By Michael Chibuzo
In the past few days, Nigerians have taken to the streets to protest against what the organisers call bad governance or government, depending on which organizer’s messaging one is looking at. Despite the discordant demands from various groups, one common demand has been calls for the federal government to “subsidise fuel back to below N300 per litre”. Few others are also demanding that the Naira be “returned” to a value of N374 or N700 to one US dollar.
On Sunday, President Bola Tinubu addressed the nation and it was obvious from his speech that the question of reversing fuel price back to below N300/litre is not even a remote possibility. The whole protests have further shown the level of innocent ignorance in Nigeria especially about stuffs like pricing of petroleum products.
Some erroneously believe that because we have crude oil, we must be selling PMS or diesel close to free. A similar mentality also pervades around electricity pricing. It is for this reason that I have decided to guide those with OPEN MINDS through a LENGTHY mathematical journey to understand what why we cannot return to the era they clamour for desperately.
THE OIL CALCULATIONS:
A barrel of crude oil (Nigeria’s Bonny light) as at today is sold at $86.
In Nigeria, cost of extracting one barrel of crude oil is $48.
1 barrel of crude oil when refined produces 170 liters of products. Out of this 170 liters, PMS make up 73 liters, diesel make up 40 liters and kerosene make up 15.5 liters. Other heavier components make up the rest.
At today’s exchange rate of N1635, $86 is N140,610. This means, cost of one barrel of crude oil in Naira is N140,610.
Let’s use the following prices as sample price for the listed products:
PMS – N800 per litre
Diesel – N1200 per litre
Kerosene – N1,555 per litre.
If one barrel of crude oil is refined FREE OF CHARGE and the resulting PMS, diesel and kerosene (aviation fuel) sold, the following would be realised:
N800 x 73 = N58,400 (PMS)
N1,200 x 40 = 48,000 (Diesel)
N1,555 x 15.5 = N24,102 (Kerosene)
Total = N130,502.
So, as a refinery owner in Nigeria, if you buy one barrel of crude oil for N140,610 and after refining, you decide to sell the main products (PMS, AGO and DPK) at the pump price enumerated above, you’ll realise N130,502 per barrel. Without adding your cost of refining that one barrel, you have already incurred a loss of N10,108.
When you add up cost of transporting the crude oil to your refinery and the cost of refining plus your expected profit margin, you are potentially running a minimum loss of around N20,000 for every one barrel of refined petroleum products you sell.
“BUT WE OWN THE CRUDE OIL! GOVERNMENT CAN REDUCE PRICE OF CRUDE OIL TO REFINERIES….”
The above quote is what many would say. I understand that sentiment. Yes, we own the crude oil of course, but the crude oil DOESN’T BRING ITSELF MAGICALLY UP FROM THE GROUND OR SEA BEDS. People invest money in terms of equipment, personnel and other logistics to bring it up to the ground. They do this with the hope of making profit. Government through the national oil company, NNPC usually go into Joint Ventures (JVs) with the international oil companies and the few local ones with the financial muscle to invest in oil exploration and exploitation.
Let me take a necessary detour here…
To get crude oil, whether offshore or onshore, you have to drill an oil well (similar to your regular borehole but far deeper and complex to drill especially offshore). To drill the oil well, you will need an OIL RIG. An oil rig in simple terms is the set of installations and equipment used to drill an oil well in an offshore or onshore site where there is oil deposit. Oil rig can be dismantled and moved to another site for more drilling.
Meanwhile you have many categories of well but the general categories are: EXPLORATION well (when searching for crude oil) APPRAISAL wells (for assessing proven oil reserves) and DEVELOPMENT wells (wells drilled in areas with proven oil reserves for production of crude oil). As of today, Nigeria has over 5000 oil wells (many of whom are inactive or dry). An average oil well can produce between 1000-3000 barrels per day for onshore wells or 5,000 barrels and above for offshore oil wells. Nigeria has 30 oil rigs as at May 2024. For context, the US has 600 operational oil rigs as at May 2024.
Now, let us return to the mazy mathematics. To drill an oil well, you will need to get an oil rig. Drilling an oil well can take up to 83 days on land (onshore) and between 3-4 months offshore especially in Nigeria due to many factors. Average cost of using an advanced offshore oil rig PER DAY is over $400,000. If you are drilling an offshore oil well, you may end up spending close to $37 million for just one oil well. This oil well may not even be a development oil well but an exploration one that would not fetch you commercial revenue.
You replicate this expenses for all the oil wells within an OIL FIELD (between 10 to 50 wells in a medium size oil field). Nigeria has around 159 oil fields of various sizes. When you put all the expenses together, you may be spending around $1 billion to drill some wells in a small oil field and build pipelines to transport the oil and gas to the processing facilities where you separate oil, gas and water and remove impurities. You will also need to build storage tanks to store the crude oil as they await loading into vessels.
I believe we are beginning to understand the cost implications of bringing up crude oil from an oil well. Let me use the Agbami oil field, discovered in 1999, as an example to illustrate the complex process of bringing crude oil to the ground and cost implications. The Agbami oil field is a deep water field with a proven reserve of around 900 million barrels of crude oil. Currently, it has 22 oil wells, some of which are ageing (i.e. no longer producing near their initial capacity).
The Agbami field is a subsea development with the oil wells tied back to a floating production, storage and offloading (FPSO). The Floating Production unit, which is the length of three football fields cost over $1.2 billion to build as far back as 2005 and has the capacity to store 2.15 million barrels of crude oil. The vessel itself generates 75MW of electricity to power activities there and has quarters to house up to 100 personnel.
The FPSO arrived the Agbami oil field in Nigeria’s coastal waters from South Korea in 2007. The entire Agbami field development cost a total of $5.4 billion and became operational in July 2008, reaching peak production capacity of 250,000 barrels of crude oil per day in 2009. Currently, it is producing around 140,000 barrels per day because of ageing oil wells, which means new oil wells need to be drilled in other parts of the Agbami oil field.
The Agbami field is operated by Chevron Nigeria Limited in partnership with the Nigerian National Petroleum Corporation (NNPC), Famfa Oil Limited, and Petrobras of Brazil. As at June 2008, Petrobras had contributed over $500 million of the total $5.4 billion it cost to develop the Agbami field without getting a single dollar as revenue. Other partners in joint venture also invested. NNPC and by extension the Nigerian government did not put in one dollar even though it should own 60% of the stake in the JV, instead Chevron came in to become financier to NNPC.
For the Agbami oil field, just like other fields in which companies bring in huge sums to develop oil fields awarded to them, it operates under a Production Sharing Contract (PSC), which is between the NNPC and the companies involved in the joint venture. According to the PSC for the Agbami oil field (which was consolidated with a nearby oil block), Chevron Nigeria Limited has 68% stake, Famfa Oil Limited has 20% stake while Petrobras of Brazil has 12% interest. This is a CONTRACT and is usually signed before development of an oil field.
This contract enables companies involved to confidently raise finance both from banks and other sources, knowing that after investing, they will recoup the money they invested with profit. That is business. If you do not want it that way, your crude oil will remain in the ground or alternatively the government will look for how to raise billions of dollars to invest in developing the oil field while also making sure they have the expertise and technology.
In the end there is a sharing formula for the proceeds of the oil produced after cost of production has been deducted. As of today, cost of offshore crude oil production in Nigeria is $48 like I earlier said. This means if you sell crude oil for $80 per barrel, what you have to share between NNPC and its JV partners is $32 per barrel.
The royalty is usually 60% of the profit oil and goes to the federation account while 40% of the profit goes to JV partners (this profit is also subjected to company tax). So, for every one barrel of crude oil sold as at today, the profit margin that is available for sharing between the JV partners is $32. Meanwhile 60% of $32 is $19.2. This amount is what is sent to the federation account for sharing by all tiers of government through FAAC after additional deductions of a couple of statutory percentages and debts sometimes.
With this knowledge let us carry out another practical calculation using the $19.2 that flows into the federation account from every barrel of crude oil Nigeria sells at $80. I want us to use May, 2024 as an example:
In May, 2024 Nigeria recorded an average DAILY crude oil production of 1.25 million barrels (excluding condensate). The average crude oil price for the Month of May was $84. This means that, in the 31 days that make up the month of May, Nigeria produced 38.75 million barrels of crude oil (that is, 1.25 million x 31). At the average price of $84 per barrel, we earned a total of $3.255 billion (that is, 38.75 million barrels x $84).
Remember, $3.255 billion is the TOTAL EARNINGS from the 38.75 million barrels of crude oil that we produced in May, 2024. However the entire amount does not go into the federation account for sharing as statutory revenue. You have to deduct the cost of producing the 38.75 million barrels of crude oil since the crude oil did not automatically jump out from the ground. I mentioned earlier that it costs $48 to produce one barrel of crude oil in Nigeria (higher than many oil producing countries by the way).
Therefore, when you deduct $48 cost of producing one barrel from $84, which is the average price one barrel of crude oil was sold in May, we have $36 left for sharing between NNPCL (who represents the Nigerian federation in JVs) and the oil companies that invested to produce the 38.75 million barrels. $36 is the profit for one barrel. The federation through the NNPCL usually collects around 60% of this $36, which amounts to $21.6 for every barrel of crude oil sold (that is, 60/100 x $36).
Nigeria, therefore got a total of $837 million ONLY from the crude oil sales in May, 2024. In May, 2024 the average exchange rate was ₦1,424.56 for $1. In Naira terms, Nigeria earned approx. N1.19 trillion from crude oil sale in May, 2024 (that is, $837 million x ₦ 1,424.56). It does not end there. The entire N1.19 trillion does not go into the federation account. The Petroleum Industry Act mandates that NNPC Ltd retains 20% of its profit oil (and profit gas) for use in growing its business with an additional 30% of the profit oil transfered into a frontier exploration fund escrow account. This means 50% of the federation’s share of N1.19 trillion (N596 billion) is deducted in line with the Petroleum Industry Act. This is the amount NNPC Ltd uses to fund its operations as well as invest in oil exploration in frontier basins. That leaves a balance of N596 billion trying to make its way into the federation account.
If you check the FAAC report for June 2024 disbursement , you will see that total revenue generated in the month of May was N2.33 trillion. This includes the 13% oil derivation. However if you analyse the revenue inflows into the federation account from three statutory agencies that collect revenue on behalf of the federation (namely: FIRS, Nigeria Customs Service and NUPRC, which was carved out from the NNPC), using their cost of collection as a guide you will get the following:
1. NUPRC remitted N486.53 billion as oil revenue it collected;
2. FIRS remitted N908.33 billion as taxes including VAT and EMTL it collected;
3. Customs remitted N297.89 billion it collected as customs duties.
These inflows from the three entities amounted to around N1.692 trillion. When you add exchange rate gains of N587.5 billion for the month, you will have approximately N2.28 trillion total revenue for May, 2024 (NB: marginal difference between the NBS-reported N2.33 trillion figure and my N2.28 trillion is due to early approximations I made). From the actual figure remitted by NUPRC (N486.5 billion) you will notice a difference of up to N109.5 from the N596 billion balance after the combined 50% deduction for NNPC retained revenue and transfer to frontier exploration fund had been made.
The Nigerian federation is still owing NNPC Ltd subsidy arrears (it was N2.7 trillion in May 2023) and NNPC Ltd has been gradually collecting its money back, which leaves the net amount of direct oil revenue flowing into the federation account diminished. That notwithstanding, the indirect revenue from oil is there to augment the revenue inflows into the federation account. 40% of the taxes FIRS collects are actually oil-related as they are company taxes paid by the operators in oil and gas sector.
So, if you want the FG or the President to unilaterally decide and say, “oh we produce crude oil in Nigeria, so let us collect $50 per barrel from Dangote Refinery or other local refineries instead of say the global price of $84”, it means we would simply be digging our grave as a nation. Apart from the fact that there will be zero inflow of direct oil revenues into the federation account, 13% oil derivation will also be negatively affected, and even a bulk of FIRS oil-related tax revenue inflows will dry up.
Meanwhile NNPC Ltd JV partners will insist that the terms of the production sharing contract they signed with the NNPC Ltd must be respected in terms of crude oil pricing, calculation of royalties etc. If you attempt to change the rules, you will find yourself in arbitration panel in London or Paris. NNPC Ltd is already struggling to raise capital to fund necessary exploration projects because oil wells do not flow indefinitely. They dry up and if you do not re-invest to develop new oil wells or explore to discover new crude oil reserves, your oil production will slowly grind to a halt. NNPC Ltd already has a crude oil-backed $3 billion loan deal with Afreximbank and is allegedly looking for a fresh $2 billion loan.
When you look at these situations, it becomes obvious that we are severely limited in the options available to us in the short to medium term. We are paying for the unchecked consumption appetite of the past, which was exacerbated by unbridled corruption and inefficiencies. What Nigerians should be clamouring for at the moment is how can the country reduce its dependence on petrol for transportation by increasing the pace of CNG adoption in our mass transit system.
Nigerians should also get more interested in how we can reduce the cost of producing one barrel of crude oil in Nigeria in addition to demanding for increased openness from the operators and regulators in our oil and gas sector so that Nigeria will ensure maximum value from available oil and gas assets. Of course intelligent and specific questions bordering on accountable must be asked of our leaders at the federal, state and local government levels that superintend the public revenues that eventually get distributed.
We don’t need to dissipate energy on an unnecessary (even if popular) aluta quest that will only set us back to square one. We must understand our predicament, which are mostly self-inflicted and make only realistic demands.