Monitoring Nigerian Oil and Gas Production

Processing & Monitoring of Nigerian Crude/Gas Production and Proper Accounting of Sales
TIONAL P NA
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February 2011
NIGERIAN
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P O R AT I O
TIONAL P NA
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PROCESSING & MONITORING OF OIL/GAS PRODUCTION:

Presentation Outline
NIGERIAN
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P O R AT I O
1. Background Nigerian Oil & Gas Fiscal Arrangement and Systems

Type of arrangements JVs, PSCs, SCs & Independents Production Contribution and trend Contribution to Government Revenue
2. Role of NNPC In Nigerias Crude Oil/Gas Production & Accounting

Production Quota Allocation & Fiscal Price determination Monitoring Oil & Gas Production and Cost Oil & Gas Sales Revenue and Accounting Applicable Fiscal System
3. Factors influencing Government Share of Oil & Gas Revenue
Production Costs
Oil & Gas Price Business Environment - Security
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PROCESSING & MONITORING OF OIL/GAS PRODUCTION: Presentation Outline (2)
NIGERIAN
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P O R AT I O
4. Joint Venture Cash Call Funding Mechanism & Implication on Government Oil Revenues
Cash Call Funding Process Implication of Cash Call Funding On Government Revenues Alternative to Cash Call Funding Funding Managing Cost Fiscal (AGFA) Acreage Management System Institutional Framework Downstream Subsidy
5. Issues, Challenges and Proposed Solutions
6.
Conclusions
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Background
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Background - What is Oil & Gas Fiscal System
NIGERIAN
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Petroleum means mineral oil (or any related hydrocarbon) or natural gas as it exists in its natural state in strata and does not include coal or bituminous shales or other stratified deposits from which oil can be extracted by destructive distillation Fiscal system or arrangement is the Host Governments most important tool for managing Oil and Gas resources From the international oil companies (IOCs) perspective, fiscal regimes are some of the most critical factors to be considered for investment decisions
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Background - Balance of Objectives
NIGERIAN
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Maximum Economic Development of Hydrocarbon Resources

Realization of Country s Economic Potential Development of National Expertise Broad Control of Overall Activity Balanced Risk / Reward Relationship Stable Political and Fiscal Environment Management of Operations on Sound Commercial Basis
Government
Investor Company
Fiscal Terms
Fiscal terms act as the contractual balance between the financial Objectives of Government and the investor Company
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Background - Fiscal Policy Design
NIGERIAN
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Government Objective:
Maximize value of the Nations petroleum resource
Investor Objective:
Maximize shareholders interest The challenge of the fiscal system is to ensure that government receives as high a share of the economic value as possible while encouraging the exploration and exploitation of petroleum resources
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Background - Balancing Government Take
NIGERIAN
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Government Revenue ($ million)
Terms too lenient
Terms too tough
1993/2000 PSCs
JV Royalty/Tax Systems
Optimal terms
Need to increase government take
Need to provide greater incentive
Government Take (% Project Economic Profit) Rent)
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Background Types of Production Arrangements
NIGERIAN
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Includes Independents
SERVICE FEE CONTRACTS
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Background: Petroleum Contract Arrangement - JV
NIGERIAN
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Joint Ventures (JV) operations

An arrangement whereby the government is in working partnership with the IOC on an equity contribution basis.
The relationship is governed by the Joint Operating Agreement (JOA).
Under the JOA the Partners retain their separate legal identities with one of them appointed as an Operator.
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Background: Petroleum Contract Arrangements - JV Participating Interest
NIGERIAN
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S/no
Name of Joint Venture

NNPC/SPDC/EPN/NAOC
NNPC IOC equity equity (%) (%)

55 Shell 30 Elf - 10 NAOC - 5 40 40 40 NAOC 20 Phillips - 20 40
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Operator
SPDC
2 3 4 5 6
NNPC/MPN NNPC/CNL NNPC/EPNL NNPC/NAOC/Phillips NNPC/POOC
60 60 60 60 60
MPN CNL EPNL NAOC POOC
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Background: Petroleum Contract Arrangement PSC
NIGERIAN
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Production Sharing Contracts (PSC)

Govt. is 100% owner of the Blocks.
Contractor provides all funds & and bears all risks All equipments / assets become property of NNPC (Govt.) upon arrival in Nigeria Contractor Pays Royalty Oil Recoups Its Operating Cost
Pays Tax Oil

Shares Part Of Profit Oil
There are currently over 60 PSCs, out of which about 6 are on production
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Background: Petroleum Contract Arrangement SC
NIGERIAN
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Service Contracts (SC)

An Agreement to undertake exploration activities for a fee, either in Cash or Kind.
Main Features Of Service Contract

Contractor Has No Title To Oil
Payment For Services In Cash Or Kind Only One Block Per Contract
Agreed Level Of Work Must Be Met To Continue

Has First Option To Buy Fixed Qty Of Oil Agip Energy & Natural Resources (AENR) is Only Service Cont. Coy. AENR Operates the Agbara field as a Service Contractor
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PROCESSING & MONITORING OF OIL/GAS PRODUCTION: Background: Petroleum Contract Arrangement Marginal Fields Marginal Fields
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Such fields as the President may from time to time identify as marginal fields (Sec. 17 of First Schedule)
Specific fields in the JV concession areas are farmed out to the marginal field operators. The JV companies who are owners of these marginal fields receive an overriding royalty in return for allowing the marginal field operators work these fields. Farm-out of marginal fields is backed by Petroleum Amendment Act No. 23, which introduced paragraph 16A into the First Schedule to the Petroleum Act. Under this amendment a farm-out can only be brought about by the approval of the President under the terms as he may approve.
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Background: Petroleum Contract Arrangement Independents
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Independents
This is a concession type arrangement
Concession licenses are granted to independents to work the blocks on sole risk basis. Government derives royalty and taxes only, from these set of investors
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Background: 2009 Lifting by Regimes (Sample)
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Background - JV and PSC Oil & Condensate Production Forecast
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Oil & Cond Forecast

4,000 3,500 3,000
JV & Deepwater production are on track to achieve GDP growth target by 2011 JV Production will reach 2.5 MMBOPD by 2011. GDP growth aspiration expects JV oil prod (incl. float) of 2.6 MMBOPD by 2011 JV Production will only be attained with sustained investment at the levels shown in the previous slide Any JV production gap due to lack of required investment could be partially filled by deepwater production; however, this will not deliver the expected revenues, as the government take is much less in the deepwater PSCs.
Deepwater PSC Production
BOPD
2,500 2,000 1,500 1,000 500 0

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Base Production New Oil Projects Unconstrained PSC
Dev Drilling & Work ov er Ongoing Gas Projects
Ongoing Oil Projects New Gas Projects
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Background - JV and PSC Oil & Condensate Production Forecast (2)

ALL FIGURES IN THOUSAND BARRELS OF OIL PER DAY (MBOPD)
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2009 1,297 773 2,070
2010 1,392 800 8 2,200
2011 1,470 824 7 2,300
2012 1,578 1,012 5 2,596
Joint Ventures (JVs) Production Sharing Contracts (PSCs) Service Contracts (SCs) Total 3000 2500 2000 1500 1000 500 0
773 1297 2009
8
800 1392 2010
7
824 1470 2011
5
1012 1578
2012
JVs
PSCs
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SCs
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JV Reservoirs are Reservoirs Leading to High Natural Decline Rates Number of wells and cost implication to maintain current production
There is need to drill more wells Just to mainteain current production rates
Crude oil production Production decline Total crude oil production forecast Production to replace anually Production to replace anually Replacement from development drilling Replacement from workovers Total No of development wells required No of workover wells required Total no of wells Cost of development drilling wells Cost of workover wells Total cost of wells to replace maintain prod $MM $MM $MM MBOPD MBOPD MBOPD MBOPD MMBbls MBOPD MBOPD MBOPD 2009 1,629 0 1,629 2010 1,466 163 1,629 163 59 147 16 163 49 16 65 750 82 2011 1,319 310 1,629 310 113 279 31 310 93 31 124 1,451 161 1,613 2012 1,188 441 1,629 441 161 397 44 441 132 44 176 2,101 233 2,335 2013 1,069 560 1,629 560 204 504 56 560 168 56 224 2,728 303 3,031
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2014 962 667 1,629 667 243 600 67 667 200 67 267 3,312 370 3,682
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831
PROCESSING & MONITORING OF OIL/GAS PRODUCTION: 2010 Crude Oil & Condensate Production Forecast by Business
Arrangement
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Business Arrangement
Joint ventures Alternative Funding Production Sharing Contracts Service Contracts
Production in Thousands Barrels Per Day

1050 342 800 8
Total Production
2,200
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PROCESSING & MONITORING OF OIL/GAS PRODUCTION: Background Federation Account Revenue Flows 2010 Approved Oil and Gas Fiscal Assumptions
NIGERIAN
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Crude Oil & Condensate Production 2.2 mbp

Natural Gas Production Oil Price Joint Venture Cash Calls
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PROCESSING & MONITORING OF OIL/GAS PRODUCTION: Background Government Revenue Sources
NIGERIAN
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NNPC -NAPIMS
JOINT VENTURES (6)
PRODUCTION SHARING CONTRACTS (PSC)) Over 50 blocks distributed among these coys SERVICE CONTRACT (SC) (1) (AENR)
PSC COMPANIES 1. ADDAX PET. DEV. CO. LTD 2. ADDAX PET. EXPL. LTD. 3. ADDAX OIL & GAS NIG LTD 4. CHEVRON STARDEEP 5. CONOCO 6. ELF 7. TEXACO NIG OUTER SHELF 8. SHELL NIG. EXPL 9. STATOIL 10 . ESSO OPL 214 11. ESSO OPL 209 12. NAE 13. NAE/NPDC 14. NAOC 15. PETROBRAS 16. PHILLIPS 17.. ORANTO 18. OCEAN ENERGY PSC COYS Contd 19.TOTAL UPSTREAM 20.BRITISH GAS 21.CONOIL 22.CENTRICA 23.KNOC 24.OANDO 25.CNODC 26.CNPC 27. STERLING GLOBAL 28.STERLING EXP. 29.NNDC 30 OMEL 31.GAS TRANSMISSION 32. AENR (SC)
NNPC/SHELL/ELF/AGIP NNPC/MOBIL NNPC/CHEVRON NNPC/AGIP/PHILIPS NNPC/ELF NNPC/PAN OCEAN
(55%) (60%) (60%) (60%) (60%) (60%)

FRONTIER EXPL. SERVICES (FES)
GOVERNED BY
JOA
GOVERNED BY
PSC
Background - Comparative Revenue Flow to Federation Account from JVs & PSCs
Data Set: Well Cost IDC TWI Facilities Cost Operating Cost Sales volume Crude Oil Price $MM % % $MM $MM MMBbls $/bbl JV 85.0% 18.5% 10.0% NA 100 80.0% 20.0% 150 160 40 50 93 PSC 50.0% 2.0% NA 50.0%
NIGERIAN
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1.
Update Technical Costs!!!

2.
Shortfall in JV production due to lack of funding may be be filled by PSC production However, PSC volumes will deliver only about half of JV revenues to government due to the following reasons: Fiscal terms for the deepwater PSCs (especially the 1993 PSCs) from where the bulk of the deepwater production will come from are not as favourable to government Costs are significantly higher in the deepwater terrain compared to the conventional JV terrains At a technical cost of $10.25/bbl and crude oil price of $50/bbl Government Take in the JVs is about 70% of total revenues compared to 37% in the deepwater Consequently, government interest is better served if the JVs are adequately funded for incremental volumes.
PPT Rate Average Royalty Rate Invest Tax Allowance (ITA) Invest Tax Credit (ITC)
Operator margin, 4.94 Cost Recovery, 10.25 $50/bbl Crude Oil Price Operator margin, 20.75 21.50
Govt Take (GT) 70% of total revenues
PPT, 25.56
Cost Recovery, 10.25
3.
GT 37% of total revenues
PPT, 17.25 16.50
Royalty, 9.25
Royalty, 1.0 2.50
4.
JV Oil
PSC Oil
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Role of NNPC In Nigerias Crude Oil/Gas Production & Accounting
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NIGERIAN
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P O R AT I O


Production Quota Allocation & Fiscal Price determination Monitoring Oil & Gas Production and Cost Oil & Gas Sales Revenue and Accounting Applicable Fiscal System
Production Costs
Oil & Gas Price Business Environment - Security
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Presentation Outline (2)
NIGERIAN
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P O R AT I O
Cash Call Funding Process Implication of Cash Call Funding On Government Revenues Alternative to Cash Call Funding Funding Managing Cost Fiscal (AGFA) Acreage Management System Institutional Framework Downstream Subsidy
6.
Conclusions
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Production Quota Allocation & Fiscal Price Determination
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COMD & GFAD Input
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Monitoring Oil & Gas Production and Cost
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COMD & GFAD Input
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JV Operations : Governance
NIGERIAN
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J O A
DEFINES PARTICIPATING INTERESTS AND RESPONSIBILITIES
SETS OUT OPERATING PROCEDURES

Including Funding Process Format & frequency of Returns Accounting Policies & Procedures
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Monitoring Oil & Gas Production and Cost - JV
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Operators are required to conduct operations in accordance with good industry practice (JOA Section 2.2.1) Governance
OPCOM is the highest operational decision making body;
TECOM reviews sub-committee report and makes recommendation to OPCOM (JOA Art 3.1)
Technical Subcommittees serve as the initial point of contact between \NNPC and the operators for budget and performance review and makes recommendation to TECOM
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Monitoring Oil & Gas Production and Cost JV (2)
NIGERIAN
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P O R AT I O
Operator required to make full and frank disclosure of operation (JOA Art. 2.2.3) Specific approvals are required from non-operator Uniform accounting procedure establishes formats for reporting costs (OPEX & CAPEX)
Uniform Project Implementation Procedure: Sets out guidelines for initiating, contracting and executing project.
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NIGERIAN
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OPCOM / MACOM
OPCOM Operating Committee MACOM Management Committee TECOM Technical Committee
TECOM
SUBCOMMITTEES
PED
FACILITIES
EXPLORATION
GAS
MMD
FINANCE/PLANNING & HUMAN RESOURCES
ENVIRONMENT & SAFETY
COMMUNITY RELATIONS
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NIGERIAN
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OPERATORS WORK-PROGRAMME & BUDGET OBLIGATION AS DEFINED BY JOA
ARTICLE 2 OF JOA PROVIDES THAT:

(i) (ii) (iii) OPERATOR SHALL DEVELOP & SUBMIT PROPOSED WORK-PROGRAMME & BUDGET TO CHAIRMAN OF OPCOM, PARTIES MUST MEET TO DELIBERATE ON SUBMISSIONS WHICH CAN ONLY BE APPROVED BY OPCOM , OPERATOR MAY NOT DEVIATE FROM APPROVED WORK PROGRAMME & BUDGET EXCEPT IN CASE OF EMERGENCY, OR IF MODIFIED BY OPCOM.
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Monitoring Oil & Gas Production and Cost PSC
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Funding of work programme & petroleum operations

Specifies minimum expenditure during the exploration period.
Requires contractor to submit a performance bond to cover amount agreed as minimum financial commitment for the phases of exploration period. Additionally contractor provides necessary funds for payments of operating costs. Contractor permitted to finance petroleum operations from external sources.
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Monitoring Oil & Gas Production and Cost PSC (2)
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Review and approve annual work programme & budget and reported performance. Review contracts in excess of contractors limit of authority (>$250,000 or N10 million).
Review project costs by project cost control teams

Carry out annual cost verification exercise. Verify crude oil allocation for payment of Royalty, Cost Oil, PPT & Profit through Cost Recovery committee.
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Project Monitoring / Audit
NAPIMS nominate a multidiscipline project monitoring team for all major development projects to work with the operator project teams in a task force in order to ensure:
Cost effectiveness in project execution Enhancement of Local content Project controls and timely delivery Compliance with due process
NAPIMS also constitute a separate multi - discipline Audit team to carry out periodic audit of all major projects in order to:
Verify expenditure and system of internal control Generate an asset register Create data bank for bench marking and cost estimation
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Value for Money Audit
Periodically NNPC commissions consultants / firms of chartered accountants to carry out value for money audit of the JV operating companies in order to advise on:
Compliance with the operating agreements (JOA). System weakness if any and recommendations to correct them. Performance Measurement, Benchmarking and Value Analysis. JV Upstream Monitoring
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Monitoring Oil & Gas Production and Cost - Trial Marketing Period
NIGERIAN
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Valuation of Available Crude On the attainment of commercial production Each party determines the assay of the new crude Quality - yield values from refinery modeling Engages in Trial Marketing Period (TMP) of 6 months or 10 lifting whichever is longer to establish crude commercial price Shares the market so that each party markets approximately an equal amount of the new crude oil Pays proceeds from lifting into Escrow Account Exchanges information regarding the marketing of the new crude sales price and terms of each lifting Reconciles the TMP within 90 of expiration distribute proceeds with accrued interest to fiscal pots Migrates into monthly nomination and lifting programming Agrees on allocation priorities JV Equity share volume PSC, SC Royalty Oil Cost Oil Tax Oil NNPC Profit Oil Contractor(s) Profit Oil Equity Share, Royalty Oil, Tax Oil and NNPC Profit Oil to Federation Accounts Cost Oil and Contractor(s) Profit Oil to Contractors Accounts
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Monitoring Oil & Gas Production and Cost - Lifting Programme
NIGERIAN
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Each Lifters share in the Production determines its lifting entitlement (JV, PSC, SC, PSA)
Written statements are issued by each party to the operator at least 25 days in advance on the nomination(s)
Operator endeavours to make volume available based on
Technical allowable production and commercial production quota
Credit/debits accruing after reconciliation with actual production

Normal operational carry forward
An agreeable Lifting programme is prepared by the Operator on the basis of each Lifters entitlement and the technical conditions of the Terminal Right and obligation to lift allocated cargoes Over-lifting/under-lifting rules Priority is given to the lifter having the highest entitlement
Principles
Operator has the right to modify the lifting programme if operational constraints at the terminal so required
Curtailment meetings holds between Operators/Contractors and NNPC on production and lifting every month
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PROCESSING & MONITORING OF OIL/GAS PRODUCTION: EASTERN OPERATIONAL BASE ODUDU (AMENAM) - EPNL ANTAN - ADDAX BONNY - SPDC BONNY RIVER - MOBIL QUA IBOE - MOBIL BRASS - NAOC YOHO - MOBIL OKWORI - ADDAX OKONO NPDC/AGIP ENERGY IMA - AMNI
Monitoring Oil & Gas Production and Cost - Oil Terminal Locations
NIGERIAN
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WESTERN OPERATIONAL BASE ESCRAVOS - CHEVRON PENNINGTON - CHEVRON SEA EAGLE (EA) - SPDC ABO NAE FORCADOS SPDC OBE CAVENDISH UKPOKITI EXPRESS/ATLAS
LAGOS OPERATIONAL BASE BONGA SNEPCO ERHA MOBIL (ESSO) AGBAMI CNL AKPO - TOTAL
CRUDE AVAILABILITY AT TERMINALS CONFIRMED THROUGH DAILY REPORTS, FIELD REPS AND CURTAILMENT MEETINGS
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NNPCs Role in Oil & Gas Sales Revenue & Accounting - JVs JV PRODUCTION
NIGERIAN
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NNPC APPXM. 58%

Deducts Costs (JV Cash call)
* Surplus swept into Fed. Account
IOC APPXM. 42%

Recovers Costs
Pays Royalty @19% to Govt. Pays Taxes @85% of taxable income to Govt.
Federation Account Receipts
Keeps Profit * Surplus swept into Federation Account from NNPC equity is made up of Royalty, Taxes & NNPC net Profit
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NNPCs Role in Oil & Gas Sales Revenue & Accounting - PSCs
NIGERIAN
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P O R AT I O
GOVT. OF NIGERIA
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NNPCs Role in Oil & Gas Sales Revenue & Accounting Accounting for Federation Crude Oil & Gas Revenue SOURCES
CRUDE OIL EXPORTS
NIGERIAN
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CUSTODY OF FUNDS
DISBURSEMENTS
LPG GAS EXPORTS
NLNG FEEDSTOCKS
CBN/NNPC CRUDE OIL & GAS US$ REVENUE ACCOUNT HELD WITH JP MORGAN CHASE BANK, NEW YORK
JV CASH CALLS ACCOUNT

SPDC JV MPN JV CNL JV NAOC JV TEPNG JV PAN-OCEAN JV
NNPC DOM. CRUDE NGC LOCAL GAS SALES
CBN NNPC CRUDE OIL & GAS NAIRA REVENUE ACCOUNT HELD WITH THE CBN
FEDERATION ACCOUNT
JV MISC. INCOME
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NNPCs Role in Oil & Gas Sales Revenue & Accounting - Sources of Revenue from Oil & Gas Sector NNPC EXPORT SALES DOMESTIC CRUDE
NIGERIAN
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J.V.s PPT
INDEPENDENTS
ROYALTIES PPT ROYALTIES
FEDERAL GOVT.
STATE GOVTS.
LOCAL GOVTS.
PSC & SC PPT, PROFIT OIL ROYALTIES DPR FEES, RENTALS PENALTIES, BONUSES
OIL & GAS VAT, DUTIES ORGANIZATIONS
Revenue sources largely depends on the contractual and fiscal frameworks of exploration and production activities of the oil 44 and gas business
NNPCs Role in Oil & Gas Sales Revenue & Accounting - Payments into Agencies/Federation Accounts
NIGERIAN
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P O R AT I O
Royalties
MCA PSC
DPR Designated Account
Credit Periods Taxes

MCA PSC FIRS Designated Account Consolidated Crude Oil Revenue Account NNPC Pays Naira Value to Federation Account
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NNPC Domestic Crude 90 Days Bilateral 30 days International Traders 30 days
Equity Crude
JV
Domestic Crude
445 Kb/d Allocated NNPC
NNPCs Role in Oil & Gas Sales Revenue & Accounting Entitlements Determination & Lifting
NIGERIAN
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JV Oil/Gas Produced
Lifted by NNPC
NNPC Equity
Volume Oil/Gas Price Cost Oil Profit Oil Stock Balance Available volume Oil/Gas Price Expense Cost Amortisable Cost
Fed Account Lifted by Contractor Contractor Account Lifted by NNPC DPR - Fed Account FIRS - Fed Account Fed Account
PSC Oil Produced
Total Prod
Royalty Oil Tax Oil Profit Oil
SC Oil Produced
Total Prod
Carry Oil/Gas Produced
NNPC Equity
Stock Balance Available Volume Oil/Gas Price Expensed Cost Amortised Cost
Stock Balance Available Volume Oil/Gas Price Expensed Cost Amortised Cost
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Carry Oil Share Oil

Share Oil
Lifted by Contractor Contractor Account Lifted by NNPC Fed Account Lifted by NNPC Cash to Contractor Roy PPT to Fed Acc Lifted by NNPC Fed Account
Modified Carry Oil/ Gas Produced
Carry Oil Share Oil Share Oil
NNPC Equity
NNPCs Role in Oil & Gas Sales Revenue & Accounting Management of Government Interest
Entitlement Estimation
Tech. Allowable - DPR
Monthly Production Comml
NIGERIAN
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P O R AT I O
Lifting Programming
JV Oil/Condensate/Gas (Equity) PSC Oil/Condensate (Roy, Tax, Profit) MCA Crude (Carry Oil/Gas & Share Oil/Gas) Cargo Nominations Lifting Advice & Shipping Documents
Marketing & Sales

Term Contracts Letter of Credit Shipping Documents Monthly Lifting & Sales Profile Pricing & Valuation
Crude Price Cost data Lifting entitlements
Reconciliation
DPR, FIRS, NAPIMS, NEITI, FAAC, FMF, RMAFC, OAGF, etc
Internal & External Auditing

Shipping Documents Financial Reports Lifting Contracts Bank Statements Monthly Lifting & Sales Profile
Revenue
Shipping Documents Pricing & Valuation Lifting & Sales Profile CBN Account Statements Offshore Bank Statements FAAC / Other Financial Reports
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Processes and Controls
NIGERIAN
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P O R AT I O
Investment in Assets through JVCC or other sources of financing depending on the Operating and Financing Agreement Crude Oil and Gas are produced and lifted based on Fiscal Arrangement in place NNPC lifts share of Federation crude. All Crude Oil & Gas Sales Contracts are secured by IRREVOCABLE LETTERS OF CREDIT from first class International Banks LC Bank remits payment for Crude Oil & Gas liftings on behalf of their Customers into CBN/NNPC CRUDE OIL & GAS REVENUE ACCOUNT with JP Morgan Chase Bank, New York maintained and controlled by the CBN Proceeds of Domestic Crude sold to NNPC and other Naira proceeds are receipted into the CRUDE OIL & GAS REVENUE NAIRA ACCOUNT held with the CBN
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Processes and Controls (2)
NIGERIAN
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P O R AT I O
Only JV Cash Call payments are made out of the Oil and Gas Accounts and these are strictly in accordance with the JV Budget as appropriated by the National Assembly. Every payment requires the approval of the GMD, NNPC. All other Funds in the Oil & Gas Naira and Dollar Accounts are transferred to the Federation Account The Accounts are reconciled between NNPC & CBN on a monthly basis Similar Reconciliation is carried out between NNPC & OAGF on monthly basis; before each FAAC A separate statutory Audited Financial Statement is prepared and submitted to the Auditor General for the Federation, FGN and the National Assembly.
The office of the Auditor General in carrying out their statutory duty audits the Federation Account and by extension, the O&G Accounts as well as the JVCC Accounts
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Processes and Controls (3)
NIGERIAN
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P O R AT I O
Monthly profile of Crude Oil and Gas Sales are received from COMD Actual receipts are verified in the NNPC/CBN Crude Oil and Gas Accounts Review calendarized monthly Cash Call requirement Recommend Cash Call amount to be deducted to the AGF and the HMSF and obtain alignment. Obtain the GMDs approval. Prepare mandates to CBN for transfers to the Federation and the JV Cash Call Accounts with CBN
Clarify Components of NNPCs Notional Monthly Contribution to Federation Account:

Royalty from JV Oil and Gas PPT from JV Oil and Gas
JV After Tax Profit Oil and Gas

PSC After Tax Profit Oil and Gas
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P O R AT I O
Joint Venture Cash Call Funding Mechanism & Implication on Government Oil Revenues
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PROCESSING & MONITORING OF OIL/GAS PRODUCTION: Presentation Outline 1. Background Nigerian Oil & Gas Fiscal Arrangement and Systems
NIGERIAN
OR
P O R AT I O

Production Quota Allocation & Fiscal Price determination Monitoring Oil & Gas Production and Cost Oil & Gas Sales Revenue and Accounting
Cash Call Funding Process Implication of Cash Call Funding On Government Revenues Alternative to Cash Call Funding
52
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NIGERIAN
OR
P O R AT I O

Applicable Fiscal System Production Costs Oil & Gas Price Business Environment - Security Funding Managing Cost Fiscal (AGFA) Acreage Management System Institutional Framework Downstream Subsidy
6.
Conclusions
53
TIONAL P NA
LEUM RO ET

Cash Call Process
NIGERIAN
OR
P O R AT I O
Cash Call
A monthly request by an Operator to other partners in their respective participating interests for advance payment to meet anticipated costs and expenditures in the Cash Call month
Based on Annual Budget appropriated by the National Assembly Made in the currency stipulated in the Joint Operating Agreement (Naira and Dollar)
54
TIONAL P NA
LEUM RO ET

JV Work Program & Budget Process JVC
APPRVD DISTR. BUDGET
NIGERIAN
OR
P O R AT I O
NNPC CORPORATE
SUB-COM
WORK PROG/ BUDGETS
JOINTLY RECOMMEND TO
NAPIMS
TECOM
GOVT (FMF)
RECOMMENDS TO
NATIONAL ASSEMBLY
OPCOM
55
PRESIDENCY
TIONAL P NA
LEUM RO ET
PROCESSING & MONITORING OF OIL/GAS PRODUCTION: Alternatives to Cash Call Funding
NIGERIAN
OR
P O R AT I O
Alternative Funding
Carry Agreements Modified Carry Agreements (MCAs) IOC Bridge/Term Loans 3rd Party Debt Finance
56
TIONAL P NA
LEUM RO ET

Alternatives to Cash Call Funding
NIGERIAN
OR
P O R AT I O
The Carry Agreements had been the most common form of Alternative Funding. The 1st was entered into with SPDC in 1999 called the EA and was followed by Amenam Kpono (AK I) with Total and later with Mobil and Chevron Modified Carry Agreements (MCAs) was a very recent phenomenon having came into being only in 2008. The MCA was designed to correct some defects associated with the traditional Carry Agreements and provide funding for unpaid performances of prior years 3rd Party Debt Financing option was also introduced in the late 1999s to fund certain projects with robust cash flow for which equity funding through JVCC was not available. Four projects all under the NNPC/MPN JV have been funded under this arrangement: NGL I, NGL II, Satellite Fields Phase I. NGL I loan has been fully repaid and all its cash flows go to the Federation Account
IOC Bridge/Term Loan was negotiated with Shell to pay for unpaid performance of years prior to 2008 most of which relate AFAM NNPC/SPDC JV IPP.
57
TIONAL P NA
LEUM RO ET

Attribute Capital Costs Operating Costs Production/ Lifting Debt Normally funded 100% by Bank loan Funded through JV Cash Call Ring fenced to pay principal and interest first before distribution to sponsors. Therefore less funds will be available to Federation Account in the early years Equity
Impact of Financing Arrangement on Revenues to Federation Account
NIGERIAN
OR
P O R AT I O
Funded through JV Cash Call Funded through JV Cash Call 100% flows into Federation Account
Financing Costs Covenants
Can be high due to interest and No additional costs other than fees the opportunity cost of capital Can be restrictive, onerous and burdensome
58
No restrictions
TIONAL P NA
LEUM RO ET

Attribute Royalty Rate PPT Rate JV 18.5% 85% PSC 1.75% 50%
Impact of Financing Arrangement on Revenues to Federation Account
NIGERIAN
OR
P O R AT I O
Profit Sharing Equity Interest in JV: Ave 57% Rate across the 6 JVs
Graduated beginning at 20% in the early years
Cost Recovery Rate
Normal
Accelerated as Contractors primary goal is to recover all costs as quickly as possible
59
TIONAL P NA
NIGERIAN
LEUM RO ET
OR
P O R AT I O
Factors influencing Government Share of Oil & Gas Revenue
60
TIONAL P NA
LEUM RO ET
PROCESSING & MONITORING OF OIL/GAS PRODUCTION: Presentation Outline 1. Background Nigerian Oil & Gas Fiscal Arrangement and Systems
NIGERIAN
OR
P O R AT I O

Cash Call Funding Process

Implication of Cash Call Funding On Government Revenues Alternative to Cash Call Funding
61
TIONAL P NA
LEUM RO ET
NIGERIAN
OR
P O R AT I O
4. Factors Influencing Government Share of Oil & Gas Revenue

Applicable Fiscal System Production Costs Oil & Gas Price Business Environment - Security Funding Managing Cost Fiscal (AGFA) Acreage Management System Institutional Framework Downstream Subsidy
6.
Conclusions
62
Comparative Revenue Flow from JV & PSC Fiscal Regime Comparison Fiscal Assumptions
NIGERIAN
TIONAL P NA
LEUM RO ET
OR
P O R AT I O
PPT Assumptions
Item (/ bbl)
Opex ($/bbl) Capex ($/bbl) PPT Education Tax NDDC Levy Royalty ITA ITC 15% NA
PIB Assumptions
PSC
8.15 13.36 50%
JV
6.52 6.12 85% 2% 3% 5%
Item (/ bbl)
Opex ($/bbl) Capex ($/bbl) NHT CITA Education Tax NDDC Levy
JV
6.52 6.12 50% 30% 2% 3% 5% 80%
PSC
8.15 13.36 30%
NA 50%
Royalty (Tranche Based) Overseas Cost Limit
Comparative Revenue Flow from JV & PSC Fiscal Regime Comparison (PPT Case @ $50/ bbl Oil Price)
NIGERIAN
TIONAL P NA
LEUM RO ET
OR
P O R AT I O
PPT Computations ($/ bbl)
PPT Computations (%)
Comparative Revenue Flow from JV & PSC Fiscal Regime Comparison (PIB Case @ $50/ bbl Oil Price)
NIGERIAN
TIONAL P NA
LEUM RO ET
OR
P O R AT I O
PIB Computations ($/ bbl
PIB Computations (%)
TIONAL P NA
LEUM RO ET

JV Funding Requirements
Production shut-in mainly from militancy activities
NIGERIAN
OR
P O R AT I O
Higher investments required to bring back and eventually grow production
66
TIONAL P NA
LEUM RO ET

Implication of Crude Production Decline
Crude Price Forecast 2007 & Beyond - $60/bbl
NIGERIAN
OR
P O R AT I O
Revenues Implication of continued Production Decline
67
TIONAL P NA
LEUM RO ET

Joint Venture Federation Account Revenue Flows
Impact of declining Prices on Government Revenues - JV
Crude Price Technical Cost Gross JV Volumes
NNPC Equity
NIGERIAN
OR
P O R AT I O
$/bbl $/bbl MMBOPD % % $MM

$MM
45.00 22.32 1,402

58% 42%
100.00 22.32 1,402

58% 42%
IOC Equity Govt. Revenue from IOC Equity barrels

IOC Revenue
Roy @18.67% IOC cost recovery

IOC Taxable Income IOC PPT payment Govt. Rev. From IOC Equity Volumes (Roy + PPT)
9,672 1,806
21,493 4,013
$MM $MM $MM $MM $MM $MM $MM $MM
4,797
3,069 2,609 4,414
4,797
12,683 10,780 14,793
Govt. Revenue from NNPC Equity barrels

NNPC Revenue 13,356 29,680
NNPC cost recovery

Govt. Rev. from NNPC Equity Volumes (Rev - cost)
6,625 6,732 11,146
6,625 23,056 37,849
Total Govt Rev from JV Petroleum Operations
68
TIONAL P NA
LEUM RO ET

PSC Federation Account Revenue Flows
NIGERIAN
OR
P O R AT I O
Impact of declining Prices on Government Revenues - PSC

Crude Price Technical Cost Gross JV Volumes
NNPC Profit Oil Share
$/bbl $/bbl MMBOPD % % $MM

$MM
45.00 25.23 760

20% 80%
100.00 25.23 760

20% 80%
IOC Profit Oil Share Govt. Revenue from Taxes & Royalty
Gross revenues
Roy @2.76% Cost recovery

Taxable Income PPT payment @50% Govt. Royalty & Taxes
12,483 345
27,740 766
$MM $MM $MM $MM $MM $MM $MM
6,999
5,140 2,570 2,914
6,999
19,976 9,988 10,753
Govt. Revenue from NNPC Profit Oil

Profit oil available for allocation 2,570 9,988
NNPC share of profit oil @20% Total Govt Rev from PSC Petroleum Operations
514 3,428
1,998 12,751
69
TIONAL P NA
LEUM RO ET

Background Government Revenue Sources
NIGERIAN
OR
P O R AT I O
Main source of Government revenues in the petroleum sector is through the imposition of royalties & taxes on petroleum operations Government derives additional revenue over and above imposition of taxes & royalties, however, this is dependent on the contractual arrangement with other investor: Joint Venture All of NNPCs equity revenues less cost swept into Federation Account
PSC - All of NNPCs Profit oil share swept into Federation Account
70
TIONAL P NA
LEUM RO ET

The Petroleum Industry Bill - General Objectives of PIB
NIGERIAN
OR
P O R AT I O
Establish clear and enduring good governance principles in the Nigerian oil & gas industry. The need to remove obsolescence and outdated provisions in our current laws Encourage alignment with international best practice
Remove opaqueness and lack of transparency in the current statues

Establish fiscal provisions that are flexible, encourages investment while guaranteeing optimal take for Government. Strengthens tax administration with requisite powers and rules for the effective management of the industry. Establish clear principles for the working of the Incorporated Joint Ventures (IJVs). Support domestic gas utilization through National Gas Master Plan Proper alignment of the roles and functions of the institutions.
TIONAL P NA
LEUM RO ET
PROCESSING & MONITORING OF OIL/GAS PRODUCTION: Niger Delta Related

Production deferment due to security situation in the Niger Delta, including deferred production due to schedule delays on projects Oil theft and losses arising from the sabotage of oil facilities Cost of environmental clean up following sabotage. Projects become even more expensive after security incidents Cost of repairing or replacing damaged facilities as a result of militancy activities for example cost of replacing damaged facilities has $1.26 million in 1999 to almost $400 million in 2008 in the SPDC JV Additional cost premium as a result of Niger Delta Security situation:
Factors Impacting Government Revenue Outside Crude Oil Price
NIGERIAN
OR
P O R AT I O
Non-Niger Delta Related

Fiscal Regimes applicable to the various oil contract types Gas cost accounts for between 40% & 43% of total CAPEX, recovered from oil tax revenues via AGFA Under funding of Joint Venture Operations over a long period of time Increase in cost of materials & services as a result of increasing crude oil prices. Aging facilities with attendant increase in maintenance cost Matured reservoirs leading to high natural decline rates
More investments required for infill opportunities and integrity / production sustenance Need for more exploration to find and replace reserves.
Non competitive price fixing behaviours in the contracting environment limited number of service contractors.
72
TIONAL P NA
LEUM RO ET
Impact of Niger Delta Security - SPDC Hot Spots (Eastern Operations)
NIGERIAN
OR
P O R AT I O
Rumuekpe Area Community based groups vying for power Violent clashes during 2008 Two warlords have established presence in this area and at Egbema West
Port Harcourt Kidnapping at least 79 Nigerian and 8 Expats since 01 Jan 08. Armed robbery common Violent crime frequent
Alakiri Militant Threat Bunkering Diebu Creek Militants fighting for control Explosive attacks / vandalism on SPDC ROW
Cawthorne Channel Militant camps / activity Social fault line between Kalabari and Bonny clans Militant attacks on infrastructure Bunkering
Bonny Channel Piracy Militant attacks Kidnapping
Bomu/Kdere Ogoni issue Sabotage Bunkering
73
TIONAL P NA
LEUM RO ET
PROCESSING & MONITORING OF OIL/GAS PRODUCTION: Impact of Niger Delta Security - SPDC Hot Spots (Western Operations)
NIGERIAN
OR
P O R AT I O
Isoko South
Bunkering Community threats and blockades vandalism/sabotage
Odimodi / Ogulagha Agge / Aghoro

Militant presence. Violent attack on SPDC houseboats Community challenges to project work Inter-communal dispute over Host Community Status Community threats and blockades Militant Presence
74
TIONAL P NA
LEUM RO ET

Security Situation in the Nigerian Oil and Gas Industry Re-entry and Restoration of Vandalized Facilities
NIGERIAN
OR
P O R AT I O
75
TIONAL P NA
NIGERIAN
LEUM RO ET
OR
P O R AT I O
Issues, Challenges and Proposed Solutions
76
TIONAL P NA
LEUM RO ET

NIGERIAN
OR
P O R AT I O


Cash Call Funding Process

Implication of Cash Call Funding On Government Revenues Alternative to Cash Call Funding
77
TIONAL P NA
LEUM RO ET

Presentation Outline (2)
NIGERIAN
OR
P O R AT I O
Applicable Fiscal System

Production Costs Oil & Gas Price Business Environment - Security Funding Managing Cost
Fiscal (AGFA)
Acreage Management System Institutional Framework Downstream Subsidy
6.
Conclusions
78
TIONAL P NA
LEUM RO ET

Total JV Budget Evolution Joint Venture Operations
NIGERIAN
OR
P O R AT I O
Industry Budget has increased from about $6.0 billion in 2002 to nearly $18.0 billion projected for 2010.
79
TIONAL P NA
LEUM RO ET

Deployment of Government US$5.0 Billion Equity Funds
NIGERIAN
OR
P O R AT I O
Government share of operating cost, exploration expenses, production operations sustenance, and asset restoration costs for 2010 is about US$4.9 billion. Operating cost is about 85 90% fixed as a result of industry structure. Also at this time industry is poised to grow, to be driven by projects to be executed through MCAs. Growth in capital expenditure results in increase in operating costs. Cost captured here excludes provision for NAPIMS overhead, Exploration in the Frontier Basins, and Provision for security related operations in the Niger Delta, amounting to almost US$0.6 billion. All of the cost described above are better funded through equity.
80
TIONAL P NA
LEUM RO ET
PROCESSING & MONITORING OF OIL/GAS PRODUCTION: Objective: Create JVs That are Value Creating
NIGERIAN
OR
P O R AT I O
The PIB requires the creation of Incorporated Joint Venture Companies. These companies will substitute the current unincorporated joint ventures. The reason is that this will make financing of ongoing operations and the development of new oil and gas fields easier to achieve and will therefore permit an acceleration of petroleum activities.
It should be noted that the IJVs will pay a government take on existing production in onshore and shallow water equal to almost 90% in terms of royalties and taxes and therefore there will be no loss of revenues as a result of the creation of the IJVs. IJVs will not be subject to the provision of the Fiscal Responsibility Act and the Public Procurement Act.
Board decisions must be made based on international best practice.
PROCESSING & MONITORING OF OIL/GAS PRODUCTION: PIB Fiscal Terms-Implications for Current and Future Investors: Fiscal Design Principles
Simplification of allowable deductions for NHT purposes
TIONAL P NA
NIGERIAN
LEUM RO ET
OR
P O R AT I O
Only direct costs wholly and necessarily incurred in petroleum operations are eligible for deductions No home office expenditures are eligible
Capture of Windfall profits

Introduction of price based royalty for crude prices beyond $70/bbl
Removal of all cost based incentives and substitution by production allowances

Investment tax credits (ITC)or Allowances (ITA) have been removed in favour of defined production allowances for onshore, offshore and deep-offshore.
Preference for Nigerian goods and services

Foreign goods and services capped at 80% for deductions against NHT Alignment with the National Content Act
The PIB represents a complete overhaul of the Nigerian Petroleum Fiscal System
82
PROCESSING & MONITORING OF OIL/GAS PRODUCTION: PIB Fiscal Terms-Implications for Current and Future Investors:
Issues & Challenges of Royalty/Tax System
TIONAL P NA
NIGERIAN
LEUM RO ET
OR
P O R AT I O
The high tax rate (85%) means that there is no incentive for cost reduction
Nigeria has a low savings index
Government participation without operational control

It means that Government bears 94% of cost risk while IOC bears only 6% with operational control
Tax Administration
Difficulty in efficient assessment & collection of tax Difficulty in accessing cost data especially for the independents
Lack of integrated development planning to minimize cost and maximize government take AGFA terms accentuate the decline in government take from oil Decline in GT with low oil prices, no provision for windfall profit Govt. inability to fund its equity in the Joint Venture operations
Cost Control is Key to Maximizing Govt. Take

83
PSC Economics Review: Comparison of Global PSC Fiscal Regimes ($60/bbl)
NIGERIAN
TIONAL P NA
LEUM RO ET
OR
P O R AT I O
Nigeria has the Least Government Take !

84
TIONAL P NA
LEUM RO ET

Issues & Challenges of PSCs
NIGERIAN
OR
P O R AT I O
Contract clarity & Conflict with legislations Interpretation Disputes between Govt. & IOCs Divergent entitlement claims
Rising Production with declining Government take

Potential Zero Government take High Technical Cost Weak accounting procedures Stability clauses
85
TIONAL P NA
LEUM RO ET

Part III: Upstream Petroleum - Regular Acreage Management
NIGERIAN
OR
P O R AT I O
The Government Memorandum proposes to establish the international concept of drill or drop. This means a company is required to carry out an intensive work program on the acreage that is being granted. It the company does not want to carry out further work, a part of the acreage or all the acreage needs to be returned to the Federal Government. The acreage management provisions consist in particular of: National grid system :
An orderly national grid system is proposed. This permits the granting and relinquishment of acreage based on specific 1 by 1 square km parcels.
PPL Acreage relinquishment provisions:

50% based on parcels after initial exploration period all acreage after renewal, except for
appraisal areas and significant gas discovery areas, which need to be relinquished after certain period if no declaration of a commercial discovery is made.
TIONAL P NA
LEUM RO ET
Part III: Upstream Petroleum - Mandatory Acreage Relinquishment
NIGERIAN
OR
P O R AT I O
One of the main bottlenecks to increased activity in Nigeria is lack of new license and contract areas. The petroleum prospective part of Nigeria is covered with existing licenses, leases and contracts. These areas were granted without implementing strong relinquishment practices. As a result, in Nigeria petroleum companies are sitting on acreage. There is no access to acreage for new investors. This harms petroleum investment activity. Under the Government Memorandum petroleum companies will have to give acreage back from existing oil prospecting licenses and oil mining leases within 2 years after the effective date of the Act. Existing companies can keep all areas that are in production or will be appraised or developed in the near future. Also certain exploration areas can be maintained based on new work commitments. However, the acreage that companies are not using, will have to be returned to the Government. This may free up probably as much as 30% of the prospective petroleum area of Nigeria for new investors. In particular, small Nigerian companies will be offered major new opportunities in this regard.
TIONAL P NA
LEUM RO ET

Part II: Institutions - Regulatory Institutions (1)
OLD INSTITUTIONAL FRAMEWORK
Upstream Sector
Oil Exploration & Development Gas Exploration & Development
Cost Control by NAPIMS
NIGERIAN
OR
P O R AT I O
NEW INSTITUTIONAL FRAMEWORK

Upstream Sector
Oil Exploration & Development Gas Exploration & Development
Technical & Commercial Regulation by NPI
Downstream:(Midstream) Sector

Midstream Sector
Technical Regulation by Inspectorate Commercial Regulation by PPPRA
Oil Transportation & Gas Transmission Gas Processing LNG/CNG/GTL Derivative Processing/Production Oil Refining
Oil Transportation & Gas Transmission Gas Processing LNG/CNG/GTL Derivative Processing/Production Oil Refining
Technical & Commercial Regulation by NAMIRA
Downstream Sector
Downstream Sector

Petroleum product distribution & Storage Petroleum Product Retail
Gas Distribution /Sale Petroleum product distribution & Storage Petroleum Product Retail
Technical & Commercial Regulation by PPRA
TIONAL P NA
LEUM RO ET

Part II: Institutions - Regulatory Institutions (2)
NIGERIAN
OR
P O R AT I O
PIB Institutional Re-Alignment
Technical Regulation
Upstream Inspectorate
Commercial Regulation
Engineering Safety Environment Geo. Science Cost Economics Local Content Engineering Safety Environment e.t.c Cost Economics Tariff Local Content Engineering Safety Environment e.t.c Cost Economics Tariff/pricing Local Content
Oil Exploration & Dev. Gas Exploration & Dev.
NOC IOC IJV MFO IDOC
Directorate
Midstream Agency
Oil Transp. & Gas Transmission Gas Processing LNG/CNG/GTL Derivative Processing/Produ ction Oil Refining
NOC IOC IJV IDOC
Downstream Authority
Gas Dist. /Sale Petroleum product distribution & Storage Petroleum Product Retail
NOC IOC IDOC
Policy &
Coordination
89
Regulation
Commercial
Operations
TIONAL P NA
LEUM RO ET

Objective: Deregulate Petroleum Products Prices
NIGERIAN
OR
P O R AT I O
PROBLEMS
Current levels of subsidies for petroleum products are unsustainable. Poor infrastructure and low refinery throughput create significant bottlenecks in petroleum product supplies. Corruption and smuggling operations are rampant. Impediments:
Regulated prices are a disincentive for private investment. Equalisation Fund operations are cumbersome Strain on NNPC financial performance No adequate regulatory framework for investors
TIONAL P NA
LEUM RO ET
ROCESSING & MONITORING OF OIL/GAS PRODUCTION: Objective: Deregulate Petroleum Product Prices (2) SOLUTIONS
Complete deregulation of the petroleum product sector
Equalisation Fund will be scrapped.
NIGERIAN
OR
P O R AT I O
Strong midstream regulatory framework will be established with one shop stop for certificates for new refineries and terminals and open access provisions for bulk plants, product pipelines and terminals.
Price monitoring will be put in place to avoid misuse of free market environment. Private investment framework will be established.
TIONAL P NA
LEUM RO ET

Conclusion
NIGERIAN
OR
P O R AT I O
To address the key issues of the Nigerian oil and gas industry, early passage of the Petroleum Industry Bill is most critical
92
TIONAL P NA
LEUM RO ET
The Petroleum Industry Bill :

Overview of PIB
NIGERIAN
OR
P O R AT I O
The Petroleum Industry Bill contains a number of initiatives: It creates a single Act for the entire petroleum industry and repeals 16 prior Acts, thereby creating transparency It strengthens the administration, by creating four well financed administrative institutions as follows: Directorate, Inspectorate, Authority and Agency It converts NNPC to a self-financing NOC It converts NNPC joint operation agreements to NOC incorporated joint ventures It creates a new acreage management system in line with international best practice It requires bid system for all upstream licenses and leases It removes confidentiality on royalty and tax payments It separates oil and gas for Tax purposes.
TIONAL P NA
LEUM RO ET
The Petroleum Industry Bill:

Key Elements of PIB Fiscal Framework
NIGERIAN
OR
P O R AT I O
Capturing the full gas value chain (upstream, midstream and downstream) within and without Nigeria Developing a fiscal regime for gas that is decoupled from oil thereby creating a level playing field for all investors in gas Promoting the effective management of costs across the industry and maximising Government take Developing a fiscal system that is responsive to the significant shift in energy prices Clarifying inconsistencies and/ or conflicts in the application of fiscal terms for oil and gas and Developing a fiscal rule of general application based on a body of fiscal laws rather than incentive letters.
94
TIONAL P NA
LEUM RO ET
The Petroleum Industry Bill :

Proposed Fiscal Provisions in the PIB Overview
NIGERIAN
OR
P O R AT I O
Simplification of collection of government revenue Capture of windfall profits Encouragement of cost efficient operators Development of small oil fields & indigenous companies Increase of government take from large deepwater fields Enhancement of transparency & accountability
Many nations have changed Fiscal systems to respond to operational and Economic realities :UK, Alaska(USA), Venezuela, Russia, Algeria, Alberta, Angola etc, without recourse to NOC or IOCs
JV Today
Incorporation
NIGERIAN
Understanding Joint Venture Incorporation

NNPCs only means of financing share of investment is Incorporation allows NNPC to finance its share of JV from FGN cash calls. operations through a balance sheet..
TIONAL P NA
LEUM RO ET
OR
P O R AT I O
Income statement FGN Income 60 40 Chevron Expenses 100 Asset Utilization Drives Income
Income statement Income
Oil revenues Gas revenues

Expenses JV OPEX/CAPEX Taxes & Royalties Dividends
Balance sheet
Assets Liabilities Retained Earnings
Balance sheet
Assets Liabilities Debt
Interest Charge
JV assets
PPE Cash Capital
96
Key Messages Incorporation enables NNPC to leverage asset base of JV to finance operations Key difference between incorporation and status-quo is NNPCs ability to raise debt, while the government can still maintains same share of ownership in JV via NNPC share.
TIONAL P NA
LEUM RO ET
JV Incorporation Environment Key Changes

Before
Investment
NIGERIAN
OR
After
funding strategy One off equity injection JV Inc raises debt financing
P O R AT I O
NNPC funds share of investments

FGN cash call Third Party financing
Removes the need for cash call & annual
Revenue
NNPC receives share of sales proceeds

which is passed directly to FGN
NNPC receives share of revenues after

expenses & taxes via Dividend
Taxes
FGN receives taxes and royalties from JV

partners only
FGN receives taxes and royalties from

entire JV Inc ( JV Partner + NNPC )
Retained earnings
There are no retained funds for future, FGN

takes all its proceeds out of organization
JV Inc will retain some portion of earnings

to fund future investment. Dependent on dividend policy
Balance Sheet
There is no balance sheet, organization

has no assets or liabilities
JV Inc will have balance sheet with own

assets & liabilities Balance sheet used to raise finance
NNPC control is limited to level of

Control/Transparency
investment that is put in. Lack of transparency constrains level of decision making
NNPC will exercise greater direct control

via board & management. Makes operations and financial data transparent
97
TIONAL P NA
LEUM RO ET
JV Incorporation provides an industry wide solution with substantial additional benefits to NNPC & Nigeria
JV Inc is a robust industry solution
Removes the need for cash
call and piecemeal financing
NIGERIAN
OR
P O R AT I O
It also increases net proceeds to FGN

Increased transparency &
accountability will drive down industry costs and increase efficiencies
and sets NNPC on the road to of being world class

NNPC gets direct access
to expertise and operational excellence of the worlds top oil companies
Provides a viable and

sustainable method for industry to self-finance
Increased transparency
will ensure less opex, capex are claimed against revenues thus increasing tax revenues.
Can be applied across the

whole sector in a uniform manner.
NNPC develops skills to be

an operator in future or at least benchmark future operator performance
In the long-term JV Incs

will be able to raise increased amounts of debt financing, boosting investment levels and related revenue
Globally tried & tested

Incorporation is the dominate model across NOCs around the world
NNPC can expand

internationally via JV Incs, thus sharing international risk with IOCs
Aligns industry & FGN

aspirations
98 Source:
Team analysis
TIONAL P NA
NIGERIAN
LEUM RO ET
PSC Production Outlook

PSC Production / forecast
1,400 1,200
OR
P O R AT I O
Crude Oil Prod MBOPD
1,000 800 600 400 200 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Bonga Main Usan
Bonga SW Abo Main
Bonga NW Abo Extension
Erha Agbara
Erha North OML 123 / 124
Agbami Okwori / Nda
Bosi / Bosi Ser 2
Akpo
99
TIONAL P NA
NIGERIAN
LEUM RO ET
OR
P O R AT I O
Oil & Cond Forecast

4,000 3,500 3,000
JV & Deepwater production are on track to achieve GDP growth target by 2011 JV Production will reach 2.5 MMBOPD by 2011. GDP growth aspiration expects JV oil prod (incl. float) of 2.6 MMBOPD by 2011 JV Production will only be attained with sustained investment at the levels shown in the previous slide Any JV production gap due to lack of required investment could be partially filled by deepwater production; however, this will not deliver the expected revenues, as the government take is much less in the deepwater PSCs.
BOPD
2,500 2,000 1,500 1,000 500 0

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
100
NIGERIAN
JV Funding Outlook Gas Production Forecast

Gas Production Forecast
15,000 12,000
TIONAL P NA
LEUM RO ET
OR
P O R AT I O
Even with the investment levels outlined in the previous slide, GDP gas aspiration will not be achieved. 9 BCFD will be attained by 2011, compared to the expected 14 BCFD Deepwater PSC gas production still low Proper definition could unlock additional gas volumes in due course
MMSCFD
9,000 6,000 3,000 0

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
101
TIONAL P NA
NIGERIAN
LEUM RO ET
OR
P O R AT I O
Picture of drilling session showing Men and and drill string
102
TIONAL P NA
NIGERIAN
LEUM RO ET
Way Forward
Niger Delta security situation needs urgent attention to improve Oil & Gas production and reduce costs
OR
P O R AT I O
The Petroleum Industry Bill (PIB) currently before the National Assembly needs speedy passage to deal with the fiscal and joint venture financing issues affecting Government revenues.
Despite all the security challenges in the Niger Delta there is still need for greater cost efficiency in the petroleum sector.
103
TIONAL P NA
NIGERIAN
LEUM RO ET
OR
P O R AT I O
Thank You
104

Monitoring Nigerian Oil and Gas Production

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Monitoring Nigerian Oil and Gas Production

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Processing & Monitoring of Nigerian Crude/Gas Production and Proper Accounting of Sales

PROCESSING & MONITORING OF OIL/GAS PRODUCTION:

1. Background Nigerian Oil & Gas Fiscal Arrangement and Systems

2. Role of NNPC In Nigerias Crude Oil/Gas Production & Accounting

3. Factors influencing Government Share of Oil & Gas Revenue

PROCESSING & MONITORING OF OIL/GAS PRODUCTION: Presentation Outline (2)

5. Issues, Challenges and Proposed Solutions

PROCESSING & MONITORING OF OIL/GAS PRODUCTION:

PROCESSING & MONITORING OF OIL/GAS PRODUCTION:

Maximum Economic Development of Hydrocarbon Resources

PROCESSING & MONITORING OF OIL/GAS PRODUCTION:

PROCESSING & MONITORING OF OIL/GAS PRODUCTION:

Government Revenue ($ million)

Terms too lenient

Terms too tough

Need to increase government take

Need to provide greater incentive

Government Take (% Project Economic Profit) Rent)

PROCESSING & MONITORING OF OIL/GAS PRODUCTION:

SERVICE FEE CONTRACTS

PROCESSING & MONITORING OF OIL/GAS PRODUCTION:

Joint Ventures (JV) operations

Background: Petroleum Contract Arrangements - JV Participating Interest

PROCESSING & MONITORING OF OIL/GAS PRODUCTION:

Name of Joint Venture

NNPC IOC equity equity (%) (%)

NNPC/MPN NNPC/CNL NNPC/EPNL NNPC/NAOC/Phillips NNPC/POOC

MPN CNL EPNL NAOC POOC

PROCESSING & MONITORING OF OIL/GAS PRODUCTION:

Production Sharing Contracts (PSC)

Pays Tax Oil

PROCESSING & MONITORING OF OIL/GAS PRODUCTION:

Service Contracts (SC)

Main Features Of Service Contract

Agreed Level Of Work Must Be Met To Continue

PROCESSING & MONITORING OF OIL/GAS PRODUCTION:

Background: Petroleum Contract Arrangement Independents

PROCESSING & MONITORING OF OIL/GAS PRODUCTION:

PROCESSING & MONITORING OF OIL/GAS PRODUCTION:

Background - JV and PSC Oil & Condensate Production Forecast

Oil & Cond Forecast

Deepwater PSC Production

2,500 2,000 1,500 1,000 500 0

Base Production New Oil Projects Unconstrained PSC

Dev Drilling & Work ov er Ongoing Gas Projects

Ongoing Oil Projects New Gas Projects

PROCESSING & MONITORING OF OIL/GAS PRODUCTION:

Background - JV and PSC Oil & Condensate Production Forecast (2)

2009 1,297 773 2,070

2010 1,392 800 8 2,200

2011 1,470 824 7 2,300

2012 1,578 1,012 5 2,596

773 1297 2009

PROCESSING & MONITORING OF OIL/GAS PRODUCTION:

Production in Thousands Barrels Per Day

Crude Oil & Condensate Production 2.2 mbp

PROCESSING & MONITORING OF OIL/GAS PRODUCTION: Background Government Revenue Sources

NNPC/SHELL/ELF/AGIP NNPC/MOBIL NNPC/CHEVRON NNPC/AGIP/PHILIPS NNPC/ELF NNPC/PAN OCEAN

(55%) (60%) (60%) (60%) (60%) (60%)

PROCESSING & MONITORING OF OIL/GAS PRODUCTION:

Update Technical Costs!!!

Govt Take (GT) 70% of total revenues

Cost Recovery, 10.25