The Future of the Upstream Oil and Gas Industry in Nigeria and the required Policy Imperatives - PowerPoint Presentation

1. The Future of the Upstream Oil and Gas Industry in Nigeria and the required Policy Imperatives to Increase InvestmentLagos Business School (LBS) Breakfast End of year Dinner Oriental Hotel, Lekki Lagos, NigeriaDecember 4, 2019Jeff EwingChairman/Managing Director, Chevron Nigeria LtdThe Future of the Upstream Oil and Gas Industry in Nigeria and the required Policy Imperatives to Increase InvestmentLagos Business School (LBS) Breakfast End of year Dinner Oriental Hotel, Lekki Lagos, NigeriaDecember 4, 2019Jeff EwingChairman/Managing Director, Chevron Nigeria LtdThe future of the upstream oil and gas industry in Nigeria and the required policy imperatives to increase investmentLagos Business School (LBS) Breakfast end of year dinner December 4, 2019Jeff EwingChairman/Managing Director, Chevron Nigeria Ltd

2. Country2014 Year-End Proven Oil Reserves Billion barrelsCountryProduction rankNigeria’s has the resources to compete in the global marketworld’s 11th largest oil reserves and 9th largest gas reserves484898Venezuela298CanadaIranIraqSaudi ArabiaRussiaKuwaitUAEUSLibya267173158150103102112478396129Nigeria 37 12Much of Nigeria’s discovered gas can only be delivered to market with higher prices and better infrastructureExperts believe there is much more to find1 - but incentive for finding gas is limitedNigeria has enough discovered gas to support both domestic and export supply5566810172533NigeriaAlgeriaUAEVenezuelaUSSaudi ArabiaTurkmenistanQatarRussiaIran2014 Year-End Proven ProductionGas Reserves Tcm rank34 42311181427229SOURCE: BP Statistical Review of World Energy 20151 NNPC (2014) estimates Nigeria's total discovered and yet-to-find reserves amount to ~600 tcf

3. oil & gas industry contributions to Nigeria600,000direct and indirect jobs for the Nigerian economy generated by the Oil & Gas industry(2007-2018)3.0Mn boe/dof Nigerian Oil & Gas production in 2019$425bn1 total amount contributed to the Nigeran Government from Oil & Gas revenues(2007-2018)CSRInitiatives:>50,000 scholarshipsHundreds of km of roadsSchools and hospitalsSkills acquisition / EntrepreneurshipTechnical capacity buildingEtc.… and variousSOURCE: OPTS analysis, Rystad

4. challenges that could limit Nigeria’s ability to attract new investment and successfully take advantage of its reservesKey ChallengesPetroleum industry in Nigeria faces several challenges such assecurity/ community risksineffective/inefficient regulationslengthy contract approval cycles, and increased macro-economic risks (inflation, currency)Furthermore, industry faces significant legislative uncertainty as well as bureaucracy and over-regulation by multiple agenciesChallenging business environmentDescription1In addition to petroleum profits tax, company income tax, and royalties, industry pays a plethora of other taxes, fees and levies; leading to substantial additional financial burdenThese include but are not limited to: the Education Tax, NDDC Levy, NCDF levy, NPA charges/dues/leviesWorsening fiscal environment2

5. FGN receives ~91% of total JV proceeds after costSOURCE: OPTS IOC business plan data; Press search FGN receives ~91% of total JV proceeds after costJV proceeds at oil price of $50/Bbl and gas price of $2/MMBTU1 Includes royalties, taxes and NNPC profit oil; NOTE: Individuals components may not match totals due to rounding effects2 Includes VAT and duties3 Assuming JV split of 40% IOCs and 60% NNPC; excluding VAT and duties$7.2$4.0$8.3Taxes2 $16.9NNPCprofitRoyalties$2.9$3.2$4.0$4.8$5.9NNPC share of JV Opex3 NNPC share of JV Capex3 IOC share of JV Opex3IOC share of JV Capex3IOC profit $2.9/boeTotal FGN revenue ~$29/bbl1 Royalties, levies, taxes & fundsRoyaltiesRoyalty based on shore type / water depth:Oil 18.5 – 20%Gas 5-7% Oil 85% and Gas 30% PPT on assessable profitGas related cost can be deducted from Oil taxable income (AGFA)As investment incentive 5-15% of tangible capex can be used as a tax deductible (depends on shore type)2% Education taxAdditional levies and fees include:3% of cost NDDC1% of contracted cost NC Levy TaxesJV splitAs shareholder NNPC (55% in SPDC, 60% in all other JVs) is obligated to fund its share of investment and operational costs and receive its share of liftingsAll royalties, levies and taxes are interrelated and have a cumulative influence on the total profit of IOCs and Federal Government of NigeriaEmployee CostContract LaborLogistics CostMaterials & SuppliesOthersCapital Projects:D&CFE & MCPOthers

6. post-PSC amendment: fiscal structure allows government receive 75-80% of net revenues through royalties, taxes and profit oilSOURCE: Industry modelingNOTE: Individuals components may not match totals due to rounding effects1 Cash flows under current terms for all existing projects (equal bases); undiscounted cash flows; 2020-end of life2 Costs include both capital and operating expenses, which is not part of either FGN take or Industry profit3 VAT & Duties are deducted from costs and included in Taxes Royalty Oil10% flat for water depth >200mPrice based royalties of 0-10% depending on the oil priceCost OilAllocated to the contractorAllows for recovery of costs of exploration and development of the fieldTax Oil50% PPT on assessable profit - as investment incentive 50% of tangible capex can be used as a tax credit (part of disputed items)Additional levies and fees include: 2 % Education tax, 3% of cost NDDC,1% of contracted cost NC Levy Profit OilNNPC entitlement share increases with cumulative production of asset; ranging from 20% to 60%, remainder is for IOCsFiscal structure of a PSCPSC proceeds at USD 50/bblFGN receives 75-80% of total PSC proceedsAll royalties, levies and taxes are interrelated and have a cumulative influence on the total profit of IOCs and FGN$ 15.0$12.6IOC Profit oilNNPC Profit oilTax oilCost oilRoyalty oil 12.5%$ 7.6$ 8.4$6.2

7. 1.26.60.82.228.24.324.25.20.373.0Nigeria has received only 3% ($2bn) of the $73bn major project investments in Africa from 2015-2019SOURCE: Wood Mackenzie Global Economic Model, Press SearchAfrican major O&G projects FID-ed in 2015 or laterCountryEgyptGhanaMozambiqueAlgeriaAngolaSenegal / MauritaniaNigeriaTotal capex of these projects USD bn Equatorial GuineaChadTotal fields 422311211Deepwater fields420010000Other fields002301211TOTAL AFRICA17710GasOilOil/gasFactors driving low investment in Nigeria:Overall high cost structureHigh government takeLow rank in ease of doing business

8. 179005007001920232002118300222015600244002025160100800-27%PSC Amendment Bill is likely to result in at least 27% less production by 2023 due to drop in competitiveness8PSC Liquid production – IOC 2019 Business Plans, kbbl/dProduction viable under Current Fiscal TermsNew PSC Bill (3rd Reading)Production without any further FIDsSOURCE: IOC business plans 2019The new PSC Amendment translates to:27% oil production decline by 2023 Loss of ~USD 55.5bn of investment compared to Nigeria’s full potentialTotal lost potential FGN revenue of 10.4 bn by 2030Oil price of $50/bblThe legislative uncertainty around PIB could potentially stall any new projects/production which appear economically viable under the PSC Amendment bill8

9. policy imperatives to increase investment in NigeriaWe believe that a holistic industry reform bill can increase competitiveness, unlock new production and benefit both government and industryA well-thought out holistic industry reform bill could “grow the pie” by:Government has indicated that an industry reform discussion and bill could begin in early 2020Timely conclusion of ongoing industry reform to guarantee legislative clarity and certainty Agree on a set of fiscal terms that return revenue to FGN but also safeguard Nigeria’s investment competitiveness and attractivenessEnabling a conducive business environment, through:Ensuring safety of lives, security of assets and facilities Improving the efficiency and effectiveness of institutions responsible for contract approval process

10. Thank you

11. Uncompetitive fiscal & business environment have pushed Nigeria’s onshore production cost to the last quartile among the top 20 producers11SOURCE: Wood Mackenzie GEM; Mckinsey AnalysisSubtitle354515504030051020253639UzbekistanLibya ChinaIranUAEVenezuelaUS30303031323233342043Nigeria202212162829Iraq48KuwaitRussiaSaudi ArabiaEgyptTurkmenistanIndonesia23O&G Cost curve (capex + opex + government take)1 for top 20 conventional onshore producers2USD/boe, 2017 real terms Govt take/boeCapex/boeOpex/boe2030 O&G productionMMboe1 Includes technical cost (capex, opex, and government take; 2030 cash cost for existing fields and full life cycle cost for greenfield project developments 2 production ranking on the basis of 2017 production rateArgentinaKazakhstanAlgeriaCanadaOman