2005 Nov 7 Independent African Gas Ventures 1

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NEPV NEPV Wm. D. (Bill) Brumbaugh New E&P Ventures The Woodlands, Texas bill.brumbaugh@bigfoot.com ‘African Independents’ Forum 2005’, Cape Town, South Africa 7 November 2005 Independent African Gas Ventures

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NEPV NEPV Financial Enablers and Inhibitors Some Issues Local Participation Strategy? Take Away: A Recipe for Success Topics Nature of the Africa Gas Business

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NEPV NEPV Recipe (cont’d)

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NEPV NEPV Recipe (cont’d) What Can Independents Bring to the Table? Drive and Commitment Technical Expertise and Experience Imbedded Engagement Practices Long Term Vision Domestic-Scale Projects Organizational Simplicity Flexibility and Responsiveness

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NEPV NEPV Recipe (cont’d) Major Resources Lessor Resources Likely Resources Unrecognized Resources Producing or Proven Conventional Africa Gas Resources

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Recipe (cont’d) Natural Gas - including Liquid Petroleum Gas (LPG) NEPV NEPV BTU to KWH

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Recipe (cont’d) NEPV NEPV Schematic Financial Impact of Local Subsidy on a Gas Project Nature of the African Gas Business (Cont’d) Time Cashflow 0 Seismic Exploration Drilling Development 1st Oil Investment Break-even Maximum Cashflow OpEx Cashflow Break-even Effect of Local Subsidy (+) (-)

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Recipe (cont’d) NEPV NEPV

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Recipe (cont’d) NEPV NEPV Pan-African Trends at Work: Gas Master Plans, Gas Infrastructure (pipelines & electricity transmission), Gas Pricing by Btu, Market Driven Independent Power Production

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Recipe (cont’d) NEPV NEPV Roles of major, large or mid-size local or international independents, and single-project operators. Independents are not vertically integrated energy companies The Russian Independents at a Glance The independent oil companies (IOCs) in Russia are small- or mid-size enterprises with oil production currently under 800,000 tons/year (16,000 bpd). There are about 150 independents in Russia, of which just over 40 have reached production levels exceeding 1,000 bpd. The IOCs operate in all the main oil producing regions of Russia from Timan-Pechora to Orenburg to Sakhalin. Independents control about 1 billion tons (over 7 billion barrels) of recoverable oil and condensate reserves concentrated in about 300 fields. Oil production of the independents accounted in 2004 for 26 million tons, or 5.7% of Russia’s total output. The reserves of the fields operated by the IOCs rarely exceed 10 million tons (73 million barrels), have low levels of depletion (typically under 25%), while also frequently show complex geology that requires carefully customized application of production technology. The Russian and international majors don’t have interest in such assets, while some have embarked on divesting their smaller assets, which presents a growing field of opportunity for the independents – note LUKOIL’s sale of Arktikneft to Urals Energy over a week prior to the latter’s IPO. The accelerating licensing program is another important method for the IOCs to achieve growth, as demonstrated by the licensing auctions of the last 12 months when independents competed fiercely for the smaller assets that were below the radar screen of the majors. In today’s environment of high energy prices, the reserves and production potential of the Russian IOC segment becomes increasingly important for global energy investors. One should keep in mind that the independents hold a substantial number of licenses for undeveloped fields with significant possible reserves, which could present an important upside for a strategically-minded investor. From another perspective, financial returns from many of the complex fields developed by the IOCs could be strongly enhanced through expert application of modern technology and reservoir management.

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Recipe (cont’d) NEPV NEPV

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Some Issues Nature of the Oil and Gas Beast Conventional Upstream Oil and Gas Is a Business*: Of “detached engagement” aimed at the export market with little domestic market involvement, Of “field dependent” commitment to exhumation and exhaustion of the resource, Where local content tends to lag business development, That requires a performance contract with government containing revenue sharing in cash or production in kind, and Feeds an “infinite” market Some Issues (Cont’d)

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Some Issues (Cont’d) Domestic Gas and Gas Liquids Is a Business*: Of “imbedded engagement” aimed at a local market, Of “supply dependent” commitment to long term indigenous use, reserves augmentation and maintenance of delivery, Dependent upon local content keeping pace with business development, That requires a vertically integrated plan containing initial up- and downstream agreements with Government, and That feeds a finite market * (Both businesses require import and export of capital freely) Nature of the Oil and Gas Beast (Cont’d)

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Enablers and Inhibitors Enablers and Inhibitors (Cont’d) Statutory and Regulatory National Gas Policies of: Preferred Energy Sources and Usage A Domestic Gas Regime Fiscal Regulation for Domestic Gas Domestic Gas Economic Incentives Foreign Investment Incentives for Domestic Gas Proposed Total “State Takes” (> 50% after full cycle costs) Realistic and Practical Labor Laws and Policies Commitments from the Private Sector Including: Coordinated Up- and Downstream Business Plan Models A Tax/Royalty Regime over a PSA Infrastructure Development Domestic Market Development Long-term, Multi Component Project Financing Early Engagement of Local Content Domestic Gas Business Enablers * (Assuming a Domestic Gas Development Strategy)

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Enablers and Inhibitors (Cont’d) Statutory Petroleum Legislation without Domestic Gas Policy Foreign Exchange Import/Export controls Regulatory Domestic Gas Treatment as Exportable Oil Non Guaranteed Indigenous Market Non International Market Driven Btu Pricing Non-recovery of total investment costs Protracted accounts receivable for product sales No take-in-kind for Government participation For Initial Domestic Gas Projects, these are Sure-fire Project Killers Domestic Gas Business Inhibitors What could be the Next Step to support Domestic Gas?

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NEPV NEPV Take Away: Recipe for Success Domestic Gas THE SIX KEY INGREDIENTS

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Recipe (cont’d)

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Conclusion The Age of Africa Gas Usage is Dawning Let Us Seize Opportunity by Drilling for, and Developing Gas with Purpose