NNPC Ltd Corporate Strategy PDF February 2023

NNPC Ltd Corporate Strategy February 2023 Corporate Strategy & Sustainability This document details NNPC Limited’s Corporate Strategy & key levers. It is strictly an internal document intended to provide the reader with an understanding of the rationale for NNPC Limited’s Corporate Strategy. Content...

NNPC Ltd Corporate Strategy February 2023 Corporate Strategy & Sustainability This document details NNPC Limited’s Corporate Strategy & key levers. It is strictly an internal document intended to provide the reader with an understanding of the rationale for NNPC Limited’s Corporate Strategy. Content Strategic Inputs to the Corporate Strategy Strategic Ambition NNPC Ltd’s Mandate Methodology and Strategic Options Critical Enablers 10-year Strategic Roadmap Key Levers – Vision, Mission, Core Values Developing the 10-year strategy for NNPC Limited required a review of 4 critical elements as “strategic inputs” to the Corporate strategy ​Strategic inputs ​Objective ​1 ​Review of the mandate of the PIA, MEMART and provisions under CAMA ​To understand the stipulations of the Acts and Agreement in order to ensure that the strategy is compliant ​2 ​Outlook of the Global energy market with a focus on Africa and the local market ​To understand the demand and supply landscape as well as review projections for future growth and projected product mix ​3 ​Review of the peer landscape of Global NOCs and IOCs ​To understand what strategic moves others are making in light of the evolving energy market landscape ​4 ​Analysis of NNPC’s strengths, weaknesses, opportunities and threats (SWOT), including analysis of PESTLE, recent and past performance ​To understand current strengths and areas for improvement to ensure that the strategy builds on NNPC’s core capabilities The development of NNPC Limited’s Corporate strategy kicked off with a broad review of the context within which the new company is emerging. The review covered external context such as the overarching legislative framework, global energy market trends, as well as internal context such as the strengths, weaknesses, and performance records of the legacy corporation. 4 4 STRATEGIC INPUT 1. Mandate of the PIA, MEMART and provisions under CAMA ​Evidence to grow portfolio The Petroleum Industry Act (PIA) maintains NNPC Limited’s footprint across the energy value chain with a clear mandate for costeffectiveness, operational efficiency, and sustainable profitability. The Act also vests NNPC Ltd with the responsibility to ensure national energy security through an uninterrupted supply of affordable and acceptable energy for a fee. These mandates are reinforced by the objects in NNPC Limited’s MEMART1 which cover a wide range of energy and non-energy business activities. ​Upstream ​Key messages ​Implications for NNPC Ltd ​“…carry out petroleum operations on a commercial basis, comparable to private companies…” (64a) Maintain upstream operations as core business but emphasis should be placed on operational efficiency to ensure profitability ​“...be vested with the rights to natural gas…” (64e) ​Gas & Power “…promote the domestic use of natural gas through development and operation of large-scale gas utilization industries…” (64i) “…engage in the business of renewables and other energy investments…” (64h) ​Refineries n/a ​Downstream “…engage in activities that ensure national energy security in an efficient manner…” (64k) ​Ventures ​Evidence to contract portfolio Maintain gas and power operations as core business with focus on the development of gas utilizing capacities as well as power and renewables n/a “…make NNPC Ltd supplier of last resort for security reasons…” (64m) Develop a robust and cost-effective supply chain and retail distribution network to ensure energy security and fuel availability n/a n/a 1 Memorandum and Articles of Association 5 5 STRATEGIC INPUT 2. Overall market outlook ​Evidence to grow portfolio ​Upstream ​Evidence to contract portfolio ​Key messages ​Implications for NNPC Ltd While global oil demand is expected to peak in the mid-2020s, oil demand in Africa is expected to continue to grow beyond 2040 Opportunity to monetize oil production within the next 10-15 years, with emphasis needed on significant cost optimization to ensure profitable production High cost of production linked to poor infrastructure, and OPEC production quotas could present a risk to ~50% of new production ​Gas & Power ​Natural gas demand in Africa is expected to grow by 21% from 2020 to 2040 with Egypt, Nigeria and Algeria making up ~80% of demand, primarily driven by the power sector, industry and LPG cooking Opportunity to seize the additional shortterm upside that may come from the gas shortage in Europe but decarbonization efforts are needed to remain competitive ​Refineries ~50% of oil products demand in Africa until 2040 will be fulfilled by imports with refining capacity projected to be flat, caused by the Dangote and other refineries coming online. This will increase competition and drive margins down significantly Opportunity to prioritize cost-efficient operations with high capacity utilisation to meet growing demand Nigeria is expected to see ~2x stable growth in demand for oil products, particularly in LPG 11-17%; however, supply security risks have increased and are expected to persist Opportunity in LPG marketing with a strong need for a robust and cost effective supply chain and retail distribution network ​Downstream Phasing out the subsidy program for gasoline will continue to challenge retail margins ​Ventures Different dynamics exist within the market landscapes of the existing NNPC venture operations: from highly saturated markets such as Telecom to markets with significant development growth opportunities such as real estate, education, etc. Need to rationalize existing unprofitable non-energy venture operations and focus only profitable operations to maximize shareholder value The overall market outlook indicates continued growth in local and global energy demand but with a limited window of opportunity to maximize value from hydrocarbon resources due to the global push for decarbonization and energy transition. NNPC Limited’s global competitiveness relies heavily on its ability to optimize production and distribution costs while investing proactively in decarbonization programmes and renewable energy ventures. 6 6 STRATEGIC INPUT 3. Peer landscape ​Evidence to grow portfolio A review of the peer landscape establishes three 3 significant trends: ▪ NOCs are focused on maximising value from hydrocarbon assets within the limited window of opportunity ▪ Investments in gas and alternative energy sources are being prioritized. ▪ Cost efficiency is an increasingly important competitive advantage as market dynamics continue to shift. ​Evidence to contract portfolio ​Key messages ​Implications for NNPC Ltd ​Upstream Global NOCs are maximising O&G production leveraging low-cost, low-carbon reserves to monetize pre-peak oil demand, while IOCs are rebalancing their portfolio towards resilient O&G assets, primarily gas Focus on maximizing oil and gas production to monetize demand in the short-term, while prioritizing resilient gas assets ​Gas & Power ​O&G companies, both IOCs and NOCs globally, are choosing to invest in gas and alternative energy sources as a key strategic focus Focus on investing on operations in gas and alternative energy sources ​Refineries The majority of global peers have reduced focus and investments in refinery capacities with the exception of a number of new capacities in the Middle East and North Africa Focus efforts only on operationally efficient operations that are competitive given available spare capacity globally Focus of a number of O&G companies has shifted towards petrochemicals Potentially consider investment in petrochemicals ​Downstream Given constrained margins in downstream operations, global peers are focusing on cost optimization practices as well as investments in additional revenue streams (e.g. non-fuel) in order to increase overall retail margins Focus on margin improvement opportunities and commercial competences to grow margins ​Ventures While global IOCs are focusing on investing in energy venture operations to diversify focus away from conventional energy sources with Renewables and Digital as key areas; NOCs are retaining their non-energy ventures under profitability condition or high criticality for business or country Rationalize existing unprofitable nonenergy venture operations and focus only profitable operations to maximize shareholder value 7 7 STRATEGIC INPUT 4. NNPC’s overall recent and past performance ​Evidence to grow portfolio ​Evidence to contract portfolio ​Key messages ​Implications for NNPC Ltd ​Upstream Declining levels of production over the last 5 years with associated gas responsible for a significant proportion of production; 4th quartile performance on operational efficiency benchmarked against global peers; 2nd quartile performance on average R/P ratio and capital unit costs Significant reserve volumes can be leveraged for production increase with a focus on improving operational efficiency and profitability ​Gas & Power Negative cash flow over the past years due to limited asset availability and utilization (15% in 2021), debt recovery issue, delays in infrastructure expansion projects; no progress in renewable projects Gas business requires profitability increase initiatives; clear strategic objectives needed for new energy sources ​Refineries All three refineries have not been operational since 2018 and at their peak were operating at 15-25% capacity utilization, which is significantly below the commercially viable threshold of ~80% capacity utilization to breakeven and make a profit Rationalize operations to focus only on commercially viable refining operations ​Downstream Weak supply chain with frequent disruptions and security challenges; current retail network has an 8% market share with 85% DODO retail sites and overall retail margins are significantly less than market average, primarily due to share of DODO sites in the network Focus on margin improvement opportunities and commercial competences to grow margins ​Ventures RTI1 is the only venture operation that is profitable due to corporate funding; there is growing pressure for all venture operations to be self funding and/or operate at a higher efficiency Rationalize existing unprofitable nonenergy venture operations and focus only profitable operations to maximize shareholder value NNPC’s overall performance over the past five (5) years demonstrates low competitiveness in key metrics ranging from production levels to Unit Operating Cost (UOC) to asset capacity utilization, among others. However, our recent turn to profitability in 2020 and the concerted effort by the Senior Management Team through initiatives such as TAPE, NUCOP, Priority Gas Projects, tracking and monitoring our Cost-toIncome ratio, as well as our Peoples Strategy have laid the foundation to reposition the organization for a future of profitability and performance excellence. 1 Research Technology and Innovation 8 8 NNPC Limited’s strategic ambition is focused on growth NNPC Limited has adopted a growth-focused strategy to: ▪ Leverage significant energy reserves to meet the current and future energy needs of economies, enterprises, and societies. ▪ Position the business to seize opportunities arising from the market push for long-term shifts in the global energy mix. While ensuring that our noncore business will broaden social impact. ​Grow NNPC interests in the energy sector through: ​E&P: Increase oil and gas production, optimize costs and decarbonize portfolio ​Gas and Power: increase gas production, transmission and sales for domestic use and LNG exports ​New Energy: Invest in large-scale new energy projects across Nigeria and West Africa ​Ref & Chem: Rehabilitate current assets and grow refinery and petrochemicals portfolio ​Trading, Marketing and Logistics: Expand supply chain and grow retail network Non-Core Business: Focus on strategic investments that broaden social impact 9 9 NNPC’s growth ambition is driven by 3 mandates – attain ‘profitability’ and ensure ‘energy security’, while ‘future proofing’ the organization Profitability Energy security According to PIA, NNPC must be self-funding, attaining profitability by 2024 and return dividends to shareholders thereafter Support and protect domestic consumption through active participation in strategic priority areas e.g., refining, storage and pipelines The company’s sights are set on deepening its global footprint of value in line with the overarching mandate to create an energy business that is profitable, resilient, and sustainable through the energy transition while ensuring domestic energy security. Future proofing Create a sustainable business that is capable of capturing and delivering value to shareholders through energy and non-energy streams. 10 10 Methodology: We reviewed options against the strategic inputs from the PIA, Market outlook, Peer landscape and NNPC performance… ​Evidence to grow portfolio ​ trategic inputs S ​PIA/MEMART ​Market ​Peer ​Past NNPC mandate outlook landscape performance In arriving at the corporate strategic ambition, several options were considered for all segments of the value chain along the grow – optimize – rationalize continuum. These options were weighed against the strategic inputs earlier identified to guide decision-making ​Upstream ​Gas, Power & New Energy ​Refineries ​Downstream ​Non-core Business ​Strategic options ​Grow ​Optimize ​Evidence to rationalize portfolio ​Rationalize ​Increase O&G production to monetize prepeak demand ​Increase O&G production with a focus on resilient assets ​Focus only on profitable and resilient gas assets ​Increase gas production and engage in new energy sources ​Optimize gas production focused on the domestic market ​Focus efforts on engaging in new energy sources ​Grow and rehabilitate refinery portfolio beyond current assets ​Focus on rehabilitating assets with positive ROCE ​Reduce current asset portfolio footprint ​Grow the retail network to include additional revenue streams ​Enhance current network focused on profitability ​Reduce current retail portfolio footprint ​Expand existing ventures and develop new business lines ​Rationalize existing unprofitable ventures ​Focus venture operations on social impact opportunities ​Integrated energy company focused on maximizing shareholder value ​Integrated energy company maintaining presence across the value chain and adjacent sectors ​Focused O&G company with a mandate to maximize profitability of core operations 11 11 …and laid out a set of strategic options for NNPC Ltd ​Steerco decision ​Recommended option ​Upstream ​Grow ​Optimize ​Rationalize Enhance production of both Oil & Gas assets to monetize peak demand in the next 10 years Maintain oil production rebalancing portfolio towards low Decrease oil production keeping only the most efficient and GHG-effective assets Decrease UOC to further increase shareholder value and stay competitive Increase gas production, reduce flaring and venting, and Introduce decarbonization program to maintain longterm investor attractiveness ​Gas, Power & New Energy Upscale and expand gas processing and transportation services to serve both Nigeria and exports, including LNG; actively drive domestic gas consumption through portfolio investments in gasbased industries and power Invest in large-scale new energy projects across Nigeria and West Africa to create long-term value for stakeholders ​Refineries ​Down-stream ​Non-core Business cost and low carbon oil assets competitively trade and monetize produced gas with focus on the domestic market Maintain current LNG commitments, partner with existing domestic gas consumers and direct efforts to processing and delivering to the domestic market in line with the PIA Optimize gas production for value and GHGintensity Target portfolio investments exclusively on core gas transportation and marketing business Focus on investing in 1-2 targeted renewables projects (e.g., large-scale solar PV, biomass) to test feasibility and profitability at small scale Rehabilitate current assets and further grow the refining portfolio through a greenfield project with chemicals production integration and/or new/grow equity partnership with sufficient capacity to supply local demand & export Optimize existing refineries by only focusing on completing rehabilitation at the most efficient assets and selecting an operating model that will result in improved reliability & profitability before considering rehabilitating least efficient assets Streamline the existing refineries portfolio through divestment of the least performing and highest risk refineries exposed to security of supply Expand supply chain with new pipelines and depots to reach new B2B customers and resellers Invest in resilient supply chain by securing existing Grow retail network increasing share of CODOs and introducing COCOs to optimize for profitability Optimize for profitability of existing customer and retail Reduce number of retail sites, leave only Q1 and Q2 in terms of gross margin and focus on supply chain efficiency for the optimized network and B2B customers Develop new business lines and drive long-term value delivery to stakeholders through portfolio investments in profitable non-energy ventures Streamline existing unprofitable non-energy venture Upscale and expand coverage of existing venture operations to serve both internal and external customers and ensure independent value creation for shareholders pipelines and revamping depots network ensuring LPG sales on retail sites, growing NFR and high-margin product sales; minimizing operating costs operations and focus only profitable operations to maximize shareholder value The strategic options were duly considered, and a growth-focused strategic ambition was approved by the NNPC Limited Board for all core business segments while non-core businesses are to be rationalized to focus on social impact investments. Focus mandate of venture operations towards enhancing opportunities for social impact through strategic investments that broaden economic empowerment opportunities e.g., promoting quality education and world class learning interventions, improving health and wellbeing, etc. 12 12 To successfully deliver the strategic ambitions, critical enablers will need to be developed and implemented ​Key enabler, deep-dive to follow The corporate strategy is further developed into: ▪ Business/Operating models for subsidiaries ▪ Organisational structure ▪ 5-year high-level performance targets Enabling frameworks and policies are also developed for: Governance & Regulatory Compliance Risk Management Sustainability (ESG) Talent Management Performance Management Compensation Management Digital and Analytics OHI1 (culture, practices, etc.) ​Critical enablers ​Descriptions ​Example considerations ​Operating model and org design Profound transformation to set the organization for success and dramatically improve efficiency: review of the organizational structure, processes, necessary competences, KPIs and systems  Talent policies to attract and retain the right local & expat ​Funding Develop funding strategy: define financing need, identify potential investor archetypes and their decision-making factors, optimize the organization and operations to fit investor profile and increase investment attractiveness  Financing policies detailing out key elements like sources of ​Change management Engage stakeholders and address change management challenges: maintain maximum transparency, high morale and engagement within the organization, tackle broad set of change management challenges (comms, skills, etc.)  Defined change management procedures including ​Digital, Data & Analytics Define focal areas for digital development: improve cost and reliability across all verticals, increase safety indicators, drive customer insights as the organization grows its presence in enduser segments  Digital project prioritization guidelines; Simplify complex ​Energy transition Develop energy transition strategy: set transparent emissions baseline, set reduction targets and define a clear path to unlock funding in the mid-term and drive long-term green future for Nigeria  Determine NNPC Ltd.’s carbon footprint baseline  Clearly defined action plan towards achieving set ​Security of supply Invest and lobby government action on ensuring security: grow GR effort, develop supply chain capability and resilience to supply security projects  Develop perspective and policy around how NNPC Ltd will experience & skillset  Employee training & development policies to ensure high-skill levels capital for an optimum capital structure, principles to ensure only the most viable, profitable projects are funded etc. communication plans to specifically addresses stakeholders' potential concerns and expound on NNPC Ltd’s strategic pathways processes leveraging digital tools for efficiency and scale  IT & Data management framework including data retention& quality mgmt policies, security and protection etc. decarbonization targets balance profitability requirements with energy security and required enablers e.g., FGN funding on critical initiatives/projects Robust policies and procedures for each of these enablers will be developed to guide future changes and ensure compliance 1 Organisational Health Index 13 13 NNPC Limited's transition to being "a dynamic energy company of choice" has been road-mapped into a 4-stage 10-year journey PRELIMINARY – SUBJECT TO REVIEW UPON FINALIZATION OF BUSINESS STRATEGIES 1 ​Immediate (Jan. 2022 –Jun. 2023) ​Transition to NNPC Ltd (Rebirth and survival) 2 ​Short Term (Jul. 2023 – Dec. 2024 ) ​Consolidation (Consolidate business and skills) 1. Adoption of low carbon 1. Define the perimeter and target portfolio of NNPC Ltd 2. Create profit oriented SBUs 3. Build strong corporate governance framework across the businesses to ensure sustainability 4. Create lean corporate center with targeted HR deployment 5. Develop critical skills and capability and talent management 6. Debottleneck operations and reap short term production gains and minimize operational and logistics cost 7. Conduct GHG inventory and establish baseline emissions for NNPC Ltd 8. Develop ESG Framework/Strategy and Energy Transition Plan 9. Define funding strategies of verticals and conduct negotiations with potential investors. 10.Emplace data governance/IT policy and processes 11.Develop Tax optimization strategy 2. 3. 4. 5. 6. 7. technologies across our business value chain Entrench accountability and performance management Optimize oil asset portfolio and deepen natural gas utilization Increase research and collaboration in new energies and other low carbon solution Roll out essential IT infrastructure Implement ESG Strategy and Energy Transition Plan Attract partners and funding for the gas downstream and power business expansion 3 ​Medium Term (Jan. 2025 – Dec. 2027) ​Growth & Expansion (Leverage portfolio and alliances) 1. Launch into international markets 4 ​Long Term (Jan. 2028 – Dec. 2031) ​Energy Company (Leverage portfolio and alliances) 1. Grow presence in international markets 2. Deepen investment in energy 2. Create strategic alliances with 3. 4. 5. 6. international partners in renewables business Create advance options for capital market access Expand footprints in gas processing and power market Expand supply capabilities via revamp of existing distribution networks and establishing new lines Roll out essential IT infrastructure 3. 4. 5. 6. 7. derivatives market and the capital market Grow investment and market share in low carbon energy products Expand investment in clean energy technologies across the value chain Deepen research and collaborations in new energies and other low carbon solution Deepen decarbonization to achieve zero gas flaring and 45% reduction in fugitive methane emissions intensity in fully owned businesses Roll out essential IT infrastructure The 10-year road map highlights NNPC Limited’s journey of growth from an emerging commercial enterprise to a fully-fledged integrated energy company built on best practice and ready for capital market access. 14 14 We focus on three key levers for our corporate strategy Vision A compelling picture of what we intend to become. Provides an aspirational long-term goal. Strategy Mission What purpose do we serve to our audience? What? Why? Who? How? Core Values The fundamental beliefs our business and behaviour is based on. The Vision & Mission provide a clear path to realizing our strategic ambition Vision “Reliably” To be the dynamic global energy company of choice Consistent quality, availability and acceptability of our products and services. We invest in people. systems and processes that guarantee reliability of our products and services. “Energy” Mission Reliably delivering energy while continuously creating value for all stakeholders An integrated energy company with operations and investments covering the entire energy value chain and harnessing varied energy sources. We appreciate and serve the diverse energy needs of our various markets. “Value for all stakeholders” Firm commitment to continuous delivery of value to customers, shareholders, business partners, host communities and other stakeholders. Our activities are guided by 3 core values Thank you