Cost Optimisation in the Nigerian Oil & Gas Sector

July 15, 2021
Sam Afemikhe
Blog
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The text below is my opinion/ presentation at the recently held 20^th Edition of The Nigeria Oil and Gas Industry Conference , Abuja, Nigeria between July 5-7, 2021.

The outline

The Nigeria Upstream Cost Optimization Challenge

Modern Cost Control Technology

Two Step Approach Mechanism to Control and Drive cost down

Step One – Set Up NNPC Driven Performance Measurement & Benchmarking System

Step Two – Industry Wide Benchmarking Assembly

The Nigeria Upstream Cost Optimization Challenge4 § In 2015, crude oil prices dropped from a June 2014 high of US$115/barrel to below $30/barrel.

Similarly, at the start of COVID-19 pandemic in March 2020, they crashed to below US$20/barrel with economies on lockdowns and a generally pessimistic oil demand outlook §

In an industry accustomed to prices in the $80-$120/ bbl range, with the new price cycle of $40- $60/bbl, companies with the lowest break-even prices will be the winners in the long run.

For Nigeria and the Nigeria National Petroleum Corporation (NNPC), the oil price and fiscal breakeven level is particularly important given the role that oil plays in supporting the economy and government budgets. §

In this context, Companies and NOCs around the world are increasingly implementing ambitious cost[1]optimization programmes with the objectives of reducing their cost base by a significant level.

The average cost of producing a barrel of crude oil in Nigeria is US$29 compared to Iraq US$10.6, Saudi Arabia US$10.6, and Iran US$9.1. https://knoema.com/nolsgce/cost-of-crude-oil-production by-country-and-crude-oil[1]

Only Low Break-Even Cost Operators and NOCs will be Winners The Nigeria Upstream Cost Optimization Challenge Source: Rystad Energy

It is therefore imperative that NNPC and the upstream companies engage in an aggressive cost optimization programme

Gartner Glossary, defines Cost optimization as a business-focused, continuous discipline to drive spending and cost reduction, while maximizing business value.

It includes obtaining the best pricing and terms for all business purchases, standardizing, simplifying and rationalizing platforms, applications, processes and services, Automating and digitalizing IT and business operations. https://www.gartner.com/en/information-technology/glossary/cost-optimization Nigeria Requires an Aggressive Cost Optimization Programme

On 9 February, 2021 the Federal Government inaugurated the Nigerian Upstream Cost Optimisation Programme (NUCOP) to drive down the cost of crude oil production in the country.

At the inauguration, The Minister of State for Petroleum Resources, Chief Timipre Sylva emphasized that …“NUCOP is aimed at optimising our upstream operation expenses through process enhancement and industry collaboration”

An industry standing committee was set up to: · monitor compliance with cost production and tariffs; · design template to collate unit technical and unit development cost of productions by operating companies; and · identify cost-efficient operators. Nigerian Upstream Cost Optimization Programme (NUCOP)8

Specific areas for attention were identified: i. Capital expenditure items; ii. Operational cost; iii. Systemic cost factors; iv. Costs associated with contracting procedures; v. Policy-related elements; vi. Lack of proper project definition, weak collaboration and standardization, capacity and capability issues, security related issues etc.; vii. Others were financing and payment delays, single sourcing syndrome, high crude oil handling charges, high magnitude of crude oil loss, over-regulation, bureaucracy and multiplicity of tariffs, etc. Nigerian Upstream Cost Optimization Programme (NUCOP)9

NUCOP and its mandate are fantastic BUT…….. This paper will posit the need for Nigeria to articulately implement an ambitious cost-optimization programme with the objectives of significantly reducing industry wide cost base by taking very important actions without which NUCOP’s objectives will not be realised. Some of the action points are below:

There is need to urgently establish a Performance Measurement & Benchmarking mechanism to control cost (both CAPEX and OPEX) and drive them down;

Enhance Portfolio Management System which will segment, prioritise the nature and pace of current projects and related costs and efficiently manage asset value basically eliminate inefficient portfolio of assets from the national perspective. This will stop the execution of projects with value assurance deficit right from baseline;

NNPC through its Investment Management arm, NAPIMS a non-operating partner of Joint Ventures and Production Sharing Contracts has a pivotal role in the success of NUCOP as it needs to actively articulate and step up its role of monitoring and managing industry costs and performance;

There is an ABSOLUTE need for the industry to imbibe the Principles of Value for Money as a basis to obtain best value.

This paper will concentrate on the FIRST and briefly touch on the LAST as they are key hygiene factors. No meaningful cost reduction programme can be achieved without them. Deployment of Technology Tool is Imperative for Success10 Application of Modern Cost Control Technology – The Case for an Industry -Wide Cost Data Base

There is a need for NUCOP to install a system that allows it to undertake realistic Performance Measurement and Benchmarking both at industry or project level.

All the International Oil Companies (IOCs) carry out benchmarking at both levels.

However, this modern technology tool is required to generate metrics to monitor projects and costs on a real time basis. § To enable progress to be continuously made and value for money to improve, there is a requirement to ensure that data (Business, Technical, Cost and Schedule) from JV, PSC and other operators is structured in a manner that information gathered can be utilized to measure and challenge industry performance with realistic metrics.

Successful benchmarking is premised on two key elements i. A robust Project Development Process ii. Performance Measurement & Benchmarking System (PM&B) Performance Measurement & Benchmarking Tool12 Project Development Process Guidelines Stage Gate Templates IT Database/ Metrics Performance Measurement Benchmarking Reporting • Project Development Process (PDP) Guidelines

PDP procedures & templates

Stage Gate Data Gathering Templates • Tools • Target Operating Model • Review EPM configurations

IT System • Reporting Tools Requirement/ Specification • Prototype PMS PMS Procedures & Templates • PMS Documentations • Topics • Define geographical areas • WBS • Key cost, schedule & technical metrics Performance Measurement & Benchmarking – Implementation Roadmap • Alignment of Gates

Stage gates ensure projects are reviewed formally at key points through the Project Life Cycle. They ensure project teams have completed the agreed defined processes to the right standard and are correctly prepared for the next phase.

On approval, the project team is allowed through the gate into the next stage.

With agreement on terms, definitions, input, processes, outputs etc., templates are agreed to collect uniform data for Performance Measurement & Benchmarking Stage Gate Process is Fundamental to Data Collection 14 § Provide a consistent and structured process for establishing and reporting the performance of CAPEX, OPEX, REVEX and Decommissioning of upstream developments and projects.

Performance refers to useful outputs, results and their outcomes obtained from inputs and processes. § Measurement refers to numerical information that quantifies input, output and performance arising from processes, products and services.

Benchmarking on the other hand, is the process of measuring products, services, and processes against those known to be leaders or best in class.

Benchmarking identifies performance gaps when gauged against comparators.

Through an organisation’s commitment to process improvement, it closes such gaps, catches up and can even beat the best in class. Why Performance Measurement & Benchmarking System (PM&B) ?15 § Benchmarking plays a key role in underpinning performance and the attainment of results.

Value for Money is not guaranteed without the use of some performance measurement and benchmarking. Benchmarking essentially: • facilitates continuous improvement; stimulates process efficiency and effectiveness; • adds a much-needed external perspective to an internal process; and finally,

– focuses on what really matters. Why Performance Measurement & Benchmarking System (PM&B) Closing Poor Performance Gap is the Key To apply modern tools of Performance Measurement & Benchmarking: • Determine what and where improvements are required,

Analyse how other organisations achieve their high performance levels, • Use this information to improve performance; and • Apply Lessons Learned Imperatively. To enhance Value for Money, Best Value and to Drive Costs down

This is not guaranteed without the use of performance measurement and benchmarking. § As must be clear by now, PM&B, Cost Control are not possible without the creation of a robust Database which is the back bone of PM&B. § It is important therefore that Upstream operators under the Nigerian Upstream Cost Optimisation Programme (NUCOP), working with NAPIMS in the drivers seat, embrace the Performance Measurement and Benchmarking bandwagon to improve upstream processes, control cost, enhance productivity and obtain value for money in utilisation of scarce resources.

PM&B is critical success factor for NUCOP18 Two Steps Approach19 Step One – Set Up NNPC Driven Performance Measurement & Benchmarking System 20 Installation of a PM&B System Should Commence with NNPC Charity they say begins from home – There is a need to urgently install Performance Measurement and Benchmarking system as a Modern Tool to control costs and pursue best Value in the Upstream Sector.21 § Challenges experienced in the absence of a PM&B:

Extensive cost & schedule overrun arising from lack of clarity on Business, Technical, Cost and Schedule • Not proactive and timely regarding identification and management of variations and deviations with impact later deliverables in the project lifecycle • Infrequent updating of actual progress against the project baseline (cost, schedule) • Reviews are carried out without effective performance measurement, monitoring or effective benchmarking
Lack of Database together with sufficient and detailed templates to facilitate adequate reporting, monitoring and management of projects and operations. § Measuring the performance of upstream projects against comparators will improve project performance as measured against industry norms in Nigeria, West Africa or indeed against any part of the world.

Installation of a PM&B System Should Commence with NNPC22 Benefits of an NNPC Driven Performance Measurement & Benchmarking Stage 1: Project Identification Stage 2: Concept Screening/Evalua tion & Selection Stage 3: FEED/Execution Planning Stage 4: Engineering Procurement, Construction (EPC) Stage 5: Start[1]up/Commissioning Stage 6: Operations & Maintenance Stage 7: Decommissioning and Remediation For all stages in the project Life Cycle

Bespoke method for collecting and analysing data. • Provide an in-depth database of actual project costs in Nigeria and ultimately in the region; • Promotes accurate estimates, increased certainty in choosing project • Pro-active performance measurement

Efficiently and transparently identify and highlight areas of cost and schedule underperformance • Empower the parties to develop strategies for improvement; • Benchmarking will establish realistic targets for costs and schedules for future oil and gas projects; • Improved determination of accurate determination of returns.23 Create an NNPC PM&B Database Databases and Processes

Total Life Cycle Structure (WBS) • Data Type – Actuals, Forecast, Estimates etc. • Business Data – Operator, Development, Location etc. • Cost Data – Budget, Facility, Element, Function, Discipline etc. • Schedule Data – Start, Finish, Mid-Points etc. • Technical Data – Weight, Water Depth, Throughput etc. • Adjustment Fields – Exchange Rate, Escalation etc. • Data Acquisition Process – Standard Format etc. Analysis and Reports • Performance Analysis (Singular)

Comparative Performance (Multiple) • Standard Performance Metrics • Industry Trends • Concept Selection Benchmarks • Pre Sanction Estimate Verification The current management of NNPC has implemented the setting up Cost Database for all completed/closed-out projects. This is a very great resource for the Corporation and will definitely support the PMB when implemented.24 Measurement Performance during projects and operations • Daily, monthly
Performance measurement takes place throughout project lifecycle but is more pertinent during execution • Based on pre-defined baselines via contracts • Collection of data via templates at pre-determined intervals • Comparison of actual data vs planned baseline • Integration of results • Meaningful reporting / predictable outcomes • Risk contingency • Remedial actions – Process Improvement from lessons learned
PRO-ACTIVE rather than RE-ACTIVE R2 = 0.83 0 1 2 3 4 5 6 7 0 500 1,000 1,500 Cost per boe (USD) Estimated Recoverable Reserves (MMboe) FPSO Vessel Cost (Topsides Hull Turret) per Estimated Recoverable Reserve (boe) R2 = 0.83 0 20,000 40,000 60,000 80,000 0 20,000 40,000 60,000 80,000 Cost per km*m (USD) Distance*Water depth (km*m) Deepwater Subsea Tiebacks Cost per Distance*Water depth Eng, Mat, Inst Water depth is the depth at the wellheads/production manifold.

Typical Benchmarking Metrics and Areas Types of Metrics • Cost • Quantity • Schedule • Health & Safety • Localisation • Weight • Man Hours • Productivity • Production Outputs • Rates • Revenue • Margin Types of Areas • Project • Programme • Portfolio • Client • Region • Product • Facilities • Technology • Location / Region26 Benchmarking is Imperative through Out Project Life Cycle.

Performance Measurement should be conducted at all stages in the project life cycle. Benchmarking can be conducted at any stage of the project life-cycle. Benchmarking in the early phases of the project provides guidance to technical designs allowing comparison to industry norms. Anomalies discovered and changes made during this phase typically have a greater impact on the overall project cost and schedule.

Benchmarking conducted during the execution and operation phase can identify areas of concern. Dependent on procurement and construction, there is limited opportunity to reduce either cost or programme.27 Step Two – – Industry Wide Benchmarking Assembly28 An industry-approved, independent assessment of the performance of upstream production facilities For Industry Wide Cost Optimization to succeed there is a need to establish an Industry Wide Database Forum similar to the IOC PERFORMANCE FORUM29 Key Benefits of Industry Wide PM & B The Nigerian Oil & Gas Assembly will be of particular benefit to those working in project assessment in order to:

Unique method of collecting and analysing upstream data • Most in-depth database of actual projects in the area. • Undertake bespoke pre-project studies such as regional viability of construction in specific region. • Improve internal processes such as calibration of proprietary estimating tools. • Identify future areas of strength and weakness using project cost/duration metrics. The Nigerian Oil & Gas Assembly will demonstrate the competitiveness of your project costs/schedule against the industry benchmark30 Establish the process and system Objectives § develop the various WBS’s (CAPEX, REVEX etc)

Prepare sector terms and definitions

create the templates for CAPEX phase § choose, secure and establish database
implement, test and deliver process and system Enablers § establish organisation and reporting structure
adopt global “best practice” (IPA, PF etc)
access to the right people, information and data § provision of “test project data” from “actual project”
secure approval’s step by step31 Launch a “Performance Measurement Assembly”

■ develop the protocol and membership

■ establish the “governance” ■ appoint the Chairman and Vice Chairman ■ secure the annual scope and events ■ design and release the annual report Objectives Enablers ■ alignment between NNPC, IOC’s and Others ■ select the international standard ■ accept independent Chairman and Vice Chairman ■ debate and agree funding ■ ensure independence of all matters (transparent)

Finally… Best Value – Do the Right Things and Do Things Right

Value for Money is about obtaining the maximum benefit over time with the resources available. § It is about achieving the right balance between economy, (thrift and good housekeeping) efficiency (Productivity) and effectiveness, (Achieving objectives) § spending less, spending well and spending wisely to achieve priorities. § Economy and Efficiency are about “Doing Things Right” § Effectiveness is about “Doing the Right Things”
Best Value can only be achieved under the following: • Doing more with less • Pursuit of Economy, Efficiency and Effectiveness • Doing Things Right and Doing the Right Things.

The Pursuit of Value for Money is Imperative

Strategic Planning Strategic Objectives Programme Evaluation Results Impacts OUTCOMES Inputs Activities Outputs Project/Programme/Transaction Logic § Internal – Strategic Objective, Inputs, Processes

External – Output/Outcomes (Results & Impact) § Link is Measurement Measurement is Imperative NUCOP, NNPC and the Upstream Industry MUST set up a Database to give all stakeholders Measurement & Assurance on Costs and Performance because:

What gets measured gets done • If you do not measure results, you cannot tell success from failure. • If you cannot see success, you cannot reward it. • If you are not rewarding success, you are probably rewarding failure. • If you cannot see success, you cannot learn from it.

If you cannot demonstrate results, you cannot win public support. What Gets Measured Gets Done37 The PIB Mandate to the Upstream Regulator § Inta alia, the PIB gives the following functions to the Nigerian Upstream Regulatory Commission

Technical Regulatory Function: • maintain a Nigerian petroleum data bank comprising of materials, information and data acquired by or submitted to the Commission in the exercise of its statutory and regulatory functions • Develop, maintain and publish a database of upstream operations. § Commercial Regulatory Functions:

Supervise costs and control upstream petroleum operations; and • develop cost studies and benchmarks for the evaluation of upstream operations § The above mandate dictates a Performance Measurement & Benchmarking Mechanism