Shale: Nigeria, others must lower costs, says Kachikwu

02 February 2017, Lagos –  Members of the Organisation of the Petroleum Exporting Countries must lower production costs to compete better with shale oil producers, the Minister of State for Petroleum Resources, Dr. Ibe Kachikwu, has said.

Industry analysts have said the rising shale oil production in the United States could upend efforts by major producers including OPEC to bring global supply and demand for crude back into balance.

The US shale oil production for March is expected to rise by the most in five months, as energy companies ramp up drilling on the back of the recent rally in oil prices.

Kachikwu, in an interview with the CNBC Africa, also said he was confident that an output reduction agreed in November would see oil prices hold.

Nigeria, which relies on crude sales for around two-thirds of government revenue, saw its economy shrink by 1.5 per cent in 2016 – the first full-year contraction in 25 years – largely due to lower oil receipts.

Eleven of OPEC’s 13 members along with 11 non-OPEC countries agreed to make cuts for the first half of 2017, although Nigeria and fellow OPEC member Libya were exempt due to production setbacks suffered last year.

“OPEC members must lower production costs to compete better with shale producers,” said Kachikwu, quoted in a tweet on the CNBC Africa’s feed.

Kachikwu said he was “impressed with the work OPEC has done” and “confident prices will hold”, but added, “What is more fundamental is what OPEC countries can begin to do for themselves in term of costs, diversification.”

The November 30 agreement to cut production prompted oil prices to rise by $10 a barrel, although they have been trading in a narrow $3 range in the last few weeks.

But analysts say that a revival in the US shale production is likely to limit any major price recovery in crude oil.

The Secretary-General of OPEC, Mohammed Barkindo, on Monday in Abuja said OPEC members lost a cumulative revenue of about $1tn as a result of the crash in crude oil prices, describing the crisis in the oil sector as the worst ever in recent memory.

Crude oil prices crashed from over $100 per barrel in 2014 to as low as $23 in 2016, a development that threw many oil dependent countries into economic crisis.

The Group Managing Director, Nigerian National Petroleum Corporation, Dr. Maikanti Baru, said last week that unit technical cost of production had significantly dropped from above $70 per barrel in 2014 to about $27 per barrel as of 2016 ending.

He said efforts were ongoing to further drive down cost, adding, “But this cannot be achieved without the support, cooperation and collaboration of all stakeholders in the industry. It is worthy to mention that cost reduction will also serve as incentives for investors to grow reserves, increase profitability, thus leading to increased return on investment.”

The pace of the recovery in the US shale oil output is set to pick up steam this month as more crude-producing regions return to growth, according to the US Energy Information Administration’s latest drilling productivity report.

The EIA forecasts the US shale oil production in seven major regions will rise by a total of 80,000 barrels per day to 4.87 million bpd in March.

This is the third month in a row the agency has projected output to rise.

The increase is nearly double the 41,000-bpd climb the agency expected for February in its last report.

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