest with you, I will say that cost per barrel is a function of cost of services. It is a function of wastages in the system (corruption, among others). But there is the actual cost per barrel. We don’t have any business in having a high cost per barrel given the matured and long history of exploration and production that we have had in Nigeria.
“If we move to new areas and try to develop them that will be understandable, but, there is a lot of amortised infrastructure that have been built a long time ago and they have paid for themselves already and are just being utilised. But if you are going to a new area, for example, Aje field production, they need a lot of new infrastructure such as floating production, storage and offloading vessel (FPSO), among others. So, we have gone past that point. Our cost per barrel has no business being high.”
Adesanya said because Nigeria had been in recession and the industry had been challenged by oil price, service cost has also come down. He said there were elements that had nothing to do with oil and gas on the technical side that were also exacerbating the cost per barrel. These include the non-technical cost, cost of joint taskforce (JTF), navy patrol vessel, cost of providing security and community issues.
‘’There is also the cost of repairing in a cyclical way the damaged infrastructure because all those costs are eventually shared and passed on to the cost per barrel. So, there is a technical cost that we know – cost of drilling, logging a well and seismics. There is cost of naval patrol vessel, gun-boat rental, repairing Trans Forcados multiple times, which can easily be avoided. By the time you add these on to the technical cost, you have this bogus cost per barrel. So, if we can try and address those issues and bring them down, I think we will be alright,” Adesanya reasoned.
Top Five US Oil and Gas Firms Lost $307bn in Market Value Amid COVID-19 Crisis
Market Value of US Five Largest Companies Decline by $307bn in 2020
Even before the coronavirus pandemic, the oil and gas industry was faced with slumping prices. However, with a record collapse in oil demand amid the coronavirus lockdown, the COVID-19 crisis has further shaken the market, causing massive revenue and market cap drops for even the largest oil and gas companies.
According to data presented by StockApps.com, the top five oil and gas companies in the United States lost over $307bn in market capitalization year-over-year, a 45% plunge amid the COVID-19 crisis.
Market Cap Still Below March Levels
Global macroeconomic concerns such as the US-China trade war and the oil overproduction set significant price drops even before the coronavirus outbreak. A standoff between Russia and Saudi Arabia in the first months of 2020 sent prices even lower.
After global oil demand plunged in March, Saudi Arabia proposed a cut in oil production, but Russia refused to cooperate. Saudi Arabia responded by increasing production and cutting prices. Shortly Russia followed by doing the same, causing an over 60% drop in crude oil prices at the beginning of 2020. Although OPEC and Russia agreed to cut oil production levels to stabilize prices a few weeks later, the COVID-19 crisis already hit. Statistics show that oil prices dropped over 40% since the beginning of 2020 and are hovering around $40 a barrel.
Such a sharp fall in oil price triggered a growing wave of oil and gas bankruptcies in the United States and caused a substantial financial hit to the largest gas producers.
In September 2019, the combined market capitalization of the five largest oil and gas producers in the United States amounted to $674.2bn, revealed the Yahoo Finance data. After the Black Monday crash in March, this figure plunged by 45% to $373bn. The following months brought a slight recovery, with the combined market capitalization of the top five US gas producers rising to over $461bn in June.
However, the fourth quarter of the year witnessed a negative trend, with the combined value of their shares falling to $367bn at the beginning of this week, $6.2bn below March levels.
Exon Mobil`s Market Cap Halved in 2020, Almost $155bn Lost YoY
In August, Exxon Mobil Corporation, once the largest publicly traded company globally, was dropped from the Dow Jones industrial average after 92 years. As the largest oil and gas producer in the United States, the company has suffered the most significant market cap drop in 2020.
Statistics indicate the combined value of Exxon Mobil`s shares plunged by 52% year-over-year, falling from almost $300bn in September 2019 to $144bn at the beginning of this week.
Phillips 66, the fourth largest gas producer in the United States by market capitalization, witnessed the second-largest drop in 2020. Statistics show the company`s market cap dipped by 49.6% year-over-year, landing at $22.9bn this week.
The Yahoo Finance data revealed that EOG Resources lost over $21bn in market cap since September 2019, the third-largest drop among the top five US gas producers.
Conoco Phillips witnessed a 42% drop in market capitalization amid the COVID-19 crisis, with the combined value of shares plunging by almost $30bn year-over-year.
Statistics show Chevron witnessed the smallest market cap drop among the top five companies. At the beginning of this week, the combined value of shares of the second-largest US gas producer stood at $141.5bn, a 36.9% plunge year-over-year.
Gold Hit 26.8% ROI YTD, the Highest Increase in Value Among Top Assets
Gold Delivers 26.8% Return on Investment Year-t-Date
As the world’s earliest form of currency, gold has long been considered a reliable store of value. Unlike banknotes, stock, or other assets, the precious metal managed to preserve the investors’ wealth throughout the years, especially in times of turmoil in the financial markets.
According to data presented by AksjeBloggen, gold hit a 26.8% YTD return on investment, the highest increase in value among top assets.
Gold Return Rate 8.5% Higher than in 2019
Investors tend to focus on gold in times of market volatility, considering it to be a ‘safe haven’ in crises like the coronavirus. In 2019, the value of gold increased by 18.3%, revealed the Blackrock data. The precious metal continued the impressive performance in 2020 with a 26.8% YTD return, 8.5% more than in 2019.
Statistics show that last year, the S&P 500 index increased in value by 31% but was outperformed by Nasdaq, which grew by 35.2%. The MSCI Europe index rose by 26.1% in 2019. China A-shares followed with a 22.3% ROI.
However, the COVID-19 crisis had a massive impact on popular assets, causing a sharp fall in their values during the first half of 2020. The Blackrock data revealed the Nasdaq YTD return hit 23.9%, 11.3% below the 2019 performance. China A stocks reached 10% ROI YTD, much under the 22.3% return in 2019.
Statistics show the S&P 500 index had an 8.4% value increase in the nine months of 2020, almost four times less than in 2019. MSCI Emerging Market Index reached a 4.9% value increase in the same period, compared to 13% in 2019.
The Blackrock data show that crude oil, FTSE 100, and MSCI Europe index witnessed the most significant drop in the nine months of 2020, with their values falling by 34.6%, 22.4%, and 11.5%, respectively.
Global Demand for Investment Gold Surged by 100% YoY
Although many investors value gold as an important portfolio asset, the economic downturn caused by the COVID-19 pandemic led to a surge in global demand for the precious metal.
The World Gold Council data showed the global demand for investment gold increased significantly since the beginning of the year.
In the fourth quarter of 2019, it amounted to 279.2 metric tons. By the end of March, this figure jumped by more than 93% to 539.6 metric tons. The increasing trend continued in the second quarter of the year, with global demand for investment gold hitting 582.9 metric tons, an almost 100% jump year-over-year.
Statistics indicate the global demand for gold for investment purposes hit a record-breaking 1,152 metric tons in the first half of 2020, the highest figure so far.
Oil Prices News: Oil Gains Following Drops in US Crude Inventories
Oil Prices Gain Following Drops in US Crude Inventories and OPEC High Compliance Level
Global oil prices extended their 2 percent gains on Thursday after data showed U.S crude oil inventories declined last week.
The price of Brent crude oil, against which Nigerian oil is measured, gained 0.2 percent or 7 cents to $43.39 a barrel as at 12:10 pm Nigerian time. While the U.S. West Texas Intermediate (WTI) crude appreciated by 8 cent or 0.2 percent to $41.12 barrels.
Oil prices extended their three days gain after the American Petroleum Institute said the U.S crude inventories declined by 5.4 million barrels in the week ended October 9.
The report released after the market closed on Wednesday revealed that distillate stockpiles, which include diesel and heating oil, declined by 3.9 million barrels. Those stated drawdowns almost double analysts’ projections for the week.
“Much of the fall is due to the effects of Hurricane Delta shuttering U.S. production in the Gulf of Mexico, and as such, will be a transitory effect,” said Jeffrey Halley, senior market analyst, Asia Pacific at OANDA.
“Therefore, I am not getting too excited that a turn of direction is upon markets, although both contracts are approaching important technical resistance regions.”
Also, the report that the Organization of the Petroleum Exporting Countries (OPEC) and its allies, referred to as OPEC+ attained 102 percent compliance level with their oil production cuts agreements bolstered global oil outlook. Suggesting that demands for the commodity are likely not growing and could drag down prices in few weeks, especially when one factor in the reopening of Libya’s Sharara oil field, workers returning to operation in Norway and the Gulf of Mexico.
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