SEPLAT 2017 Annual Report and Accounts

Positioning
for growth

Seplat Petroleum Development Company Plc
Annual Report and Accounts 2017

Seplat is Nigeria’s leading independent
upstream oil and gas company with a
focus on production and development
opportunities in Nigeria and a dual listing on
both the Nigerian Stock Exchange (SEPLAT)
and the Main Market of the London Stock
Exchange (SEPL).
Faced with a challenging set of operating
circumstances throughout the past two
years, our proactive responses allowed us
to stabilise and protect our core business
and in turn provide a solid platform upon
which we have returned to profitability in
2017 and can look towards a return to growth.

Delivering solutions
in our control

Core business protected and stabilised in 2017

The challenge Our solutions Outcomes US$124m
Growing our Our gas business is making an
A complex price gas revenues increasingly material contribution Gas revenue in 2017
risk environment and 2017 was a record year. To guard
I mplementation against oil price downside, we also 443 MMscfd
of our oil hedging hedged 3.69 MMbbls of our oil production
strategy at an average of US$48.38/bbl in 2017. Working interest Seplat operated
For 2018, we have hedged 6.6 MMbbls gas processing capacity
at an average of US$44.55/bbl.
US$2.97/Mscf
• Gas revenues of US$124 million up
18% year on year from net production Realised gas price in 2017
of 114 MMscfd.

• Completed and commissioned the
225 MMscfd Oben Phase II processing
expansion project in 2017. Phase I + II
total capacity is 375 MMscfd.

• Proceeding towards FID at the
300 MMscfd greenfield ANOH gas
and condensate project at OML 53.

The challenge Our solutions Outcomes 47,291boepd
M ultiple crude In 2017, Seplat continued to actively
Disrupted oil export routes implement multiple export routes for oil H2 2017 working interest production
operating production to mitigate future over-reliance back to pre force majeure levels
conditions E xcellent on any one infrastructure system. Alongside
community and this we continued to invest in our host 81%
stakeholder communities across a number of initiatives.
relations Production uptime in H2 following
• Repairs and upgrades completed lifting of force majeure
on two jetties at the Warri refinery to
enable exports of 30,000 bopd gross US$59m
if required in the future.
Invested in our host
• Funding agreement with partners communities since 2010
and contractor executed for the
Amukpe-Escravos oil pipeline.
Construction under way to
connect to Escravos terminal.

• Invested across 177 projects under the
Global Memorandum of Understanding
with our host communities.

The challenge Our solutions Outcomes US$422m
Strong financial In 2017, we retained discretion over spend,
Positioning Seplat discipline and continued to de-leverage and strengthen Debt principal repaid since
for future growth risk management the balance sheet, diligently preserved January 2015 refinancing
and diversification strategies a liquidity buffer and kept downward
pressure on our cost base. Effective risk 28%
P rioritisation of management will always underpin Seplat’s
complementary activities and we remain focused on the Reduction in G&A year
portfolio expansion early identification of risks and future risks on year helped drive return
opportunities that that are central to delivering our strategy. to profitability
can offset the
current risk profile • Concluded an over-subscribed 10
one-year extension to our revolving
credit facility (‘RCF’). Risk Champions embedded
within the business
• Cash at bank US$437.2 million at
end 2017, up from US$159.6 million
at end 2016.

• Low cost production base with 2017
production opex of US$5.96/boe.

Gas revenue Outlook – a return to growth Positioning
(US$m) for growth
Back into “build
18 27 77 105 124 and grow” mode
2013 2014 2015 2016 2017
Seplat has emerged from
Average working interest production a period of unprecedented
(boepd) disruption to operating
conditions in the Niger Delta
30,823 43,372 47,291 36,923 which, coupled with macro
6,571 14,369 21,229 19,070 uncertainty, presented
a number of risks to
28,341 25,877 26,383 the business.
4,867
20,020 24,252 29,003 15,786 16,876 26,062 These risks were effectively managed and our
5,226 23,474 10,091 9,507 decisiveness, coupled with the strong underlying
17,853 fundamentals of the business, allowed us to
14,794 stabilise a platform upon which we will restore
operational and financial momentum to deliver
2012 2013 2014 2015 2016 H1 2017 H2 2017 FY 2017 sustainable long-term value for our stakeholders.

Looking ahead we will reinstate a work programme
to drill out the highest cash return production
opportunities in our portfolio, prioritise further
diversification of our oil export routes, prudently
manage our financial position, further consolidate
our position as a leading supplier of processed
gas to the domestic market and progress the
300 MMscfd greenfield ANOH gas and condensate
development. With our return to profitability,
strong cash generation and strong balance sheet,
we have the financial capacity to also capitalise
on inorganic growth opportunities, in line with
our price-disciplined approach, as and when
they may become available.

Oil Gas
Before reconciliation losses, volumes measured at the LACT unit.

Cash reconciliation – FY 2017
(US$m)

36
447 33 98

72
3 437

160

Cash Net cash Receipts PP&E Loan Net Foreign Cash Read more about how we are positioned
31 Dec to return to sustainable growth:
31 Dec from from repayments interest exchange 2017 page 02

2016 operations OML 55  

Free cash flow of US$450 million

2017 highlights Strategic report 01 Strategic report

Outlook – a return to growth 02

Operational At a glance 08

WI production within Chairman’s statement 10
guidance
Low unit production Large-scale 2P Market overview 14 Governance
36,923
opex reserves base Our business model 20
boepd
US$5.96 4 77 Strategy 24

Chief Executive Officer’s statement 26

/boe MMboe A spotlight on Nigeria 30

Key performance indicators 40

Additional performance metrics 42

FY 2016: 25,877 boepd FY 2016: US$8.79/boe YE 2016: 462 MMboe Operational overview 44

Financial review 50

Risk management 54

Financial Principal risks and uncertainties 58

Return to FY profitability Corporate social responsibility 62

US$44m Strong cash flow from Significantly reduced Financial statements

Profit before tax operations net debt Governance 68

FY 2016: US$173 million US$447m US$141m Chairman’s overview 70
loss before tax Board of Directors 72
FY 2016: US$172 million YE 2016: US$516 million Corporate governance report 76
Board Committee reports 82
Gas business Statutory Committee report 93
Directors’ remuneration report 94
Report of the Directors 118
Statement of Directors’ responsibilities 123

Gas revenues at Net WI domestic Seplat WI gas Additional information
processing capacity
record levels market supply Financial statements 124
4 43
US$124m 114 Independent auditors’ report 126
MMscfd
MMscfd Consolidated statement of profit
or loss and other comprehensive income 130

Consolidated statement of financial position 131

FY 2016: US$105 million FY 2016: 95 MMscfd YE 2016: 218 MMscfd Consolidated statement of changes in equity 132

Consolidated statement of cash flows 133

Notes to the consolidated 134
financial statements

Consolidated statement of value added 183

Consolidated five-year financial summary 184

Consolidated supplementary 185
financial information (unaudited)

Separate statement of profit or loss 187
and other comprehensive income

Separate statement of financial position 188

Separate statement of changes in equity 189

Separate statement of cash flows 190

Notes to the separate financial statements 191

Find out more online: Separate statement of value added 235

Separate five-year financial summary 236

Separate supplementary financial 237
information (unaudited)

ar2017.seplatpetroleum.com Additional 238
information
239
Payments to governments (unaudited) 240
Notice of fifth Annual General Meeting 242
General information 243
Glossary of terms

Annual Report and Accounts 2017 01

Outlook – a return to growth

Seplat is underpinned by a high quality asset base
and since inception has invested to consistently grow oil
production capacity. In 2017, we prioritised the creation
of multiple oil export routes to mitigate concentration
risk in the future.

Looking ahead, we have a large inventory of production
drilling opportunities in our current portfolio that we will
high-grade and implement a work programme to exploit.

Optimising our
oil production

Resumption of full A focused work programme
production operations post targeting highest cash return
lifting of force majeure at production opportunities
the Forcados terminal
In recent years Seplat has been one of the
The operator of the Forcados terminal, Shell most, if not the most, active drillers onshore
Nigeria, initially declared force majeure on the Niger Delta. This is reflected in the fact
21 February 2016 following disruption in that since 2010 we have drilled 45 new oil
production and exports caused by a spill on production wells at OMLs 4, 38 and 41.
the Forcados subsea crude export pipeline.
2017 was a year in which we exercised our
Force majeure was lifted on 6 June 2017 discretion over spend as a result of force
at which point Seplat was able to reinstate majeure and prudently scaled back our rig
operations. As a result, working interest oil based work programme. However, we took
production over the second half of the year the opportunity to make upgrades to our
averaged 26,062 bopd and was in line with liquid treatment infrastructure at OMLs 4, 38
guidance with production uptime standing and 41 that will enable Seplat to inject export
at 81%. grade dry crude on all export routes and at the
same time save on additional crude handling
charges as a result of water in our crude.
Looking ahead, having emerged from the
extended period of force majeure our focus
will now switch to selectively considering
production drilling opportunities in the
existing portfolio with a view to reinstating a
drilling programme designed to capture the
highest cash return production opportunities
to both sustain and grow output.

02 Seplat Petroleum Development Company Plc

Strategic report

Multiple export routes Governance
to de-risk distribution
to market in the future Financial statements

Seplat’s policy is to establish multiple export Additional information
routes for all of its current and any future
274 MMbbls oil producing assets. This resulted in the
Company actively pursuing alternative crude
2P + 2C working interest oil reserves oil evacuation options for production at
and resources OMLs 4, 38 and 41 and potential strategies
to further grow and diversify production in
+18% order to reduce any over-reliance on one
particular third party operated export
CAGR in oil reserves over 2010-2017 system. In line with this objective, repairs
and upgrades on two jetties at the Warri
refinery were completed in 2017 that will
enable sustained exports of 30,000 bopd
(gross) if required in the future. Prior to the
repair and upgrade work on the two jetties
gross exports via the Warri refinery were
around the 15,000 bopd level. While exports
via the Warri refinery jetty have typically
incurred barging costs of around US$11/bbl,
partially offsetting this is the fact that
exports via this route are not subject to the
reconciliation losses (historically in the order
of 10% to 12%) or terminal crude handling
and transport charges when exporting via
the Forcados pipeline and terminal.

Longer term, the 160,000 bopd capacity
Amukpe-Escravos pipeline is set to provide
a third export option for liquids production at
OMLs 4, 38 and 41. Seplat signed a Funding
Agreement in December 2017 with the
pipeline owners, NAPIMS (a 100% subsidiary
of NNPC), Pan Ocean Corporation Limited
(‘Pan Ocean’) and the pipeline contractor
FENOG to ensure timely completion of
the pipeline. Post year end, FENOG has
commenced completion works. Negotiations
between the pipeline operator, Pan Ocean,
and Chevron in relation to Crude Handling
Agreements are also advancing. The Heads
of Terms for the Crude Transport Agreement
between NPDC/Seplat JV and NAPIMS/Pan
Ocean JV is also nearly completed and
Seplat anticipates the pipeline to be fully
commissioned and operational in Q3 2018.

With line of sight on the availability of three
independent export routes it is Seplat’s
ultimate intention to utilise all three to
ensure there is adequate redundancy in
evacuation routes, reducing downtime which
has adversely affected the business over a
number of years, significantly de-risking the
distribution of production to market.

Annual Report and Accounts 2017 03

Outlook – a return to growth continued
Alongside our oil business, we have also prioritised the
commercialisation and development of the substantial
gas reserves and resources identified at our blocks,
positioning Seplat today as a leading supplier of
processed natural gas to the domestic market in Nigeria.
Looking ahead, we plan to further increase our gas
production and processing capacity to help meet Nigeria’s
growing demand, particularly in the gas-to-power sector.

Scaling up our
gas business

04 Seplat Petroleum Development Company Plc

Capacity expansion at the The expansion of processing capacity has Strategic report
strategic Oben gas hub enabled a corresponding increase in gas
production at our assets and therefore Domestic gas pricing trend Governance
A major driver behind the rapid growth of increased supply to the domestic market. (US$/Mscf)
Seplat’s gas business to date has been the 2017 was another record year for our gas
modular build-up of processing capacity at business that saw gross production average 18
the Oben facility to create a strategic gas hub 254 MMscfd and our share of gas revenues
ideally located to aggregate and supply gas step up by 18% to US$124 million. We remain Average red diesel price
to Nigeria’s main demand centres on the actively engaged with counterparties to
Lagos and Abuja axes. Having completed the increase contracted gas sales with the
Phase I expansion project in 2016, which aim of ultimately taking gross production
added 150 MMscfd of processing capacity, towards the 400 MMscfd level on a
we completed and commissioned the Phase consistent basis. The expansion of gas
II expansion in 2017 adding a further 225 processing capacity is also designed
MMscfd of processing capacity. As a result, to provide headroom that will allow
Seplat’s overall operated gas processing the Company to receive and tariff
capacity has increased to the 525 MMscfd third party gas volumes in the future.
level. Of this, 465 MMscfd is located at Oben
with the remaining 60 MMscfd located at 254 MMscfd
Sapele. The 375 MMscfd expansion at Oben
(Phases I and II) was completed by Seplat as Gross average daily gas
a 100% sole investment project. production in 2017

+18% 0.3 1.0 1.5 1.5 2.0 2.0 2.5 2.5 2.5 Financial statements

Year-on-year growth 2009 2010 2011 2012 2013 2014 2015 2016 2017
in gas revenues Source:NNPC;assumed 1 MMbtu equals 1 Mscf.
Based on DSO pricing levels.

1,000 MW Commencement of deliveries Greenfield development of Additional information
to the 459MW Azura-Edo IPP ANOH to drive future growth
Power generation that envisaged
Seplat operated capacity at ANOH On 20 December 2017 the first turbine at The ANOH gas development at OML 53 (and
could underpin the Azura-Edo IPP was synchronised to the adjacent OML 21 with which the upstream
national grid as it began producing electricity project is unitised) is expected to underpin
for distribution with gas supplied by the the next step-change expansion of our gas
Seplat / NPDC joint venture. Back in 2014 business. Seplat’s involvement positions it
we had concluded a long-term gas sales at the heart of one of the largest greenfield
agreement to supply 116 MMscfd to the gas and condensate developments onshore
Azura-Edo IPP for a period of 15 years. the Niger Delta to date. The project
The commencement of deliveries under this represents an opportunity for us to leverage
sales agreement is a significant event that the experience and track record we have
will bring much of our production under gained at Oben to derive repeatability
the cover of a long-term, credit enhanced, gains and optimal configuration of facilities.
contract and creates a strong platform upon
which we can further grow the gas business. 2017 was spent working to finalise an
Upon conclusion of the commissioning incorporated joint venture relationship
process we will move to take-or-pay terms. between Seplat and government and we aim
to progress the upstream and midstream
elements of the project to FID in 2018.

1,531 Bscf

2P + 2C working interest gas
reserves and resources

+20%

CAGR in gas reserves
over 2010-2017

Annual Report and Accounts 2017 05

Outlook – a return to growth continued

We have continued to carefully manage our finances,
striking the balance between focused investment
and preservation of a liquidity buffer to guard against
unplanned interruptions to the business. Alongside this
we have kept downward pressure on our cost base and
taken steps to strengthen our balance sheet.
At the heart of everything we do is our risk management
framework that helps us effectively identify, assess,
mitigate and monitor risks with a uniform methodology.

Strong financial
and risk
management

Return to profitability As the oil price is not a factor in our control,
and high margin cash flow we continue to implement our rolling hedging
strategy to provide a level of cash flow
Following the resumption of full production assurance and have already price-protected
in June we saw a return to profitability in the 6.6 MMbbls in 2018.
third and fourth quarters of 2017, recording
a net profit of US$24 million and US$46 million In order to preserve and enhance our cash
respectively. This allowed us to reverse a loss flow margins we have also continued to
at mid-year of US$26 million and report a apply downward pressure on our cost base.
profit before tax of US$44 million for the full This has been reflected in our production
year 2017. A net tax credit of US$221 million, opex which stood at US$5.96/boe in 2017,
owing primarily to deferred tax credit of down 32% year-on-year and down 61% from
US$224 million, increased overall profit US$15.40/boe in 2012.
after tax for 2017 to US$265 million.

06 Seplat Petroleum Development Company Plc

Strategic report

Discretion over the Governance
timing and level of spend
Financial statements
As operator of our core production and
development projects we have been able Additional information
to retain a level of operational and budget
US$450m control that has afforded us the necessary
flexibility to scale our investments
Free cash flow in 2017 appropriately to live within our means.
In 2017 our capital investments stood at
US$141m US$33 million, the majority of which was
allocated to the gas business.
Net debt at 31 December 2017
Looking ahead into 2018, we will retain
discretion over spend and appropriately scale
our investment programme, taking account
of the prevailing operating environment and
availability of crude export terminals, oil price
and the influence of these factors on free cash
generation within the underlying business.

We will maintain our strict discipline of only
allocating capital to the opportunities that
offer the greatest returns to deliver
shareholder value.

Strengthening
of the balance sheet

The extended period of force majeure
created an inevitable requirement for us to
carefully manage our balance sheet in 2017.
Having re-profiled our seven-year Term Loan
in Q3 2016, we successfully concluded an
oversubscribed one-year extension of our
revolving credit facility (‘RCF’) in July 2017.
The RCF, originally due to expire at the end of
2017, was extended to 31 December 2018
and successfully amended to amortise the
remaining outstanding principal balance of
US$150 million in equal instalments over five
quarters commencing Q4 2017.

Overall, our aggregate indebtedness under the
Term Loan and RCF had reduced by US$422
million at 31 December 2017 from its peak in
Q1 2015 of US$1 billion, which is a significant
deleveraging of the balance sheet particularly
in exceptionally difficult trading conditions.

Post period end, in March 2018, we refinanced
the RCF with a new four-year RCF due June
2022 and also issued US$350 million of senior
notes due 2023. The proceeds from the RCF
and notes were used to repay and cancel
existing indebtedness. Our debut bond
issuance further diversifies our long-term
capital base and along with the RCF resets our
capital structure, considerably strengthening
our liquidity position which will allow us to
scale up our work programme and focus on
delivering our organic growth strategy, with
capacity to also pursue inorganic growth
opportunities in line with our price disciplined
approach if and when they become available.

Annual Report and Accounts 2017 07

At a glance What we do

Who we are Full-cycle upstream oil and gas
Our portfolio comprises direct interests in
Seplat is a leading independent oil five blocks in the Niger Delta area, four of
and natural gas producer in the which Seplat operates, and one further
prolific Niger Delta area of Nigeria revenue interest. Since acquiring our first
and a leading supplier of processed blocks in 2010, we have consistently grown
gas to the domestic market. oil production, primarily through the drilling
of new oil wells and employing advanced and
proven technologies to increase production
in mature fields. We have also invested to
increase gas production and capitalise on
the rapidly growing demand and improving
economics for gas.

As a full-cycle upstream oil and gas exploration and production Strategically important
company, our focus is on maximising hydrocarbon production midstream gas operations
and recovery from our existing production and development Alongside our upstream activities, we have
assets, acquiring and farming into new opportunities in successfully become a pre-eminent supplier
Nigeria (specifically those which offer production, cash flow of processed natural gas to the domestic
and reserve replacement potential with a particular focus on market in Nigeria through substantial
the onshore and shallow water offshore areas) and realising investments made in the commercialisation,
the upside potential within our portfolio through focused development and monetisation of the
appraisal and exploration activities. In addition to our upstream large-scale gas reserves that exist on our
activities we have also prioritised development of midstream blocks. Together with growing wellhead
gas processing capacity to supply the domestic market. production we have invested in the installation
of dedicated gas processing facilities to meet
domestic supply obligations and provide
feedstock to power projects and industry that
will help increase Nigeria’s power generation
capacity and industrial output.

Our strong track record The only Nigerian company fully listed Strong relationships with host communities
on the Nigerian Stock Exchange and We have built strong relationships with our
A high-quality asset base London Stock Exchange host communities, promoting trust and
We have consistently increased oil In a first for any Nigerian company we confidence amongst our various stakeholders.
and gas production capacity and grown completed the dual listing of Seplat on both This has ultimately resulted in stability at
reserves through both organic and inorganic the London Stock Exchange and the Nigerian operations under our control, which then
activities since inception. We have grown Stock Exchange in April 2014, where we facilitates the creation of shared value. To
gross operated liquids production at raised US$535 million in an initial public continue to nurture these relationships, we
OMLs 4, 38 and 41 almost six-fold and offering. This has allowed us to further are fully focused on proactive engagement
augmented this with inorganic growth implement the Company’s business strategy, with the communities where we operate,
via strategic acquisitions, most notably acts as a strong and tangible endorsement implementing community projects based on
the acquisition of an interest in OML 53 of our corporate governance standards sustainable development principles. These
and in turn participation in one of Nigeria’s and opened up wider access to both the initiatives seek to promote local capacity
largest greenfield gas/condensate domestic and international capital markets. building and aim to support host community
development projects. To date we are the only Nigerian company to participation and enhance the quality of life
have achieved this feat, something of which for individuals within these communities.
we are justifiably proud.
Corporate social responsibility:
page 62

08 Seplat Petroleum Development Company Plc

Onitsha

1 OML 4 Key

3 OML 41 Okwefe Oben Terminal point Strategic report
Sapele Mosogar Okporhuru Gas processing
facility
Ubaleme Amukpe Orogho 2 Future gas
Ovhor processing facility
OML 38
Okoporo Jisike 5

Umuseti (Pillar) OML 53

Escravos Ohaji
South Owerri
Warri OPL 2834
Igbuku (Pillar) Heoma

Forcados Odinma Governance
Emeabiam

Alaoma

Owu
Omerelu

Gulf of Port Harcourt Financial statements
Guinea
Krakama
6 OML 55 Dama Akaso

Soku Ke Bonny

Nembe Inda Bonny

Robert Kiri

Nigeria Belema

Brass

Operational overview: Additional information
page 44

Working interest 2P gas reserves Looking ahead of multiple export routes, we aim to
(2010 to 2017) significantly de-risk distribution of oil
Our portfolio provides a robust platform of production to market and buffer the impact
2017 251 MMboe1 oil and natural gas reserves and production of future disruption. Our gas business is set to
2016 267 MMboe capacity together with an extensive make an increasingly important contribution
2010 142 MMboe -6% opportunity set of material organic to our performance with its revenues providing
Movement in working interest 2P gas upside opportunities through further field a key source of growth and diversification,
reserves from end 2010 to end 2017. developments, 2C to 2P conversion and as well as delivering a much-needed reliable
exploration and appraisal drilling. We will supply of gas to the Nigerian power and
Working interest 2P liquid reserves retain the flexibility and financial discipline industrial sectors. Seplat is now well
(2010 to 2017) that has seen us emerge from a difficult positioned to return to sustainable growth.
chapter in our history a fitter and stronger
business. With line of sight on the availability Strategy:
page 24
2017 226 MMboe1 +16%
2016 195 MMboe
2010 139 MMboe
Movement in working interest 2P liquid
reserves from end 2010 to end 2017.

Total working interest 2P reserves
(2010 to 2017)

2017 477 MMboe1 +3%
2016 462 MMboe
2010 281 MMboe
Movement in total working interest
2P reserves from end 2010 to end 2017.

1 As certified by Ryder Scott CPR
dated 31 December 2017.

Annual Report and Accounts 2017 09

Chairman’s statement

A resilient business
returned to profitability

I am pleased to report the success of our Dear shareholders,
strategy in navigating through a difficult
period. The resumption of full production Our 2017 Annual Report and Accounts
in our operations is translating into demonstrates Seplat’s resilience in difficult
strong financial performance and our times. As you are aware, the price of oil fell
gas business continues to go from from a high of about US$112/bbl in 2014
strength to strength. to below US$50/bbl in 2016 and as such
Nigeria, which depends on the oil sector for
A.B.C. Orjiako about 90% of export earnings, slipped into
Chairman a recession having been impacted by the
fallen oil price, its weakened currency and
dollar shortages, aggravated by militant
attacks on key oil infrastructure in the then
restive Niger Delta, slashing oil output.
According to the National Bureau of
Statistics (‘NBS’), Nigeria’s economy grew
1.9% year-on-year in the fourth quarter
of 2017. This marked the third consecutive
quarter of expansion and the strongest since
the fourth quarter of 2015, as the oil sector
continued to recover.

Seplat prides itself on being an extremely
irrepressible business that is able to
withstand and effectively navigate through
an often challenging operating environment
to deliver on its strategy, and in turn
generate long-term sustainable value to
our shareholders. In 2017 these attributes
continued to be tested as the first half of
the year was characterised by a protracted
period of force majeure at the Forcados
terminal, which continued to impede export
of crude oil production from our Western
Assets, and the fallen commodity prices
that saw Brent start the year around the
US$55/bbl mark and further decline to
around US$44/bbl mid-year.

36,923 boepd

2017 full year working interest
production

US$124m

2017 gas revenue

10 Seplat Petroleum Development Company Plc

Strategic report

In contrast, the second half of the year Our strategy to diversify US$98 million. As a result, we reduced Governance
saw a resumption of full production in our and grow our sources our net debt position to US$141 million
operations following the lifting of force of income through the as at 2017 year end (73% reduction from Financial statements
majeure on 6 June 2017, which marked the expansion of our gas US$516 million recorded in 2016).
turning point for our return to profitability business continues Additional information
(US$44 million for the full year) and strong to gain momentum. The Board specified that the preservation
operating cash flow (US$447 million for the of a liquidity buffer was a clear priority for
full year). This emphasises the high quality Since the government launched various the Company in 2017 and I am pleased to
and strength of our business fundamentals. initiatives to stimulate investment in the say that this safeguard was achieved. As
The strengthening macro-economy also gas sector, including opening the Domestic operator of our core production assets, we
provided a tailwind into the year-end with Supply Obligation (‘DSO’) price to commercial are able to exercise discretion over spend
Brent trading up steadily to exit 2017 at market forces, Seplat has been at the and in 2017 limited capital investments to
around US$67/bbl. Operationally, our 2017 forefront of gas commercialisation and just US$33 million, the majority of which
full year working interest production was made substantial investments in support was allocated to the gas business. In line
36,923 boepd; within market guidance of of the government’s energy agenda. with this objective, the Board also took the
35,000 boepd – 38,000 boepd. difficult but necessary decision not to pay
In 2017 we completed and commissioned a dividend for 2017 and our ongoing efforts
Against this backdrop I am pleased to report the Oben Phase II expansion project, adding to reduce corporate costs also saw general
that in 2017 we made good progress as we a further 225 MMScfd of processing and administrative expenses fall by 28%
reviewed our vision, mission and strategy capacity at the Oben hub and taking our year on year.
towards refocusing the Company on our gross operated gas processing capacity
key priorities: to de-risk future cash flows overall to 525 MMScfd. The Board recognises the need to have a
through diversification of oil export routes; capital structure that provides the right
invest in and scale up our domestic gas To highlight the increasing contribution flexibility, access to and cost of capital in
business; maintain a liquidity buffer our gas business is making, we have seen support of our growth strategy. In line with
while continuing to reduce debt; keep our gas revenue grow from US$18 million this, we concluded a refinancing of our
tight financial control with discretion in 2013 to a record US$124 million in 2017, indebtedness post period end, in March 2018,
in spending; and position Seplat with a a seven-fold increase in four years. We are that saw us put in place a new four-year
stabilised platform for sustainable growth justifiably proud of this and at the same time US$300 million revolving credit facility and
even in a harsh operating environment. we see tremendous potential headroom for make a debut US$350 million bond issuance
further growth. that further diversifies our capital base. The
De-risking future cash flow resultant capital structure greatly enhances
from operations The ANOH greenfield development project, our projected liquidity and will allow us to
I highlighted last year that in response to which incorporates the development of OML scale up our work programme and accelerate
force majeure at the Forcados terminal, the 53’s Ohaji South field (large scale gas and delivery of our growth strategy.
Board mandated management to accelerate condensate reserves) is set to provide the
various initiatives to diversify our risks by next phase of growth in our gas business. Effective risk management
reducing our reliance on a single export We are making good progress towards Final If there is one over-riding lesson we can
route, both in the short and long term. Investment Decision (‘FID’) and once this is draw from our experience of the past two
We continued these efforts in 2017 and in place we will be able to set out a clear years it is the fact that we operate in a
completed necessary repairs and upgrades pathway to first gas. volatile, uncertain environment, and a key
to two jetties at the Warri refinery that will responsibility of the Board is to ensure we
enable sustained exports of 30,000 bopd Prudent financial management have a comprehensive and effective risk
(gross) if required in the future. One of the key reasons we were able to management framework in place.
withstand the disruptions to oil production
We are also working with the owners of the and associated revenues caused by force Our risk management framework has been
160,000 bopd capacity Amukpe-Escravos majeure between February 2016 and June stress-tested to the extreme during this time
Pipeline System (‘AEPS’) with a view to 2017 is the prudent management of our and I am pleased to say its effectiveness is
opening it up as a long-term alternative financial position. evidenced in how we have emerged from this
export route for Seplat and other operators period with our operations, finances and
when completed in the coming months. With We ended 2017 with US$437 million of cash growth prospects intact. Details of our full
the availability of these three independent on our balance sheet, up from US$160 million risk management framework can be found
export routes in the line of sight, it is our last year, and despite the constrained on pages 54 to 57 of this report.
ultimate intention to be able to utilise all revenues in the first half, we still met our
three to ensure there is always availability debt repayment obligations in the sum of
of evacuation routes, thereby reducing
downtime production and export.

Scaling up our gas business
Our strategy to diversify and grow our sources
of income through the expansion of our gas
business continues to gain momentum.

Annual Report and Accounts 2017 11

Chairman’s statement continued

We move into 2018 on Honouring our corporate responsibilities Shell Nigeria, Effiong has over 26 years of
a substantially firmer Seplat has always been proud of its experience in oil and gas, having undertaken
operational and financial identity as an indigenous Nigerian a breadth of senior technical and leadership
footing compared to a independent energy company, with a roles with Shell during that time, both in
year ago and have a sense of responsibility to Nigeria and, Nigeria and internationally. In addition, he
high-quality portfolio in particular, our host communities. As well was deputy VP for the upstream gas supply
that offers a material and as being a distinct competitive advantage, to the Qatar GTL and LNG mega projects.
predictable production our indigenous status is a source of great Effiong has proven expertise in successfully
base combined with pride and one of our central priorities is to developing and operating upstream oil and
a large inventory leave a lasting, positive legacy in our host integrated gas projects in Africa, Europe and
of production and communities through implementation the Middle East regions. We look forward to
development drilling of our shared value model. his contribution as we seek to grow our
opportunities we plan production output across our portfolio.
to capitalise on. Following the strategic review of the
Company’s Community Social Responsibility A positive outlook – Poised for
(‘CSR’) strategy in 2016, this year our efforts continued growth
were focused on incorporating our learning In 2017 we focused on stabilising our
into implementation. Whilst we have core business and, in doing so, we have
successfully reached the natural completion successfully re-positioned Seplat to resume
of various community projects this year, we a growth trajectory provided we can operate
are pleased to have developed a revised CSR to our full capacity without disruptions. We
strategy which includes Seplat’s Eastern move into 2018 on a substantially firmer
Assets, which has ensured we have the operational and financial footing compared
right short and long-term programmes to a year ago and have a high-quality portfolio
in place to drive real social impact for that offers a material and predictable
our local stakeholders. production base combined with a large
inventory of production and development
In particular, the CSR Committee and drilling opportunities we plan to capitalise
operational team have spent significant on. Our operations team is poised to restart
time this year reviewing various governance drilling operations and we also have
structures to ensure we remain aligned with dedicated teams tasked with helping to
international best practice. Firstly, the deliver the alternative Amukpe-Escravos
governance structures of our community Pipeline System (‘AEPS’) and achieve FID
projects have been reviewed and we at the ANOH project.
are delighted to have developed a
communications-led strategic policy Seplat has always been an ambitious
document that provides a robust framework company and we continue to see Nigeria
for the effective management of our major as a world class opportunity set that
community programmes. This will ensure remains the envy of many. In addition to our
the highest standards of management are organic growth opportunities, we maintain
met across the portfolio of programmes. our clearly defined strategy of balancing this
with inorganic expansion and will leverage
Secondly, we have completed the review our competitive advantages to seek out
of the CSR Committee terms of reference. carefully considered, price-disciplined and
This process means that the roles and value accretive acquisition opportunities.
responsibilities of the Committee members
have been benchmarked against global Finally, I would like to thank all our employees
best practices and we are confident that and wider stakeholders for their efforts and
we remain industry leading in our CSR support in what has been a challenging
governance approach. These critical steps period. I am now more confident than ever
ensure we are doing everything within our in our ability to build Seplat into a leading
control to protect our social licence to operate independent energy company, delivering
for the long term. It is what sets Seplat apart premium value on the global stage, and look
from its peers and it is critical that it remains forward to exciting times in the year ahead.
central to our business strategy.
A.B.C. Orjiako
Board appointment Chairman
I am pleased to tell you that our Board
has been further strengthened by the
appointment of a new Executive Director in
charge of Operations, Effiong Okon, effective
23 February 2018. Previously, General
Manager for Deepwater Production for

12 Seplat Petroleum Development Company Plc

Strategic report

Governance

A robust approach to governance Financial statements

Our business is built on effective is a definitive measure of our success and Board composition
corporate governance framework and reflects our strong corporate governance as at 28 February 2018
corporate governance standards. These structure and the effective management
standards dictate how we operate as a team we have at Seplat. Chairman 1 Additional information
business and the way in which Seplat is Executive Directors1 3
governed. It also guides how we relate As a Board, we collectively set out the Non-Executive Directors 2
with our various stakeholders. long-term strategic direction of the Independent Non-Executive Directors 6
business and a business wide strategy
Over the last few years, Seplat has is in turn executed by the CEO with the
successfully grown its business and leadership team. We remain committed
created significant shareholder value to good corporate governance, which has
despite the challenges confronting us in ensured our success and operational
our operating environment. For us, this excellence for the business.

1 Stuart Connal retired 30 March 2017.
Effiong Okon was appointed on 23 February 2018.

Board meetings and main How the Board spent its
subjects discussed in 2017 time during the year (%)

25 23 20

January March April
• Corporate strategy.
• Performance review. • Succession planning. • Corporate responsibility.
• Corporate governance. • Finance.
1
20 26 Corporate strategy 21
June Finance 38
• Shareholder July October Structure and capital 14
Risk management and internal control 10
engagement. • Performance review. • Strategy and budget review. Corporate governance 17
• Risk management. • Refinancing.

Governance:
page 68

 

Annual Report and Accounts 2017 13

Market overview

Recognising the
Nigerian opportunity

Nigeria’s oil and gas industry represents
a compelling value proposition and is
attractive, not just to Seplat but the
wider industry also, on many levels.

Nigerian oil Prolific hydrocarbon geology Development (‘NOGICD’) Act. The Act not
It starts below the ground and the prolific only presents advantages to the Nigerian
Sub-Saharan Africa’s largest hydrocarbon geology of the Niger Delta operators seeking to acquire oil licences
remaining proven oil reserves area, where Nigeria’s oil and gas industry in-country, but also guarantees the creation
is concentrated. Covering an area of of composite value to the Nigerian economy
37bn approximately 75,000km2 and with up to by a systematic development of capacity
10km sedimentary thickness, the critical and capabilities through the deliberate
barrels factors required for hydrocarbon generation utilisation of Nigerian human resources and
Africa’s largest oil producer, have all combined to great effect in the Niger services in the Nigerian oil and gas industry.
capable of producing Delta basin, namely the existence of source This inclusive approach has gone some way
rocks with high levels of organic content, to re-engaging with disenfranchised host
2.3m high rates of sedimentation and rapid burial communities and militants that can threaten
to allow hydrocarbon generation, and the the performance of oil and gas operations.
barrels per day presence of good quality reservoir rocks
The world’s and effective trap/seal mechanisms where Compared to a decade ago, when indigenous
hydrocarbons have accumulated in vast operators contributed only 6% (120kbopd)
13th quantities. Nigeria is estimated to hold to the nation’s daily production, Nigerian
largest oil producer remaining recoverable proved reserves of players have started to develop the technical
around 37 billion barrels of oil and 187 trillion expertise and financial resources to manage
Source: BP Statistical Review cubic feet of gas, making it a globally their own assets, which has impacted
of World Energy, 2017. significant source of long-term supply. positively on Nigeria’s cumulative production
numbers. Indigenous operator activity
Operational overview: Nigerian ownership of the E&P sector has now doubled and accounts for around
page 44 In recent years, the Government of Nigeria 12% (approximately 215kbopd) of Nigeria’s
has taken significant steps to increase oil production.
  the level of local Nigerian participation
in the oil and gas industry, both through the Divestment programmes, whereby the Major
re-licensing of blocks to Nigerian companies IOCs have sold a number of blocks to Nigerian
and the enactment of policy such as the bidders, have also been a significant factor
Nigeria Oil and Gas Industry Content in expanding local Nigerian ownership and
participation in the sector. Nigerian

Brent oil price 2010-2018 (US$/bbl)

140
120
100

80
60
40
20

0
Jan Jun Jan Jun Jan Jun Jan Jun Jan Jun Jan Jun Jan Jun Jan Jun Jan
2010 2010 2011 2011 2012 2012 2013 2013 2014 2014 2015 2015 2016 2016 2017 2017 2018

Source: Bloomberg.

14 Seplat Petroleum Development Company Plc

Strategic report

independent exploration and production Gas monetisation Gas opportunity Governance
(‘E&P’) companies, which were restricted to For over 50 years, oil has been a critical
marginal assets before the Act was enacted, Africa’s largest gas reserve economic driver in Nigeria. However, the Financial statements
now have access to larger acreages, due to country’s gas reserves exceed those of its oil
the divestment of onshore assets by the IOCs 187 trillion ft3 (it is ranked tenth in the world for proven gas Additional information
to boost indigenous participation in the reserves) and yet historically, gas flaring has
industry. Between 2009 and the end of 2017, Africa’s second largest gas producer been employed to dispose of the majority of
Nigerian operators – including Seplat – had associated gas produced in association with
acquired oil and gas blocks with a total 4.3 Bscf crude oil.
estimated aggregate transaction value of
around US$10 billion from the IOCs, the per day Although difficult to measure precisely,
majority of which was debt funded. Nigeria is estimated Nigeria’s current share of total gas flared
to have the world’s globally is estimated to be around 300 Bscf
But while progress has been made, and annually, constituting 11% of global gas
Nigeria’s share of ownership in upstream 10th flared and ranking seventh out of gas flaring
production has been enhanced significantly, largest gas reserves nations globally. It is estimated that the
long-term sustainability lies in access to Source: BP Statistical Review cost of flaring this gas amounts to around
funding and development of local capacity. of World Energy, 2017. US$700 million a year, although the real
The extended period of lower oil prices saw cost is to the economy as that volume of
the support of domestic banks dwindle as gas would be capable of sustaining around
high exposure to the oil and gas industry 3.5 GW of power, enough to double Nigeria’s
along with deteriorating macroeconomic current effective on grid capacity. Nigeria
conditions in the country led to higher than lags behind many of its frontier market peers
expected impairment charges on loans made in electricity production per capita despite
to the energy sector. Declining profitability considerable domestic demand and its
and free cash flow generation stifled the power generation deficit is widely recognised
balancing of debt service obligations and as a critical constraint on economic growth.
capital investments required to increase The Nigerian government, through a
output, making it increasingly difficult for combination of penalties, incentives and gas
many companies to manage. The incumbent development drive, has been implementing
E&Ps will only continue to succeed if they an ambitious strategy through its Gas Master
possess strong fundamentals that ensure Plan (‘GMP’). The plan seeks to liberalise the
low break-even economics, balance sheet domestic gas market and provide fiscal
strength and access to capital so that they incentives for gas producers to ultimately
can invest to diversify and dilute asset triple natural gas production capacity to
concentration risk, for example in order to 12 Bscf per day to fulfil electricity generation
capitalise on the gas-to-power opportunity and industrial development demand.
in the Nigerian market.

Major emerging markets’ power Sub-Saharan Africa power Gas supply required to scale up
consumption (kWh/capita, 2011) consumption (kWh/capita, 2011) power generation

4,604 599 40
GW
2,438 344 15
248 GW 12.0
155 149 52 10
GW
684 540 150 (Bscf per day)4
GW
South Brazil India SSA SSA Zambia Ghana Angola Kenya Nigeria Ethiopia
Africa Average excl. 10x
SA
3.2
Source:McKinsey study, Company data. 2.0
1.2

Annual Report and Accounts 2017 15

Market overview continued

Central to the GMP is an extensive upgrade Political landscape and the reform also remained a central focus and is one of
of gas infrastructure – construction of gas of Nigeria’s oil and gas industry the seven key areas. The militancy risk was
processing plants and pipelines and Despite the various challenges the addressed constructively in 2017 through
significant investment has been required Nigerian upstream oil and gas industry has the Presidential Amnesty Programme, with
to translate surplus gas production into encountered over the past few years, Nigeria the Forcados terminal located in the western
feedstock for gas-fired power generation. still remains a leading global oil producer. area of the Niger Delta returning to full
The prior awarding of Pioneer Tax Status to The sector remains the single largest capacity in June after damage to a subsea
local Nigerian operators has allowed them to contributor to the country’s GDP and the export pipeline in February 2016 led to an
allocate significant capital expenditure into government made concerted efforts extended period of force majeure. Additional
gas projects to further this development and throughout 2017 to resolve local risks to key components of the roadmap include
generate employment. To this end, a more protect the industry’s continued growth. increasing transparency and efficiency in
favourable policy environment for producers In Nigeria, government investment in other the industry and catalysing a gas revolution
seeking to commercialise their gas reserves sectors to diversify the economy will only to enhance socio-economic growth. It is
has been institutionalised and has realised be made possible by a robust oil and gas the policy reforms for gas monetisation
an increase in the 2P national gas reserves. industry that is able to make its maximum in terms of infrastructure development
economic contribution to the state. and flaring, that will help stabilise Nigeria’s
In 2015, Nigeria joined the World Bank-led power supply, increase electrification rates
Global Gas Flaring Reduction Partnership In 2017, the Nigerian government continued and ultimately support the diversification of
(‘GGFR’) in the “Zero Routine Flaring by 2030” to prioritise the reform of the oil and gas the economy by increasing commercial
initiative, which aims to end routine flaring industry to increase economic income from investment in the country.
of 5 Tscf of natural gas globally every year. the sector and to protect and encourage
Nigeria seeks to end its own gas flaring a full continued investment in the country. The Petroleum Industry Bill remains a critical
decade before the GGFR by 2020 and has Progress was made, with a particular focus component of Nigeria’s energy sector reform
also committed to prohibit any new oil well on increasing transparency amongst the initiatives and was broken up into separate
developments from flaring natural gas. key industry institutions such as the NNPC. sections in order to try and expedite its
Realising that harnessing the gas opportunity Importantly, a Petroleum Industry Roadmap passage. The first, newly titled section, the
will constitute significant development of the titled the ‘7 Big Wins for the New Nigerian Petroleum Industry Governance Bill (‘PIGB’)
economy, the government in 2017 introduced Petroleum Industry’ has been launched has moved closer to becoming law after
the National Gas Flaring Commercialisation and reflects the vision of the current Nigeria’s lower house of parliament passed
Programme to reward companies that are administration to further open up the same version that was approved by
compliant with the zero flaring policies, to investment opportunities in the country’s the Senate in 2017, meaning that the only
further encourage investment in this space. oil and gas sector. Taking proactive action outstanding formality for it to become law,
to attain zero militancy in the Niger Delta is Presidential sign off. The PIGB deals with
management of the NNPC and will create
four new entities whose powers would
include the ability to conduct bid rounds,
award exploration licences and make
recommendations to the oil minister on
upstream licences. The passage of this first
bill is an important milestone as it means
that the government can move forward with
other sections, including a fiscal bill, and in
doing so, remove uncertainty in key areas
that has held back significant upstream
investments in recent years.

With a democratically elected and stable
government in place that is committed to
social and economic growth in Nigeria,
leveraging off the significant contributions
of the oil and gas industry, the country
is offering an increasingly more secure
political and regulatory landscape for
foreign investment.

16 Seplat Petroleum Development Company Plc

Global market Strategic report
analysis

Key market trend Brent started the year around US$55/bbl together with market disappointment at Governance
and was relatively stable at this level for the OPEC not deepening its cuts, drove Brent
Oil prices first two months after OPEC and certain non to a 2017 low of around US$44/bbl. Over the Financial statements
OPEC members agreed to production cuts in second half of 2017 prices staged a steady
What this means to us an effort intended to accelerate rebalancing recovery as strengthening fundamentals
• Oil price influences our revenue, of the market. Prices fell away sharply in started to indicate that a rebalancing of
March, however, after a series of reports the market was occurring, albeit at a slower
profitability and cash flow detailing large crude inventory builds in the pace than most had expected, overriding the
• This in turn shapes our capex US, the fall being exacerbated as traders persistent concerns of US output growth.
moved to unwind long positions on the Prices received a boost late in the year
programme commodity. Prices fluctuated in the US$50/ when the OPEC and non OPEC producers
bbl to US$50/bbl range until mid-year when confirmed an extension to the production
concerns around the seemingly relentless cuts until end 2018.
growth in US oil production took hold which,

In 2017, our oil business accounted for for the sector which can influence our Additional information
73% of total revenues. Global oil prices are trading performance as a listed company.
therefore a key sensitivity that influences our In terms of evaluating new business
financial performance and correspondingly opportunities, oil price is a major driver of
the level of ongoing investments we can valuations and projected cash flows. High
make through recycling free cash flow into levels of volatility in oil price can therefore
growth opportunities, our ability to service lead to higher levels of risk to the business
our debt and to deliver shareholder returns. and introduce uncertainty into decision
Oil price is also a major factor in driving making processes.
equity valuations and investor appetite

Key market trend In the UK, Brexit was a continued focus as Elsewhere, 2017 saw the highest total
Article 50 was triggered and negotiations return level in Europe since 2013 amid robust
Global equity with the EU continued during the year. economic expansion and a cautious view
markets June also saw a snap election that saw the towards monetary-stimulus withdrawal.
governing Conservative party return but with In the US, the year opened with a focus on
a reduced majority. The major UK equity President Trump’s pro-business agenda.
indices, FTSE 100, 250 and All-share, all Equity market returns enjoyed a strong year
made strong gains in 2017 which saw all (also the best since 2013) and were boosted
indices reach record highs during the year. by the end-of-year tax-cutting package and
By the end of the year, the FTSE 100 was up promised infrastructure spending. The S&P
7.6% reaching its record closing price on 29 500 Index recorded a 21.8% gain whilst
December 2017. Similarly, the FTSE 250 also defensive stocks tended to lag the rest
closed at a record high, outperforming the of the US market.
FTSE 100, finishing 14.7% up for the year
with the FTSE All-share also finishing up The best-performing equity markets in 2017
9.0%. The FTSE 100 was weighed down by were in Asia and the emerging markets aided
a strengthening sterling in 2017 whilst the by a weak dollar as well as a recovery in
international nature of the index meant commodity prices which impacts a number
global factors such as pro-business, of emerging market indices. The performance
pro-growth policies in China and the of the Nigerian Stock Exchange was notable,
US helped bolster gains. finishing the year 42.3% higher.

What this means to us Seplat is the only Nigerian company to be different markets and different sectors as
fully dual listed on both the Nigerian Stock a result. We therefore focus on influencing
• Seplat is listed on two stock Exchange and the main market of the what is in our control, aiming to deliver
exchanges London Stock Exchange. As such, our trading performance in line with guidance,
performance can be driven by both domestic underpinned by strong risk management,
• Fluctuations in market conditions and international market conditions. Equity prudent financial management,
can impact Seplat’s trading markets performance can be driven by a operational control and demanding
performance number of complex factors outside of our investment criteria to help ensure
control and returns can differ greatly across long-term value creation for shareholders.

Annual Report and Accounts 2017 17

Market overview continued

Key market trend Over 2017, the global economy grew at Across the eurozone, economic conditions
3.7%, its fastest level for six years. Growth improved markedly as the year unfolded,
Global accelerated in approximately three quarters enabling the European Central Bank (‘ECB’)
economy of countries, the highest share since 2010. to cut its monthly bond purchases by half to
30 billion euros for a period of nine months,
What this means to us In December, the Federal Reserve raised commencing in January 2018. The euro-area
• T he global economy influences interest rates for the third time referencing an ended the year on strong footing with
improving economy and labour market whilst December seeing the fastest growth of
oil supply/demand dynamics in the UK, the Bank of England reversed its business activity for nearly seven years.
• S hapes investment trends and 2016 post-Brexit rate cut of 0.25% late in the In Japan, signs of more consistent and
year as it attempted to bring inflation (which sustainable growth emerged. Economic
asset allocation reached 3.1% towards year-end) back to its growth in China also remained strong
preferred 2% target. Focus in 2018 will throughout 2017 with industrial production
continue to be on the US position in relation growth stable at an annual rate of 6% and
to trade agreements and potential tariffs. retail sales growth of approximately 10%.

The state of the global economy is equities, debt, commodities and currency
inextricably linked to energy demand and in spaces all of which can impact business
turn the oil supply/demand balance which is decisions of companies operating in the oil
a key driver of oil prices and therefore sector and gas sector. In the investment industry
profitability, valuations and investment the global economy helps drive investment
decisions. Alongside this, the global economy themes and asset allocation across sectors
contributes to stability or volatility in global and type of investment.
financial markets, including in particular the

Key market trend Global upstream oil and gas deal volume was and independents sought to expand
down by around 19% at 970 recorded deals footprints or gain a foothold. Russia
Global oil and gas in 2017, although the aggregate deal value accounted for US$26 billion of deal value
corporate activity was up by around 30% at US$172 billion, while in the rest of the world, including
most likely reflecting the oil price recovery West Africa, there were localised centres
What this means to us and improved fundamentals offering a more of deal activity as Majors moved to take new
• C ompetitive landscape and cost stable outlook relative to the prior year. In positions in large-scale strategic resource
terms of geographical spread, the US and bases and/or divest non-core portfolios.
of inorganic growth Canada accounted for the majority of deal 2017 also saw a surge in activity from well
• Drives industry decision making share by value at US$79 billion, the main capitalised private equity firms as much
theme being existing players consolidating of the small to mid-cap universe remained
on allocation of capital their presence in unconventional plays. focused on capital preservation strategies
Europe saw an uptick in deal activity with and deleveraging. Alongside this, deal
US$27 billion deal value representing the structures became more innovative as
highest level in five years (excluding the 2015 joint ventures between buyers became
Shell/BG deal) on the back of renewed more common and vendors retained a
interest in mature basins such as the UK degree of flexibility on methods of funding
North Sea as major incumbents divested deal considerations.

The oil and gas sector is highly competitive where we believe we have distinct
with an often large number of corporate competitive advantages as an indigenous
participants pursuing new business operator with a strong track record of
opportunities in overlapping areas. The level delivery and price-disciplined acquisition
of competition and relative availability/ strategy combined with broad access to
scarcity of new opportunities can result multiple classes of international and
in competitive tension that can drive up domestic capital. Seplat is, to date, the
benchmark acquisition multiples. The cost only Nigerian company to be fully dual
of new business opportunities can also help listed on Nigerian Stock Exchange and the
drive the allocation of capital if opportunities main market of the London Stock Exchange
represent good value versus organic making it a unique investment and partner
investment, or vice versa. Seplat is solely of choice in sub Saharan Africa’s largest
focused on the Nigerian oil and gas sector and most productive oil and gas plays.

18 Seplat Petroleum Development Company Plc

Strategic report

Key market trend After five consecutive quarters of negative improvement in tax collection, anti-corruption Governance
growth, Nigeria’s economy entered a recovery drive to block revenue leakages and multiple
Nigerian in the second quarter of 2017, with GDP currency practices (‘MCP’) to address foreign Financial statements
economy growing for the first time since Q3 2015 by exchange shortages. The multiplier effects of
0.80% (2016: -1.58%) and the momentum these enabling policies started to show as the Additional information
What this means to us continued to build in the subsequent months. PMI recorded its best quarter since Q4 2014
• We are a significant contributor The recovery was largely driven by higher oil in Q3 2017 and headline inflation assumed a
output and improved oil prices as annual downward trend, from 18.7% in January 2017
to the Nigeria economy growth of the oil sector stood at 4.8% year on to 15.4% in December 2017. The MCP also
• N igeria’s economic performance year (2016: -14.5%). Despite positive dynamics included a special window (‘IEFX’) for
in the agricultural and other non-oil sectors, Investors, Exporters & End-users to boost
influences its attractiveness as the non-oil sector only grew marginally by liquidity in the FX market and ensure timely
an investment destination for 0.5% (2016: -0.2%), reiterating the country’s execution and settlement for eligible
capital providers dependence on oil – a pressing issue for transactions with the rates determined by
government to address (oil accounts for 70% market forces. Though not perfect, this has
of government revenue and 90% of foreign aided stability in the exchange rate of the Naira
exchange earnings, even though it now for over eight months, with rates converging
accounts for only 8.7% of GDP). across the various windows and segments
of the market in a range from ₦305 to ₦364
In a bid to generate more and diversify to the US Dollar. This was instrumental in
revenue as well as boost foreign exchange, significant improvements in capital
the government has developed certain importation, which had been on a decline since
policies including the Economic Recovery the beginning of 2015 but exceeded US$12
and Growth Plan (‘ERGP’), executive orders billion in 2017 (FY 2016: US$5.4 billion).
to improve the ease of doing business,

Seplat contributes positively to Nigeria’s power generation and displace burning
economy through payment of our royalties of more expensive imported diesel is
and taxes, employment, increasing domestic seen as a key driver of GDP growth
gas supply and social investments in and addressing FX constraints. The
particular. We have also raised substantial overall state of Nigeria’s economy
amounts of capital from domestic and also influences Nigeria’s and, therefore,
international sources that we have cycled Seplat’s attractiveness as an investment
into investments in Nigeria to drive growth. opportunity, as well as our access to and
Increasing gas supply to underpin domestic cost of capital.

Annual Report and Accounts 2017 19

Our business model

Generating value for
all of our stakeholders

Our business model leverages our core strengths
and experience to create long-term value and
shared prosperity for all of our stakeholders.

Inputs Our core activities

Operational expertise
and control

97%

Of our production
is Seplat operated More on page 44 

Unified and
motivated workforce

400+

multi-discipline More on page 66 
employees

Strong financial 1. Acquire 2. Explore 3. Develop
management and & appraise
access to capital

US$437m
More on page 50 
Cash at bank

Effective HSSE and
risk management

0.31

LTIF More on page 62 

Good corporate To date, we have acquired We will continue to appraise In recent years, Seplat has
governance direct interests in five blocks and test upside at our been one of the most active
and a revenue interest in producing fields and drillers in Nigeria and has
87.8% one further block, located also have a number of successfully undertaken
in the onshore and swamp discovered but undeveloped and completed significant
Corporate Governance areas of the Niger Delta. We discoveries on our blocks, facilities and infrastructure
Rating System score More on page 70  will continue to pursue new some of which may be projects on a fast-track
acquisition and farm-in considered as appraisal timetable and within budget.
Strong relationships targets to help us grow targets in the future.
with host communities reserves and production.

US$59m

Invested in our More on page 64  See pages 22 to 23 to find out more about our priorities
communities for each stage of our core activities, going forward.
since 2010

20 Seplat Petroleum Development Company Plc

Read more overleaf: Strategic report
page 22

 

Governance

Outcome Value for our stakeholders Financial statements

The end result of our core activities is For our shareholders Additional information
a profitable underlying asset base that
4. Produce, generates strong margin cash flow and – Capital growth
process & sell within which we have numerous organic – Dividends
reinvestment opportunities to selectively
Seplat has consistently redeploy this cash flow. We combine LSE NSE
grown oil production capacity this with our access to inorganic growth
and has more than doubled opportunities, for which we may need 49.7% 64.8%
gas production following to secure additional external capital,
significant expansion of the to generate sustainable long-term value Total Shareholder Return in 2017
Oben gas processing plant. for our multitude of stakeholders.
Our oil production is marketed For government
and sold internationally to We have assembled a multi-disciplinary
offtakers at the export terminal team that has an in-depth knowledge of – Royalty and tax revenue
while our gas production is sold the areas in which we operate, both below – F oreign and local capital
under a number of gas sales and above the ground. When considering
agreements wholly into the both our organic and inorganic capital investments
domestic market. investment opportunities, we benchmark
and high grade each option in the context US$519m
of the whole portfolio so that we can be
sure that each dollar of capital deployed Payments to government reported in 2017
is efficiently allocated to those
opportunities that meet our technical, For Nigeria
commercial and strategic requirements.
– Infrastructure development
Strong margin Value – Multiplier effect from improved
cash flow
gas-to-power supply
– H igh grading
of portfolio 1/3
opportunities
of Nigeria’s current power generation can
– D isciplined be underpinned by our gas production
allocation
of capital For our host communities

– Economic empowerment
– Healthcare and education

1,300+

jobs created via Seplat operations

Annual Report and Accounts 2017 21

Our business model continued

Our core activities

1. Acquire In line with our strategy, we will maintain Seplat will benefit from the corresponding
a price-disciplined approach and prioritise return to profitability and strengthened
To date, we have acquired direct interests opportunities in the onshore and offshore capital structure, and in turn resume
in five blocks and a revenue interest in areas of Nigeria that offer near-term the active identification and execution
one further block, all of which are located production, cash flow and reserve of new growth opportunities that is
in the onshore and swamp areas of the replacement potential. central to our strategy.
Niger Delta, Nigeria.
At any point in time we have an active pipeline 2017 was a year of stabilisation and Key strengths & priorities
of new acquisition and farm-in targets to help consolidation for Seplat as we navigated • First Nigerian operator to acquire
us grow our reserves and production on an through the extended period of force majeure
ongoing basis. at the Forcados terminal that continued blocks from Major IOCs
through the first half. As a consequence of • Six blocks acquired to date (five direct
the obvious capital constraints and need for
careful management that were placed on the interests and one revenue interest)
Company, no new acquisitions were made in • Ability to match opportunities with
the year.
access to capital
Looking ahead, with the resumption of • Stabilised core business provides
operations back to full production and
steps underway to achieve long-term platform to actively pursue new value
diversification of oil export routes, accretive acquisitions

2. Explore against the volatile oil price backdrop and It is our intention to fully assess the
& appraise unprecedented levels of interruption to oil exploration potential of this block and
production following the declaration of incorporate it into our overall planning
We will continue to appraise and test upside force majeure on 21 February 2016 until in future years.
at our producing fields and also have a 6 June 2017 by the operator of the
number of discovered but undeveloped Forcados terminal (Shell Nigeria). Key strengths & priorities
discoveries on our blocks, some of which • Anagba-1 appraisal well successfully
may be considered as appraisal targets At OPL 283, Seplat participated in one
in the future. non-operated appraisal well in 2017. proved additional volumes at OPL 283
In 2017, we did not drill any operated Operator Pillar Oil Ltd completed drilling of • Continue to evaluate potential for a new
exploration or appraisal wells, electing the Anagba-1 appraisal well in November.
instead to scale back capital expenditure deeper exploration play in OMLs 4, 38 and
The well successfully appraised a structure 41 indicated by the Ogegere-1 exploration
that straddles the block boundary with well (drilled in 2014)
adjacent OML 60 (where the reservoirs • OML 53 adds significantly to inventory
are in production). of E&A opportunities
• Focus on opportunities close
Elsewhere we have an extensive inventory to infrastructure that can be
of exploration leads and prospects and monetised rapidly
numerous appraisal opportunities in our
portfolio, particularly at OML 53.

3. Develop Oben gas plant, completed a new liquids We did not drill any new development
pipeline linking our assets directly to the wells in 2017 owing to the weak oil price
In recent years Seplat has been one of Warri refinery, installed additional storage backdrop and unprecedented levels of
the most active drillers in Nigeria and has capacity and implemented gas lift to aid interruption to oil production following
successfully undertaken and completed our production with pressure support. the declaration of force majeure on
significant facilities and infrastructure 21 February by the operator of the
projects on a fast-track timetable and Development activity in 2017 was largely Forcados terminal (Shell Nigeria).
within budget. focused on our gas business. Early in the
Since we acquired our interest in OMLs 4, year we completed and commissioned Key strengths & priorities
38 and 41 in July 2010, as operator we have the Oben gas processing plant Phase II • Proven track record as a skilled operator
drilled 45 new development wells, completed expansion project. • Installed and commissioned the Oben
multiple workovers, reactivated production
from pre-existing wells, constructed and This involved the installation of a further gas plant Phase II expansion to take
installed a new liquid treatment facility, three 75 MMscfd processing modules gross processing capacity to a minimum
upgraded and significantly expanded the (225 MMscfd aggregate capacity) that of 525 MMscfd
means overall Company operated gross • Retain full discretion over future work
processing capacity has leapt from programmes and flexibility to respond
300 MMscfd to a minimum of 525 MMscfd. to macro conditions
• Prioritise the most cash generative
Elsewhere, progress was made towards and short-cycle return development
FID at the ANOH project and formalising opportunities
an incorporated joint venture relationship
between Seplat and the government.

22 Seplat Petroleum Development Company Plc

4. Produce, order to reduce any over-reliance on one commenced completion works. Negotiations Strategic report
process & sell particular third party pipeline system and/or between the pipeline operator, Pan Ocean,
export terminal. In line with this objective, and Chevron in relation to Crude Handling Governance
Seplat has consistently grown oil production during 2017 we continued to utilise an Agreements are also advancing. The Heads
capacity since inception and has more than alternative option for crude oil and of Terms for the Crude Transport Agreement Financial statements
doubled gas production since the Oben gas condensate produced at OMLs 4, 38 and 41 between NPDC/Seplat JV and NAPIMS/Pan
processing plant Phase I and Phase II whereby crude oil was sent to available Ocean JV is also nearly completed and Additional information
expansions were commissioned. storage tanks at the Warri refinery, via our Seplat anticipates the pipeline to be fully
With a significant undeveloped reserves and own 100,000 bopd capacity pipeline, from commissioned and operational in Q3 2018.
resource base Seplat has a portfolio capable where the barrels were then sold FOB at a
of yielding significant oil and gas production loading jetty to our offtaker Mercuria. By end Seplat has grown its natural gas output
for many years to come. 2017 a net volume of 1.9 million barrels had dramatically and in 2017 supplied an
At OMLs 4, 38 and 41 we increased liquids been monetised through this route (Seplat’s average of 254 MMscfd gross exclusively
production six-fold from an initial gross rate equity barrels). to the domestic market, enough gas to
of 14,000 bopd at time of acquisition in 2010 underpin around a third of Nigeria’s
to a peak rate of over 84,000 bopd. Similarly, During the year we completed necessary current power generation.
we have seen our overall annualised average repairs and upgrades to two jetties at the
working interest production grow from Warri refinery that now provide a 30,000 bopd The Phase II expansion of the Oben gas
21,431 boepd in 2011 (our first full year of (gross) back up evacuation route for our oil processing plant provides headroom to
operations) to 47,291 boepd in the second production. Furthermore, as a direct result further increase future gas production in the
half of 2017 once force majeure was lifted of this alternative export route via the Warri near term whilst the development of our gas
and normal operations were restored. refinery we were able to de-constrain gas reserves at OML 53 offers significant growth
A key priority of ours is to actively pursue production (previously impacted by potential in the medium term.
alternative crude oil evacuation options in condensate handling constraints following
shut-in of the Forcados terminal) and greatly Key strengths & priorities
Outputs improve security of domestic supply. Looking • Diversification of oil export routes will
ahead, the Amukpe-Escravos 160,000 bopd
capacity pipeline is set to provide a third see access to three options in 2018
export option for liquids production at OMLs with sufficient redundancy to de-risk
4, 38 and 41. Seplat signed a Funding distribution of product to market
Agreement in December 2017 with the • Consistently grown oil production
pipeline owners, NAPIMS (a 100% subsidiary capacity since inception
of NNPC), Pan Ocean Corporation Limited • Operate enough gas production to
(‘Pan Ocean’) and the pipeline contractor underpin around a third of Nigeria’s
FENOG to ensure timely completion of the current power generation
pipeline. Post year end, FENOG has • Significant inventory of future development
opportunities in current portfolio to provide
continued growth in coming years

Strong margin cash flow

High grading of portfolio opportunities Disciplined allocation of capital Key strengths & priorities
It is important to maintain the financial We also seek to utilise appropriate external • Low unit of production opex
strength and financial flexibility to fund our funding sources, including debt, in support • Opportunity to capitalise on
budgeted work programme at our existing of new business opportunities and
portfolio and also a range of incremental greenfield developments where up-front cost deflation
growth opportunities available to us. We acquisition costs and early capital • P rudent hedging strategy
aim to operate in the E&P “sweet-spot” investments may be required to bring them
whereby cash flow generation from our to self-funding status over the long term. to provide a level of cash
current portfolio more than covers flow assurance
investments there too. • Good balance between oil
and gas derived cash flows

Value for our stakeholders

Shareholders Government Improved security of supply and greater
In addition to offering strong capital growth Our investments to grow oil and gas electrification is a critical multiplier effect
potential through the successful execution production have also translated into to drive future GDP growth for Nigeria.
of our strategy, we also have a clear a significant increase in reserves and
dividend policy that, in the absence of extended the economic life of our assets. Host communities
adverse operating and/or macro-economic Accordingly, the value that the government We have directly and indirectly created
conditions, should allow us to pay our will ultimately realise over the life-span of over 1,300 jobs, and since 2010 invested
shareholders a regular dividend taking the assets through royalty and taxes has US$59 million into numerous projects to
into account our financial position and increased dramatically. leave a positive social and economic legacy
funding requirements. for our host communities.
Nigeria’s economy
Seplat has become the second largest Key strengths & priorities
supplier of processed natural gas to the • Low unit of production opex
domestic market and the gas we supply is
enough to underpin around one third of the
current grid.

Annual Report and Accounts 2017 23

Strategy

A robust strategy
for growth

Since inception we have been guided by a clear and consistent
strategy that is supportive of our long-term strategic vision to be
the leading indigenous African independent oil and gas company.

Strategic pillar Progress

Maximise production and cash flows from operated assets • Established alternative
oil export route via Warri
The development stage of the upstream value chain is where the majority of capital investments are usually made. refinery jetties with line
It is imperative that we do this well, maintaining strict cost control, implementing the most appropriate technical of sight on access to the
solutions and organising ourselves and our service providers so that we deliver projects on time and within budget. Amukpe–Escravos
This enables us to generate strong margins and cash flows from our production, which in turn underpins our ability pipeline
to fund our work programme. At the same time, we seek to improve operational efficiency by maximising uptime and
reducing reconciliation losses, mitigating asset concentration and sole reliance on third party export infrastructure. • Discretion over level
and timing of spend
allows alignment with
cash flow

Move up 2C resources into 2P reserves category • Converted 141 MMbbls
oil and 72 MMboe gas
Our drilling campaigns have, in addition to development wells, an appraisal component built in so that we are from 2C resources to 2P
constantly testing upside potential at our assets, gathering and interpreting new information to allow us to maximise reserves since 2010
hydrocarbon recovery from the reservoirs and capitalise on low risk reserve addition opportunities. We also recognise
the importance of exploration as a means of growing reserves. It is our intention that we will return to our objective of • Current 2C resource
drilling at least one exploration well per year when oil prices and production recover and stabilise, with a focus on base 48 MMbbls oil
prospects that if successful can offer rapid monetisation, utilising our existing infrastructure where possible. and 75 Bscf gas

Commercialise and produce gas reserves • Seplat has become the
second largest supplier
Nigeria has a vast natural gas resource that, to date, has barely been developed. We see the commercialisation and of processed gas to the
monetisation of Nigeria’s natural gas resource as an attractive long-term opportunity and have strategically domestic market
positioned ourselves by developing the Oben facility as a core gas processing hub through which Nigeria’s greatest
demand centres can be accessed and supplied whilst the acquisition of an interest in OML 53 positions Seplat as • Oben Phase I and II
a key participant in what will be one of Nigeria’s largest greenfield gas developments. During periods of oil price expansion projects
weakness, the gas business takes on added importance. Gas prices are de-linked from oil price and have steadily expanded plant
increased to commercial levels, meaning that we can confidently plan, finance and invest in gas opportunities processing capacity
independent of oil price dynamics. to 465 MMscfd from
90 MMscfd

Pursue a focused acquisition and farm-in strategy • Acquired direct
interests in five blocks
We see a rich opportunity set and a wide range of growth opportunities in Nigeria including further asset divestments and further revenue
from the Major IOCs, asset farm-in and acquisition opportunities amongst the independent E&P sector as liquidity in interest in one block
the secondary asset inevitably increases and future licensing awards occur. Our focus is on securing blocks in the to date
onshore and offshore areas of the Niger Delta that offer near-term production growth, cash flow and reserve
replacement potential. • Well positioned to
access future deal
flow in Nigeria

Be a highly responsible corporate citizen • Established and
proven community
Being a highly responsible and accountable corporate citizen is a key priority of ours. We recognise that minimising engagement model
the effects of our activities on the environment, understanding local issues, positively contributing to our host aligns Seplat with its
communities, being a first-rate employer and providing our staff with a safe working environment and career host communities
development opportunities are essential enablers that allow us to achieve our goals. Underpinning all of this
is a strict adherence to strong corporate governance and business integrity throughout our organisation. • High retention rate
of our skilled and
motivated workforce

24 Seplat Petroleum Development Company Plc

Strategic report

Governance

Measuring our performance Risk overview Risk categories Outlook

• Working interest production Oil and gas production operations have a number • Operational • Access to multiple long-term Financial statements
• Earnings before interest and of risks attached, above and below the ground. risks alternative oil export routes,
The Company has a skilled technical team with mitigating concentration risk
tax (‘EBIT’) a detailed knowledge of the geology and reservoir • External risks
• Opex per boe dynamics to allow optimal production solutions to • Financial risks • Disciplined allocation of capital
be implemented. Above the ground, the Company • Strategic risks to growth opportunities that
• Reserves replacement has clear systems and procedures in place to ensure offer strongest cash returns
the safe and secure operation of its operated oil and
• Gas reserves, production gas production, processing and transportation • Right-sizing of capital
and revenues facilities. The Company does, however, rely on third investments to match
party operated export infrastructure that has been prevailing environment and
susceptible to interruptions. continued downward pressure
on cost base
Exploration activities are focused on determining • Operational Additional information
the presence of hydrocarbons whilst appraisal risks • Continued evaluation and
activities are focused on better defining and high-grading of the E&A
assessing the commerciality of a hydrocarbon • Financial risks potential within Seplat’s
discovery. Both activities by definition carry • Strategic risks portfolio
significant geological risk, so the technical
maturity of an E&A target is key to narrowing the • Assessment of OML 53
range of risk and uncertainty. Seplat seeks to use E&A potential
available technologies including seismic analysis
to minimise pre-drill risks and maximise chances • Resume plans to drill one
of a successful drilling outcome. exploration well a year when oil
prices and free cash flow permit
Despite the abundance of resources in the ground, • Operational
the natural gas sector in Nigeria is at a relatively risks • Capitalise on Oben Phase II
nascent stage of development and requires expansion of processing
significant ongoing investment to grow capacity. • External risks capacity to increase production
The pace at which the sector grows and scale of • Financial risks
investment will to a large extent dictate the timing • Strategic risks • Progress development of OML
and magnitude of opportunities for producers 53 strategic gas resource and
such as Seplat. aim to aggregate additional
opportunities

• Increase supply to the
domestic market

• Portfolio expansion Competition for upstream oil and gas blocks • Financial risks • Continued long-term pursuit of
• 2P reserves and 2C resources in Nigeria is intense and there are an increasing • Strategic risks our focused acquisition strategy
• Working interest production number of industry participants seeking to grow
their presence in or gain access to the sector. • Operational • Price discipline and seek
• Lost time incident frequency High levels of competitive tension can drive risks to implement innovative
(‘LTIF’) acquisition prices higher. Oil price volatility structures to protect the
also presents increased uncertainty when • External risks balance sheet
• Corporate responsibility evaluating opportunities and access to capital • Financial risks
initiatives can also constrain ability to successfully • Strategic risks • Targeting both oil and gas
execute transactions.
Failure to adhere to the highest standards of • Continually strive to improve
corporate responsibility can severely impede the environmental, health and
Company’s ability to efficiently operate its current safety performance
portfolio, access new business opportunities,
secure capital and ultimately deliver value • Strict adherence and
accretion to its shareholders. commitment to international
governance standards

• Positively contribute to our
host communities

Annual Report and Accounts 2017 25

Chief Executive Officer’s statement Dear shareholders,

Reset and in I am pleased to report that Seplat made
position to a return to full-year profitability in 2017,
deliver growth registered strong cash flow performance
and significantly strengthened the balance
Our proactive and decisive management sheet. In a year of contrast, we were plagued
coupled with the strong underlying throughout most of the first half by force
fundamentals of the business have seen us majeure at the Forcados terminal. However,
emerge from an exceptionally challenging following the lifting of force majeure on
period a much fitter and stronger 6 June, we were able to return to operations
business that is well equipped to deliver on OMLs 4, 38 & 41 and rapidly restored full
long-term value for our shareholders. production. Our subsequent operational and
financial performance is a clear indicator of
Austin Avuru our strong fundamentals and what we can
Chief Executive achieve when we have unhindered access
Officer to market. We will retain the flexibility and
financial discipline that has seen us emerge
from a difficult chapter in our history a fitter
and stronger business. With line of sight on
the availability of multiple export routes, we
aim to significantly de-risk the distribution of
our oil production to market. Notably, our gas
business made another record contribution
in 2017 and continues to demonstrate the
robustness of its revenues, providing a key
source of growth and diversification, as well
as delivering a much-needed reliable supply
of gas to the Nigerian power sector. Seplat
is now better positioned to return to
sustainable growth.

Continued emphasis on efficiency and
cost control
During the past two years the volatile
macro-economic environment and
disrupted operating conditions prompted
us to reset the business in many ways.
We focused on taking steps in areas within
our control that would, in the first instance,
protect the core business and ultimately
provide Seplat with a strengthened platform
upon which to execute our long-term growth
strategy. In 2017 we continued to place
great emphasis on operational efficiency
and cost control to maximise cash margins
and in doing so further reduced our unit
production operating cost year-on-year
by 32% to US$5.96/boe. Alongside this our
general and administrative costs fell by 28%
year-on-year. One of the advantages of
operating onshore is the discretion we have
over capital expenditures and the ability
to dial-up or dial-down our work programme
to match our cash generation and business
priorities. In 2017 we scaled capital
expenditures back to US$33 million,
the majority of which was allocated to
expansion of our gas business. It is not
a natural state for Seplat to scale back
the work programme to this extent,
our hallmark is our ability to build and
grow reserves and production through
accelerated investment programmes, but
it has been a necessary and prudent step
to take in order to preserve a liquidity buffer
during uncertain times. With operations
restored in early June we have very quickly
been able to reverse the impact of force
majeure on the business and are making
preparations to re-deploy rigs into the field
and scale-up investments into our inventory
of short-cycle production and development

26 Seplat Petroleum Development Company Plc

A robust strategy for growth Our strategy comprises the five key Maximise production and cash Strategic report
Since inception we have been guided by priorities that we have identified as flows from operated assets
a clear and consistent strategy that has essential in allowing us to run the
remained unchanged and is carefully business efficiently and responsibly M ove up 2C resources into 2P
designed to provide sustainable in order to achieve our vision of being reserves category
long-term value creation and growth for the leading Nigerian independent oil
our shareholders and other stakeholders. and gas company. Commercialise and produce
We aim to do this by leveraging our core gas reserves
strengths and expertise to capitalise Governance
on growth opportunities available to Pursue a focused acquisition
us across the upstream oil and gas and farm-in strategy
and midstream gas value cycle.
Be a highly responsible corporate
citizen

pSatrgaete2g4y  :

opportunities. When making investment during force majeure that was the enabling industry. In addition to processing our own Financial statements
decisions we have a robust system whereby, factor for us to achieve continuity of gas gas we have installed processing headroom
through a process of benchmarking and supply to the domestic market and it can that will enable us to process third party Additional information
high-grading, capital will be selectively be kept available going forward to underpin volumes and generate a tariffing income
deployed to opportunities that offer the and greatly improve security of gas supply in the future.
best cash returns. to the domestic power sector in particular.
Our gas strategy is based around the concept
Underpinned by strong oil and gas Longer term, the Amukpe-Escravos of interconnection between large-scale gas
fundamentals 160,000 bopd capacity pipeline is set to reserves in the ground, operated processing
Our full-year 2017 average daily working provide a third export option for liquids hubs, connectivity to transmission
interest production stood at 36,923 boepd, in production at OMLs 4, 38 and 41 which infrastructure and a large number of high
line with guidance and up 43% year-on-year, presently accounts for around 90% of our demand users. In this respect our current
and comprised 17,853 bopd and 114 MMscfd total liquids production mix. I am pleased and planned future portfolio is ideally
of natural gas. However, these figures reflect to say that good progress continues to be located, with the Oben hub providing a
the force majeure conditions at the Forcados made towards completing and connecting gateway to supply Nigeria’s major demand
terminal for much of the first half and do the pipeline and also finalisation of the suite centres on the Lagos axis and Abuja axis and
not accurately represent what our portfolio of commercial contracts and agreements even in the future neighbouring markets of
is capable of delivering with unhindered that needs to be put in place and that Ghana, Togo and Benin through the WAGP
access to market for our oil production. Over we anticipate the pipeline to be fully should the opportunity present itself. The
the second half of 2017 our average working commissioned and operational in Q3 2018. next phase of growth in the gas business is
interest production stood at 47,291 boepd, We view this as an important milestone in going to be anchored around the large-scale
comprising 26,062 bopd and 127 MMscfd, our efforts to embed greater diversification ANOH greenfield gas and condensate
and coming into 2018 our run rate was over in our business activities and one that will development. The upstream development
55,000 boepd comprising approximately significantly de-risk distribution of our oil is unitised with adjacent OML 21 and will
29,000 bopd and 160 MMscfd. production to market. be delivered by the unit operator, Shell.
Alongside this we are making good progress
Our 2P reserves at end 2017 stood at 477 A record year for our gas business towards FID at the midstream development
MMboe, a modest increase of 3.2% on end In 2017 our gas business continued to go on OML 53 within an incorporated joint
2016, and we have a further 61 MMboe of 2C from strength to strength and made a venture partnership with government and
resources taking our total working interest record contribution with revenues of US$124 look forward to setting out our plans for
reserve and resource base to 538 MMboe million, which accounted for over 27% of this exciting opportunity in due course.
split almost evenly between oil and gas. Seplat’s total revenues. Early in the year we Consistent with our strategy ANOH will
This is a material volume by any standard completed and commissioned the Phase II represent a major step forward in connecting
and gives the business a great deal of expansion of our Oben gas processing hub, large-scale gas reserves in the eastern Niger
running room production wise. which added a further 225 MMscfd of Delta to the main demand centres by utilising
processing capacity to take total capacity at the OB3 gas pipeline currently under
Diversifying oil export routes to market the Oben plant to 465 MMscfd. Together with construction that will provide a future
In previous years I have discussed the 60 MMscfd capacity at the Sapele plant this link to our Oben hub.
importance of diversification as a key means that we now operate 525 MMscfd of
enabler for Seplat to deliver sustainable gross gas processing capacity, 443 MMscfd Return to profitability and financial
returns and value growth over the long term. of which is net to our working interest, strength to support growth
In this respect our most important near-term cementing our position as a pre-eminent 2017 marked a financial inflection point for
priority is to ensure we have adequate supplier of gas to the Nigerian domestic Seplat as the higher oil and gas production
redundant capacity through multiple market. This capacity expansion has following the lifting of force majeure at the
crude oil export routes to buffer against already started to pay dividends as moving Forcados terminal from June 6 onwards,
any extended periods of force majeure into 2018 we have been able to meet an together with higher oil price realisations,
or downtime in the future. In 2017 we increased call on our gas volumes, owing positively impacted revenue which was up
successfully completed repairs and to supply interruptions elsewhere in the 78% from 2016 at US$452 million. Profit
upgrades on two jetties at the Warri refinery network, and step up gross deliveries to the before tax for the year stood at US$44
that will enable sustained exports of 30,000 400 MMscfd level when required. This not million and reflects the return to profitability
bopd (gross) if required in the future. Prior only demonstrates flow assurance at that in the third and fourth quarters where net
to the repair and upgrade work on the two level and a production swing capability quarterly profit before tax of US$24 million
jetties gross exports via the Warri refinery from our assets but it also underscores and US$46 million respectively offset the
while force majeure was in effect at the the strategically important nature of our US$26 million loss before tax recorded at
Forcados terminal were around the 15,000 gas business to Nigeria in improving security mid-year. A net tax credit of US$221 million,
bopd level. It was access to this export route of gas supply for power generation and owing primarily to deferred tax credits of

Annual Report and Accounts 2017 27

Chief Executive Officer’s statement continued
As a truly indigenous organisation, nothing is more
important to us than the prosperity of Nigeria. As such,
we are building on our position as a leading supplier
of gas to the domestic market, as we continue to
prioritise the commercialisation and development of
the substantial gas reserves and resources identified
at our blocks – to power homes and fuel businesses.

US$224 million, increased the overall profit and skills on. Throughout all of our various workforce and support of our stakeholders.
after tax for the year to US$265 million. Cash programmes we share our resources It is these same attributes that will drive us
flow from operations was US$447 million, and expertise to help build more resilient forward into our next phase of growth, which
against capital investments of US$33 communities, adding long-term value can be broken out into three distinct themes.
million, and translated into a significantly beyond our core business activity and Firstly, Seplat has historically been one of
strengthened balance sheet at year end creating a mutually beneficial alignment. the most active drillers onshore Nigeria and
when cash at bank and net debt stood at we have a large inventory of oil production
US$437 million and US$141 million At Seplat, we recognise that the skill, drilling opportunities we will high grade
respectively. With the uncertainty created dedication and enthusiasm of our team and drill out to organically sustain and grow
by force majeure we maintained a prudent is critical to our success and we support production. Secondly, we will capitalise on
stance in managing our liquidity throughout our employee development with individually our early mover advantage in the domestic
2017 and in July successfully concluded an tailored training programmes. We provide gas sector and further grow upstream and
oversubscribed one-year extension of our a platform for career development for young midstream production and processing
revolving credit facility to end 2018. Overall, people and new graduates and take pride in capacity to help meet Nigeria’s increasing
Seplat’s aggregate indebtedness had the diversity that has powered our growth. demand and power deficit.
reduced by US$422 million at end 2017
from its peak in Q1 2015 of US$1 billion, Management changes Finally, with our balance sheet refinanced,
which is a significant deleveraging of the Following his retirement from the Board a free cash flow positive production
balance sheet particularly in exceptionally effective 30 March 2017, I would like to business together with headroom in our
difficult trading conditions. thank Stuart Connal for his significant capital structure we have the capacity
contribution to Seplat in the last few years. and capability to selectively consider
Post period end, in March 2018 we He has provided excellent operational and and execute value accretive acquisition
concluded a full refinancing of our technical leadership that has translated opportunities whilst staying true to our
indebtedness and in doing so reset our into the consistent growth in reserves and price-disciplined approach.
capital structure with longer dated debt production capacity we have delivered
maturities, freeing up significant near- and also in particular his contribution to the I stated last year that I want Seplat to be
term cash flow that would otherwise be growth of our gas business. In February 2018, known as the most effective, innovative
consumed servicing debt, and providing we announced the appointment of Effiong and efficient operator in Nigeria, delivering
a headroom to fund further growth. We Okon to the Board as Executive Operations premium value to stakeholders, and nothing
refinanced the revolving credit facility with Director. Effy brings a wealth of relevant has changed this year other than I believe we
a new, four-year US$300 million revolving operational experience from 26 years in are a step closer to achieving that ambition
credit facility and also completed a debut the industry with Shell and has an in-depth and realising our full potential.
US$350 million bond issuance which further understanding of the Nigerian sector
diversifies our long-term capital base. Our coupled with international experience. Austin Avuru
improved liquidity position post refinancing Effy is a great addition to the team and we Chief Executive Officer
will now allow us to scale up our work look forward to his contribution as we seek
programme and focus on both organic and to build and grow oil and gas output across
inorganic opportunities to deliver our our portfolio.
growth strategy.
Outlook
Honouring our corporate responsibilities We look ahead into 2018 and beyond with
Community investment remains at the heart a strong sense of optimism and from a
of Seplat’s corporate responsibility strategy position of both strategic and financial
to deliver shared value and leave a long- strength. Every aspect of our business and
lasting positive social and economic legacy management capabilities has been stress
for our local stakeholders. By investing in tested in the extreme during the past two
and supporting our host communities years and I am delighted to be able to say
we seek to broaden opportunities for that we have proved our ability to withstand
economic empowerment and employment severe external shocks to the business,
to alleviate poverty through support of local be they macro-economic or disrupted
entrepreneurial initiatives. For example, local operating conditions, through finding
through our skills acquisition training and implementing innovative solutions
programme we can connect with a large to complex problems; effective risk
number of young people and provide them management; continually improving
with the necessary training and tools to offer operational efficiency; financial discipline;
services to their communities well into the strong leadership; and above all else the
future, and also pass the acquired expertise dedication and professionalism of Seplat’s

28 Seplat Petroleum Development Company Plc

Our key focus areas as we Strategic report
look to the year ahead

Key focus areas Progress in 2017 Outlook for 2018 Governance
Strong margins at current oil prices, increased
Manage and optimise our Following the lifting of force majeure at the Forcados contribution from the gas business and a more
production and development terminal in June, production was quickly restored to aggressive work programme will generate free cash
operations to maximise cash 47,291 boepd in H2, while the Company also reduced flow to be reinvested to further increase production.
flows and value of the business production opex by 32% and G&A costs by 28%.

De-risk distribution of The force majeure at the Forcados terminal highlighted The 160,000 bopd capacity Amukpe-Escravos
oil production to market Seplat’s reliance on that particular export route. During pipeline is expected to be commissioned and
2017 the Company established a barging export operational in Q3 2018. Seplat is actively engaged
solution from Warri capable of sustained exports with the pipeline owners and contractor to help
of 30,000 bopd. ensure timely delivery of the project that will help
provide sufficient redundant capacity to buffer
against future interruptions.

Grow and maximise utilisation In 2017, we achieved a record US$124 million in With sufficient installed processing capacity Financial statements
of gas production and gas revenues from working interest production of headroom, there is potential to increase gas sales
processing capacity 114 MMscfd. Completion of the Oben Phase II expansion significantly in 2018 with additional offtake
project increased gross operated processing capacity agreements in the pipeline. Deliveries to the Azura
to 525 MMscfd. Edo IPP will also move to take or pay terms. 2018 will
also see FID for the large-scale ANOH greenfield
development project.

Organically grow Appraisal drilling was suspended during 2017 We plan to scale up our drilling programme and
reserves to reduce capex and maintain a liquidity buffer. in doing so have the optionality to incorporate
an appraisal element into our activities.

Effective risk Risk management continues to be an integral part Seplat will continue to closely monitor risks to the Additional information
management of all business activities in Seplat and good HSSE business and implement our proven and reliable
performance was achieved in 2017. risk management framework.

Prudent financial During this challenging period, capex and opex were In March 2018, Seplat refinanced its debt with
management reduced, our RCF was extended and debt was reduced a new four-year RCF and debt bond issuance.
to ensure a liquidity buffer was maintained. We also The significantly strengthened balance sheet and
benefitted from our hedging policy. improved liquidity will allow for capital investments
into growth opportunities to be scaled up.

Operate safely and securely Oil and gas activities carry significant levels of HSSE As activity levels continue to increase there is a strong
and minimise the impact on risks if not properly managed. In 2017, we achieved focus on preventing major environmental, health or
the environment an LTIF of 0.31, a slight improvement over 2016’s safety incidents. We have set an LTIF target for 2018
0.33, and once again avoided any employee or of 0.16.
contractor fatalities.

Value accretive acquisitions Given the operating challenges confronted for much With full production operations restored and the
of the period our primary focus was on controlling balance sheet refinanced Seplat is in a position
expenditures to maintain a liquidity buffer rather to capitalise on new business opportunities such
than to pursue new opportunities. as acquisitions, farm-ins and bid rounds in
accordance with our price-disciplined approach.

Play a major role in the Nigeria’s power generation deficit is widely recognised The pipeline of potential new offtakes to absorb
development of Nigeria’s as a critical constraint on economic growth. Seplat Seplat’s processing capacity and its gas growth
gas-to-power programme cemented its position as the second largest supplier projects are set to make the Company the largest
of processed gas to the Nigerian market, accounting single supplier of gas to the domestic market in the
for up to one third of Nigeria’s gas-to-power years ahead.
generation requirement.

Maintain strong relationships As an indigenous Nigerian oil and gas company we 2018 will see continued investment in our host
with host communities are proud of the positive contribution we are able to communities to develop local talent, creating a
make to our host communities through our social domestic multiplier effect in the communities
investment programmes. In 2017 we invested over where we operate.
US$3.8 million and undertook a wide range of
activities, focusing on healthcare, education,
economic empowerment, infrastructure
development and environmental stewardship.

Annual Report and Accounts 2017 29

A spotlight on Nigeria

Nigeria is rapidly advancing and the opportunities
are extensive. Key factors in this development will
be the huge, young and urbanised population,
large oil and gas reserves, an increasingly
diversified economy and enormous transport
infrastructure projects.
Things are looking bright for the future.

A spotlight
on Nigeria

© Mapbox, © OpenStreetMap

30 Seplat Petroleum Development Company Plc

Strategic report

Governance

Financial statements

Additional information

Country facts Top exports
Petroleum oil and gas
198m1 US$1,897 Cocoa
Wood
Population size (2017) GDP per capita (2017) Oil seeds
Raw hides and Leather
+6.5%1 +2.7% 3
Source: Nigerian Export Promotion
Population growth GDP growth forecast 2017-2020 Council (‘NEPC’).
(2017) (average yearly rate)

US$376bn2 3.30 4

GDP (2017) Global competitiveness index
(global rank 2017/ 125)

1 Source: National Population Commission (‘NPC’).
2 Source: National Bureau of Statistics (‘NBS’).
3 Source: World Bank.
4 Source: The World Econimic Forum (‘WEF’).

Annual Report and Accounts 2017 31

A spotlight on Nigeria continued

Reversing Nigeria’s
infrastructure deficit and
developmental challenges:
the energy connection

Professor Adeola Adenikinju Quality infrastructure is an essential element for productivity
and growth. For Nigeria, and indeed Africa, the need for adequate
Ph.D, fnaee infrastructure – secure energy supply, efficient transportation,
Professor of Economics, reliable communication systems, resilient sanitation and
Department of Economics, affordable housing – is particularly apparent. While Nigeria
Research Professor, Centre for has basked under the glow of impressive economic growth
Econometrics and Allied Research, over the past decade, serious infrastructural shortcomings
Director, Centre for Petroleum, have undercut business and economic growth, service delivery,
Energy Economics and Law trade and investment. Unless Nigeria and the rest of the
University of Ibadan, Ibadan, Nigeria continent urgently address the obvious infrastructure deficit,
Member, Central Bank of Nigeria the full socio-economic development potentials of the African
Monetary Policy Committee economy will continue to be constrained.

Most African countries are facing a Past and present efforts to address the
substantial infrastructural deficit. The continent’s infrastructure gap have been
impressive growth performance of the constrained by budgetary challenges,
continent in the past decade is in sharp limited and inconsistent foreign aid inflow,
contrast to the experience of the 1980s, the weak capacity of the private sector to
which was largely termed the lost decade mobilise international finance in many of
for Africa. The economic performance in the countries, the small size of the domestic
the region started to turn for the better finance and capital markets, and even by
in the mid-1990s with improved policies many of the economies themselves. Yet
and structural reforms. African countries these countries have no alternative but to
recorded some of the fastest, most upgrade, maintain existing infrastructure
diversified and consistently high economic and invest in new ones in order to meet
growth rates in the world during the past their development aspirations.
decade and the continent is also projected
to grow at above the global average in the The improved macro-economic environment,
future. This evolution occurred in spite of governance and institutional indicators
the huge infrastructure challenges faced provide Africa with better outlook to
by most African nations. attract investments from private sectors,
development partners and multilateral
institutions into infrastructural development,
and reverse the existing inadequate state
of transport networks, energy supply,
information and communication technology
(‘ICT’) that cut across Africa.

32 Seplat Petroleum Development Company Plc

The economic The rising focus on infrastructure Across Africa, infrastructure contributed Strategic report
growth effect development is critical for Africa to sustain 99 basis points to per capita economic
its present impressive economic growth growth from 1990 to 2005, compared with
rates. Infrastructure is a critical productive 68 basis points for other structural policies. Governance
input that impacts directly on economic That contribution is almost wholly
growth and indirectly on the efficiency of attributable to advances in the penetration
other complementary factors of productivity. of telecommunication services. On the other
Investment in new infrastructure, hand, poor power supply shaved 11 basis
infrastructure upgrades and maintenance points from per capita growth for Africa as a
has accounted for a significant share of GDP whole and as much as 20 basis points for
growth in the past decade. Countries with South Africa (Calderon, 2008).
above average levels of infrastructure in
Sub-Saharan Africa, and those that have 11basis points
invested significantly in their infrastructure
development in recent years, have   shaved from per capita
experienced accelerated growth, for growth for Africa due to
example, Rwanda, Ethiopia, South Africa poor electricity supply
and Nigeria.

Cost of doing Financial statements
business effect
Additional information
In Africa, the current state of infrastructure
remains a major constraint to doing business,
reducing firm productivity by about 40%,
imposing extra burden on businesses through
private provisions of power, security, water
and roads (Escribano et al, 2008). Power ranks
as the major business obstacle across most
parts of the continent. Inefficient functioning
of ports and associated customs clearance is
also very significant. Other challenges include
transport and ICT inadequacies.

40%

reduced productivity due to
infrastructure constraints

Human Diversification and For countries with small markets, regional
development effect industrialisation effects integration and cooperation will allow for
economies of scale in infrastructure
Development of infrastructure projects No country can successfully transform its development by pooling resources together
contributes directly to socio-economic economy without appropriate complementary to create bigger markets that will be attractive
development through creation of jobs, infrastructure. Good infrastructure networks to non-public sector investors. Regional
boosting farm and off-farm productivity and link up agricultural raw materials that are integration would also contribute to reducing
incomes, especially in the poor rural areas, largely based in the rural areas with the the regulatory burden facing domestic
thereby reducing poverty, and meeting other industries that are largely located in the industries through harmonising policies and
sustainable development goals, such as urban centres. Power will allow rural farmers restraining unfavourable domestic policies.
improved access to clean water, education, to better preserve their farm output and Furthermore, it would boost inter and
health, clean energy and better roads. reduce post harvest losses. With reliable intra-African trade, thereby accelerating
Access to potable water can lead to and stable power, manufacturers will be industrialisation across the continent.
reduction in diseases such as cholera and in a better position to compete with foreign
dysentery, which are leading causes of infant producers in local and international markets.
mortality. Road networks when constructed This will boost economic growth, employment
will also open up host communities and and reduce poverty.
regional markets. Power is key to realising
the human development goals agenda as per
capita energy and power consumption is
highly correlated with diverse indicators
of quality of life.

Power is key to realising the
human development
goals agenda

Annual Report and Accounts 2017 33

A spotlight on Nigeria continued

The Nigerian connection

Nigeria, with a population of around and privatisations of some assets like
186 million (2016 estimate) and a GDP of refineries, railways, airports, among others,
US$376 billion, is the most populous and and exploring the options presented by the
largest African economy. The population is public pension funds and the sovereign
predominantly young and dynamic. The wealth funds (‘SWF’).
country sits astride a huge deposit of energy
resources making it the largest producer and Power is by far the most binding constraint
exporter of petroleum in Africa and among to doing business in Nigeria. Apart from being
the top ten in the world. Oil and gas reserves the most efficient form of energy, electricity
are also large by regional and global is hugely important for production processes
standards1. According to the 2014 World in all sectors of the economy. Other factors
Bank’s Enterprise survey, the major obstacles of production, capital machinery and
faced by businesses operating in Nigeria are equipment, computers, and even labour,
limited access to finance, poor infrastructure depend on the availability of a reliable and
(especially power) and corruption. The value quality electricity supply. Little wonder that
of Nigeria’s total infrastructure stock (road, Nigerian firms have no choice but to spend
rail, power, airports, water, telecoms and large investments on self generated provisions
seaports) represents less than 30% of GDP, of power. The cost of this extra investment in
far below the acceptable standard of 70%. power is heavier on small and medium scale
Nigeria lags behind comparator countries like enterprises than large enterprises.
India, Brazil and South Africa, with total core
infrastructure stock as a share of GDP at Doing business, Global ranking
58%, 47% and 87% in 2012, respectively on quality of infrastructure
(NPC, 2013).
Overall infrastructure 132
To bridge this gap, the current administration
has launched a medium-term development Roads 126
agenda tagged the Economic Recovery and
Growth Plan (‘ERGP’). The Plan envisages that Railroads 103
the Nigerian economy will attain a 5% annual
economic growth rate by 2020. This growth Ports 117
target is, however, dependent on closing the
massive infrastructure gap in the economy, Air
especially power. Hence, the country will put 119
preeminent attention to power and gas
infrastructure in the development of the First Electricity supply 137
Operational Plan for the Nigerian Integrated
Infrastructure Masterplan (‘NIIMP’) which Mobile telephone subscription 118
covers the period 2017-2021.
Fixed telephone lines 137
The NIIMP is a major government initiative
developed to accelerate infrastructure Source: World Economic Forum, Grid supplied power in Nigeria has been
development. Its primary objective is to raise Global Competitiveness Index Report, 2017–2018. so irregular that the economy has been
national infrastructure stock / GDP ratio described as a ‘generator economy’
from 20-25% to 70% by 2043. According to Only about 57% of Nigerians have access (IseOlorunkanmi, 2014). A series of power
the NIIMP, Nigeria spends US$10 billion to on-grid power. Aliyu et al. (2013) pointed sector polls conducted by NOI Polls Ltd
annually on infrastructure, half of which out that 60% of the time there is no access for the second quarter of 2013 revealed
comes from the private sector. About 70% of to power in Nigeria. Blackouts are that about 130 million, representing 81%,
infrastructure spending is distributed among commonplace and Nigerians are forced out of the 160 million Nigerians generated
ICT (28%), transport (23%) and energy (19%). to rely on biomass fuel and petrol or diesel their own power through alternative sources
The estimated cost for meeting the target of generators to make up for the unreliable to make up for irregular/non-existent
infrastructure stock/GDP ratio of 70% will power supply from the national grid2. The power supply.
require an annual investment expenditure national average for power supply is around
of US$100 billion over the 30-year period of 35 hours a week. Nigerian households spend 1 Current estimates show that Nigeria has over
the NIIMP. Government projected that 48% almost four times as much on fuel/electricity 37 billion barrels of oil reserves and 187 trillion
of this investment will be financed by the as they do on healthcare and only half as cubic feet of proven gas reserves.
private sector. Partnership between the much of their fuel/electricity expenditure
public and private sectors is therefore very on education. 2 It is estimated that nearly US$22 billion of foreign
important to deliver on the infrastructural exchange is spent annually on the importation of
goals set out in the ERGP and the NIIMP. diesel. This is a huge pressure on Nigeria’s foreign
Options available to complement reserves and exchange rate. Improved electricity
government finance include public supply locally will relieve this burden on foreign
private partnership (‘PPP’) arrangements, exchange as well as contribute to lower energy
budgets for electricity consumers in the country.
Household savings from high energy budgets can
be spent on other human development needs.

34 Seplat Petroleum Development Company Plc

Strategic report

Governance

Financial statements

Transport Additional information

Nigeria’s access to electricity (% of population) 1990-2014 Nigeria’s publicly owned and operated transportation infrastructure
100 remains a major obstacle to economic development. While the
Nigerian government has opened the ports for the private sector
75 to manage and operate through concession agreements, the
50 government still manages the rail and roads sector. A sound legal
framework and policy reforms are needed to allow PPPs to move
25 forward in the rail and roads sector. Of the 50,000 miles of road,
0 only slightly more than 10,000 miles are paved, and many of these
Source: World Bank Indicators, 2016. paved roads are in poor shape. Only five of Nigeria’s 22 airports are
currently able to receive international flights. The government is
seeking to encourage private sector involvement in these major
airports in a bid to revamp the aviation infrastructure in the country
and better position it for business. Nigeria’s railway network
currently has eight lines that are collectively only about 2,000 miles
long. These railways require major rehabilitation, modernisation,
and expansion. The Chinese government is collaborating with the
government to rehabilitate and expand the existing rail system.

O2nl,y000 miles

of rail lines

5/22 airports

are currently able to receive
international flights

1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014

Annual Report and Accounts 2017 35

A spotlight on Nigeria continued

Energy Nigeria’s access to electricity (% of population) 2000-2014, 2000
compared to other African countries 2014
Access to reliable and affordable power is 100
vital for businesses. Nigeria’s manufacturing 75
sector had an estimated self-generation 50
capacity of 13.2GW in 2013 and spent over 25
₦213billion on private power generation 0
over a three-year period. Nigeria’s growth
potential will remain unrealised if these Source: World Bank Indicators, 2016.
power sector challenges are not addressed. Nigeria
Although Nigeria has 12.5GW of publicly Algeria
installed generation capacity, less than 5GW
is typically available on a regular basis Cote
(USAID Power Africa Factsheet, 2017). d’Ivoire

Addressing the power deficits of Nigeria will Egypt
require policy makers to address a number Ethiopia
of challenges: electricity and gas pricing,
gas-to-power infrastructure, technical Gabon
and economic losses, weakness in power Ghana
transmission and distribution networks, Kenya
under-investment across the entire value Mauritius
chain, among others. Morocco
Senegal
South
Africa

36 Seplat Petroleum Development Company Plc

Strategic report

Nigeria’s installed power generation mix Experts’ estimates of the value of The link between the power and petroleum Governance
investment needed to resuscitate and sector is very important in Nigeria. Currently,
Thermal 82.4% rehabilitate Nigeria’s power sector range thermal plants (mainly gas fired plants)
Hydro 17.6% from US$10 billion in the short term to account for over 82% of power generation
Source: World Bank US$900 billion in the next 30 years. mix. This implies that upstream petroleum
Indicators, 2016. companies have a significant role to play
The government has launched several in bridging the gas-to-power supply gap.
Gas to domestic power pricing initiatives to address the myriad of power
has improved (US$/Mscf) problems, including inequality in rural-urban It is important to point out that most of the
access. These include the 2017 Power Sector newly licensed power plants are gas fired
2009 Recovery Programme (‘PRSP’), which plants and it is for this reason that the
2010 contains a series of policy actions, and Domestic Supply Obligation (‘DSO’) was
2011 operational, governance and financial introduced. The DSO is a system that
2012 interventions to be implemented by 2022. manages price increases to meet the
2013 The programme aims to restore the financial market price and aims to guarantee gas
2014 viability of Nigeria’s power sector, improve supply to ‘strategic sectors’ of the economy
2015 transparency and service delivery and reset which include power.
2016 the supply industry for future growth. The
2017 PRSP also focuses attention on the role of Financial statements
the private sector in closing the power supply
Average red diesel price gap across the country.

0 5 10 15 20
Source: NNPC; assumed 1 MMbtu equals 1 Mscf.
Based on DSO pricing levels.

Water There is more than Additional information
enough water resource
Water is central to human existence. for domestic, industrial,
Socio-economic development and agricultural, hydropower,
environmental sustainability revolve transportation and
around it. The total surface and ground recreational use.
water resource in Nigeria is estimated at
above 250 billion cubic metres representing National access to water supply was
about 1,800 m3/capita/year of total estimated in 2015 at 69%. This implies
renewable water resources, which is well significant effort is required to ramp up the
above the 1,000m3/capita/year typically water supply system to meet the 100% water
used to define water scarcity. Nigeria is supply target envisaged by the SDG by 2030.
NOT a water-poor country. There is more Again, power provision is key to ensuring that
than enough water resource for domestic, clean water is available for Nigerians living in
industrial, agricultural, hydropower, rural, semi-urban and urban areas of the
transportation and recreational use. country. The high rate of failure of solar
However, Nigeria is ranked as an Economic powered borehole water across the country
Water Scarce Country, because there is a has to be urgently addressed, even as policy
lack of investment and proper management seems to favour non-grid power to meet the
to meet demand. needs of the rural population.

250bn m3

total surface and ground
water resource estimate
in Nigeria

Annual Report and Accounts 2017 37

A spotlight on Nigeria continued

ICT

The ICT sector, buoyed by the
telecommunication sub-sector, has
recorded major advancement and growth.
Liberalisation policies in the ICT sector have
resulted in widespread, low-cost mobile
services and major private investments in
the development of a national fibre-optic
backbone. The sector has attracted
significant investment since it was
liberalised in 2000 and, according to the
Nigerian Communications Commission,
investment in the sector is estimated at over
US$70 billion since 2000. This investment
has created direct and indirect employment
for Nigerians. However, quality of service
delivery remains a major challenge as costs
remain high due to energy challenges.

Recent infrastructural Mambilla Hydro Power project Airport concession
developments The government has approved and awarded The government has approved the
contracts for this US$5 billion hydro power concession of the Lagos and Abuja
There are numerous developmental and project which is expected to be operating in airports for the pilot phase which will
infrastructural projects springing up six years’ time. The project is expected to ensure private sector involvement in the
across vital sectors of the nation’s expand the amount of power generated to running of the airports. The 2018 budget
economy that can catalyse growth. the grid and also expected to drive the power also provides for the construction of a
These include: mix and energy security of the country. second runway at Abuja Airport.
₦9.8 billion was allocated in the 2018
Gas pipelines budget towards the Mambilla project. Nigeria launches first African Sovereign
Several gas pipeline projects have been Green Bond
approved by the Federal Executive Council Lagos-Calabar Railway The government has approved the raising
to address local gas supply challenges in The US$11 billion rail project, which is to of ₦10.6 billion green bonds to finance
Nigeria and as part of the implementation be carried out in two phases, has been renewable energy projects to protect the
of the First Phase of the Nigerian Gas approved by the government. It will connect environment. According to the Debt
Master Plan (‘NGMP’). The very important two major shipping and trading hubs: Lagos Management Office, the bonds would be
127 kilometre Obiafu-Obrikom-Oben (‘OB3’) in the west with major eastern cities such used to finance three renewable energy
gas pipeline will be the first gas pipeline to as Enugu, Port Harcourt and Calabar. projects: Renewable Energy Micro-
transport gas from the gas rich east of the Utilities Programme, Re-energising
country to the demand centres in the west East – West Road and Education Programme and Afforestation
of Nigeria. On completion in 2018, this Second Niger Bridge Programme. The bonds will provide an
pipeline system will transform the Funds for these two critical infrastructural alternative financing source for renewable
infrastructure landscape and boost the projects were included in the 2018 budget energy projects in the country, help
availability of gas to existing power plants which earmarked ₦10 billion for the Second protect the environment and assist the
and manufacturers. Various contract sums Niger Bridge and ₦17.82 billion for the country in meeting its commitment under
including US$2.8 billion were approved for completion of the East – West Road. Funding the Paris Agreement on Climate Change.
the construction of a 40-inch pipeline will come from issuance of government
across 614 kilometres from Ajaokuta- bonds and through PPP. Lekki Deep Seaport
Abuja-Kaduna-Kano. The project is slated Construction is expected to begin at the
for completion in 2019. Another contract Infrastructure/Sukuk Bond Lekki Deep Seaport in 2018, as project
has also been approved for the The use of Sukuk Bonds to raise funds sponsors have opened discussions with
engineering, verification, procurement and to finance infrastructure is one of the domestic financial institutions and
construction of a 40-inch pipeline across innovative financing schemes undertaken commercial lenders. Both the Nigeria
30 kilometres from Odidi-Warri gas in 2017. The ₦100 billion bond was Ports Authority and the Lagos State
pipeline expansion project to transport oversubscribed and the proceeds are to be government have taken up equity
additional gas supply from upstream used to construct and rehabilitate 25 roads participation. On completion in 2019, this
producers to various demand points at in Nigeria’s six geo-political zones. These multi-purpose deep sea port in the heart
a cost of ₦7.7 billion and US$56 million. roads have been selected by the Federal of the Lagos Free Trade Zone will be one
These contracts will provide a massive Ministry of Power, Works and Housing of the most modern ports in Africa and
boost to energy transportation networks (‘FMPWH’) because of their strategic will support trade across Nigeria and
that will benefit all sectors of the economy. economic importance. the entire West African region.

38 Seplat Petroleum Development Company Plc

Strategic report

Seplat’s role Seplat is well positioned <5GW – Governance
to align its business plan 30GW
Following the implementation of the with the needs of the Financial statements
Domestic Supply Obligation in 2010, gas Nigerian economy and to government predicted
pricing has moved to commercial levels as support the government’s electricity generation Additional information
the gas market transitions to a free market energy agenda increase by 2030
system. Seplat has been able to align its
gas business with the broader needs of With further expansion of its already sizeable ranked as the largest for a Sub-Saharan
the Nigerian economy and emerge as gas business planned, Seplat will not only Africa company since 2008 and the
a key strategic operator in support of the make an increasing contribution to bridging second largest ever for a Nigerian company,
government’s energy agenda. This has the current power shortages in Nigeria, but demonstrating the international appetite
to be the template for future successful at the same time will add momentum to the for high quality indigenous Nigerian
businesses in the energy space in particular, positive multiplier effects derived from opportunities. Alongside this, Seplat has
where the shared values of all stakeholders increased electrification that can boost successfully accessed the debt capital
are integrated into the long-term business other sectors of the nation’s economy: markets and in January 2015 completed a
plans of the operating companies to deliver higher employment, higher industrial output, US$1 billion debt refinancing that attracted
sustainable growth. higher agricultural output and reduced participation from numerous international
imports which will lead to higher income, banks in a revolving credit facility. This was
The demand for power is obvious for greater spending power and higher followed in March 2018 by a further debt
several decades to come in Nigeria and the standards of living. refinancing that saw Seplat make its debut
government envisages that power generation rated bond issuance. With a foot in each
will need to increase from the current level of This will, however, require the expansion of of the domestic and international markets
less than 5GW to 30GW by 2030. Given the current and development of new large-scale Seplat is clearly differentiated amongst
prolific reserves in the country, gas is the gas feedstocks and gas infrastructure indigenous peers and well positioned to
obvious fuel to underpin large-scale and grid projects which in turn will need substantial access multiple forms of capital globally
based power generation for the long term. capital investments. The domestic capital to fund future growth. In conclusion,
Against this current backdrop of a wide markets alone will not be able to fund future Seplat represents a template and has
power supply deficit, of which inadequate gas capital requirements, meaning that access to set a precedent that other indigenous
supply is a major cause, Seplat is positioned the international capital markets and private Nigerian companies should aspire to
to play a leading role in addressing the issue sector participation are going to be integral replicate and help position Nigeria
by boosting a reliable supply of processed to achieving success. and its vast array of opportunities as
gas to the domestic market which in turn an attractive investment destination.
can underpin increased power generation. In April 2014 Seplat became the first, and to
Seplat has built an upstream portfolio with date only, Nigerian company to fully dual list
considerable gas reserves in the ground on the Nigerian and London stock exchanges
and has made substantial investments and raised US$535 million in an IPO that
to increase midstream production and
processing capacity to meet the growing
local demand.

References:
Aliyu, A., A. Ramli, and M. Saleh (2013). ‘Nigeria
Electricity Crisis: Power Generation Capacity
Expansion  and Environmental Ramifications’.
Energy,  61(8): 354–67.
Calderon, C. 2008. Infrastructure and Growth
in Africa. AICD, Working Paper, World Bank.
Escribano, A., Guasch, J. L. and Pena, J. 2008. Impact of
Infrastructure Constraints on Firm Productivity in Africa.
AICD, Working Paper, World Bank, Washington, D.C.
IseOlorunkanmi O. J. (2014) ‘Issues and challenges
in the Privatized Power Sector in Nigeria’. Journal of
Sustainable Development Studies ISSN 2201-4268
Volume 6, Number 1, 2014, 161-174.
NPC (2013), Nigerian Integrated Infrastructure
Master Plan. Draft Report.
USAID Power Africa Factsheet (2017)
https://www.usaid.gov/powerafrica/nigeria
World Bank (2016). ‘World Bank Indicator:
Electric Power Consumption (kWh per capita) 2014’.
http://data.worldbank.org/indicator/EG.USE.ELEC.KH.PC

Annual Report and Accounts 2017 39

Key performance indicators Key
Year-on-year progress
Measuring
our progress Below expectations
In line with expectations
Seplat measures its progress through Above expectations
certain key performance indicators that
are closely linked to the successful Linked to remuneration?
delivery of its strategy.
Yes, this KPI is linked to remuneration
No, this KPI is not linked to remuneration

Strategic pillars
Maximise production and cash flows
from operated assets
Move up 2C resources into
2P reserves category
Commercialise and produce
gas reserves
Pursue a focused acquisition
and farm-in strategy
Be a highly responsible
corporate citizen

Net working interest Progress Linked to remuneration? Delivering on our
production (boepd) (See page 100) strategic pillars:

36,923 Definition losses decreased significantly to 3.5% from
The Company’s share of oil and gas produced previous levels of around 10%.
43,372 during the year proportionate to its working Outlook
interest in each producing block. Volumes The Company completed upgrades to the Warri
30,823 36,923 expressed are as measured at the Company’s refinery jetties in 2017 that will enable sustained
28,311 25,877 facilities, prior to any reconciliation losses. exports of 30,000 bopd (gross), if required in the
Relevance future. Alongside this, a third export option
2013 2014 2015 2016 2017 An indicator of production strength at the through the pipeline into the Escravos terminal
Company’s current blocks and the impact is expected to be completed in Q3 2018 and will
of development activities at organic and become available for Seplat to utilise. Having
inorganic projects. also increased gas processing capacity to 525
Progress MMscfd, the Company expects to sign additional
Oil production during H1 2017 was heavily GSAs that will allow for gas production to be
influenced by force majeure at the Forcados increased further.
terminal owing to disruption of the subsea Risk management
export pipeline in February 2016. Force majeure The Company has an in depth understanding
was lifted on 6 June 2017 and full production of the subsurface and constantly monitors
operations were rapidly restored. Consequently, individual well and reservoir performance in
full year 2017 working interest production stood order to optimise the drawdown rate on each
at 36,923 boepd (17,853 bopd and 114 MMscfd), well and maximise long-term economic recovery
up 43% year on year. Production uptime on the of oil and gas from the reservoirs. It has also
Trans Forcados System post lifting of force prioritised the establishment of alternative oil
majeure was 81% while average reconciliation export routes to mitigate high concentration risk.

2P reserves movement Progress Linked to remuneration? Delivering on our
(% increase/decrease) (See page 100) strategic pillars:

+3.2 Definition Outlook
The number of barrels of oil equivalent added to The Company has a significant working interest
480.0 462.0 477.0 the 2P reserves base during the year, expressed 2C resource base of 61 MMboe that offers good
as a percentage increase/decrease. reserves growth potential. The Company will
281.0 Relevance also continue to evaluate acquisition
An indicator of the Company’s ability to opportunities and undertake a focused
226.0 capitalise on organic opportunities within E&A drilling programme.
its portfolio and inorganic opportunities Risk management
2013 2014 2015 2016 2017 to replenish its reserves base. The Company high grades its inventory of
Progress exploration and appraisal opportunities,
Working interest 2P reserves at end 2017 stood each being subject to rigorous technical and
at 477 MMboe, an increase of 3% year on year. commercial evaluation to de-risk as far as
The main drivers of the upward revision are an possible prior to committing capital. When
increase in oil reserves attributed to the Sapele evaluating new acquisitions the Company
Shallow reservoir at OML 41 and gas reserves at is careful to maintain price discipline and
OML 53 more than offsetting volumes produced undertake rigorous analysis.
in the year.

40 Seplat Petroleum Development Company Plc

Production opex Progress Linked to remuneration? Delivering on our Strategic report
(US$/boe) strategic pillars:

5.96 Definition Outlook
The operating costs (excluding non-cash flow The Company remains focused on cost control.
10.27 8.79 expenses, and financing costs) net to the Whilst increases in certain cost components
9.58 9.31 Company divided by the Company’s working are expected year on year there are areas where
interest barrels of oil and equivalent produced downwards pressure can be applied with the
5.96 in the period. objective of achieving a stable unit cost. Governance
Relevance Risk management
2013 2014 2015 2016 2017 An indicator of how cost efficiently the The Company carefully monitors expenditures
Company is able to produce its oil and gas and continually analyses its underlying cost
reserves. By controlling its operating cost base base, making comparisons to prevailing market
the Company is able to be more resilient to rates in order to ensure that the Company is
periods of depressed oil prices. identifying and able to action cost saving and
Progress efficiency gains keeping it competitively
Opex costs per unit of production fell by 32% positioned on the cost curve.
year on year in 2017 as a result of continued
efforts to improve operational efficiency,
resulting in lower operating and maintenance
costs, and the effect of resuming of exports
through the Forcados terminal, as opposed
to utilising higher cost barging operations via
the Warri refinery jetties.

EBIT Progress Linked to remuneration? Delivering on our Financial statements
(US$m) strategic pillars:
Definition
112.4 The Company’s earnings before the deduction Outlook
of interest and tax expenses. Improved oil production levels, tight cost
478.7 Relevance control and anticipated growth in gas
An indicator of the Company’s earnings ability. production at OMLs 4, 38 and 41 will ensure
301.6 An increase in EBIT requires growth in revenue robust earnings potential in the future.
and/or strong cost control. Development of the substantial gas and
171.0 112.4 Progress condensate reserves at OML 53 will also Additional information
EBIT in 2017 reflects the higher oil and gas enhance the future earnings profile.
(158.0) production and higher oil price realisations year Risk management
on year. 2017 EBIT was also positively impacted The Company has robust financial processes
2013 2014 2015 2016 2017 by the lower opex per unit of production and in place and carefully monitors revenues, cost
lower general and administrative expenses. of sales and admin costs to ensure continued
strong profitability. Oil price is a major
influencing factor on the Company’s revenue.
The Company is analysing hedging strategies
to help mitigate exposure to oil price volatility.

LTIF (number of incidents Progress Linked to remuneration? Delivering on our
per million man hours) (See page 100) strategic pillars:

0.31 Definition Outlook
The number of lost time incidents recorded In 2018 efforts will continue to minimise the
0.42 0.40 per million man hours worked. frequency of lost time incidents in all areas
Relevance of operations. The Company will continue to
0.33 An indicator of health and safety performance ensure high HSSE standards are met and
0.31 that is widely established within the oil and assess opportunities to constantly improve
gas industry. its HSSE systems and protocols.
2013 2014 0.00 2016 2017 Progress Risk management
2015 Despite the low level of rig-based activity in The Company has in place extensive and
2017 the Company remained operationally well developed HSSE policies and reporting
active, completing the Oben gas plant Phase II procedures with an emphasis on the early
expansion project and expanding the gross identification and mitigation of HSSE risks.
capacity of the alternative oil export route via The Company closely monitors its HSSE
the Warri refinery jetties to 30,000 bopd. The performance and is constantly evaluating
Company achieved an LTIF of 0.31 in the year, ways to improve its performance.
which is slightly lower than 0.33 in 2016.

Annual Report and Accounts 2017 41

Additional performance metrics Strategic pillars

Tracking our Maximise production and cash flows
performance from operated assets
Move up 2C resources into
In addition to its key performance 2P reserves category
indicators, Seplat also tracks Commercialise and produce
performance against additional gas reserves
metrics that further assist in Pursue a focused acquisition
measuring progress. and farm-in strategy
Be a highly responsible
corporate citizen

Net cash flow from operating activities Delivering on our
(US$m) strategic pillars:

447 Definition Outlook
The Group’s operating cash flow in the year. Strong underling wellhead oil production
447 Relevance capacity and anticipated future growth in
An indicator of the cash generative potential gas production will ensure robust cash flow
291 of the Company’s producing oil and gas blocks. generation in the future. Development
225 Progress of the recently acquired OML 53 block together
167 172 Seplat’s operating cash flow in 2017 reflects with OPL 283 will also significantly augment
the higher oil and gas production following future cash flow potential.
2013 2014 2015 2016 2017 the resumption of full production operations Risk management
after force majeure at the Forcados terminal Careful financial management and high levels
was lifted on 6 June, together with higher of operating efficiency allow the Company
oil price realisations, lower opex costs per to ensure positive cash generation from its
unit of production and lower general and operating activities. Access to multiple oil
administrative costs. 2017 operating cash flow export routes will also de-risk distribution
also reflects the accelerated recovery of legacy of oil production to market and improve
cash calls owed by NPDC through measures uptime, positively influencing cash flows.
that included receipt of NPDC’s share of gas
revenues and monetisation of oil volumes
allocated by NPDC to Seplat.

Capital expenditure Delivering on our
(US$m) strategic pillars:

33 Definition Outlook
The total amount of capital expenditure made The Company will continue to invest in the
321 during the year, excluding acquisition costs. development of its portfolio, allocating capital
Relevance to the opportunities that offer the best returns
233 An indicator of the Company’s level and volume growth potential whilst scaling and
of investment activities in production, timing investments at appropriate levels to
152 development and exploration and closely match cash flow generation.
appraisal activities. Risk management
2013 2014 2015 52 33 Progress Project investments are monitored closely
2016 2017 The Company has continued to invest in the against budgets to minimise the risk of
development of its portfolio of blocks onshore over-runs. The Company benchmarks
the Niger Delta and in particular has prioritised every investment opportunity to ensure
acceleration of gas capacity development to capital is deployed to only the highest return
supply the domestic market. By having projects, and adheres to a price disciplined
discretion over capex, 2017 spend was scaled acquisition strategy.
back significantly owing to force majeure at the
Forcados terminal from 21 February 2016 to
6 June 2017 and the Company’s prudent
strategy of maintaining a liquidity buffer.

42 Seplat Petroleum Development Company Plc

Strategic report

Governance

Realised oil price Delivering on our Financial statements
(US$/bbl) strategic pillars:

50.4 Definition covering 3.6 MMbbls at a strike price of
The average oil price per barrel sold by the US$40.0/bbl in H1 and covering 3.0 MMbbls
110.2 Company during the period. at a strike price of US$50/bbl in H2.
Relevance Outlook
97.2 The Company’s financial performance is closely The Company has historically sold over 90% of
linked to the oil price. its produced oil under the Forcados blend that
51.2 50.4 Progress has generally received a premium to a Brent Additional information
40.4 Oil prices improved overall in 2017 but remained marker price. Oil prices are expected to remain
volatile. Brent started the year at the US$55/ subject to macro economic volatility.
2013 2014 2015 2016 2017 bbl level before recording a low of around Risk management
US$44/bbl in June, recovering steadily Seplat’s management continues to closely
thereafter to exit 2017 at the US$67/bbl level. monitor prevailing oil market dynamics and will
The Company put in place dated Brent put consider further measures and take advantage
options covering a volume of 3.69 MMbbls in of opportune periods to implement additional
2017 at a combined weighted average strike hedges to provide appropriate levels of cash
price of US$48.38/bbl. This hedging flow assurance.
programme has been rolled forward into 2018
with deferred premium put options in place

Staff turnover Delivering on our
(%) strategic pillars:

2.7 2.7 Definition Outlook
The rate at which full time staff of Seplat The industry is still expected, over the longer
2.6 choose to leave the Company voluntarily, term, to continue to face skills shortages in key
expressed as a percentage of average full areas with competition for high performing
1.4 time headcount during the year. individuals amongst competitors being intense.
1.0 1.0 Relevance Risk management
An indicator of the Company’s ability to attract The Company’s policy is to provide industry
2013 2014 2015 2016 2017 and retain personnel. The loss of people can competitive benefits packages and provide
result in skills shortage, loss of knowledge progressive career opportunities to retain and
and higher recruitment costs. attract high-performing employees.
Progress
The Company has continued to develop its
employment policies with the aim of attracting
and retaining high calibre industry talent. This
resulted in staff turnover remaining low in 2017
at 2.7%, slighter higher than the prior year.

Annual Report and Accounts 2017 43

Operational overview

Building our
output capacity

Our proactive approach to overcoming
challenges and management actions
led to an improved performance
outlook with greater optionality around
export routes at our core assets.

Overview Full year average daily production Working interest 2P gas reserves
Seplat’s current portfolio comprises direct 2017 full year average working interest (2010 to 2017)
interests in five oil and gas blocks and production stood at 36,923 boepd and
a revenue interest in one further block, represents an overall increase of 43% year 2017 251 MMboe1 -6%
all of which are located in the onshore to on year. Within this, liquids production was
swamp areas of the prolific Niger Delta. up 77% year on year whilst gas production 2016 267 MMboe
This portfolio provides the Company with was up 20% year on year. The 2017 figures
a robust platform of oil and natural gas reflect the resumption of full production 2010 142 MMboe
reserves and production capacity together operations following the lifting of force
with material upside opportunities through majeure at the Forcados terminal on 6 June. Movement in working interest 2P gas
future development projects, 2C to 2P Overall reconciliation losses arising from use reserves from end 2010 to end 2017.
conversion and exploration and appraisal of third-party infrastructure were around
drilling. We also continue to view the shallow 3.5% for the year. Post force majeure being Working interest 2P liquid reserves
water offshore areas of the Niger Delta as an lifted, net working interest production from (2010 to 2017)
appealing opportunity set and one we hold June to year end averaged 47,522 boepd
ambitions to access in the future. (comprising 26,527 bopd liquids and 2017 226 MMboe1 +16%
126 MMscfd gas).
Working interest reserves 2016 195 MMboe
Working interest 2P reserves as assessed Alternative oil export route
independently by Ryder Scott at 31 December The Company’s policy of creating multiple 2010 139 MMboe
2017 stood at 477.3 MMboe, comprising export routes for all of its assets has
226.3 MMbbls of oil and condensate and resulted in it actively pursuing alternative Movement in working interest 2P liquid
1,455.7 Bscf of natural gas. This represents crude oil evacuation options for production reserves from end 2010 to end 2017.
an increase in overall 2P reserves of 3% at OMLs 4, 38 and 41 and potential strategies
year on year. The main driver of the upward to further grow and diversify production in Total working interest 2P reserves
revision year on year is increased oil reserves order to reduce any over-reliance on one (2010 to 2017)
attributed to the Sapele Shallow field at OML particular third-party operated export
4 and an increase in gas reserves at OML 53 system. In line with this objective, in 2017 2017 477 MMboe1 +3%
more than offsetting volumes produced in the Company successfully completed
the year. repairs and upgrades on two jetties at the 2016 462 MMboe
Warri refinery that will enable sustained
At 31 December, working interest 2C exports of 30,000 bopd (gross) if required 2010 281 MMboe
resources stood at 61 MMboe, comprising in the future. Prior to the repair and upgrade
48 MMbbls of oil and condensate and work on the two jetties gross exports via the Movement in total working interest
75 Bscf of natural gas. Consequently the Warri refinery were around the 15,000 bopd 2P reserves from end 2010 to end 2017.
Company’s working interest 2P+2C reserves level. Exports via the Warri refinery jetty to
and resources stood at 538 MMboe at date have typically incurred barging costs 61 MMboe
31 December 2017, comprising 274 MMbbls of around US$11/bbl but partially offsetting
oil and condensate and 1,530 Bscf of this, exports via this route are not subject to Working interest 2C resources
natural gas. the reconciliation losses or terminal crude at 31 December 2017
handling and transport charges when
exporting via the TFS. At 31 December 2017
a gross volume of 1.9 million barrels had
been evacuated via this route in the year.

1 As certified by Ryder Scott CPR
dated 31 December 2017.

44 Seplat Petroleum Development Company Plc

Strategic report

Prior to establishing the alternative oil pipeline contractor FENOG to ensure timely Governance
export route via the Warri refinery, gas completion of the pipeline. Post year end,
production was limited by storage FENOG has initiated completion works. Gas business Financial statements
constraints for associated condensate Negotiations between the pipeline operator, Alongside its oil business, the Company has
volumes that would ordinarily be spiked into Pan Ocean, and Chevron in relation to Crude also prioritised the commercialisation and
crude oil production and exported via the Handling Agreements are also advancing. development of the substantial gas reserves
Forcados terminal. Crucially, availability of The Heads of Terms for the Crude Transport and resources identified at its blocks and is
the alternative export route enabled Seplat Agreement between NPDC/Seplat JV today a leading supplier of gas to the domestic
to step up deliveries to the domestic market and NAPIMS/Pan Ocean JV is also nearly market in Nigeria. The lifting of force majeure
and greatly improve security of supply. 100% complete and Seplat anticipates the pipeline on 6 June 2017 and resumption of full exports
of Seplat’s gas production is supplied to the to be fully commissioned and operational via the TFS removed the condensate handling
domestic market. in Q3 2018. constraints and translated into an immediate
uplift in gross gas production. As a result,
Longer term, the Amukpe-Escravos With line of sight on the availability of three gross production in the second half averaged
160,000 bopd capacity pipeline is set to independent export routes it is Seplat’s 283 MMscfd, up 26% from a previously
provide a third export option for liquids ultimate intention to utilise all three to constrained level of 225 MMscfd in the
production at OMLs 4, 38 and 41. Seplat ensure there is adequate redundancy in first half of the year. Furthermore, having
signed a Funding Agreement in December evacuation routes, reducing downtime which successfully completed and commissioned
2017 with the pipeline owners, NAPIMS has adversely affected the business over the Phase II expansion of the Oben gas
(a 100% subsidiary of NNPC), Pan Ocean a number of years, significantly de-risking processing plant early in 2017, taking overall
Corporation Limited ‘Pan Ocean’ and the the distribution of production to market. operated gas processing capacity to the
525 MMscfd level, the Company is actively
Working interest reserves engaged with counterparties to increase
contracted gas sales with the intention
At 31/12/20162 At 31/12/20173 of taking gross production towards the Additional information
400 MMscfd level. The Company also
Liquids Gas Oil Liquids Gas Oil commenced supplies of commissioning gas
MMbbls Bscf equivalent MMbbls Bscf equivalent to the Azura power plant, in December 2017,
ahead of commencement of full operations
137.3 MMboe 174.7 MMboe later in 2018, when it will take 116 MMscfd
8.5 5.1 on a take or pay basis.
OMLs 4, 38 & 41 41.1 766 269 657 288
OPL 283 8.5 41.5
OML 53 72 21 5.0 62 16
OML 551 195.4 226.3
Total 671 157 736 168

35 15 –5

1,544 462 1,455 477

1 Under the revised commercial terms in relation to OML 55, Seplat will no longer be a shareholder in BelemaOil
but will instead have a financial interest until a discharge sum of US$330 million has been paid to Seplat
through the monetisation of oil reserves at OML 55.

2 Working interest reserves stated at 31/12/2016 assessed independently by DeGolyer and McNaughton.
3 Working interest reserves stated at 31/12/2017 assessed independently by Ryder Scott.

Full year average daily production

Seplat % Liquids1 Gas Gross Liquids Working interest
bopd MMscfd Oil bopd Gas Oil
OMLs 4, 38 & 41 45.0% MMscfd equivalent
OPL 283 40.0% 35,060 254 equivalent 15,777
OML 53 40.0% 2,502 – boepd 1,001 boepd
Total 2,687 – 77,438 1,075 114 34,847
2,502
40,249 254 2,687 17,853 – 1,001
82,627 – 1,075
114 36,923

1 Liquid production volumes as measured at the LACT unit for OMLs 4, 38 and 41. Volumes stated are subject to
reconciliation and will differ from sales volumes within the period.

Annual Report and Accounts 2017 45

Operational overview continued
Increased power generation is key to Nigeria’s future.
Seplat is investing to grow gas production and
processing capacity to further step up supplies
of processed gas to the domestic market that can
underpin greater levels of power generation in
the future.

Of the 525 MMscfd total processing operational and cost efficiencies. The reinstating a work programme designed to
capacity, 465 MMscfd is located at Oben Company has made good progress in capture the highest cash return production
with the remaining 60 MMscfd located formalising an incorporated joint venture opportunities whilst diligently preserving
at Sapele. The 375 MMscfd expansion at relationship with government, signing a a liquidity buffer.
Oben (Phases I and II) was completed by Heads of Terms, and inaugurating a joint
Seplat as a 100% investment project. The steering committee to encompass the At the non-operated OPL 283, Seplat
gas processing capacity expansion is also midstream element of the project, in light participated in one appraisal well during
designed to allow the Company to accept of which Seplat’s FID will be aligned with the year. Seplat successfully delivered
third-party gas and receive a processing NNPC approvals. The project is expected the Anagba-1 appraisal well on behalf of
tariff. Another 2 x 10 MMscfd compressors to achieve FID in H1 2018. operator Pillar Oil Ltd in November 2017.
were installed and commissioned in Q4 2017 The well confirmed the extension of the
to capture additional associated gas (‘AG’) Rig-based activity and productive reservoirs of the Ashaka field,
at the Oben flow station (following on from other capital projects located on adjacent OML 60 (operated by
the successful installation of 3 x 10 MMscfd Rig-based activity at OMLs 4, 38 and 41 in the Nigerian Agip Oil Company Limited), into
compressors in 2015). The project is geared 2017 was limited with just one rig deployed OPL 283. The successful well will support
towards elimination of routine flares and for a workover well in the Orogho field. The Pillar in ongoing unitisation discussions with
monetisation of AG. Seplat’s focus on gas workover and recompletion of the Orogho-7 the Nigerian AGIP Oil Company Limited,
monetisation also includes the Sapele production well commenced in July and was thereby enabling the OPL 283 partners to
non-associated gas (‘NAG’) for which completed as planned in August. Upgrades share in the Ashaka wells’ oil production.
commercial discussions are ongoing to the liquid treatment infrastructure at
and development option selected. OMLs 4,38 and 41 were also made that will
enable Seplat to inject export grade dry
The ANOH gas development at OML 53 (and crude via alternative routes and at the same
adjacent OML 21 with which the upstream time eliminate crude handling charges that
project is unitised) is expected to underpin have historically been incurred on water in
the next phase of growth for the gas the wet crude injected into the TFS. While
business and Seplat’s involvement positions the Company continues to exercise
it at the heart of one of the largest green discretion over spend and, having pulled
field gas and condensate developments back on expenditure during the extended
onshore the Niger Delta to date. Seplat is period of force majeure, it is now selectively
well positioned to leverage the experience considering production drilling opportunities
gained at the Oben gas hub to incorporate in the existing portfolio with a view to

46 Seplat Petroleum Development Company Plc