#1NATIONAL CORPORATION The Nigerian Gas Master-Plan Engr. Abubakar L. Yar'adua Group Managing Director Nigerian National Petroleum Corporation Abuja, Nigeria Gas Stakeholders Forum Abuja, Nigeria November, 26th 2007#2CONTENT ■ Overview of the Nigerian Gas Sector Diagnosis of the Sector ■ Strategic Interventions Next Steps ■ Conclusion#3OVERVIEW OF THE GAS SECTOR The Gas Resource Base Proved reserves = 184 TCF AG = 95 TCF; NAG = 89 TCF World's 7th largest gas reserves ■ Significant gas reserves upside No gas exploration to date Growth in reserves largely linked to crude oil reserves growth Current Daily production = 5 bcf/d ■ High grade gas quality - 0% sulphur; rich in liquids 2101 Gas Reserves 180 150 T 120- C 90- F 60- 30- 0 I 1992 1993 1994 1995 1996 AG 1997 1998 1999 2000 2001 NAG 2002 2003 The gas sector holds significant potential. Nigeria has the 7th largest reserves in the world with significant scope for growth. The gas quality is high – particularly rich in liquids and low in sulphur#4Gas Volume Utilised (MMS 30000 OVERVIEW OF THE GAS SECTOR Evolution of Gas Utilization in Nigeria Gas Demand Boom - Utilization Profile: 1975 - 2020 25000 The Flare Era 20000 15000 10000 5000 Year Demand Explosion Domestic Gas Demand Gas Export Demand Following several years of low gas utilisation, the sector is now confronted with a huge potential for unprecedented growth from about 5bcf/d currently to over 20bcf/d by 2011/12. Compared with the global average, this is by far the world's most aggressive growth forecast#5OVERVIEW OF THE GAS SECTOR 3 Distinct Phases in the Evolution of Nigerian Gas Phase 1: Pre-1999 Demand Constrained Era ■ Era marked by intense flaring ■ Fiscal incentives to stimulate demand ■ Focus on exports (LNG) as most promising source of demand, hence birth of an export oriented gas sector ☐ Proliferation of fiscal incentives and absence of gas legal framework ☐ Phase 2: 1999-2005 NLNG Era ■ Kick-off and subsequent growth of LNG ☐ Beginning of steady decline in flares ■ Initiation of new export projects - EGTL etc. ■ Commencement of consolidation of fiscal and legal regime - DGA, NAGFRA Bill Phase 3: Post 2005 Demand Boom/ Supply Constrained Era ■ Sudden boom in demand from both domestic and export sectors ■ Sudden shift from demand to supply constrained ■ Birth of the Gas Master-plan initiative The Gas Master-Plan initiative was borne in response to the sudden boom in gas demand in Nigeria#6Growing the Nigerian Economy with Gas OVERVIEW OF THE GAS SECTOR The Gas Master-plan - Key Objectives 1. Maximising the multiplier effect of gas in domestic economy 2. Optimizing Nigeria's share and competitiveness in high value export markets 3. Assure the long term energy (gas) security for Nigeria ■ Facilitate gas to Power, Fertilizer ■ Domestic LPG & CNG ■ Stimulate broad gas based industrialization - methanol, fertilizer etc. ■ Selective participation in ☐ high value markets Strategic positioning for growth Balancing trans-generational needs - managed exploitation#71. OVERVIEW OF THE GAS SECTOR Drivers of Demand Growth Rising and High Gas Price in Key Export Markets as Reserves Decline ■ Propelling a vibrant export LNG business in Nigeria ■ Causing relocation of gas based industries e.g. methanol etc. to reserves rich and low gas cost countries like Nigeria, Egypt, Trinidad etc. 2. Aggressive Domestic Power Sector Reform 3. Successful campaign by the FGN to attract gas based investors Henry Hub $/mm btu $16 Natural Gas Spot Price $14 $12 $0 1990 1992 1994 1996 1998 2000 2002 2004 2006 Figure 60. World Electricity Generation Capacity by Region, 2002-2025 Gigawatts 4.000 History Projections Mature Market Economies 3,000 Transitional Economies Emerging Economies 2,000 1,000 2002 2010 2015 2020 2025 Sources: 2002: Energy Information Administration (EIA). The current demand boom is driven by 3 mutually reinforcing factors - rising gas prices, power sector reform and investor confidence in Nigeria#8Sector OVERVIEW OF THE GAS SECTOR Robust Portfolio and Changing Demographics Overview of Proposed Plants Power Sector Fertilizer Methanol & Other Gas Cement Steel & Aluminium Existing Manufacturing Strategic 4 New PHCN Power Plants 7 New Power Plants in the Niger Delta 5 New JV IPP Plants 5 New 3rd Party IPPs 1 Refurbished Plant (NAFCON) 6 New 3rd Party Plants 3 Methanol Plants 2 GTL Plants 2 New Plants 2 refurbished Steel Plants 1 Refurbished Aluminium Plant Numerous Manufacturing Plants 2 Pipeline projects to West Africa Intergovernment 1 Pipeline Project to North Africa Total MIMS of 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%- * * * * % % % % % É Power 2007 Domestic & Inter Governmental Export Gas Requirement (2007 2026) 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Domestic Industries 2023 2024 2025 Inter-Governmental Export There is a robust portfolio of gas opportunities to underpin the objectives of the gas master-plan. The challenge is sustaining this portfolio with available and affordable supply 2026 T#9MMSch 12000 10000 8000 6000 4000 2000 OVERVIEW OF THE GAS SECTOR Demand and Supply Balance Domestic Gas Demand & Supply Profile (2007-2015) 0 01 02 03 04 01 02 03 04 01 02 03 04 01 02 03 04 01 02 03 04 01 02 03 04 01 02 03 04 01 02 03 04 01 02 03 04 2007 Power Sector GTL Plants 2008 2009 2010 Existing Industries Cement 2011 2012 New Fertilizer Plants CNG & AL SCON 2013 2014 Methanol Plants Total Dom Gas Supply 2015 The challenge is supply - its pace of growth and sustainability over time!!!#10CONTENT Overview of the Nigerian Gas Sector Diagnosis of the Sector Strategic Interventions Next Steps ■ Conclusion#11DIAGNOSIS OF THE GAS SECTOR 5 Key Issues Supply Challenge Affordability! Deliverability Legal & Availability +Commerciality + & its Cost +Regulatory +Funding of Supply Effectiveness Framework Export orientation of ■ Gas Pricing ■ Infrastructure adequacy Gas Funding of Legislation gas sector Revenue Securitization developments Infrastructure and ■ Short/Medium flexibility and infrastructure Term Proven Reserves ■ Bankable Gas Agreements costs Reserves Development 5 key factors underpin the supply challenge particularly in the domestic market. Sustainable supply growth only possible if all 5 are addressed holistically. This has been the focus of the gas master-plan#12DIAGNOSIS OF THE GAS SECTOR Structural Weakness - Export Oriented IOCS Transmission Downstream Ownership of National Reserves Fully Integrated Suppliers Shell 48.2% ChevTex 13.8% ХоМ 9.6% Company Interests Interests 35% OGGS, WAGP, Part Elf Agip 4.5% 8.6% Shell owner of GTS1, NLNG, OK LNG (future) Numerous tie-in lines -2% -0% ChevronTexaco WAGP EGTL, LPG and LNG future) Integrated Suppliers Upstream Suppliers Affiliated Suppliers NPC Operatorship of National Reserves Fully Integrated Suppliers Shell 14.5% 1% ChevTex 5.5% 9% XoM 3.8% 5% Elf 6.6% Agip 4.1% ExxonMobil NGL and LNG (future) Elf Part owner GTS1 NLNG ☐ Dominant resource / infrastructure control Highly diversified downstream interest but trend is towards LNG as core downstream Convergence across all of integrated suppliers in strategic focus and delivery approach i.e. ✓ Grow global LNG market share ✓ Secure and guarantee supplies ✓ Secure value at end of downstream value chain Key Issues Balancing gas supply to own export with competing domestic supply 3rd party access to infrastructure ☐ PR Agip Part owner GTS1/2/4 NLNG, Brass LNG (future) ☐ Transfer pricing and impact on 3rd party Integrated Suppliers Upstream Suppliers Affiliated Suppliers NPC ☐ supplier without downstream interest Sub-optimal infrastructure development ← Core IOC operators have a strong portfolio interest that is biased towards export LNG. There isn't a natural confidence in the domestic market. This natural bias creates a major conflict and potential resistance to gas supply to domestic market#13DIAGNOSIS OF THE GAS SECTOR Structural Weakness - Inflexible Structure ■ Oligopolistic structure of the Gas market Nigerian gas market is control by few major players ■ Vertical integration is another key feature of the gas market ☐ ☐ Essential facilities such as gas plants and pipelines are controlled by the largest incumbents. Government owned NNPC/NGC control the downstream sector and Shell Operated Joint Venture controlled the upstream sector of the gas market. ■ Huge sunk costs and several long term gas supply agreements Because of the huge Capital required to develop gas, long term supply agreements with payment guarantees are required to ensure sustainable supply Bankable commercial agreement is key to the development of domestic market ■ Barriers to entry into the gas market in Nigeria There is no third party access rules currently in place Some players do not have access to the gas market Downstream Gas Bill will address this when passed The current structure of the Nigerian gas sector is not robust enough to cope with the sudden increase in demand#14Reserves T 250 200 150 100 181 50 DIAGNOSIS OF THE GAS SECTOR Short/Medium Term Reserves Constraint Reserves Availability Breakdown Short Medium Term Available Reserves 20 NAG will be 65 core part of available 51% reserves Almost 40% of reserves not available in short term Potentially Available Reserves 11% 0 Total Reserves Available SG NAGReserves PSC Reserves NAG Reserves Reserves (GIP-100BCF) (GP400BCF) Stranded Reserves (Ogon) Stranded Reserves (Others) Long-ten 54 38% 15 Remaining Remaining AG Reserves (Gas Solution Cas Cap Blowdown Although the country gas reserves is estimated at about 180TCF, almost 40% of this reserves are not available in the short term as they are stranded in gas caps and not accessible until much after the production of oil. The remaining available reserves falls far short of the required reserves base to meet the outlined demand growth#15Reserves (TCF) DIAGNOSIS OF THE GAS SECTOR Indicative Short/Medium Term Reserves Balance 200 180 160 140 120 100 80 60 40 20 20 LNG & Other Exports : 71TCF Inter Governmental Export: 15TCF Long Term Reserves : 69TCF Industries: 39TCF Short/medium Reserves: 112 TCF Power: 31TCF 0 Reserves Required Reserves Available Available proven gas reserves fall short of the forecast requirement. This partly explains the short term tightness in gas availability. This conflict is evident not only in the domestic vs export but also across export projects themselves.#16mmscf/d 20,000 10,000 0 DIAGNOSIS OF THE GAS SECTOR Gas Production Capacity Constraint 2013 Gas Supply Theoretical Supply Limit!!! □ PAG OP NAG NP AG NP NAGYTF Given technical constraints on production, the maximum unconstrained production capacity of the Nigerian gas sector is estimated at about 18bcf/d. With capital and contractor constraint, supply development will be much lower. In essence, it is practically impossible to meet the total demand without some form of rationalisation#17Paplanto DIAGNOSIS OF THE GAS SECTOR Inadequate Infrastructure Overview of Pipeline Infrastructure Capacity Vs. Demand actions Installed Pipeli Capacity Egbin Agura, Ikorodu Lagos Omotosho WDdProjection ventaled Pipe B SPDC OGGS Eyzen Benin City Sapele Okpai 162 ..... Obite Gharal Afam Port Harcourt Omoku Ikot Abas Bonny Calabar Calabar Existing gas pipeline infrastructure is inadequate in capacity and reach for the current and projected demand growth. Lack of connectivity between East and West, coupled with limited throughput capacity severely constrain supplies. Whilst gas reserves are concentrated in the East, there is limited connectivity with the West where demand is concentrated. This infrastructure situation limits the flexibility of supply#18Lagos DIAGNOSIS OF THE GAS SECTOR Gas Processing Infrastructure Proposed Gas Processing/Gathering Plants ☐ Chevron Proposed plant Shell proposed plants Benin City River Niger Ward Mobil proposed Plants Part Harcourt Cabbar Cameroon ◉ Sub-optimisation of treatment facilities ☐ Synergies across JVs not fully leveraged Domestic gas treatment facility has no provision for full liquids extraction ■ NGL value not fully utilized ■ Non-standard gas specification for domestic grid-liquids ingress in ELPS No mechanism to fully leverage 3rd party merchant participation Scope exits to further leverage synergies in the development of gas processing plants as well as attract 3rd party investment#19Pepelento Egbin DIAGNOSIS OF THE GAS SECTOR Infrastructure Duplications OVERVIEW OF PPELINE INFRASTRUCTURE Loop (HACC) Agure, und Еувел La 9DCIĘ Escravos Lagos Offshore pipeline (ELOP HGC WESTERH HETWORK HGC EASTERH HETWORK 3PDC 0003 GT3 1(HLHG) Phz - 1 Obite - Uber Au rj GT3 + (HACC) PHAGE 1 CETERUUJIBETA LOOP (H.ADC) Ajout Geregu OBIAFU AARON OO) GT3 1 (HLHG) Opel 1a2 Fotemb Abbo Obe AUNUJTE LETAHODE Worl Expe Gberar A bmd All 1 Phzz - 2 Ruj - Comy Scope for optimisiation ESCRLAUG LAGOS OFFSHORE PIPLINE (EL OP) exists across IOCS! GT3 + (HADC) Abed Borny Calaber ☐ ■ Evidence of sub-optimal pipeline configurations ■ SPDC OGGS vs CNL ELOPS ■ NAOC GTS4 vs ENL OUR Pipeline ■ Poor collaboration across IOC is key driver of sub-optimal pipeline configurations Scope to harmonise pipeline configurations Current approaches to pipeline development suggests scope exists for optimisation and subsequent cost reductions#20DIAGNOSIS OF THE GAS SECTOR Inadequate LPG Infrastructure Shipping Berthing issues at receiving depots ■ At NLNG Min. ships are 20KT while at ■ depots max. ships are 4- 8KT Significant turn around time for ship Same facilities used for petroleum products leading to de-prioritisation of LPG in off-loading Resulting in high demurrage & terminaling costs Primary Storage ☐ Poor infrastructure and obsolete equipment ■Inadequate storage both in size and integrity ■ ☐ Storage typically far from potential markets High demurrage costs Transportation Significant under- investment in the LPG trucking sector ■ Over 2500 needed ☐ 170 dedicated LPG trucks in Nigeria of which only about 100 are operational ☐ Investment has always focused on primary storage throughput only ■ Unsafe LPG transportation Secondary Storage ■ Of 80 distribution companies only 20% are still operational ■Low secondary storage investment due to dependency on other parts of the value chain i.e. no signal from supply Cylinder Bottling ■ Most of existing LPG cylinders unsafe ▪ Few large scale cylinders and bottling plants ☐ Only 120 bottling plants of which 50% are in Lagos ■Limited size ranges of LPG cylinders ■ Reduces LPG penetration to low income users who typically require smaller sized cyliners ☐ Retail ▪ High retail price N3500/12 kg bottle ■ Market largely supplied by imports#21DIAGNOSIS OF THE GAS SECTOR Gas Pricing - Commerciality of Supply vs Affordability Cement LNG Methanol Power - High Fertiliser GtL Power Aluminium Breakeven Feedgas Price for 15% IRR (US$/mcf) 1 2 3 Pre-Take Post-Take (AGFA) Post-Take (NAGFRA) 5 The diversity of the downstream gas portfolio creates opportunities and challenges alike. Perhaps the most critical challenge is the varying capacities of the various sectors to afford gas. In particular, the power sector which is the singular largest buyer, is least able to pay. A sector based gas pricing intervention is therefore inevitable - particularly in the short/medium term#22DIAGNOSIS OF THE GAS SECTOR Other Commercial Issues ■ Gas Agreements ■ Significant portion of currently supplied domestic gas not backed by a standard GSPA As investment deepens in the sector, bankable GSPAs are required Outstanding Debt ■ IOCS/NNPC are owed over N10 bn by the domestic market (largely PHCN) from supplies made historically over the last few years Other commercial issues such as lack of world class agreements, unpaid debts contribute to making the domestic gas market a less attractive market for the investors#23GAS SUPPLY CHALLENGES Other Commercial Issues ▪ Revenue Securitization - History of non-payment for gas in domestic market – mainly from government parastatals such as PHCN, ALSCON*, DSC* etc. ■ Created a drag in IOC willingness to invest heavily in supply unless adequate interventions on revenue security are provided Bankable Agreements ■ In view of the size of capital investments required to supply, gas agreements are critical and need to be enforceable ■ Current domestic market is not mature and agreements need to be improved to enable investor confidence With the power sector, re-structuring has created lack of clarity on who the counterparties to an agreement are Other challenges mitigating against sustained supply growth are lack of confidence in ability of buyers to pay and the perceived weakness of GSPA's in terms of protection they offer the supplier#24DIAGNOSIS OF THE GAS SECTOR Fiscal & Regulatory Framework Deficiencies The existing AGFA Fiscal regime favours existing upstream investors and thereby act as a barrier to non- oil investors and new entrants into the sector. Offsetting capital costs at higher marginal rate (85%) than the rate at which gas profits are assessed does not give effective incentives for containment of costs Giving tax relief as an uplift of capital expenditure encourages upstream investors to 'gold plate' investments The Government share of economic rent is low as gas development is essentially being funded from existing Oil tax revenues due to Government (PPT) Need to have a proper commercial regulatory framework for downstream gas sector, including the provision of third party access, pipeline ownership and tariff structure, gas transportation code etc. It is therefore necessary to have a separate fiscal regime for gas (NAGFRA) and downstream commercial regulatory framework (DGA)#25GAS SUPPLY CHALLENGES Legislative Delays in Passage of Fiscal and DGA JV Gas Capex $ Billions: 2007-2011 50.8 30.5 20.3 New Gas Capex $ Billions; 2007-2011 20.3 11.6 Impact of NAGFRA bill between $4.4- $5.4 bn* over the next 5 years, ■ Downstream Gas Act submitted in 2005 depending on revenues generated ☐ 8.7 Total gas Existing New gas Capex gas projects projects New gas Govt projects Share IOC share Assuming both new export and domestic gas projects fall under NAGFRA 2007-2011: $4.0b of 100 capex recovered. ■ Both Houses have had public hearings etc. However, bill not passed yet Fiscal Reform Act submitted in 2005 ■ NASS hasn't reviewed this ■ Potential revenue loss to government is $4 - $5bn as a result of delays Delays by the National Assembly in the passage of critical legislative submissions are creating uncertainty in major projects, further escalating the long term supply development and could also in the long run reduce the Government net proceed by $4.4 -5.4 bn, if the relevant fiscal laws are not passed#2618000 16000 Power Generation (IV (MW) 14000 12000 10000 8000 6000 4000 2000 OVERVIEW OF DEMAND AND SUPPLY The Power Sector Demand Forecast Power Generation and Required Gas Demand (2007 - 2015) 6000 35 5000 4000 3000 0 888888888888888888 88888888878888888 2007 2008 2009 2010 2011 YEAR 2012 2013 2014 2015 PHCN NIPP JV PRIVATE PP -GAS REQUIRED Required (MMScfd) Tc1 8 25 8 15 2000 10 1000 5 O Domestic Gas Reserves Requirement in Tcf (2007-2026) Power Fertilizer Methanol GTL Cement Existing CNG & Industries ALSCON Power sector demand growth is most aggressive. Over 20 plants are under construction or evaluation with potential to generate 16GW by 2010. The gas reserves requirement of this sector is also most significant relative to other sectors. The disproportionate demand has a significant impact on the overall commerciality of supply - as the price of gas to power significantly impacts on the total revenue of the gas suppliers#27GAS SUPPLY CHALLENGES Funding 2005-2008 Investment Level Upstream $12.4bn Natural Downstream $20.3bn Gas Total Gas $32.7bn The investment level required to deliver both export and domestic opportunities is significant. A radical approach to sector financing is therefore essential. More importantly, there also needs to be a reduced focus on the cost effectiveness of development projects in order to ensure that funding requests are optimised#28CONTENT ■ Overview of the Nigerian Gas Sector Diagnosis of the Sector Strategic Interventions Next Steps ■ Conclusion#29GAS MASTERPLAN INTERVENTIONS Central Processing Facilities CPFS To market 1 through transmission system a Lagos Reserves > 1 TCF Illustration of Central Processing Facility To market 2 through transmission system,b Ng Benin City CPF CLUSTER A 500BCF < Reserves <1000 TCF Reserves < 500 TCF ⚫ Central processing facilities (CPF) will be strategically located within each cluster Accessible to most reserves • Reasonably accessible by other remote reserves possibly outside cluster e.g. small company reserves Open access to all players for standardized tolling fee CPFS will replace all incremental plant capacity upgrades ⚫ Focus for capacity investment within • • • cluster Allow critical mass of capacity growth to be consolidated rapidly in one plant, hence accelerating capacity availability CPF will be modular, enabling steady capacity growth Consolidation within single CPFS will align capacity expansion with available execution capacity within EPC sector#30GAS MASTERPLAN INTERVENTIONS Infrastructure Blueprint BA FLAIRE Key Downstream Existing Downstream Proposed Upstream Existing Upstream Proposed Demand Centres (mmscfd) >3200 800-3200 200-800 < 200 Central Processing Facilities Proposed infrastructure blueprint will ensure infrastructure access to most demand centres Ensure connectivity between major gas reserves sources and the demand centres Explore synergies across JVs and reduce overall cost of infrastructure development Reduce incremental infrastructure development cost by leveraging most of existing infrastructure Facilitate more flexibility in gas supply deliverability than currently exists A robust gas infrastructure blueprint has been proposed. This infrastructure covers gas pipelines, gas central processing facilities and LPG storage and supply infrastructure. The blueprint aims to reduce overall infrastructure cost as well as ensure a more flexible supply grid nationwide#31Proposed Infrastructure Schematics Capacity CPFs Phase Type (mmscf/d) When? Escravos Export/Grid Current Phase 1 385 500 2012 Phase 2 500 2015 Phase 3 500 2018 Phase 4 500 2021 Total Ob-Ob 23.05 Grid Phase 1 Phase 2 700 2011 1000 2012 Total 1700 Calabar Export/Grid Phase 500 2008 900 2011 500 2012 Phase 4 600 2013 Phase 5 1500 2015 Phase B 500 2018 Total Wami 4.500 Grid Phase 1 350 2009 Phase 2 300 2009 Phase 3 500 2013 Phase 4 500 2017 Phase 5 550 2023 Total Brass 2200 Grid Phase 1 None 2008 Tota Olokola LNG Phase 1 Total Bonny 2000 2000 2012 LNG Jebba Current 3500 2007 48 bar Phase 1 665 2013 Total Bonny 4165 Grid Current Phase Phase 3 500 2009 500 2013 500 2020 Total Grand Total 1500 16460 56/16/94 Ogbomoshu 72 bar Opur Legend: Papanto 54 bar 40 bar WAGP 60/20/200 100 Ibadan badan 85mm scha 4076/150 Lagos 65/100 bar Shagamu Ogun 40/32/750 13736/1100 Upstream Pipelines Downstream Pipelines Compressor Stations OK LNG 3500.945 59 bar Ext 49.53 Onde Ajaokuta 60 Da DOGZAZ 100 bar Ore 100/36/1100 91 ban Cluster 1 Benin City 52 1650 Escravos 70124/550 2-100 COLLEG 7000 bar 55/36/250 Oben Cluster 3 10062/1700 Obiafu Warri Foroadod 50/24/900 50/40/1900 $3624750 (2016) 200/42/9250 122/4/2000 200/34/1000 (20-93 Cluster 9 125/16/350 125/32/1000 (2020) 38/36/800 20/36/1200 Central Processing Facilities Pipeline length (km)/ Diameter (inches)/ Design Capacity (mmscf/d) Cluster 8 OGGS 98/1840 90/16/200 (2020) 90/3200 (2023) Cluster 2 Bayelsa 0008 164/32 200 Brass 87 DAT 248462200 Abuja Umuna 30/49/2200 1/ 100 bar zombe 30/10/175 140462200 Umuahia 77 bar TSGP 63 bar Kaduna kat Expere 25 Okopedi Ito 89 bar Aba 40/18850 65/66/9000 Cluster 4 EGGS: 85401400 95/441800 (2011). River Cluster 5 Bonny 200/42/1700 70.18600,2010) 7060700216 71/8170022) Cluster 7 100/30/1000 1285/3500 Cluster 0 Calabar Calabar Blok Island 80/32/800#32INFRASTRUCTURE BLUEPRINT Investment Opportunities DOWNSTREAM INVESTMENT PACKAGES CAPACITY(M DISTANCE(km) | DIAMETER MSCF/D) PIPELINE Calabar-Ajaokuta 490 Oben-Ajaokuta 56" 3000 1250 Ajaokuta -Kaduna 495 48" 2500 OB-OB -Oben Node 100 42 1700 ELPSB Oben-Benin 1100 Ore-Ekiti 125 650 Shagamu Jeba 321 24 390 ELOPS 200 42" 1250 CRITICAL DEPENDENCY Completion of Calabar CPF, Adequate supply of Gas to Cal CPF Completion of OB-OB to Oben link Completn of ELPS restoration Restoration of Supply to Warri Completion Cal to Ajaokuta line Upgrade of capacity of Oben-Ajaokuta Completion of OB-OB CPF Adequate supply to OB-OB CPF Completion of OB-OB to Oben line Adequate supply to Warri Completion of CPF at Warri Completion of OB-OB-Oben Line Adequate supply of gas to Warri Upgrade of ELPS Completion of ELOPS Upgrade of ELPS Adequate Supply at Escravos CPF at Escravos#33CPFS Escravos INFRASTRUCTURE BLUEPRINT Investment Opportunities Phase Type Current Phase 1 Phase 2 Phase 3 Phase 4 Export/Grid Capacity (mmscf/d) Year 395 500 2012 500 2015 500 2018 500 2021 2395 Total Ob-Ob Grid Phase 1 Phase 2 700 1000 2011 2012 Total Calabar 1700 Export / Grid Phase 1 Phase 2 Phase 3 Phase 4 Phase 5 Phase 6 Total Warri 500 2008 900 2011 500 2012 600 2013 1500 2015 500 2018 4,500 Grid Phase 1 Phase 2 Phase 3 Phase 4 Phase 5 Total 350 2009 300 2009 500 2013 500 2017 550 2023 2200#34DIAGNOSIS OF THE GAS SECTOR LPG Infrastructure LPG production in Nigeria is set to grow from the current level of about 2mtpa to about 10mtpa by the year 2015 with NNPC equity production of about 5.5mtpa To address the above challenges, NNPC initiated a strategy to develop the domestic LPG market through international and local strategic partners engaged in LPG business The strategic partners must satisfy the following criteria: Technical & Financial capability to participate in the LPG value chain Provide adequate strategic investment in domestic LPG infrastructure and market development Offer the highest price for the exported LPG portion Local Content development Tonary 6000000 5000000 4000000 3000000 2000000 1000000 Forecast NNPC Equity LPG 2007 2011 Project LPGs Refinery LPG 25 2015#35PRICING FRAMEWORK DEVELOPMENT Study Approach – 5 Steps Strategic Grouping of Demand Sectors Establish Upstream Cost of Supply ☐ Establish critical ▪ Determine the strategic sectors of economy ☐ Establish the strategic intent for the sectors and tracker for this strategic intent breakeven gas price for a 15% ROR to suppliers ■ Establish this breakeven gas price for entire AG/NAG reserves Establish Affordable Gas Price for Sectors ■ Determine for each sector, the breakeven gas price required to deliver 15% ROR for sector Develop Pricing Framework ■ Develop generic pricing framework ☐ Develop Implementation Approach ■ Develop implementation approach#36GAS MASTERPLAN INTERVENTIONS The Gas Pricing Framework - Marginal Cost of Supply Analysis New fields cost curve (2006 to 2045) Cost ($/'000cf) 5.0 4.0 3.0 2.0 1.0 0.0 -1.0 -2.0 0 10 20 30 40 Volume (Tcf) 50 60 70 80 Source: OPTS The marginal cost of supply in the Niger Delta was established as basis for developing a cost reflective pricing mechanism. This indicated that there is a limited volume of gas reserves that can be developed profitably at a relatively low dry gas price#37GAS MASTERPLAN INTERVENTIONS The Gas Pricing Framework Strategic Demand Sector Classification 1. Strategic Domestic Sector - Power (residential and light commercial only), Domestic Fertilizer 2. Strategic Industrial Sector -Methanol, GTL, Export Fertilizer 3. Other Commercial Sectors - LNG, Cement, Steel, CNG Domestic Industries, Power (heavy industrial users) Pricing Approaches Explored 1.Cost of supply basis Primarily for the strategic domestic sector 2. Product Netback Basis ■ For strategic industrial sectors i.e. sectors with gas as feedstock 3. Alternative Fuels Basis ■ For commercial sectors where alternative fuels are LPFO, Diesel and/or PMS In developing a gas pricing framework, demand sectors were categorized into 3 strategic groups. Also various pricing approaches were explored and 3 selected. The pricing approaches were then mapped to the demand groupings#38$/mmbtu GAS MASTERPLAN INTERVENTIONS The Gas Pricing Framework 2.00 1.50 1.00 Regulated Pseudo-Regulated Market-Led Nigerian Gas Reference Marker Price Tunnel Strategic Export Sector Breakeven Price 0.50 0.00 Marker Price Floor Price Domestic Saturation Strategic Export Saturation Sector Strategic Saturation Index The resulting gas pricing framework caters to the 3 different strategic groupings and establishes thresholds at which the pricing approach changes from one type to another. This is necessary in order to discourage a disproportionate growth of one sector relative to the other in a manner that ultimately compromises the long run economic objective of the nation. It is important to state that the price framework stipulates only floor prices for each sector. Actual prices will be negotiated#39Gas Reserves required 14.0 12.0 10.0 80 15.0 10.0 PROPOSED IMPLEMENTATION OF GAS PRICING Concept of Aggregated Pricing Gas Reserves Requirement & Indicative Sector Prices Reserves Requirement TCF 1.0 0.5 0.0 -Indicative Gas Price $MMBtu Discounted 10 Years Domestic Gas Reserves Requirement 13.5 61 5.0 0.0 Pomer & Domestic Fertilizers Others ■ The domestic sector comprises a rich mix of project opportunities with significantly higher gas pricing thresholds Though Power and domestic fertilizer constitute 70%, the value potential (from a price perspective) of the remaining 30% is over 7-10 times the $0.1/mmbtu Realising this higher price however requires access to the aggregated price by suppliers There is significant potential to earn far more than the $0.1/mmbtu on an aggregate basis from the domestic sector in view of the rich mix of sectors involved.#40Price in US$/M M B tu PROPOSED IMPLEMENTATION OF GAS PRICING Concept of Aggregated Pricing Aggregate Price of Gas For Domestic Market 1.00 0.50 0.00 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Year Aggregate Price (Discounted Case) Aggregate Price (Undiscounted Case) A simulation of the aggregate domestic gas price suggests that the aggregate price could range between $0.5/mmbtu - $0.8/mmbtu. This range does not include price escalations due to inflation or product prices#41PROPOSED IMPLEMENTATION OF GAS PRICING Impact of Escalation in Product Price - Methanol Example Gas Cost in US$/TVTM SENSITIVITY OF GAS COST TO METHANOL PRICES 6.0 4.0 2.0 0.0 $4.2/mmbtu - $2.6/mmbtu 0 50 80 100 150 180 210 240 270 300 Methanol Price in US$MMT Recent Methanol Price $250/MT The impact of end product price on feed gas price can be substantial. For example based on current methanol prices in global markets, there is significant upside scope for gas price which could be as high as over $2.0/mmbtu. Such upsides will significantly increase the aggregate domestic price#42☐ PROPOSED IMPLEMENTATION OF GAS PRICING Aggregate Domestic Price - Benefits & Challenges Benefits Alleviates concerns about $0.1/mmbtu by providing a more acceptable gas price to suppliers Stimulates full participation of all Operators regardless of gas portfolio as price is relatively higher Reduces the gap between domestic and export markets in terms of effective IRR to suppliers ■ Nullifies the geographical disadvantage of some suppliers relative to attractive domestic markets Single point of contact for buyers ☐ Challenges Requires an aggregator, this is new in Nigeria ◉ ☐ Legal and organisational construct issues Cost and time to set-up etc. ■ Concept of aggregation will impact strongly on NGC'c commercial model Redistribution of margin between suppliers and NGC The aggregated price concept has a lot of benefits, however, there are challenges too mainly in the implementation and its impact on NGC#43ADDRESSING CHALLENGES OF AGGREGATION The Strategic Aggregator Concept ☐ Conceptually, the aggregator acts as 1.Gas Suppliers intermediary between the suppliers and the diverse price demand sectors Manages the reserves obligation and demand periodically ■ Ensures suppliers get the aggregated price ☐ Manages the planning of supply disbursement Aggregator Strategic Domestic Commercial Sectors May be regulated profit or non-profit making Strategic Export Three Options were identified for the implementation of the approved gas pricing framework for the benefit of all the stakeholders. Establishment of a strategic aggregator is a key enabler.#44ADDRESSING CHALLENGES OF AGGREGATION The Strategic Aggregator Concept - Operational Model aggregated IOC 1 IOC 2 ☐ GSPA's Strategic Aggregator $ sector $0.1/mm btu buyer Buyer $0.1/mm btu ☐ SA logs all gas demand requests SA plans and aligns gas demand with supply subject to ■ IOC allocation quota ■ Minimum aggregated price target ■ Other logistic consideration SA advices IOC's of supply obligation - customer, volume IOC and buyer sign GSPA based on framework prices Buyer pays into account, SA manages supplier payment on aggregated basis The operational model of the concept ensures operational contact between supplier and buyer, but the SA plays the role of portfolio manager on behalf of all suppliers - the primary objective being to preserve a minimum aggregate price portfolio#45GAS SUPPLY STRATEGIC INTERVENTIONS Other Commercial Interventions - Gas Agreements NNPC/OPTS Team Developing GSPA, GTA Template ➤ Ongoing integrated effort to develop international standard GSPAS and GTAs Define minimum conditions precedent for gas supply applicable across the Nigerian domestic market e.g. credit guarantees, take or pay terms etc. Will be standardized and implicitly capture the requirements of gas suppliers to mitigate commercial risks in domestic market Will ensure an orderly and sustainable growth of the domestic market in line with international standards#4619.6 GAS SECTOR INTERVENTIONS Domestic Gas Supply Obligation Regulation Indicative Reserves Obligation 2.3 9.9 7.4 Total Gas Required Small Producers NNPC 5 IOCs IOC Mandatory Supply Obligations • NNPC in final stages of proposing gas supply obligation regulation • Proposed regulation stipulates that all operators in the country make a mandatory reserves allocation for domestic sector • Allocated reserves will be based on the domestic requirement and help mitigate the supply shortfall driven by focus on export by major suppliers • Regulation stipulates meeting domestic supply obligation as requirement for export NNPC has finalized a gas supply regulation which mandates that all operators in the country allocate a minimum gas reserves and production for domestic use. Compliance will be a condition for export of gas. It is intended that this will mitigate against the rising shortfall in the domestic supply base and force internal portfolio re- alignment amongst the IOCS#47GAS SUPPLY INTERVENTIONS Other Portfolio Interventions ■ Developed a short term gas supply plan Significant growth in supply within 12-24 mths - initial doubling and then a tripling of gas supply capacity Evident growth in Power generating capacity - almost tripling capacity within 18-24mths ■ Managed Growth of Future Export Projects Recommended that future export projects now be contingent on satisfaction of domestic demand requirement and exploration success Capacity of future projects also to be aligned with size of exploration find ■ Aggressive Exploration Initiate Gas exploration master-plan NNPC is championing major portfolio interventions to manage the supply crisis.#48CONTENT ■ Overview of the Nigerian Gas Sector Diagnosis of the Sector Strategic Interventions Next Steps ■ Conclusion#49Next Steps Adoption of the proposed gas infrastructure blueprint for immediate implementation ■ Set up an implementation consisting of all stakeholders Work with all stakeholders to ensure the delivery short term gas supply to the Power and other industrial sectors Implementation of all the approved concepts of the Gas Master Plan including pricing framework and domestic gas supply obligation Investor Road Show to sensitize investors of the available opportunities Facilitate the passage of all legislations currently at the NASS ■ Initiate the Gas Exploration Master Plan for Nigeria#50CONTENT ■ Overview of the Nigerian Gas Sector Diagnosis of the Sector Strategic Interventions Next Steps Conclusion#51■ The challenges in the gas sector appear daunting, but the fundamentals are bright for Nigerian Gas ➤ A robust opportunity set, strong enough to anchor economic development ➤ A fully developed master- plan focused on the key issues CONCLUSION