The role of independents in the Nigerian oil and gas industry

Chairman Egbert Imomoh

22 October 2010

Notice
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The role of independents in the Nigerian oil and gas industry

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Agenda
Background Independents in Nigeria today Afren an independent E&P case study The independent sector poised for growth Conclusions 4 9 21 24

The role of independents in the Nigerian oil and gas industry

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Background Independents in Nigeria today

The role of independents in the Nigerian oil and gas industry

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The evolution of Nigerias upstream industry

1955 Mobil Oil Corporation starts operations in Nigeria 1938 Shell DArcy granted exploration licence to prospect for oil throughout Nigeria

1971 Nigerian National Oil Company (NNOC) formed

1990-1994 38 indigenous companies granted E&P licences

1961/1962 Texaco, Gulf (Chevron), Safrap (later Elf) and Agip (ENI) start operations in Nigeria

1977 Government establishes Nigerian National Petroleum Corporation (NNPC)

1993 First Production Sharing Contracts signed

2000-2009 Government encourages competitive tenders through the 2000, 2005, 2006 and 2007 licensing rounds First marginal oil field awards to indigenous firms

1940

1950
1956 First commercial oil discovery (Oloibiri field)

1960

1970

1980

1990
1993-1998 Further indigenous licensing rounds

2000

2010
2010 onwards Indigenous Bill signed and PIB expected to further promote significant indigenous participation

1959 Government introduces the Petroleum Profit Tax Act

1971 Nigeria becomes a member of OPEC. Nigerian concessions evolve into joint ventures (JVs) between the IOCs and the Government

1986 MoU signed between IOCs and the Government

1990 First open licence rounds begin

The role of independents in the Nigerian oil and gas industry

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The corporate landscape today

<1% 1%
4% 4% 5%

License Interests
15%

(No. of blocks)
State owned Indigenous E&P Major IOC International NOC International E&P 37% International integrated /large cap

4% 10%

Working Interest Total Production

State owned 42% Major IOC International NOC Indigenous E&P International E&P International integrated /large cap

35%

44%

1%

1%

5%

3%

Distribution of Resource ownership

(mmboe)
State owned

Indigenous independents well represented in terms of license interests held but under represented today in terms of commercial reserves and production Resource ownership and production dominated by the five major IOCs Reflective of stage Nigeria is at on maturity curve The challenge is for the independent sector to now grow its share of commercial reserves and production

43%

Major IOC International NOC Indigenous E&P International E&P International integrated /large cap

47%

Source: Company data, Wood Mackenzie, IHS

The role of independents in the Nigerian oil and gas industry

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What Independent E&Ps can contribute to Nigeria

Innovative ideas and fresh approach

Lower materiality thresholds

Contribute to energy supply (domestic & International)

Focus and Solutions for overlooked / fallow assets

Economic contribution (royalty & taxes) Employment

Indigenous capacity building

Independent E&Ps can be a key driver for continued economic and industrial growth in maturing basins Nigeria can be likened to the GoM and North Sea 20 years ago

The role of independents in the Nigerian oil and gas industry

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The challenges faced

Opportunity constraints
-

No. of blocks

Sporadic licensing activity Low liquidity in asset market Retention of assets by Majors

40
35 30 25 20 15 10 5 0 90 92 94 96 98 00
Deepwater Offshore Onshore

Blocks Awarded by region

Access to capital Exploration and appraisal drilling activity at all time low Skills and expertise
-

02

04

06

08

10

No. of well completions 250

Drilling Activity by well

Exploration Appraisal

Skilled personnel taken by majors May be reluctant to leave for smaller/start-up E&P

200

150

Sustainability
-

Many E&Ps over-dependent on a single/small number of assets Diversification and portfolio effect can help mitigate risk and manage exposure

100

50

65

69

73

77

81

85

89

93

97

01

05

09

Source: Wood Mackenzie Upstream Service Slide 8

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The role of independents in the Nigerian oil and gas industry

Afren an independent E&P case study

The role of independents in the Nigerian oil and gas industry

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Afren an established African independent E&P

Established operating track record

27 assets acquired in 9 African countries Circa 20,000 boepd net WI production (all operated) 106 net mmboe material reserves and contingent resources base (independently certified at 30/06/10) 2,400 mmboe net un-risked prospective resources 30 wells drilled and operated by Afren by end 2010, with sustained multi well drilling campaign planned throughout 2011
Drilled on time and within budget - Zero incidents - Zero environmental issues
-

9 assets in Nigeria accounting for more than 70% of Group reserves and production, in partnership with 7 indigenous companies

Maiden Okoro greenfield development onstream June 2008 Demonstrable long term commitment to working and empowering local management Nigerian production from existing portfolio expected to grow from circa 18,000 bopd to over 50,000 bopd in the near term First oil expected from Ebok in Q4 2010, with Phases 1 & 2 expected to deliver 35,000 bopd Actively appraising and exploring Okwok and OML 115 High impact exploration potential at OPL 310

The role of independents in the Nigerian oil and gas industry

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Afren an established African independent E&P

Sustained growth
Reserves
120 mmboe 100

Accessing international capital markets

US$mm 1800

Total capital raised to date

80 60 40

100% Ebok appraisal success rate Prospective upside of 2,400 mmboe

1600

1400

1200
20 0

1000

31/12/07

31/12/08

31/12/09
800

Production
Outlook boepd (average net WI production) 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 H2 2010* H1 2011 H2 2011

Okoro CI-11 & NGLs Ebok

Ebok onstream Q4 2010 >70% of Group reserves and production from Nigeria

600

400

200

0
Mar 05 Dec 05 Mar 07 Jul 07 Apr 08 Oct 08 Nov 09 Apr 09 Mar 10 Jul 05 Jul 06 Mar 07 Aug 07 Sep 08

The role of independents in the Nigerian oil and gas industry

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Building a significant Nigerian portfolio through indigenous partnerships

OPL 310

OPL 907/917
OML 26

Okoro Ofa

Ebok

Okwok

OML 115

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Okoro Setu project - an established track record

Partnered with indigenous company Amni

-

Q3 2008 reservoir model

40,000 36,000 32,000
FOPR Observed Daily Rate STB/D FWCT Observed WCT %

1.0 0.9 0.8 0.7

Afren acts as Technical Services Provider

Oil Rate, STB/D

Located on OML 112 offshore south east Nigeria

-

28,000 24,000 20,000 16,000 12,000 8,000 4,000

Actual oil production

Okoro field discovered in 1974

0.6 0.5 0.4 0.3 0.2 0.1

Green field development project

-

Successfully operated 7 development and 1 appraisal well

Actual water cut

0 0 1,000 2,000 3,000 0.0

First oil achieved in just two years from entry Production continues at ca. 18,000 bopd gross
-

Cumulative Oil Production, MSTB

Q4 2009 reservoir model

40,000 36,000 32,000 2.0 1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0

Continues to outperform pre start up expectations Moving towards upper end of recovery estimates

28,000

average parcel size increased to 812,000 bbls in 2010 (from 169,000 bbls) excellent operational efficiency maintained with process uptime of 99.6%

24,000 20,000 16,000 12,000 8,000

Infill drilling targets identified

- Expected to restore production to >21,000 bopd

4,000 0

Cumulative Oil Production, MSTB

The role of independents in the Nigerian oil and gas industry

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Watercut, fraction; GOR, Mscf/STB

Exports via Ima terminal

Oil Rate, STB/D

Watercut fraction; GOR, , Mscf/STB

4,000

5,000

6,000

7,000

8,000

9,000

10,000

11,000

12,000

13,000

14,000

15,000

16,000

17,000

18,000

19,000

20,000

21,000

22,000

23,000

24,000

25,000

26,000

27,000

28,000

29,000

30,000

31,000

2,000

4,000

9,000

18,000

27,000

1,000

3,000

5,000

6,000

7,000

8,000

10,000

11,000

12,000

13,000

14,000

15,000

16,000

17,000

19,000

20,000

21,000

22,000

23,000

24,000

25,000

26,000

28,000

29,000

30,000

31,000

Okoro Setu project a fast track development

Q1 06

Q2 06

Q3 06

Q4 06

Q1 07

Q2 07

Q3 07

Q4 07

Q1 08

Q2 08

Q3 08

Q4 08

Agreement signed with partner AMNI

Rig secured for development drilling

Appraisal drilling RBL facility / certified reserves FDP approval FPSO secured Long lead items

Development drilling (7 wells)

Production
Complete Source: Afren

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Ebok/Okwok/OML 115 creating a new Nigerian production hub

Partnered with indigenous company Oriental Energy Resources

-

Afren acts as Technical Services Provider

Ebok & Okwok fields located on OML 67 offshore South East Nigeria
-

Ebok discovered 1968; Okwok discovered 1967

Appraisal campaign more than quadrupled gross 2P reserves to >100 mmbbls

-

Successful partnership at Ebok created follow on opportunities at Okwok and OML 115

First Oil expected from Ebok in Q4 2010

-

35,000 bopd from Phases 1 & 2

Okwok appraisal well in progress Potential for significant joint development synergies between Ebok and Okwok Ebok and Okwok fields both extend into OML 115, exploration drilling planned on OML 115
-

Ufon exploration well to spud Q4 2010 targeting 60 mmbbls prospect

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Ebok/Okwok/OML 115 creating a new Nigerian production hub

FSO Ebok Central Wellhead Platform Ebok West Wellhead Platform

Moored within 70m of CWHP

4 Gas line
8 Production line 6 Water injection ESP Power & control cable 4 Test line

8 Produced line 8 Produced water

Power & control cable

135 feet of Water 50km Offshore

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Ebok/Okwok/OML 115 - unlocking substantial resource potential

Gross mmbbls
600 550 500 450 400 350 300
52 206 558

250
200
50 172

128

150 100 50 0 Ebok 2P Okwok 2P* Okwok AFR tech case 2P Total area 2P Ebok Upside Okwok Upside** OML 115 Total Unrisked Reserves & Resources
20 102

* Pre acquisition gross 2P reserves estimate, Okwok reserves not yet independently reviewed ** Assumes one prospect only in Qua Iboe

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Building indigenous capacity First Hydrocarbon Nigeria

Established in response to Nigerian governments policy of increasing indigenous participation in the upstream sector Vision to become a champion in the indigenous sector through acquiring and developing discovered but undeveloped fields Majority Nigerian owned objective to broaden Nigerian ownership (Initial Public Offering on NSE) Major step forward in establishing a secondary market in Nigerias E&P sector Afren will provide FHN with technical, financial and management support as Technical Services Provider as with other existing indigenous Nigerian partnerships

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FHN acquisition of OML 26

Acquisition by FHN of a 45% interest in OML 26

Two producing, three undeveloped fields and significant exploration upside Maximum investment of US$ 187.5 million acquisition cost and equity share of phased development

Large scale reserves and resource base

Independently certified gross 2P reserves and contingent resources of 184 mmbbls Undeveloped gross recoverable resources of 144 mmboe Prospective resources of 615 mmboe gross

Current production with major planned redevelopment

Currently producing 5,000 bopd (gross) Phased work programme defined for Ogini and Isoko fields to increase production to 40,000 bopd over five years

FHN to operate the assets with Afren acting as Technical Services Provider

Leveraging Afrens established development and operating track record

Terms agreed with BNP for a loan to fund 88% of entire acquisition cost

US$130 million credit facility agreed at LIBOR +5.5% Six year term

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OML 26 Ogini and Isoko fields phased development plan

Phase 1

Phase 2

Phase 3

Drill 6 producers + 1 water disposal well Refurbish existing production facilities 30,000 bopd liquids handling capacity 16,000 bopd production uplift expected Conduct detailed G&G Study Analyse existing and new production data Net capex: c.US$ 70m Net cash flow: c.US$ 30m

Expand production capacity Drill 15 additional producers 40,000 bopd expected production rate Net capex: c.US$ 170m Net cash flow: c.US$ 230m

Further expand facilities Drill 18 infill-wells 50,000 bopd expected production rate Net capex: c.US$ 136m Net cash flow: c.US$ 280m

Impact on gross boepd

Impact on gross boepd

Impact on gross boepd

50 40 30 20 10 0
Yrs 1-3

50 40 30 20 10
Phase 2 Yrs 4-6 Phase 3 Yr 7

50 40 30 20 10 0
Phase 1 Yrs 1-3 Phase 2 Yrs 4-6 Phase 3 Yr 7 Phase 1 Yrs 1-3 Phase 2 Yrs 4-6 Phase 3 Yr 7

Phase 1 Yrs 1-3

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The independent sector poised for growth

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A platform for sustainable growth

The Government

The Independent E&Ps

Continued promotion of the indigenous and independent sectors Stable regulatory and fiscal platform to promote sustainable investment Regular and defined licensing processes new acreage, relinquished acreage, undeveloped/fallow fields Support and promote development of capital markets

Commitment to achieving and maintaining international industry best practices vital for creditworthiness and viability as transaction counterparty

Sustainable sector growth

Attract, develop and grow the best local oil and gas talent (technical, financial, managerial) Innovate to provide solutions the value add of independent E&Ps

The incumbent Major IOCs

Proactive approach to portfolio management use it or lose it

Opportunity to capitalise on strong demand for upstream assets that do not fall within forseeable development plans

The role of independents in the Nigerian oil and gas industry

The Opportunity Set

4000 3500

Liquids Production (000p/d) Source: Wood Mackenzie

Structural reform of the upstream industry

Nigeria shut-in production

3000 2500 2000

Development of an indigenous E&P industry capacity building Re-activation opportunities at assets currently shut in or producing well below capacity / potential A clear strategy and solution for such assets is crucial to realising optimal development of Nigerias hydrocarbon resources an indigenous E&P solution is required

2006 Unrest begins

1500 1000 500 0

Onshore Shelf Deepwater with FID Deepwater without FID WM View in 2005

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

No of Fields

Original Reserve Size Distribution

Source: IHS Energy data

The undeveloped fallow fields

60 50 40 30

Proved undeveloped fields

Oil Gas

Large number of discovered but undeveloped fields are attractive appraisal and development opportunities
Could significantly boost Nigerias output if developed Mostly held currently by Major IOCs Potential upside highlighted through Okoro and Ebok

20 10 0
Unknown 0-1 1-5 5-10 10-25 25-50 50-100 100-250 250-500 500-1000 2500-5000 >5000 1000-2500

Reserve Size (mmboe)

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Conclusions
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The role of independents in the Nigerian oil and gas industry

Conclusions

Independent E&Ps have an increasingly important role to play in ensuring optimal development of resources
-

Evidenced by positive impact independent E&Ps have had in maturing basins globally

Nigeria has a burgeoning indigenous E&P scene

-

FHN acquisition of OML 26 from SPDC acts as a catalyst for the emerging secondary asset market

Certain challenges must be overcome

-

Licensing and E&A drilling activity levels must increase

Nigeria remains a world class opportunity set

-

Undeveloped/fallow fields Maturing portfolios of Major IOCs

Good remaining exploration potential

Independent E&Ps should drive the next phase of growth for Nigeria

The role of independents in the Nigerian oil and gas industry

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