New upstream cost-efficiency directives fall short — Energy analyst warns

Energy analyst Kelvin Emmanuel has warned that the Nigerian government’s recently introduced executive directives aimed at improving cost efficiency in the upstream oil sector are inadequate to address deeper, long-standing structural and economic problems, particularly within the struggling onshore segment.

Speaking in an interview on Arise TV’s Business Week on Saturday, Emmanuel observed that the new Cost Efficiency Incentive (CEI) may deliver modest gains for offshore fields but fails to tackle persistent inefficiencies affecting onshore operations.

“The CEI calculates savings by multiplying the difference between targeted and actual operating costs with annualised crude oil sales,” he explained.

“This approach may benefit offshore Production Sharing Contract (PSC) fields, where production costs generally fall between $20 and $40 per barrel. However, onshore operations continue to face significantly higher costs and operational challenges.”

Emmanuel underlined that the directives do not address the root causes of these issues. “The Nigerian National Petroleum Company (NNPC) must evolve from being a government-owned entity into a commercially viable, beneficial owner,” he said.

“This transformation will take at least two years and will involve a comprehensive process of evaluation, asset classification, valuation, audits, and pricing, all in preparation for a public listing.”

While recognising the incentives as a positive development, Emmanuel cautioned they are unlikely to attract fresh investment unless they provide competitive post-tax internal rates of return (IRR).

“In Nigeria’s case, the IRR needs to exceed 10 per cent to compensate for the risks associated with emerging markets. Without mechanisms to achieve these returns, investors are likely to seek opportunities elsewhere.”

He also noted that Nigeria’s post-PIA tax burden, combining hydrocarbon and corporate income taxes, stands at around 67 per cent. This is higher than Guyana’s 55 per cent and Senegal’s 64 per cent, and only slightly lower than Norway’s 93 per cent, despite Norway’s more mature and stable oil market.

Emmanuel further pointed out that the effectiveness of the CEI model depends heavily on transparent and accurate data on both actual and targeted operating costs, as well as annualised fiscal crude sales.

To strengthen investor confidence and improve operational efficiency, he called for amendments to Section 65 of the Petroleum Industry Act (PIA).

He specifically recommended establishing Incorporated Joint Venture Companies (IJVCs), which would enable partners to make joint investment decisions and manage joint venture agreements more efficiently.