Madaki Ameh, the managing partner at BBH Consulting, has said that reducing unit operating expenses (OPEX) per barrel when getting oil from the ground in Nigeria, will reduce fuel pump prices.

He said this during a September 21 interview via Arise News when addressing the issue of the return of fuel subsidy payments.  

During the interview, he said the subsidy payments in the country were once defended as being necessary to cushion the vagaries of the international market.

He, however, disagreed with that saying that Nigeria should not be bothered about the international price of crude oil. 

He said: 

• “We produce crude oil, so we have no business being worried about the international price of crude oil, what we should be looking at is the wellhead cost of a barrel of crude, no matter how inefficiently you want to produce.” 

According to him, as an oil-producing country, Nigeria has no business paying subsidies on petroleum products.

According to him, the report that almost N100 billion had been spent on subsidies in the month of August means that there is opaqueness in the industry, and nobody audits what they do. 

Mr. Ameh emphasized his insider knowledge gained during his tenure as a former Shell employee, shedding light on the operational expenditures within the Nigerian oil sector.

Over a decade ago, Shell recognized the imperative need to take decisive actions within its Nigerian operations due to an alarmingly high unit operating expenditure (OPEX), a pivotal efficiency metric in the industry.  

At that time, Shell held the unenviable position of having the highest unit OPEX across the industry. Subsequently, data sourced from the now-defunct Department of Petroleum Resources (DPR) compared the unit OPEX of the five major oil producers in the country.  

It was revealed that Shell was the most efficient, as they were producing the highest crude output at that time.

Mr. Ameh said that as of 2007, the average unit OPEX for extracting a barrel of crude oil from the ground stood at a modest $3.25 per barrel, a figure reflective of the costs involved back then. 

However, the landscape has drastically changed over the past 16 years.

The unit OPEX for a barrel of crude oil has significantly inflated, ranging between $25 to $30 per barrel presently. He underscored the fact that achieving a production cost of $30 per barrel necessitates deliberate inefficiencies, indicating a concerning situation.  

He alleged that presently, certain operators artificially inflate oil production costs to accommodate various inefficiencies, thereby creating a burden for the Nigerian public.

He noted further that it is important to note that approximately 80% of the retail price of petrol, diesel, kerosene, and aviation fuel comprises the cost of crude oil. 

He said: 

• “In my view, no matter how inefficiently any of the companies produce, they should not produce anything higher than a unit OPEX of $7 to $10 per barrel maximum. If that is the case, then the input cost into the cost of products at the pump must be $10 because we produce the crude, we do not buy it in the international market.” 

On fuel subsidy 

Mr. Ameh said that fuel subsidy has always been a self-inflicted injury, for a country like Nigeria which is an oil-producing country, as opposed to an oil-purchasing country.  

He said: 

• “We have no business talking about subsidy or holding our breath when the price of crude oil goes up in the international market. We are doing this to ourselves, even today we can have  N200 per litre petrol, diesel, and kerosene pump prices, but I really do not know what they are doing at NNPCL and why they are inflicting this pain on Nigerians, it is completely needless. 
• “When some people have made so much money from a process it is extremely difficult to call it off, those who have become used to the sleaze that subsidy has become these several decades will just be waiting for the slightest signal and they will cash in on it.” 

Addressing the issue of fuel subsidy 

Mr. Ameh articulates a solution to definitively tackle the fuel subsidy predicament: he suggests that the government should display the courage to designate the 445,000 barrels allocated for local consumption with a price distinct from the international standard.

He underscores the need to reduce the unit cost associated with a barrel of crude.

On the topic of the country’s deficient active local refineries, Mr. Ameh contends that refining abroad is a more cost-effective and efficient option.

He contends that the sole discrepancy between domestic and foreign refining lies in the transportation expenses incurred. He emphasizes that this cost differential remains sustainable in the long run.

While he acknowledges the benefits of local refining, particularly in terms of employment generation and value addition, he also criticizes the perpetual farce that has become the turnaround maintenance of local refineries.

Mr. Ameh attributes this inefficiency to a persistent issue: the appointment of petroleum ministers lacking substantial knowledge about the petroleum industry. 

Source- Nairametrics.