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February 2011
Processing & Monitoring of Nigerian Crude/GasProduction and Proper Accounting of Sales
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ONPROCESSING & MONITORING OF OIL/GAS PRODUCTION:
Presentation Outline
1. BackgroundNigerian Oil & Gas Fiscal Arrangement andSystems
Type of arrangementsJVs, 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 Accounting3. Factors influencing Government Share of Oil & Gas Revenue
Applicable Fiscal System
Production Costs
Oil & Gas Price
Business Environment - Security2
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PROCESSING & MONITORING OF OIL/GAS PRODUCTION:Presentation Outline (2)
3
4. Joint Venture Cash Call Funding Mechanism & Implication onGovernment Oil Revenues
Cash Call Funding Process
Implication of Cash Call Funding On Government Revenues
Alternative to Cash Call Funding
5. Issues, Challenges and Proposed Solutions
Funding
Managing Cost
Fiscal (AGFA)
Acreage Management System Institutional Framework
Downstream Subsidy
6. Conclusions
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ON
Background
4
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ONPROCESSING & MONITORING OF OIL/GAS PRODUCTION:
Background - What is Oil & Gas Fiscal System
Petroleum means mineral oil (or any related hydrocarbon) ornatural gas as it exists in its natural state in strata and does notinclude coal or bituminous shales or other stratified deposits fromwhich oil can be extracted by destructive distillation
Fiscal system or arrangement is the Host Governments mostimportant tool for managing Oil and Gas resources
From the international oil companies (IOCs) perspective, fiscalregimes are some of the most critical factors to be considered forinvestment decisions
5
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6
PROCESSING & MONITORING OF OIL/GAS PRODUCTION:Background - Balance of Objectives
Realization of Countrys EconomicPotential
Development ofNational Expertise
Broad Control ofOverall Activity
Balanced Risk / RewardRelationship
Stable Politicaland Fiscal Environment
Management of Operationson Sound Commercial Basis
Government Investor Company
Maximum Economic Development of Hydrocarbon Resources
Fiscal Terms
Fiscal terms act as the contractual balance between the financial
Objectives of Government and the investor Company
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ONPROCESSING & MONITORING OF OIL/GAS PRODUCTION:
Background - Balancing Government Take
8
GovernmentRevenue($m
illion)
Government Take (% Project Profit)
Terms to o lenient Terms too toug h
Need to increase government
take
Optimal terms
Need to provid e greater
incent ive
GovernmentRevenue($m
illion)
Government Take (% Project Economic Rent)
Terms to o lenient Terms too toug h
Need to increase government
take
Optimal terms
Need to provid e greater
incent ive
1993/2000 PSCs JV Royalty/Tax Systems
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ONPROCESSING & MONITORING OF OIL/GAS PRODUCTION:
BackgroundTypes of Production Arrangements
9
SERVICE FEECONTRACTS
Includes Independents
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ONPROCESSING & MONITORING OF OIL/GAS PRODUCTION:
Background: Petroleum Contract Arrangement - JV
Joint Ventures (JV) operations
An arrangement whereby the government is in working partnershipwith 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 withone of them appointed as an Operator.
10
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ONPROCESSING & MONITORING OF OIL/GAS PRODUCTION:
Background: Petroleum Contract ArrangementPSC
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 onproduction
12
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ONPROCESSING & MONITORING OF OIL/GAS PRODUCTION:
Background: Petroleum Contract ArrangementSC
Service Contracts (SC)
An Agreement to undertake exploration activities for a fee, either inCash 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
13
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PROCESSING & MONITORING OF OIL/GAS PRODUCTION:Background: Petroleum Contract ArrangementMarginal Fields
Marginal Fields
Such fields as the President may from time to time identify as marginalfields (Sec. 17 of First Schedule)
Specific fields in the JV concession areas are farmed out to themarginal field operators.
The JV companies who are owners of these marginal fields receive anoverriding royalty in return for allowing the marginal field operatorswork these fields.
Farm-out of marginal fields is backed by Petroleum Amendment Act
No. 23, which introduced paragraph 16A into the First Schedule to thePetroleum Act. Under this amendment a farm-out can only bebrought about by the approval of the President under the terms as hemay approve.
14
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ONPROCESSING & MONITORING OF OIL/GAS PRODUCTION:
Background: Petroleum Contract ArrangementIndependents
Independents
This is a concession type arrangement
Concession licenses are granted to independents to work the blockson sole risk basis.
Government derives royalty and taxes only, from these set of investors
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ONPROCESSING & MONITORING OF OIL/GAS PRODUCTION:
Background: 2009 Lifting by Regimes (Sample)
16
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ONPROCESSING & MONITORING OF OIL/GAS PRODUCTION:
Background - JV and PSC Oil & Condensate Production Forecast
17
Oil & Cond Forecast
0
500
1,000
1,500
2,000
2,5003,000
3,500
4,000
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
BOPD
Base Production Dev Drilling & Work over Ongoing Oil ProjectsNew Oil Projects Ongoing Gas Projects New Gas ProjectsUnconstrained PSC
Deepwater PSC Production
JV & Deepwater productionare on track to achieve GDPgrowth target by 2011
JV Production will reach 2.5MMBOPD by 2011.
GDP growth aspiration
expects JV oil prod (incl. float)of 2.6 MMBOPD by 2011
JV Production will only beattained with sustainedinvestment at the levelsshown in the previous slide
Any JV production gap due to
lack of required investmentcould be partially filled bydeepwater production;however, this will not deliverthe expected revenues, asthe government take is muchless in the deepwater PSCs.
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ONPROCESSING & MONITORING OF OIL/GAS PRODUCTION:
Background - JV and PSC Oil & Condensate Production Forecast (2)
ALL FIGURES IN THOUSAND BARRELS OF OIL PER DAY (MBOPD) 2009 2010 2011 2012
Joint Ventures (JVs) 1,297 1,392 1,470 1,578
Production Sharing Contracts (PSCs)773
800 824 1,012
Service Contracts (SCs)8 7 5
Total 2,070 2,200 2,300 2,596
18
1297 1392 1470 1578
773 800824
1012- 8
75
0
500
1000
1500
2000
2500
3000
2009 2010 2011 2012
JVs PSCs SCs
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PROCESSING & MONITORING OF OIL/GAS PRODUCTION:2010 Crude Oil & Condensate Production Forecast by BusinessArrangement
20
Business Arrangement
Production inThousands Barrels
Per Day
Joint ventures 1050
Alternative Funding 342
Production Sharing Contracts 800Service Contracts 8
Total Production 2,200
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PROCESSING & MONITORING OF OIL/GAS PRODUCTION:BackgroundFederation Account Revenue Flows
2010 Approved Oil and Gas Fiscal Assumptions
Crude Oil & Condensate Production2.2 mbp
Natural Gas Production
Oil Price Joint Venture Cash Calls
21
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PROCESSING & MONITORING OF OIL/GAS PRODUCTION:Background Government Revenue Sources
NNPC -NAPIMS
JOINT VENTURES (6)
FRONTIER EXPL.SERVICES (FES)
NNPC/SHELL/ELF/AGIP (55%)NNPC/MOBIL (60%)
NNPC/CHEVRON (60%)
NNPC/AGIP/PHILIPS (60%)
NNPC/ELF (60%)
NNPC/PAN OCEAN (60%)
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
PRODUCTION SHARING CONTRACTS (PSC))
Over 50 blocks distributed among these coys
SERVICE CONTRACT (SC) (1) (AENR)
GOVERNED BY
JOA
GOVERNED BY
PSC
PSC COYS
Contd
19.TOTALUPSTREAM
20.BRITISH
GAS
21.CONOIL
22.CENTRICA
23.KNOC
24.OANDO
25.CNODC
26.CNPC
27. STERLINGGLOBAL
28.STERLING
EXP.
29.NNDC
30 OMEL
31.GAS
TRANSMISSION32. AENR (SC)
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PROCESSING & MONITORING OF OIL/GAS PRODUCTION:Background - Comparative Revenue Flow to Federation Accountfrom JVs & PSCs
23
1. Shortfall in JV production due to lack offunding may be be filled by PSCproduction
2. However, PSC volumes will deliver onlyabout half of JV revenues togovernment due to the followingreasons:
Fiscal terms for the deepwater PSCs(especially the 1993 PSCs) from wherethe bulk of the deepwater productionwill come from are not as favourable togovernment
Costs are significantly higher in thedeepwater terrain compared to theconventional JV terrains
3. At a technical cost of $10.25/bbl andcrude oil price of $50/bbl GovernmentTake in the JVs is about 70% of totalrevenues compared to 37% in thedeepwater
4. Consequently, government interest isbetter served if the JVs are adequatelyfunded for incremental volumes.
Royalty, 9.25
PPT, 25.56
Cost Recovery,
10.25
Operator margin,
4.94
Royalty, 2.50
PPT, 16.50
Cost Recovery,10.25
Operator margin,
20.75
JV Oil PSC Oil
GovtTake(GT)70%o
fto
tal
revenues
$50/bblCrudeOilPrice
GT
37%o
ftotal
revenues
Royalty, 9.25
PPT, 25.56
Cost Recovery,
10.25
Operator margin,
4.94
Royalty, 1.0
PPT, 17.25
Cost Recovery,10.25
Operator margin,
21.50
JV Oil PSC Oil
GovtTake(GT)70%o
fto
tal
revenues
$50/bblCrudeOilPrice
GTrevenues
Data Set:
Well Cost $MM 100IDC % 80.0%TWI % 20.0%Facilities Cost $MM 150Operating Cost $MM 160Sales volume MMBbls 40Crude Oil Price $/bbl 50
JV 93 PSCPPT Rate 85.0% 50.0%Average Royalty Rate 18.5% 2.0%Invest Tax Allowance (ITA) 10.0% NA
Invest Tax Credit (ITC) NA 50.0%
Update TechnicalCosts!!!
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Role of NNPC In Nigerias CrudeOil/Gas Production & Accounting
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ONPROCESSING & MONITORING OF OIL/GAS PRODUCTION:
Presentation Outline
1. BackgroundNigerian Oil & Gas Fiscal Arrangement andSystems
Type of arrangementsJVs, 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
3. Factors influencing Government Share of Oil & Gas Revenue
Applicable Fiscal System
Production Costs
Oil & Gas Price
Business Environment - Security25
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ONPROCESSING & MONITORING OF OIL/GAS PRODUCTION:
Presentation Outline (2)
26
4. Joint Venture Cash Call Funding Mechanism & Implication onGovernment Oil Revenues
Cash Call Funding Process
Implication of Cash Call Funding On Government Revenues
Alternative to Cash Call Funding
5. Issues, Challenges and Proposed Solutions
Funding
Managing Cost
Fiscal (AGFA)
Acreage Management System Institutional Framework
Downstream Subsidy
6. Conclusions
ON
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ONPROCESSING & MONITORING OF OIL/GAS PRODUCTION:
Production Quota Allocation & Fiscal Price Determination
COMD & GFAD Input
27
IONA
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ONPROCESSING & MONITORING OF OIL/GAS PRODUCTION:
Monitoring Oil & Gas Production and Cost
COMD & GFAD Input
28
TIONA
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ONPROCESSING & MONITORING OF OIL/GAS PRODUCTION:
JV Operations : Governance
29
J
O
A
DEFINES PARTICIPATINGINTERESTS AND
RESPONSIBILITIES
SETS OUT OPERATINGPROCEDURES
IncludingFunding Process
Format & frequency of ReturnsAccounting Policies & Procedures
TIONAL
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ONPROCESSING & MONITORING OF OIL/GAS PRODUCTION:
Monitoring Oil & Gas Production and Cost - JV
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
30
TIONAL
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ONPROCESSING & MONITORING OF OIL/GAS PRODUCTION:
Monitoring Oil & Gas Production and CostJV (2)
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.
31
ATIONAL
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ONPROCESSING & MONITORING OF OIL/GAS PRODUCTION:
Monitoring Oil & Gas Production and CostJV (3)
32
OPCOM / MACOM
TECOM
PED FACILITIES EXPLORATION GAS MMD
FINANCE/PLANNING& HUMAN RESOURCES COMMUNITY
RELATIONSENVIRONMENT &
SAFETY
SU OMMITTEES
OPCOM Operating CommitteeMACOM Management CommitteeTECOM Technical Committee
ATIONAL
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ONPROCESSING & MONITORING OF OIL/GAS PRODUCTION:
Monitoring Oil & Gas Production and CostJV (4)
33
OPERATORS WORK-PROGRAMME & BUDGET
OBLIGATION AS DEFINED BY JOA
ARTICLE 2 OF JOA PROVIDES THAT:(i) OPERATOR SHALL DEVELOP & SUBMIT PROPOSED
WORK-PROGRAMME & BUDGET TO CHAIRMAN OF OPCOM,
(ii) PARTIES MUST MEET TO DELIBERATE ON SUBMISSIONS WHICH CAN
ONLY BE APPROVED BY OPCOM ,
(iii) OPERATOR MAY NOT DEVIATE FROM APPROVED WORK
PROGRAMME & BUDGET EXCEPT IN CASE OF EMERGENCY,
OR IF MODIFIED BY OPCOM.
ATIONAL
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ONPROCESSING & MONITORING OF OIL/GAS PRODUCTION:
Monitoring Oil & Gas Production and CostPSC
Funding of work programme & petroleum operations
Specifies minimum expenditure during the exploration period.
Requires contractor to submit a performance bond to cover amountagreed 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 externalsources.
34
NATIONAL
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ONPROCESSING & MONITORING OF OIL/GAS PRODUCTION:
Monitoring Oil & Gas Production and CostPSC (2)
Review and approve annual work programme & budget andreported 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.
35
NATIONAL
P
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ONPROCESSING & MONITORING OF OIL/GAS PRODUCTION:
Monitoring Oil & Gas Production and CostPSC (3)
Project Monitoring / Audit
NAPIMS nominate a multidiscipline project monitoring team for allmajor development projects to work with the operator projectteams 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 tocarry 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 estimation36
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P
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ONPROCESSING & MONITORING OF OIL/GAS PRODUCTION:
Monitoring Oil & Gas Production and CostPSC (4)
Value for Money Audit
Periodically NNPC commissions consultants / firms of charteredaccountants to carry out value for money audit of the JVoperating 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
37
NATIONAL
P
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ONPROCESSING & MONITORING OF OIL/GAS PRODUCTION:
Monitoring Oil & Gas Production and Cost - Trial Marketing Period
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 crudesales price and terms ofeach lifting
Reconciles the TMP within 90 of expirationdistribute proceeds with accrued interest to fiscalpots
Migrates into monthly nomination and lifting programming Agrees on allocation priorities
JVEquity 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
38
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ONPROCESSING & MONITORING OF OIL/GAS PRODUCTION:
Monitoring Oil & Gas Production and Cost - Lifting Programme
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 inadvance 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 eachLifters entitlement and the technical conditions of the Terminal
Principles
Right and obligation to lift allocated cargoes Over-lifting/under-lifting rules
Priority is given to the lifter having the highest entitlement
Operator has the right to modify the lifting programme if operational constraints atthe terminal so required
Curtailment meetings holds between Operators/Contractors and NNPC onproduction and lifting every month
39
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ON
40
EASTERN OPERATIONAL BASE ODUDU (AMENAM) - EPNL ANTAN - ADDAX BONNY - SPDC BONNY RIVER - MOBIL
QUA IBOE - MOBIL BRASS - NAOC YOHO - MOBIL OKWORI - ADDAX OKONONPDC/AGIP ENERGY
IMA - AMNI
WESTERN OPERATIONAL BASE ESCRAVOS - CHEVRON PENNINGTON - CHEVRON SEA EAGLE (EA) - SPDC ABONAE
FORCADOSSPDC OBECAVENDISH UKPOKITIEXPRESS/ATLAS
LAGOS OPERATIONAL BASE
BONGASNEPCO ERHAMOBIL (ESSO) AGBAMICNL AKPO - TOTAL
PROCESSING & MONITORING OF OIL/GAS PRODUCTION:Monitoring Oil & Gas Production and Cost - Oil Terminal Locations
CRUDE AVAILABILITY AT TERMINALS CONFIRMED THROUGH DAILY
REPORTS, FIELD REPS AND CURTAILMENT MEETINGS
NATIONAL PE
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CORPORATI
ON
JVPRODUCTION
IOC
APPXM. 42%
NNPCAPPXM. 58%
Recovers Costs
Pays Royalty @19%to Govt.
Pays Taxes @85% oftaxable income
to Govt.
Keeps Profit
Deducts Costs(JV Cash call)
* Surplus swept into
Fed. Account
Federation AccountReceipts
* Surplus swept into Federation Account from NNPC equity is made up of Royalty, Taxes & NNPC net Profit
PROCESSING & MONITORING OF OIL/GAS PRODUCTION:NNPCs Role in Oil & Gas Sales Revenue & Accounting - JVs
41
NATIONAL PE
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42
PROCESSING & MONITORING OF OIL/GAS PRODUCTION:NNPCs Role in Oil & Gas Sales Revenue & Accounting - PSCs
GOVT. OF NIGERIA
NATIONAL PE
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PROCESSING & MONITORING OF OIL/GAS PRODUCTION:NNPCs Role in Oil & Gas Sales Revenue & Accounting Accountingfor Federation Crude Oil & Gas Revenue
JV MISC.
INCOME
CRUDE OILEXPORTS
LPG GASEXPORTS
NLNGFEEDSTOCKS
NNPC DOM.
CRUDE
FEDERATIONACCOUNT
JV CASH CALLSACCOUNTCBN/NNPC CRUDE OIL & GAS
US$ REVENUE ACCOUNTHELD WITH
JP MORGAN CHASE BANK,NEW YORK
CBN NNPC CRUDE OIL & GASNAIRA REVENUE ACCOUNT
HELD WITH THE CBN
SPDC JV
MPN JVCNL JVNAOC JVTEPNG JVPAN-OCEAN JV
NGC LOCALGAS SALES
SOURCES CUSTODY OF FUNDS DISBURSEMENTS
NATIONAL PE
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PROCESSING & MONITORING OF OIL/GAS PRODUCTION:NNPCs Role in Oil & Gas Sales Revenue & Accounting - Sources ofRevenue from Oil & Gas Sector
44
NNPCEXPORT SALES
J.V.s PPTROYALTIES
PPT
ROYALTIESPPT, PROFIT OIL
ROYALTIES
INDEPENDENTS
PSC & SC
DOMESTIC CRUDE
DPRFEES, RENTALS
PENALTIES, BONUSES
ORGANIZATIONS
VAT, DUTIES
FEDERAL GOVT.
STATE GOVTS.
LOCAL GOVTS.
OIL & GAS
Revenue sources largely depends on the contractual and fiscal frameworks ofexploration and production activities of the oil and gas business
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45
RoyaltiesMCA
PSC
DPRDesignated
Account
Taxes MCAPSC
FIRSDesignated
Account
Equity Crude JV
ConsolidatedCrude Oil
RevenueAccount
DomesticCrude
445 Kb/dAllocated
NNPC
NNPC PaysNaira Value
to FederationAccount
Credit Periods
NNPCDomestic Crude 90 Days
Bilateral 30days
InternationalTraders 30days
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PROCESSING & MONITORING OF OIL/GAS PRODUCTION:NNPCs Role in Oil & Gas Sales Revenue & Accounting EntitlementsDetermination & Lifting
46
Profit Oil
Tax Oil
Profit Oil
Share OilLifted by NNPCFed Account
JV Oil/GasProduced
PSC OilProduced
SC OilProduced
Carry Oil/GasProduced
Modified CarryOil/
Gas Produced
NNPC Equity
Total Prod
NNPC Equity
Total Prod
VolumeOil/Gas Price
Stock BalanceAvailable volumeOil/Gas PriceExpense CostAmortisable Cost
NNPC Equity
Stock BalanceAvailable VolumeOil/Gas PriceExpensed CostAmortised Cost
Stock BalanceAvailable VolumeOil/Gas PriceExpensed CostAmortised Cost
Cost Oil
Royalty Oil
Carry Oil
Share Oil
Carry Oil
Share Oil
Share Oil
Lifted by ContractorContractor Account
Lifted by NNPC
Fed Account
Lifted by NNPC
DPR - Fed Account
FIRS - Fed Account
Fed Account
Lifted by ContractorContractor Account
Lifted by NNPCCash to ContractorRoy PPT to Fed Acc
Lifted by NNPCFed Account
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09/08/1147
Internal & External AuditingReconciliation
Entitlement Estimation Lifting Programming Marketing & Sales
Revenue
Tech. Allowable - DPRMonthly Production Comml
Crude PriceCost dataLifting entitlements
JV Oil/Condensate/Gas (Equity)PSC Oil/Condensate (Roy, Tax, Profit)MCA Crude (Carry Oil/Gas & Share Oil/Gas)Cargo NominationsLifting Advice & Shipping Documents
Term ContractsLetter of CreditShipping DocumentsMonthly Lifting & Sales ProfilePricing & Valuation
Shipping Documents
Pricing & ValuationLifting & Sales ProfileCBN Account StatementsOffshore Bank StatementsFAAC / Other Financial Reports
Shipping Documents
Financial ReportsLifting ContractsBank StatementsMonthly Lifting & Sales Profile
DPR, FIRS, NAPIMS, NEITI,FAAC, FMF, RMAFC, OAGF,etc
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Processes and Controls
48
Investment in Assets through JVCC or other sources of financing dependingon the Operating and Financing Agreement
Crude Oil and Gas are produced and lifted based on Fiscal Arrangementin place
NNPC lifts share of Federation crude.
All Crude Oil & Gas Sales Contracts are secured by IRREVOCABLE LETTERSOF 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 JPMorgan Chase Bank, New York maintained and controlled by the CBN
Proceeds of Domestic Crude sold to NNPC and other Naira proceeds arereceipted into the CRUDE OIL & GAS REVENUE NAIRA ACCOUNT held withthe CBN
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Processes and Controls (2)
Only JV Cash Call payments are made out of the Oil and Gas Accountsand these are strictly in accordance with the JV Budget as appropriatedby the National Assembly. Every payment requires the approval of theGMD, 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 monthlybasis; before each FAAC
A separate statutory Audited Financial Statement is prepared andsubmitted to the Auditor General for the Federation, FGN and theNational Assembly.
The office of the Auditor General in carrying out their statutory duty auditsthe Federation Account and by extension, the O&G Accounts as well as
the JVCC Accounts49
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Processes and Controls (3)
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 JVCash 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
50
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Joint Venture Cash Call FundingMechanism & Implication onGovernment Oil Revenues
51
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PROCESSING & MONITORING OF OIL/GAS PRODUCTION:Presentation Outline
1. BackgroundNigerian Oil & Gas Fiscal Arrangement andSystems
Type of arrangementsJVs, 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
3. Joint Venture Cash Call Funding Mechanism & Implication onGovernment Oil Revenues
Cash Call Funding Process
Implication of Cash Call Funding On Government Revenues
Alternative to Cash Call Funding52
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53
4. Factors influencing Government Share of Oil & Gas Revenue Applicable Fiscal System
Production Costs
Oil & Gas Price
Business Environment - Security
5. Issues, Challenges and Proposed Solutions
Funding
Managing Cost
Fiscal (AGFA)
Acreage Management System
Institutional Framework
Downstream Subsidy
6. Conclusions
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Cash Call Process
Cash Call
A monthly request by an Operator to other partners in their respectiveparticipating interests for advance payment to meet anticipatedcosts 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
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ONPROCESSING & MONITORING OF OIL/GAS PRODUCTION:
JV Work Program & Budget Process
55
JVC
NAPIMS
WORK PROG/
BUDGETS
SUB-COM
TECOM
JOINTLY
RECOMMEND TO
OPCOM
RECOMMENDS TO
NNPCCORPORATE
GOVT (FMF)
NATIONALASSEMBLY
PRESIDENCY
APPRVD DISTR.BUDGET
AN
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PROCESSING & MONITORING OF OIL/GAS PRODUCTION:Alternatives to Cash Call Funding
Alternative Funding
Carry Agreements
Modified Carry Agreements (MCAs)
IOC Bridge/Term Loans 3rd Party Debt Finance
56
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Alternatives to Cash Call Funding
The Carry Agreements had been the most common form of AlternativeFunding. The 1st was entered into with SPDC in 1999 called the EA andwas followed by Amenam Kpono (AK I) with Total and later with Mobiland Chevron
Modified Carry Agreements (MCAs) was a very recent phenomenonhaving came into being only in 2008. The MCA was designed to correctsome defects associated with the traditional Carry Agreements andprovide funding for unpaid performances of prior years
3rd Party Debt Financing option was also introduced in the late 1999s tofund certain projects with robust cash flow for which equity fundingthrough JVCC was not available. Four projects all under the NNPC/MPN
JV have been funded under this arrangement: NGL I, NGL II, SatelliteFields Phase I. NGL I loan has been fully repaid and all its cash flows go tothe Federation Account
IOC Bridge/Term Loan was negotiated with Shell to pay for unpaidperformance of years prior to 2008 most of which relate AFAM
NNPC/SPDC JV IPP.57
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Impact of Financing Arrangement on Revenues to Federation Account
58
Attribute Debt Equity
CapitalCosts
Normally funded 100% by Bankloan
Funded through JV Cash Call
OperatingCosts
Funded through JV Cash Call Funded through JV Cash Call
Production/Lifting
Ring fenced to pay principaland interest first beforedistribution to sponsors.Therefore less funds will beavailable to Federation
Account in the early years
100% flows into FederationAccount
FinancingCosts
Can be high due to interest andfees
No additional costs other thanthe opportunity cost of capital
Covenants Can be restrictive, onerous andburdensome
No restrictions
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ONPROCESSING & MONITORING OF OIL/GAS PRODUCTION:
Impact of Financing Arrangement on Revenues to Federation Account
59
Attribute JV PSC
Royalty Rate 18.5% 1.75%
PPT Rate 85% 50%
Profit SharingRate
Equity Interest in JV: Ave 57%across the 6 JVs
Graduated beginning at 20%in the early years
Cost
RecoveryRate
Normal Accelerated as Contractors
primary goal is to recover allcosts as quickly as possible
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Factors influencing Government Shareof Oil & Gas Revenue
60
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PROCESSING & MONITORING OF OIL/GAS PRODUCTION:Presentation Outline
1. BackgroundNigerian Oil & Gas Fiscal Arrangement andSystems
Type of arrangementsJVs, 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
3. Joint Venture Cash Call Funding Mechanism & Implication onGovernment Oil Revenues
Cash Call Funding Process
Implication of Cash Call Funding On Government Revenues
Alternative to Cash Call Funding61
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PROCESSING & MONITORING OF OIL/GAS PRODUCTION:Presentation Outline (2)
62
4. Factors Influencing Government Share of Oil & Gas Revenue Applicable Fiscal System
Production Costs
Oil & Gas Price
Business Environment - Security
5. Issues, Challenges and Proposed Solutions
Funding
Managing Cost
Fiscal (AGFA)
Acreage Management System
Institutional Framework
Downstream Subsidy
6. Conclusions
IAN
NATIONAL PETRO
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PROCESSING & MONITORING OF OIL/GAS PRODUCTION:Comparative Revenue Flow from JV & PSC Fiscal Regime Comparison -Fiscal Assumptions
PPT Assumptions PIB Assumptions
Item (/ bbl) JV PSC
Opex ($/bbl) 6.52 8.15
Capex ($/bbl) 6.12 13.36
PPT 85% 50%
Education Tax 2%
NDDC Levy 3%
Royalty 5%
ITA 15% NA
ITC NA 50%
Item (/ bbl) JV PSC
Opex ($/bbl) 6.52 8.15
Capex ($/bbl) 6.12 13.36
NHT 50% 30%
CITA 30%
Education Tax 2%
NDDC Levy 3%
Royalty (Tranche Based) 5%
Overseas Cost Limit 80%
IAN
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PPT Computations ($/ bbl) PPT Computations (%)
RI
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PROCESSING & MONITORING OF OIL/GAS PRODUCTION:Comparative Revenue Flow from JV & PSC Fiscal Regime Comparison(PIB Case @ $50/ bbl Oil Price)
PIB Computations ($/ bbl PIB Computations (%)
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JV Funding Requirements
66
Production shut-in
mainly from militancyactivities
Higher
investmentsrequired to bring
back and
eventually grow
production
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ONPROCESSING & MONITORING OF OIL/GAS PRODUCTION:
Implication of Crude Production Decline
67
Revenues Implication of continuedProduction Decline
Crude Price Forecast 2007 & Beyond - $60/bbl
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ONPROCESSING & MONITORING OF OIL/GAS PRODUCTION:
Joint VentureFederation Account Revenue Flows
68
Crude Price $/bbl 45.00 100.00
Technical Cost $/bbl 22.32 22.32
Gross JV Volumes MMBOPD 1,402 1,402
NNPC Equity % 58% 58%IOC Equity % 42% 42%
Govt. Revenue from IOC Equity barrelsIOC Revenue $MM 9,672 21,493Roy @18.67% $MM 1,806 4,013IOC cost recovery $MM 4,797 4,797
IOC Taxable Income $MM 3,069 12,683IOC PPT payment $MM 2,609 10,780
Govt. Rev. From IOC Equity Volumes (Roy + PPT) $MM 4,414 14,793
Govt. Revenue from NNPC Equity barrelsNNPC Revenue $MM 13,356 29,680NNPC cost recovery $MM 6,625 6,625
Govt. Rev. from NNPC Equity Volumes (Rev - cost) $MM 6,732 23,056
Total Govt Rev from JV Petroleum Operations $MM 11,146 37,849
Impact of declining Prices on Government Revenues - JV
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PSCFederation Account Revenue Flows
69
Crude Price $/bbl 45.00 100.00
Technical Cost $/bbl 25.23 25.23
Gross JV Volumes MMBOPD 760 760
NNPC Profit Oil Share % 20% 20%
IOC Profit Oil Share % 80% 80%
Govt. Revenue from Taxes & RoyaltyGross revenues $MM 12,483 27,740Roy @2.76% $MM 345 766Cost recovery $MM 6,999 6,999
Taxable Income $MM 5,140 19,976PPT payment @50% $MM 2,570 9,988
Govt. Royalty & Taxes $MM 2,914 10,753
Govt. Revenue from NNPC Profit OilProfit oil available for allocation $MM 2,570 9,988NNPC share of profit oil @20% $MM 514 1,998
Total Govt Rev from PSC Petroleum Operations $MM 3,428 12,751
Impact of declining Prices on Government Revenues - PSC
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ONPROCESSING & MONITORING OF OIL/GAS PRODUCTION:
BackgroundGovernment Revenue Sources
Main source of Government revenues in the petroleum sector isthrough the imposition of royalties & taxes on petroleumoperations
Government derives additional revenue over and aboveimposition of taxes & royalties, however, this is dependent on thecontractual arrangement with other investor:
Joint Venture All of NNPCs equity revenues less cost sweptinto Federation Account
PSC - All of NNPCs Profit oil share swept into Federation
Account
70
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ONPROCESSING & MONITORING OF OIL/GAS PRODUCTION:
The Petroleum Industry Bill - General Objectives of PIB
Establish clear and enduring good governance principles in the Nigerianoil & gas industry.
The need to remove obsolescence and outdated provisions in ourcurrent 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 whileguaranteeing optimal take for Government.
Strengthens tax administration with requisite powers and rules for theeffective management of the industry.
Establish clear principles for the working of the Incorporated JointVentures (IJVs).
Support domestic gas utilization through National Gas Master Plan
Proper alignment of the roles and functions of the institutions.
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Factors Impacting Government Revenue Outside Crude Oil Price
72
Niger Delta Related Non-Niger Delta Related Fiscal Regimes applicable to the various oil
contract typesGas cost accounts forbetween 40% & 43% of total CAPEX,recovered from oil tax revenues via AGFA
Under funding of Joint Venture Operationsover a long period of time
Increase in cost of materials & services asa result of increasing crude oil prices.
Aging facilities with attendant increase inmaintenance cost
Matured reservoirs leading to high naturaldecline rates
More investments required for infillopportunities and integrity / productionsustenance
Need for more exploration to find andreplace reserves.
Non competitive price fixing behaviours inthe contracting environmentlimitednumber of service contractors.
Production deferment due to securitysituation in the Niger Delta, includingdeferred production due to scheduledelays on projects
Oil theft and losses arising from thesabotage of oil facilities
Cost of environmental clean up following
sabotage.
Projects become even more expensiveafter security incidents
Cost of repairing or replacing damagedfacilities as a result of militancy activities
for example cost of replacing damagedfacilities has $1.26 million in 1999 to almost$400 million in 2008 in the SPDC JV
Additional cost premium as a result ofNiger Delta Security situation:
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ONPROCESSING & MONITORING OF OIL/GAS PRODUCTION:
Impact of Niger Delta Security - SPDC Hot Spots (Eastern Operations)
73
Port Harcourt Kidnapping at least 79 Nigerianand 8 Expats since 01 Jan 08. Armed robbery common Violent crime frequent
Rumuekpe Area Community based groups vying forpower Violent clashes during 2008 Two warlords have establishedpresence in this area and at Egbema
West
Diebu Creek Militants fighting for control Explosive attacks / vandalism onSPDC ROW
Cawthorne Channel Militant camps / activity Social fault line between Kalabariand Bonny clans Militant attacks on infrastructure Bunkering
Alakiri Militant Threat Bunkering
Bomu/Kdere Ogoni issue Sabotage Bunkering
Bonny Channel Piracy Militant attacks Kidnapping
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Isoko South Bunkering Community threats and blockades vandalism/sabotage
Agge / Aghoro Militant presence. Violent attack on SPDC houseboats Community challenges to projectwork
Odimodi / Ogulagha Inter-communal dispute over HostCommunity Status Community threats and blockades Militant Presence
74
PROCESSING & MONITORING OF OIL/GAS PRODUCTION:Impact of Niger Delta Security - SPDC Hot Spots (Western Operations)
ER
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PROCESSING & MONITORING OF OIL/GAS PRODUCTION:Security Situation in the Nigerian Oil and Gas Industry -Re-entry and Restoration of Vandalized Facilities
75
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Issues, Challenges and ProposedSolutions
76
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ONPROCESSING & MONITORING OF OIL/GAS PRODUCTION:
Presentation Outline
1. BackgroundNigerian Oil & Gas Fiscal Arrangement andSystems
Type of arrangementsJVs, 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
3. Joint Venture Cash Call Funding Mechanism & Implication onGovernment Oil Revenues
Cash Call Funding Process
Implication of Cash Call Funding On Government Revenues
Alternative to Cash Call Funding77
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ONPROCESSING & MONITORING OF OIL/GAS PRODUCTION:
Total JVBudget Evolution
79
Joint Venture Operations
Industry Budget has increased from about $6.0 billion in 2002 to nearly $18.0
billion projected for 2010.
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ONPROCESSING & MONITORING OF OIL/GAS PRODUCTION:
Deployment of Government US$5.0 Billion Equity Funds
80
Government share of operating cost,exploration expenses, productionoperations sustenance, and assetrestoration costs for 2010 is about US$4.9billion.
Operating cost is about 8590% fixedas a result of industry structure.
Also at this time industry is poised togrow, to be driven by projects to beexecuted through MCAs. Growth incapital expenditure results in increase inoperating costs.
Cost captured here excludes provision
for NAPIMS overhead, Exploration in theFrontier Basins, and Provision for securityrelated operations in the Niger Delta,amounting to almost US$0.6 billion.
All of the cost described above arebetter funded through equity.
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PROCESSING & MONITORING OF OIL/GAS PRODUCTION:Objective: Create JVs That are Value Creating
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 thedevelopment of new oil and gas fields easier to achieve and willtherefore permit an acceleration of petroleum activities.
It should be noted that the IJVs will pay a government take on existingproduction in onshore and shallow water equal to almost 90% in terms ofroyalties and taxes and therefore there will be no loss of revenues as aresult 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.
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ON
Nigeria has the Least Government Take !
PSC Economics Review: Comparison of Global PSC Fiscal Regimes($60/bbl)
84
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PROCESSING MONITORING OF OIL/GAS PRODUCTION
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ONPROCESSING & MONITORING OF OIL/GAS PRODUCTION:
Issues & Challenges of PSCs
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
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ONPROCESSING & MONITORING OF OIL/GAS PRODUCTION:
Part III: Upstream Petroleum - Regular Acreage Management
The Government Memorandum proposes to establish the internationalconcept of drill or drop. This means a company is required to carry outan intensive work program on the acreage that is being granted. It thecompany does not want to carry out further work, a part of the acreageor all the acreage needs to be returned to the Federal Government. Theacreage 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.
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PROCESSING & MONITORING OF OIL/GAS PRODUCTION
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ONPROCESSING & MONITORING OF OIL/GAS PRODUCTION:
Part III: Upstream Petroleum - Mandatory Acreage Relinquishment
One of the main bottlenecks to increased activity in Nigeria is lack of newlicense and contract areas. The petroleum prospective part of Nigeria iscovered with existing licenses, leases and contracts. These areas weregranted 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 miningleases within 2 years after the effective date of the Act. Existingcompanies can keep all areas that are in production or will be appraisedor developed in the near future. Also certain exploration areas can bemaintained based on new work commitments.
However, the acreage that companies are not using, will have to bereturned to the Government. This may free up probably as much as 30%of the prospective petroleum area of Nigeria for new investors. Inparticular, small Nigerian companies will be offered major new
opportunities in this regard.
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ONPROCESSING & MONITORING OF OIL/GAS PRODUCTION:
Part II: Institutions - Regulatory Institutions (1)
Upstream Sector
Oil Exploration &Development
Gas Exploration &Development
Midstream Sector
Oil Transportation & GasTransmission
Gas Processing
LNG/CNG/GTL
Derivative
Processing/Production
Oil Refining
Downstream Sector
Gas Distribution /Sale
Petroleum productdistribution & Storage
Petroleum Product Retail
Technical &CommercialRegulation
by NPI
Technical &CommercialRegulationby NAMIRA
Technical &CommercialRegulationby PPRA
Upstream Sector
Oil Exploration &Development
Gas Exploration &Development
Downstream:(Midstream)Sector
Oil Transportation & GasTransmission
Gas Processing
LNG/CNG/GTL
DerivativeProcessing/Production
Oil Refining
Downstream Sector
Petroleum productdistribution & Storage
Petroleum Product Retail
TechnicalRegulation
byInspectorate
CostControl byNAPIMS
CommercialRegulation
by PPPRA
OLD INSTITUTIONAL FRAMEWORK NEW INSTITUTIONAL FRAMEWORK
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PROCESSING & MONITORING OF OIL/GAS PRODUCTION:
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ONPROCESSING & MONITORING OF OIL/GAS PRODUCTION:
Objective: Deregulate Petroleum Products Prices
PROBLEMS Current levels of subsidies for petroleum products are
unsustainable. Poor infrastructure and low refinery throughputcreate 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
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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.
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 andterminals.
Price monitoring will be put in place to avoid misuse of free marketenvironment.
Private investment framework will be established.
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LEUMThe Petroleum Industry Bill :
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ONThe Petroleum Industry Bill :
Overview of PIB
The Petroleum Industry Bill contains a number of initiatives:
It creates a single Act for the entire petroleum industry andrepeals 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 withinternational 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.
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The Petroleum Industry Bill:Key Elements of PIB Fiscal Framework
Capturing the full gas value chain (upstream, midstream anddownstream) within and without Nigeria
Developing a fiscal regime for gas that is decoupled from oilthereby 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 offiscal terms for oil and gas and
Developing a fiscal rule of general application based on a bodyof fiscal laws rather than incentive letters.
94
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The Petroleum Industry Bill :Proposed Fiscal Provisions in the PIBOverview
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 largedeepwater fields
Enhancement of transparency & accountability
Many nations have changed Fiscal systems to respond to operational andEconomic realities :UK, Alaska(USA), Venezuela, Russia, Algeria, Alberta, Angolaetc, without recourse to NOC or IOCs
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Understanding Joint Venture IncorporationJV Today I ti
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96
JV Today Incorporation
Income statement
Balance sheet
Income
Expenses
Assets Liabilities
60
100
FGN
X X
Income statement
Balance sheet
Income
Expenses
Assets Liabilities
Oil revenues Gas revenues
JV OPEX/CAPEX Taxes & Royalties
Dividends
JV assets PPE Cash
Capital
Debt
AssetUtilizationDrivesIncome
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.
RetainedEarnings
InterestCharge
Incorpo ration allows NNPC to finance its sh are of JV
operations through a balance sheet..
NNPCs only means of financing share of investment is
from FGN cash calls.
40
Chevron
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JV Incorporation Environment Key Changes
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97
JV Incorporation EnvironmentKey Changes
Before
NNPC funds share of investments FGN cash call Third Party financing
After
Investment
Revenue NNPC receives share of sales proceedswhich is passed directly to FGN
Taxes
Retained earnings
FGN receives taxes and royalties from JV
partners only
Control/Transparency
There are no retained funds for future, FGNtakes all its proceeds out of organization
There is no balance sheet, organization
has no assets or liabilities
NNPC control is limited to level ofinvestment that is put in.Lack of transparency constrains level ofdecision making
Removes the need for cash call & annual
funding strategy One off equity injection JV Inc raises debt financing
NNPC receives share of revenues afterexpenses & taxes via Dividend
FGN receives taxes and royalties from
entire JV Inc ( JV Partner + NNPC )
JV Inc will retain some portion of earningsto fund future investment. Dependent on dividend policy
JV Inc will have balance sheet with ownassets & liabilities Balance sheet used to raise finance
NNPC will exercise greater direct controlvia board & management.Makes operations and financial datatransparent
Balance Sheet
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JV Incorporation provides an industry wide solution with
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98Source: Team analysis
Increased transparency &accountability will drivedown industry costs andincrease efficiencies
Increased transparencywill ensure less opex,capex are claimed againstrevenues thus increasingtax revenues.
In the long-term JV Incswill be able to raise
increased amounts of debtfinancing, boostinginvestment levels andrelated revenue
JV Inc is a robust
industry solution
Removes the need for cashcall and piecemealfinancing
Provides a viable andsustainable method forindustry to self-finance
Can be applied across thewhole sector in a uniformmanner.
Globally tried & tested Incorporation is the
dominate model acrossNOCs around the world
Aligns industry & FGNaspirations
It also increases net
proceeds to FGN
substantial additional benefits to NNPC & Nigeria
NNPC gets direct accessto expertise and
operational excellence ofthe worlds top oilcompanies
NNPC develops skills to bean operator in future or atleast benchmark futureoperator performance
NNPC can expandinternationally via JV Incs,
thus sharing internationalrisk with IOCs
and sets NNPC on the
road to of being worldclass
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99
PSC Production Outlook
PSC Production / forecast
0
200
400
600
800
1,000
1,200
1,400
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
CrudeOilPro
dMBOPD
Bonga Main Bonga SW Bonga NW Erha Erha North Agbami Bosi / Bosi Ser 2 Akpo
Usan Abo Main Abo Extension Agbara OML 123 / 124 Okwori / Nda
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100
Oil & Cond Forecast
0
500
1,000
1,500
2,0002,500
3,000
3,500
4,000
200
8
200
9
201
0
201
1
201
2
201
3
201
4
201
5
201
6
201
7
201
8
201
9
202
0
BOPD
Base Production Dev Drilling & Work over Ongoing Oil ProjectsNew Oil Projects Ongoing Gas Projects New Gas ProjectsUnconstrained PSC
Deepwater PSC Production
JV & Deepwater productionare on track to achieve GDPgrowth target by 2011
JV Production will reach 2.5MMBOPD by 2011.
GDP growth aspirationexpects JV oil prod (incl. float)
of 2.6 MMBOPD by 2011
JV Production will only beattained with sustainedinvestment at the levelsshown in the previous slide
Any JV production gap due tolack of required investment
could be partially filled bydeepwater production;however, this will not deliverthe expected revenues, asthe government take is muchless in the deepwater PSCs.
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JV Funding Outlook Gas Production Forecast
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101
Gas Production Forecast
0
3,000
6,000
9,000
12,000
15,000
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
MMSCFD
Base Production Dev Drilling & Work over Ongoing Oil Projects
New Oil Projects Ongoing Gas Projects New Gas ProjectsUnconstrained PSC
Even with the investmentlevels outlined in the previousslide, GDP gas aspiration willnot be achieved. 9 BCFD willbe attained by 2011,compared to the expected 14BCFD
Deepwater PSC gasproduction still low
Proper definition could unlockadditional gas volumes in duecourse
Deepwater PSC Production
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102
Picture of drilling session showing
Men and and drill string
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ONWay Forward
Niger Delta security situation needs urgent attention toimprove Oil & Gas production and reduce costs
The Petroleum Industry Bill (PIB) currently before theNational Assembly needs speedy passage to deal with thefiscal and joint venture financing issues affectingGovernment revenues.
Despite all the security challenges in the Niger Delta there isstill need for greater cost efficiency in the petroleum sector.
103
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Thank You
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