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Know about ADDAX PETROLEUM CORPORATION

Addax Petroleum Corporation (Addax Petroleum) is an international oil and gas exploration and production company focused on Africa and the Middle East. Addax has an asset base consisting of a number of producing properties in Nigeria and Gabon, and exploration and development properties and opportunities in West Africa and the Kurdistan Region of Iraq.

On August 18, 2009, China Petroleum & Chemical Corporation completed the acquisition of Addax Petroleum Corporation. Sinopec Group signed the acquisition agreement at an offer price of CAD 52.8 per share on 24 June 2009. It was approved by the Chinese regulatory authorities on the 6th of August. The closing of this deal represents the largest successful acquisition of overseas oil and gas assets by a Chinese company. According to industry experts, “Addax’s assets are well-structured and of good quality, contain sizeable proven reserves and have strong production volumes with great growth potential.”

The company was founded in 1994 with shares listed on the TSX (since February 2006) and the Main Market of the LSE (since May 2007). With average production of 136.5 Mbbl/d for 2008, Addax Petroleum is one of the largest independent oil producers in West Africa and the Middle East.

Gross working interest production in Nigeria averaged 113.1 Mbbl/d in Q4 2008, an increase of 2% over Q4 2007 and an average of 108.0 Mbbl/d for 2008, an increase of 3% over 2007. During Q4 2008, Addax Petroleum operated five drilling rigs in Nigeria: two jack-up rigs on OML123, one semi-submersible on OML126 and two land rigs on OML124.

Services and Products

Addax Petroleum’s assets are primarily located in Nigeria, Gabon and the Kurdistan Region of Iraq and the company has a good combination of both oil and gas reserves. It has a total of 25 licensed blocks, of which 15 are under exploration and 10 are under development. Of the total blocks, 17 are offshore and 8 onshore.

Number of Employees

326 employees

Financial Information

The company recorded US$ 3.762 billion in revenue for the year 2008, with a net profit of US$ 784 million and an operating cash flow of US$ 1.521 billion. Petroleum sales before royalties in the second quarter (Q2) of 2009 amounted to $735 million, a decrease of 51 per cent over petroleum sales before royalties of $1,493 million in Q2 2008. The decrease in petroleum sales before royalties was primarily driven by a 52 per cent decrease in the average crude oil sales price in Q2 2009 to $59.45 per barrel (/bbl), offset partially by a two per cent increase in sales volumes between the same periods.

Nigerian sales revenues declined in Q4 2008 by 44% compared to Q4 2007, but increased overall in 2008 compared to 2007 by 35%, primarily due to the movement in the oil price.

Market Share

During 2008 Addax Petroleum’s operations in Nigeria accounted for 79% of the Corporation’s total production. Oil production averaged 108.0 bbl/d. Addax’s average oil production from Nigeria in Q2 2009 was 103,290 bbl/d, compared to a Q2 2008 average production level of 105,500 bbl/d. In 2008, Nigerian crude oil production averaged 1.94 million bbl/d, making it the largest crude oil producer in Africa. ADDAX market share for 2008 21.2%.

Addax’s Reserves

Business Objective

“Addax Petroleum aims to create value through successful exploration, development and production of oil and gas resources whilst contributing to the future of its host communities. It aims to grow its business through re-investment and strategic acquisitions in Africa and selected countries in the Middle East”

Business Model

Addax Petroleum has driven its growth in Nigeria by acquiring oil properties deemed by others to have limited, remaining production potential and using its strong in-house technical and operational expertise to grow reserves and production in a cost effective manner. Addax Petroleum’s strategy is to build on significant business opportunities in line with the key trends of the Nigerian oil and gas industry: A shift of major oil company focus from near shore and onshore properties to larger scale deepwater properties; the Nigerian government’s drive of gas monetisation in conjunction with a gas flare out target in 2008; and the Nigerian government’s encouragement to increased participation of indigenous companies in the oil sector.

“Addax Petroleum aims to continue to create value for its shareholders through a strategy of growing reserves and production achieved with dynamic exploration programs and the continuous development of the Corporation’s current oil and gas production assets. The growth strategy is further enhanced by a sustained reinvestment policy into the current asset portfolio and the on-going identification of new ventures and strategic acquisition opportunities in Africa and the Middle East.”

Ownership of Business

Within Nigeria, Addax Petroleum holds the following working interests:
LicenceWorking Interest %Net AcresOperator
Nigeria
OML123 »100.0090,700APC
OML124 »100.0074,100APC
OML126 »100.00178,300APC
OML137 »100.00209,500APC
OPL291 »72.50230,600APC
Okwok » (in OML67)40.009,000Oriental
OPL227 »40.0084,100Express
Total876,300
Institutional Shareholders: Top Holders
HolderShares Held% of Shares Held
Carmignac Gestion SA3.89m2.45%as of 30 Jun 2009
Capital World Investors277m1.74%as of 30 Apr 2009
JPMorgan Asset Management (UK) Ltd.257m1.62%as of 31 Mar 2009
Goodman & Co. Investment Counsel Ltd.216m1.36%as of 31 Dec 2008
Blackrock Investment Management (UK) Ltd.193m1.22%as of 28 Feb 2009

Benefits Offered and Relations with Government

The government is in the process of approving a new fiscal provision in the Petroleum Industry Bill (PIB). The government has introduced, for the first time, radical measures that will lead to higher revenue from royalties, rents and penalty. The oil firms have protested this move. They argue that doing business in Nigeria is not only costlier than most part of the world, because of poor infrastructure, but the issue of security has made the Nigerian Oil and Gas ventures the least attractive in the sub region. They insist that eroding their margins of profit with new laws may chase them out of Nigeria. Here are some sections of the proposed legislation.

Royalty rates based on value


438. (1) The royalty rates based on value shall be identical for the various geographical regions, including frontier acreages, and shall be based on the average value for the month from each PML (Petroleum Mining Lease) for the petroleum production as determined pursuant to section 434 hereof and shall be determined separately for:(a) crude oil plus condensates, and (b) natural gas.

(2) the royalty rates for crude oil plus condensates shall be: (a) 0% for a value from US $ 0 per barrel and up to and including US $ 70 per barrel, (b) over US $ 70 per barrel and up to and including US $ 110 per barrel the royalty rate shall increase by 0.4% royalty percentage for every US $ 1 increase in value over us $ 70 per barrel, (c) over US $ 110 and up to and including US $ 140 per barrel the royalty rate shall be 16% plus 0.2% royalty percentage for every US $ 1 increase in value over US $ 110 per barrel, (d) over US $ 140 and up to and including US $ 170 per barrel the royalty rate shall be 22% plus 0.1 % royalty percentage for every US $ 1 increase in value over US $ 140 per barrel, and (e) over US $ 170 per barrel the rate shall be 25%.

(3) the royalty rates for natural gas shall be:(a) 0% for a value from US $ 0 per million Btu up to and including US $ 2 per million Btu, (b) over US $ 2 per million Btu and up to and including US $ 6 per million Btu the royalty rate shall increase by 0.3% royalty percentage for every US $ 0.10 per million Btu increase in value over US $ 2 per million Btu, (c) over US $ 6 per million Btu and up to and including US $ 10 per million Btu the royalty rate shall be 12% plus 0.2% royalty percentage increase for every US $ 0.10 per million Btu increase in value over US $ 6 per million Btu, and (d) over US $ 10 per million Btu and up to and including US $ 15 per million Btu the royalty rate shall be 20% plus 0.1 % royalty percentage increase for every US $ 0.10 per million Btu increase in value over US $ 10 per million Btu, and (e) over US $ 15 per million Btu the rate shall be 25%.

(4) The oil price levels and the US $ 1 in subsection (2) hereof and the gas price levels and the US $ 0.10 in subsection (3) hereof shall be adjusted pursuant to section 431 hereof.

Rents for licenses and leases


433. (1) Every Petroleum Exploration License (“PEL”) shall be subject to a rent of US $ 10 per square kilometre included in the PEL upon the grant of the PEL and any anniversary thereof.

(2) Every Petroleum Prospecting License (“PPL”) shall be subject to a rent of:(a) US $ 100 per square kilometre upon the grant of the PPL and the first and second anniversary thereof,(b) US $ 300 per square kilometre on the third and fourth anniversary of the PPL, and (c) US $ 500 per square kilometre on the fifth anniversary and any further anniversaries of the PPL(d) During any significant gas discovery retention period pursuant to subsection 277(10) hereof the rent shall be US $ 10,000 per square kilometre per annum and shall be paid on the declaration of a significant gas discovery and any anniversary thereof.

(3) Every Petroleum Mining License (“PML”) shall be subject to a rent of US $ 1000 per square kilometre upon the grant of the PML and any anniversary thereof

(4) A PEL, PPL or PML cannot be granted without prior payment of the applicable rent for the first year.

(5) Failure to pay the rent upon any anniversary of the PEL or PPL shall result in the application of an interest rate of LIBOR plus 2% to the outstanding payment in US $ and where the payment of the applicable rent is not made within three months, termination of such license pursuant to subsection 293(1) (d) hereof shall be initiated.

(6) The rents shall be adjusted pursuant to section 431 of this Act.

(7) Any rents shall be verified and collected by the Inspectorate.

The Bill further states that:
(1) The Federal Government shall at all times promote the involvement of indigenous companies and manpower and the use of locally produced goods and services in all areas of the petroleum industry in accordance with existing laws and policies.
(2) Where any contract for work or services is considered to be within the capabilities of Nigerian companies, in accordance with any law relating to Nigerian content, the tender list shall be restricted to Nigerian companies.
(3) All companies involved in any area of the upstream or downstream petroleum industry shall, as a condition of their licence, lease, contract or permit, as the case may be, comply with the terms and conditions of any law relating to the Nigerian content law in force at the time.
(4) Failure to comply with the terms of any local content law as determined by the Inspectorate shall be a ground for revocation of a licence, lease, contract or permit that may have been previously granted to the company that failed to comply with the said terms.

There is a pending administrative proceeding between Addax Petroleum and the Federal Board of the Inland Revenue, in Nigeria, following audits for the years 2002 to 2004 conducted by the Nigeria Federal Inland Revenue Service. The case relates to income and value added taxes on charges from Addax Petroleum Services to the Addax Nigerian companies, and the valuation of revenue for petroleum profits tax. Addax Petroleum’s Management believes it is adequately accrued for in both current tax and royalties should any additional liabilities emerge.

The income tax rate in the Nigerian Production Sharing Contracts (PSCs) is 60%.

Product Development

Addax announced a significant onshore oil discovery from the Njaba 2 well (formally Okaka) currently drilling in the eastern part of the OML124 license area in Nigeria in 2009. It is a leading discovery that has the potential to be one of our largest fields in Nigeria. The Njaba discovery is the first exploration well to be drilled in OML124 since the mid-80’s and these results will increase the production potential of the license area considerably, as well as significantly upgrade the remaining undrilled prospects.

During 2008, Addax Petroleum drilled seven appraisal and two exploration wells in Nigeria and proven plus probable reserves increased by 23% to 324.0 MMbbl as at December 31, 2008 from 262.7 MMbbl as at December 31, 2007. The most significant addition to reserves in Nigeria came from additional appraisal activity at the Kita Marine field in OML123 which increased the probable reserves in that field by 34.0 MMbbl.

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