Understanding

the Upstream
Oil & Gas Business
AMBONG-DUSSO

This presentation includes forward-looking statements. Actual future conditions (including economic conditions, energy demand, and energy supply) could differ materially due to changes in technology, the
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development of new supply sources, political events, demographic changes, and other factors discussed herein (and in Item 1A of ExxonMobil’s latest report on Form 10-K or information set forth under "factors
affecting future results" on the "investors" page of our website at www.exxonmobil.com). This material is not to be reproduced without the permission of Exxon Mobil Corporation.
 Outline
 Upstream vs Donwstream

 Oil and Gas Accumulations

 The Exploration & Production Life Cycle

 Acreage Acquisition
 Basin Analysis and Prospect Generation
 Wildcat and Appraisal Drilling
 Field Development
 Operations

 Gestation Period, Life-Cycle Costs and Profit

 The Upstream Oil & Gas Industry in Nigeria

 Conclusion

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 2A. Phases of Seismic Acquisition
SEISMIC ACQUISITION

PLANNING PRE-MOBILIZATION MOBILIZATION DEMOBILIZATION

SURVEY PERMIT
BASELINE DISMANTLING
DESIGN MEETINGS
STUDY OF INSTALLED
(FTO)
EQUIPMENT
SCOUTING WORKER’S
BUDGETING TRAINING(SWIM TESTS, ENVIRONMENTAL
FIELD TRAINING) REMEDIATION
STAKEHOLDER’S REGULATORY
ENGAGEMENT APPROACH PRE-START
ECONOMIC
(DPR, FMENV) INSPECTION/AUDIT
COMPENSATION
OF EQUIPMENT

SURVEY LINE AFTER

CUTTING ACTION
REVIEW
DRILLING OPERATIONS
(SHOT HOLE DRILLING)

RECORDING
OPERATIONS
 The Oil and Gas Business - Major
Elements

Upstream (Exploration, Development & Production)

Downstream (Marketing and Refining)

 A Fully-Integrated Oil Company

Getting Raw Refinery Getting Refined

Oil & Gas to Products to
the Refinery the Consumers
 Integrated Oil Company Structure

Integrated Oil Company

Upstream Downstream Chemicals
Basic Chemicals
Refining
Exploration
Supply Intermediates
Development Fuels
Polymers
Production Marketing
Films
Lubricants
Research
Research Research

Corporate Strategic Research

How Do We Go About Our Work?
– Which basins should
Exploration we focus on?
Less Detail
What questions do I face?
– Where should we drill
a wildcat well?
How will I find the correct
answers?
Development
– How should we
develop
a new field?

Production
– How can we enhance
More Detail
production from
existing fields?

Our work becomes more Focused and

Detailed as we progress from
Acreage Capture to Field Depletion
 Geoscience

• Geology: The
study of the
composition, structure,
processes, history and
resources of the earth.
• Traditionally, however,  Geology
Geology has come to  Geophysics
mean the study of 
Rocks.
Geochemistry
• Also referred to as  Geomorphology
Geological Sciences.  Geodesy
• The terms Geoscience The following disciplines belong to the field of 
& Earth Science were
Geography
later proposed. Geoscience or Earth Science:  Astronomy
Oil and Gas Accumulations
Oil and Gas accumulations are not found in large storage tanks under Petrol
stations. To accumulate hydrocarbons requires organic material that
transforms into oil through heat and pressure, reservoir rocks to hold the
accumulation, and sealing rocks to keep the oil from rising to the surface. Less
than 1% of the earth’s surface is prospective to these conditions.
The Upstream Oil and Gas Business
 Acreage Acquisition
Exploration commences with the
assignment of rights to an operator to
explore a specific block or acreage.

License award is usually after

payment of a non-recoverable
signature bonus. Competitive Lease
Bids run in the $10M - $100M range.

There is no guarantee of success.

Indeed the majority of licences
yield nothing, even after the
costs of a full work programme
The Upstream Oil and Gas Business
Basin Analysis and Prospect Generation

It all comes at a cost ($10M’s), and

we haven’t found anything yet
Wildcat Drilling
WILDCATTING

 This is the process of drilling a location to some determined depth to test if

hydrocarbon is present as speculated. A wildcat is therefore the first well
drilled in a hitherto unknown or untested structure.

 Usually very expensive: $10 - $100 million depending on location

Wildcatting is associated with very high risks (dry hole, blow-outs, pipe
sticking, etc). Average WC success approx. 30%. May or may not find
hydrocarbon in commercial quantity
Appraisal Drilling

Appraising, although expensive, is

actually designed to reduce risk. It
narrows the uncertainty in the biggest
cost of all: Field Development
Field Development Plan

The FDP will take 1-2 years to

develop. Large multi-disciplinary
teams using state of the art
technology, make their
recommendation on whether the
field can make money or not. Project
may get halted at this stage
Development Phase
 In a shallow water offshore environment, facilities to develop a field cost
hundreds of millions of dollars. An offshore medium size field of, say, 200 million
barrels of oil could cost $400 -$500 million to develop
 In Deepwater the costs can be 5 to 6 times that amount

Floating Production
Storage and Offloading
Vessel (FPSO) with
subsea tie-backs

However good the FDP is, it is only a prediction, and the reality
will often bring surprises. Costs and timing will change, and the
new well information will change the geologic picture. A 10%
variation in the costs or the reserves has enormous consequences,
and the project must be robust to these uncertainties before
proceeding
 Production
This phase is divided into two broad but complex operations
- Reservoir management (secondary recovery; gas injection
etc.) - Production operations

RESERVOIR MANAGEMENT
PRODUCTION OPERATIONS
 Reservoir Performance
• Drive mechanism  24 Hours a day, 365 days in a year
• Solution gas
operations
 Well Performance
 Continuous production optimization by Well
 Reservoir Surveillance
monitoring and Well repair
 Production Enhancement techniques
• Infill drilling  Thousands of dollars expended for
• Gas lift
• Gas / Water injection continuous performance and surveillance
 Asset Development Depletion Plan monitoring.
• Depletion Strategy
• Abandonment
Gestation Period
 From the time of first discovery to the time of first oil production
could be as long as 10 years.

 The following are the estimated approximate timings for each phase for
a 200 million barrel field:
- acquisition with signature bonus - 1 year
- seismic, processing and interpretation - 2 years
- wildcating, appraisal and development wells - 2 years
- facilities design/construction/installation - 3 years
- Hookups, testing and commissioning - 2 years

 In some cases, after the acquisition has been made, the rest of the cycle
up to abandonment could take up to 25 or more years.

 Millions of dollars spent before production start-up due to long lead

time.

At every step along the way, the original assumptions can be invalidated,
but the money may already be spent or at least committed to
Life-Cycle Costs
Profit
3.0
VALUE OF PRODUCTION
COSTS
DIVISIBLE INCOME
POSITIVE

INVESTOR Government take is a

NET CASH FLOW

G
balancing act between

O
VE
maximising the benefit to

R
N
M
the country, and not

EN
T
scaring off investors

TA
CASH FLOW

K
E
PIT ME OF
START OF
ECONOMIC

AL NT
CA EST ERY
PRODUCTION LIMIT
AGREEMENT
SIGNED INV COV
RE
PROFIT
0 INVESTMENTS
NEGATIVE

PAYOUT

EXPLORATION PERIOD PRODUCTION PERIOD

DEVELOPMENT Oil company profit on a

PERIOD
successful project also has to
cover the costs for failed projects
TIME FROM START OF VENTURE at all stages in the life-cycle
The Upstream Oil and Gas Industry in Nigeria
Nigeria Petroleum Industry Facts
Comparison of Government Take
750 MBO Development Scenario
$3.75/BBL Capex
Discounted (12.5%) Government Take (%)

$20.00/BBL Real, 3% Inflation

100
90
80
70
60
50
40
30 *

20
10
0
Nigeria(2001) Brazil Nigeria(93-98) Angola US GOM
All Taxes All Taxes
Included Included

* Per IHS Energy

Upstream Business Environment
 Peculiarity of the Nigerian Petroleum Industry
• Nigeria is the 10th largest oil producer in the world, the third
largest in Africa, and the most prolific oil producer in Sub-
Saharan Africa.

• Nigerian economy is largely dependent on its oil sector which

supplies 95% of its foreign exchange earnings,

• Crude Oil and liquefied natural gas (LNG) account for 98% of
exports and around 80% of government revenue.

• Maintenance of the highest environmental standards is

challenged. Oil spillage and gas flaring have been major issues

• The corporate tax rate is 30% in all sectors except petroleum,

which is taxed separately under the Petroleum Industry Bill.
Huge Government take.
 Highlights of Nigeria Oil and Gas Industry Reforms
The industry has gone from a stable environment and
investment climate to prolonged reforms and
uncertainty
• Before the Reforms (1955-2000)
─ Unprecedented investments in the upstream and
downstream sectors
─ Memorandum of Understanding (MOU)
─ Industry developed faster than extant laws and
regulations
• The Reforms (2000-Date)
─ Oil and Gas Sector Reform Implementation, 2000
─ National Oil and Gas Policy, 2004
─ The Petroleum Industry Bill (PIB), 2008 and ongoing
Highlights of Nigeria Oil land Gas Industry Reforms
The uncertainties in Nigeria’s investment policy
and regulatory framework pose challenges to oil
and gas exploration activities and delay in
project development.
• The Current State
─ Security

─ Divestments

─ Under-funding of the JV

─ NCDMB Implementation

─ New indigenous investors

 Emerging Industry Challenges
• Security Challenges
─ Crude oil and Refined products theft
─ Pipeline vandalism/sabotage &
Piracy
─ Abduction/Kidnapping for Ransoms
─ Impact: Production and export
lifting reduced by 3% and 4%,
respectively
• Range of Divestment
─ BG (100%); ConocoPhillips (100%), Petrobras (100%)
─ SPDC 30% stake in OML 4, 38, 41, 42
─ Chevron: 40% in OML 83, 85
─ Total: 20% stake in OML 138
─ SPDC, Chevron, and XOM plan to divest more interest
Emerging Industry Challenges
• Inadequate Funding Challenges
─ Inability of Govt. to provide her equity fund for the JV is responsible
for:
 Biggest impediments to the industry progress: Viable projects not
executed. Little to no Exploration activities.
 Industry cash calls not being honored
 Budget overrun leading to increasing receivables
 Ineffective monitoring of the industry by the regulators
• Nigerian Local Content: Implementation
─ Desire for Nigeria to derive maximum benefits through optimal use
of local competences and resources being challenged due to:
o Absence of the required political will to carry through change,
o Lack of support from relevant stakeholders and corruption.

─ Sincerity of government about the local content issue must be

reflected in attractive fiscal policy or measures.
• Indigenous Oil Producers
─ Account for 10% of current production
─ Growth dependent on improved investment climate
 Resolutions to Emerging Industry Challenges
• Develop innovative financing solutions for the oil and gas
industry. Industry is willing to work with all stakeholders
to explore options to resolve arrears and funding
challenges. There is upside to full investment
• Sustainable local content development needs to be
adopted by government policy makers and upstream
operators to guarantee a better future for the industry.
• Any piece of legislation aimed at attracting investors to
the petroleum Industry should be kept simple and
transparent. Over-bureaucratization of the regulatory
process by multiple institutions does not invite potential
investors
• Until the PIB is passed unanimously and subsequently
signed into Law, the Nigeria oil and Gas industry will
remain stagnant, and no model to compete in a globalized
petroleum industry
From Bid Round to Production
High Risk Phase with no guarantee of
Success

Involves Geological and Geophysical

evaluation
- Basin Analysis, Seismic acquisition and
- Interpretation, Biostratigraphic analysis,
- Prospects are generated

Drill first wildcat well and if successful drill

a few more Appraisal wells to determine
Reserve, - May carry out DST to determine
producibility

How do I monetize this Asset? – Investors?,

loan from bank, Build facilities, Acquire a Rig,
Build a Development team, Will I make
profit
from this - Project Economics

With Successful Development, investor moves

from negative to Positive vcash Flow
 From Reservoir to the Tank: How Oil is Produced

Oil in the ground Drilling Rig Wellhead/ Xmas Tree/ Flowline

(Reservoir Barrel)

• Oil that lies in the

reservoir rock is
accessed through
drilling
• The flow of oil and gas
with pressure are
controlled with using
Xmas Tree
Terminal / Storage Pipeline
• Produced oil and gas is (Stock Tank Barrel)
flowed through
network of pipeline to
terminal where it is
treated and stored for
the buyers
 From Reservoir to the Tank: How Oil is Produced
E-W Cross Section through X Field
Map of X Field

• Recoverable reserve is what is of interest and is estimated in millions of barrels

(MBO)
• Production rate is measured in barrels per unit time (bbls/day)
• Capital Expenditure (Capex)
• All cost to Development
• Cost of Field Personnel
• All Drilling Costs
• All initial Facilities/ Project costs
• Operating expense is typically small at this stage
• Produced oil and gas is flowed through network of pipeline to terminal where it is
treated and stored awaiting sales
Investor Obligations to the Government and Community

• The following additional obligations to the Community and Government

have to be considered in the development plan
• Royalty - Sliding scale based on water depth – deducted before
expenses
• Petroleum Profit Tax – After expense is deducted
• NDDC Tax – Community Development
• Other Expenses
• Community development cost
• Staff Salary
• Oil and Office equipment
• Training cost
 Running Oil And Gas Economic Model
Key Questions
• Will the Investor make money from this investment – Run Project Economics
• How much money should I invest? – Capital Expenditure/Operating Expenditure
(CAPEX/OPEX)
• How much Profit (Return on investment) will I make – Actual value Profit (AVP)
• What is the value of the future profit today if inflation is accounted for – Present Value Profit
(PVP)
• When will I start making Profit (Pay out)
• Should this money be better spent purchasing Google share or Apple shares – PVP/I
Model Input Data
• Projected Investment over time
• Production Forecast
• Interest rate
• Inflation rate – Discount Rate
• Royalty Rate
• Tax rate
• Oil Price Forecast
 Time Value of Money: Interest Rate / Inflation
Simple Interest = Principal x Int Rate x Time in year
Compound Interest = (1 + Int rate) raised to power Time Simple int, F = P + (P x i x n)
Comp int, F = Px(1+i)^n
Example: I have N5,000 and interest rate is 10% Where:
Simple interest investment: at end of 10 years I will have P = Principal
F = Future value
a future amount (F) of N10,000 i = interest in fraction
Compound investment: at end of 10 years, future amount n = number of years

will be N12,969

Principal 5,000
Int Rate 10%

Year Simple Int Simp Ending Bal

Comp Int Factor
Comp Ending Bal
1 500 5,500 1.10 5,500
2 1,000 6,000 1.21 6,050
3 1,500 6,500 1.33 6,655
4 2,000 7,000 1.46 7,321
5 2,500 7,500 1.61 8,053
10 5,000 10,000 2.59 12,969
20 10,000 15,000 6.73 33,637
Time Value of Money: Discount Factor & Present Value
Business plans and decisions are made based on: Present Value of Future Amount
• Money to be invested today Recall that F = Px(1+i)^n
• Profit estimated to be realized in future Make P the subject:
Present Value, P = F/(1+i)^n
What is the present worth or value (P) of that future
P = Principal
estimated profit (F)? F = Future value
Example: What is today’s value of N5,000 that I will i = interest in fraction
realize from my business in 10 years from now when n = number of years
inflation rate is 10%?
Principal 5,000
Int Rate 10%

Year Discount Factor

Present Value
0 1.00 5,000
1 0.91 4,545
2 0.83 4,132
3 0.75 3,757
4 0.68 3,415
5 0.62 3,105
6 0.56 2,822
7 0.51 2,566
8 0.47 2,333
9 0.42 2,120
10 0.39 1,928
20 0.15 743

We employ similar concept in investment decision to be able to compare the

present value of the future profit with the cost of investment we are making
 Conclusion
 The Upstream Oil and Gas business is a high-risk, high-reward business

 There is no return to the investor until the field is developed, facilities

installed and production monetised. There is risk and uncertainty at
every stage of the cycle. Scale is large, and upside and downside
reward correspondingly so

 Oil Companies and Governments compete and collaborate within this

framework

 Companies can succeed through scale, management systems,

geographical and business diversification, and via technology

 Government’s levers are their fiscal regimes, and the approval powers
within the legal agreements they make with the oil companies
 Ambong-Dusso Training Offers
 Introduction To Ambong-Dusso Oil and Gas Industry Training Offers;

TECHNICAL
 Disciplinary Technical, Software, Field Equipment Practical/Hands-On
 Geosciences – Seismic Data Acquisition, Processing and Interpretation
 Surveying - Seabed Survey, Pipeline Route Monitor and Seabed Core Samples Analyses
 Petrophysics – Drilling Logs Interpretation and Sample Core Analyses
 Engineering Technology

• Mechanical - (Directional Drilling, Mudlogging – MWD, NDT-Non Destructive Testing – drill pipes collars,
casings, AutoCAD, Equipment and Machinery Operation - Forklift, cranes)
• Electrical (Wireline and Testing – LWD, 3D Laser Scan)
• Petroleum (Reservoir Modeling - Static and Dynamic)
• Civil (Building and Construction Technologies)
 ICT
• Microsoft Suite (Word, Excel, CorelDraw, Access, PowerPoint, Project)
• Java
• C++
• Fortran

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 Ambong-Dusso Training Offers (Cont’d)

 Systems (Computer) Administration (Unix and Linux programming)

 HSE (Cashes – Community Affairs Safety Health Environment And Security) – ISPON CERTIFIED
• General Safety – (HSE Levels 1&2)
• HSE Level 3
• Advanced HSE

NON-TECHNICAL
Disciplinary Non-Technical
 Oil and Gas Industry Job Employment Interview Preparations (Processes, Procedures and Methodologies)
 Project Management (Concepts, Theories, Methodologies)
 Business Development and Administration (Concepts, Theories, Methodologies)
 Office Administration (Concepts, Theories, Methodologies)
 Human Resources Development and Management (Concepts, Theories, Methodologies)
 Manpower Development and Outsourcing (Processes and Procedures)

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