2006 Annual rpt pg1-23 - Oando PLC | one of Africa’s ... · World Bank estimates global GDP grew by 3.9% during the year, compared with 3.5% in the previous year, and this was largely

01Oando Plc Annual Report 2006

VISIONTo be the premier companydriven by excellence.

MISSIONTo be the leading integratedenergy solutions provider.

02

Results at a Glance

2006 2005

Turnover 209,078,938 182,763,434

Profit on ordinary activities before taxation 3,794,091 2,621,139

Profit after tax, exceptional items and minority interest 2,725,481 1,515,344

Proposed Dividend 2,289,200 1,430,750

Retained profit attributable to shareholders transferred to general reserve 436,281 84,594

Earnings per 50k share 4.76 2.65

Dividend per 50k share 4.00 2.50

Net assets per 50k share 42.63 39.71

Dividend cover x 1.19 1.06

0

Chairman’s Statement

On behalf of the Board of Directors, it is my privilege to heartily welcome you

all to the Thirtieth Annual General Meeting of your Company.

As we herald a change at the helms of leadership in Nigeria and reflect on

what has been attained over the past 8 years, we have good cause to be

proud of our achievements thus far, both as a nation and a corporate entity.

The economic transformation witnessed since the onset of the current

democratic dispensation is worthy of note and we are particularly proud of the

pioneering role Oando Plc has played in fostering this change at policy and

sector levels.

We are equally optimistic about our future, as we plan on how best to build on

the foundations that have been put in place. We have focused on

restructuring our operations and building an integrated energy platform over

the past few years, in early anticipation of reforms within our industry. We are

now formidably positioned to leverage this platform to fully exploit these

opportunities as they emerge.

We commend you all for your patience thus far, as we look forward to

harnessing the rewards of our foresight very shortly.

OUR WORLD IN 2006

The year 2006 presented its fair share of operating and environmental

challenges but Your Company once again performed commendably during the

period under review.

MACROECONOMIC ENVIRONMENT

Global economy strengthened in 2006

The world economy continued to strengthen in 2006, despite high commodity

04

05Oando PLC Annual Report 2006

prices and a bout of financial market volatility. The

World Bank estimates global GDP grew by 3.9%

during the year, compared with 3.5% in the previous

year, and this was largely driven by the continued

expansion in developing economies. Average growth

in sub-Saharan Africa in 2006 was estimated at 5.3%,

compared to 3% growth in the US, 2.4% in the Euro

Zone and 2.9% in Japan.

Africa also grew at a healthy pace

Economic growth in sub-Saharan Africa in 2006 was

also broadly based, with a third of the countries in the

region experiencing growth in excess of 5%. This

continued trend in recent years suggests the

resilience in the region’s economic growth is not

temporary, but is rather a structural shift based on

adoption of sound macroeconomic policies and

evidence of higher productivity growth.

Lab, Apapa Terminal, Lagos, Nigeria

Global oil prices rose…and then fell below $60

mark

Crude oil prices stayed high during the most part of

2006, rising to a record high of $76 per barrel in

August, before plummeting below the $60 mark and

closing at $56.43 per barrel at the end of the year.

The fall in prices has been attributed to rising

inventory stock levels amongst the major consumer

nations. In response, the Organization of Petroleum

Exporting Countries (OPEC) at a meeting in Nigeria in

December 2006 announced their decision to cut oil

production by over 1.2 million barrels/day, in a bid to

stem the fall in prices and boost demand, despite the

persistent threat to supply from on-going activities in

the Middle East and the Niger Delta region in Nigeria.

Nigerian economy benefited from high oil prices

Nigeria’s Gross External Reserves increased from

$28.13 billion at the start of the year to $41.39 billion

at the end of 2006, as a result of surplus crude oil

receipts from sustained high international prices for

most of 2006 and prudent macroeconomic policies by

the Federal Government.

During the year, Nigeria paid $4.6 billion in April 2006

as final tranche of outstanding debt to exit the Paris

Club and $1.4 billion paid to the London Club of

Creditors in December 2006. With payment of an

outstanding balance of approximately $900 million

to exit the London Club expected in March 2007,

Nigeria would have completely paid off its external

debt burden.

Further economic growth witnessed in 2006

Provisional data from the Federal Office of Statistics

(FOS) shows the Nigeria economy grew by an

encouraging 7.5% in 2006, up from 5.5% in the

previous year. This was however lower than the 10%

target set at the start of 2006.

Inflation figures released by the Central Bank of

Nigeria (CBN) at the end of 2006 show Year-on-Year

(YOY) inflation reduced from 23.1% in 2005 to 6.1%

in 2006. The 12 month moving average rate also fell

from 17.8% in 2005 to 9.0% as at the end of

December 2006. Anxiety about increased government

and party spending in preparation for general

elections may however change the current

inflationary trends, albeit temporarily, in the first half

of 2007.

The Naira also continued its appreciation against the

US dollar in 2006, appreciating in value by 3% from

US$1/N130 to US$1/N126 at the close of the year.

This marks the third consecutive year in which the

currency has appreciated against the US dollar, riding

on the back of recent reforms introduced by CBN in

the banking sector and foreign exchange markets.

domestic growth fuelled by reforms

Reflecting the above improvements amongst others,

Nigeria received its inaugural sovereign BB- (BB

Minus) long term credit rating from both Fitch and

Standard & Poors rating agencies in January 2006,

with a stable outlook further based on ongoing

economic reforms and the Paris Club debt deal. With

the achievement of this ‘investment’ grade rating, the

Federal Government has improved access to long

term financing through the international capital

markets and should attract more foreign direct

investment into the domestic economy.

The capital market performance in 2006 was also

impressive, with the all-share index increasing by

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ia 37.8% and market capitalization growth of 67.54% to

N4.227 trillion ($33 billion). This performance was

attributed to, amongst other factors, increased liquidity

resulting from the release of pension fund accounts

and the continued increase in the inflow of Foreign

Direct Investment (FDI) into the country.

Other economic highlights

Adversely, renewed militant attacks on oil installations

in the Niger Delta resulted in a decline in crude oil

production, during most part of 2006, by approximately

600,000 barrels a day or 24% of current 2.5 million

barrels a day production. Incessant vandalisation of

product pipelines also disrupted the supply of fuel

products during the year.

PERFORMANCE REVIEW

Operational review continued in 2006

Oando continued in its stride to become the leading

integrated energy solutions provider during the year

under review, by focusing on reviewing its existing

processes and aligning the operational structure of

each entity under the group platform. Some of the key

initiatives embarked upon in this regard during the

period include:

• Commencement of the implementation of an

Enterprise Resource Planning (ERP) project,

named Project Synergy in August 2006

• Completion of an external process audit by the

Standards Organization of Nigeria (SON), at the

end of which your organization was issued with

the ISO 9001 Certification in November 2006

• Roll out of a new branch structure for the

Marketing business in July 2006

A major challenge faced during the year was in the

management of working capital as a result of

significant increase in unpaid government receivables

from the Petroleum Subsidy Fund (PSF) and the

Petroleum Equalization Fund (PEF). At the end of the

year however, agreement was reached with the

relevant Government agencies to pay up all

outstanding receivables and within 4 weeks have

virtually been cleared out.

Benefits have started to materialize

As a result, Your Company once again achieved an

improved performance over the previous year,

increasing turnover by 14% to N209 billion and net

income by 80% to N2.7 billion for the year ended

December 2006. This improvement reflects a

realization of restructuring benefits and better

alignment of processes between entities in the Group

in 2006.

Capital investment: Capital investment for the

Group increased by 51% to N3.42 billion in 2006,

against N2.26 billion in 2005. Most of these

investments were made in the Upstream and Gas

businesses, in furtherance of the Group’s growth

objectives.

The Board: Your Board of Directors remained the

same in 2006, with our focus on improving long term

profitability of the Company and delivering better

shareholder value to all.

OUR OUTLOOK FOR 2007

As earlier noted, the operations of our Marketing

Company underwent significant change in 2006 as a

result of the Branch Project transition. The savings

from this change will continue to kick in during 2007.

With the increased discipline from the recent ISO

9001 process certification, the company also hopes


to harden the consistency of service and profitability

delivery and block the leakages in the system that

have proved challenging in the past.

The Group will continue in its strategic focus for Gas

and Power, which is to consolidate and optimize

existing assets and expand into new markets. Gaslink

has already commenced the third phase of the

expansion of Greater Lagos pipeline infrastructure.

There are also plans for expansion during the year

into other parts of Nigeria and the West Africa sub

region, specifically Ghana, Togo and Benin, to take

advantage of the West Africa Gas Pipeline project

which is planned to supply natural gas to the sub

region.

The trading business will continue to strengthen its

drive to expand market share in Nigeria, even as it

consolidates its position as the largest private

importer of petroleum products.

Plans are on to expand the existing Product Service

Lines (PSLs) of the Energy Services business in

2007. Having restructured its operations in 2006 to

reduce overheads and improve margins, the

company is confident that a solid platform has been

laid for a robustly profitable business over the next 12

months. Already, the company has entered into the

Drilling Rigs business line via the acquisition of

stakes in 3 Swamp Rigs, which is expected to start to

yield revenue immediately.

Major focus will be placed on monetizing the existing

upstream assets of the Exploration & Production

division in 2007, either via direct production or farm

out opportunities.

Particular focus will be placed on developing human

capital within the company in 2007, through planned

development programs and increased functional

training for staff at all levels, to build capacity for the

future.

Despite the ongoing challenges of the market

environment, we are optimistic in our outlook for

2007. We believe that the restructuring activities that

have taken place in previous years, as well as those

to be implemented in 2007, will position us to

achieve another strong performance in 2007. We

intend to stay focused on executing our LPG

strategy i.e. improving Liquidity, enhancing

Profitability maintaining sustainable Growth, even as

we continue to drive to create greater value for our

shareholders.

Thank you for your attention.

Major General M. Magoro (Rtd.)

PSC, OFR, USAWC

Galadiman Zuru

Chairman

We also set out to streamline operations and internal processes across the

Group, with the aim of driving greater efficiency within each business entity

and the Group as a whole. Specific achievements made in this regard during

the period include:

• Restructuring of our Marketing business and switching to a simpler, more

efficient ‘branch network’ structure

• Restructuring the operations of the Marketing, Trading and Energy

Services businesses to enable joint supply chain operations

• Completing the Group-wide process audit by the Standards Organization

of Nigeria (SON) and award of the globally recognised ISO 9001

Certification

08

Dear Shareholders, Clients and Colleagues

2006 marked another remarkable year in our organization’s transformation

into an integrated energy Group. At the start of the year, we set out with three

key areas of focus i.e. strategic, operational and manpower.

Strategically, we set out to derive optimal value from our expanded platform in

2006 by focusing on the tripod objectives of “improving Liquidity, enhancing

Profitability and maintaining sustainable Growth”. In line with this, detailed five

year rolling plans were developed by each business and the Group as a

whole. These plans formed the basis of capital allocation in 2006 and will

continue to do so going forward.

Group Chief Executive’s Report


In addition, we commenced the implementation of our

Enterprise Resource Planning (ERP) project, branded

‘Project Synergy’, in July 2006. The project will

leverage Oracle technology to integrate business

processes in key functional areas across the Group,

namely Finance, Human Resource, Sales/Marketing,

Manufacturing (Production) and Supply Chain

Management. With the implementation process

scheduled for completion in 2007, the ERP system

will enhance efficiency by ensuring business

transactions are processed uniformly within the

Group and will provide managers access to more

timely and accurate information to make better

business decisions.

Human capital development was also a key focus in

2006. As a precursor to this, an evaluation of the

overall organization Job structure was carried out

early in the year, with the results supporting ongoing

efforts to streamline structures and create more

efficient business operating models. The resulting

structure, which is presently being implemented, will

force Managers to identify and manage careers of

high performance/high potential staff, whilst equally

forcing them to take remedial action against non-

performers/mediocre staff.

We went further in 2006 to articulate the Group’s key

human resource (HR) objectives, which are:

1. To be an employer of choice;

2. To be a developer of people;

3. To improve the delivery and effectiveness of our

HR services.

To achieve these objectives, we have set out to

revamp our HR systems and framework through a

series of carefully planned projects and initiatives

which are presently being implemented and will be

concluded in 2007. In the interim, we have continued

to intensify key staff training across all cadres within

the Group.

Following from the various initiatives above, your

company was able to better optimize use of

shareholders capital to generate higher profitability

from operations during the period under review as

well as position for further future growth. With Return

on Equity of 12%, Return on Total Assets (ROTA) of

3.13%, expense-to-income ratio of 81%, earnings

attributable shareholders growth of 78% and an

earnings per share of N4.76, Year 2006 performance

is clearly an improvement over previous years.

Further details of this sterling performance and our

plans for the new year are provided within the

subsequent business unit reviews.

OANDO MARKETING

Oando Marketing is the leading oil-marketing retailer

with over 500 retail outlets in Nigeria and operations

in Ghana, Togo, Liberia and Republic of Benin. The

company markets a wide range of products including

Premium Motor Spirit (PMS), Automotive Gas Oil

(AGO, also known as Diesel), Dual Purpose

Kerosene (DPK), Aviation Turbine Kerosene (ATK),

Low Pour Fuel Oil (LPFO), Lubricating Oils and

Greases, Insecticides, Bitumen, Chemicals and

Liquefied Petroleum Gas (LPG, also known as

Cooking gas).

2006 In Review

Issues Arising During The Year

2006 was dominated by the loss of the Kaduna and

Warri refineries for most of the year as a result of

pipeline vandalisation by militants in the Delta region.

Following a record production year in 2005, this was

a major setback for the industry as a whole, as most

players saw a significant drop in the volume of

products (especially white products) received locally

from the Petroleum Pricing and Marketing Company

(PPMC). Given the low margin structure of the

industry, fixed cost overhang led to reduced

profitability for a majority of these players.

Another major factor that shaped 2006 was the

government’s introduction of the Petroleum Subsidy

Fund (PSF), a response to the need to increase PMS

imports to mitigate the loss of the local PMS

production. Your company was the most aggressive

supporter of this government initiative during the

period under review but severe delays in receiving

subsidy reimbursements and related interest

financing costs significantly reduced the initial

expected benefits of the Fund.

Kaduna Lube Plant, Kaduna, Nigeria

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Business Review (By Main Product Lines):

1. Premium Motor Spirit (PMS)

PMS fortunes were dominated by the loss of

local production and the cash flow impairment

from late PSF and PEF (Petroleum Equalisation

Fund) reparation. Oando’s aggressive support of

this government initiative resulted in your

company importing by far the greatest volumes

under the scheme. As a result, PMS still

contributed over 50% of gross margin

contribution

2. Automotive Gas Oil (AGO)

AGO, a deregulated product, saw record

average prices (26% rise on 2005 values) as

supply was dominated by imports in a year that

also saw record crude oil prices. Your

company’s ability to leverage the import

capabilities of its sister trading company saw

healthy margins for most of the year, off-setting

the consumer price resistance which dampened

volumes.

3. House Hold Kerosene (HHK)

HHK, largely government supplied and included

in the PSF, witnessed wild supply and pricing

swings in 2006. Volumes were significantly

lower than the previous two years but margins

were largely attractive.

4. Aviation Turbine Kerosene (ATK)

In the import focused Aviation Fuel business,

Oando’s importing strength should have

delivered strong margins for the business.

However, in the period under review, cost

disadvantage versus competitors using grey

imports caused contribution to lag expectations

throughout the year.

5. Lubricants

Oando’s retail lubricant business witnessed

strong growth in 2006, as the strategic focus for

expansion in new non-forecourt channels

enabled us protect unit margins in a highly

competitive environment. However, the

Commercial business was affected by the drive

to improve cash collection and the process

changes required to bed down the new Branch

Structure. Commercial customer rationalisation

has now received its final adjustment and

Marketing has a sophisticated set of credit

controls that will see consistent and risk

managed commercial revenues going forward.

6. Other Specialty Products

Volumes of other specialty products suffered in

2006 due to supply interruptions, aggressive

market pricing and the move to a better

quality of commercial customers. We expect

positions on these products to reflect a more

risk adjusted position in 2007.

West Africa Operations

The West African businesses witnessed improved

margins in 2006, as country (Nigeria) supply

activity continued to expand across the region.

Oando Togo was also admitted into the select

group of government product importers during the

period.

Performance

In review, Oando Marketing assumed the No1

volume player position in the downstream

marketing sector, creatively growing its higher

margin lubricant volumes and restructuring its

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operations to reduce fixed costs. As a result,

revenue from the business unit increased by 9%

from N122 billion in 2005 to N132 billion in 2006,

primarily driven by a 22% aggregate rise in product

prices. This was despite a 9% decrease in

volumes, as total white products volumes fell due

to the loss of the Kaduna and Warri refineries for

10 months of the year.

Profit after tax also increased by 70% from N1.38

billion in 2005 to N2.35 billion in 2006. This

increase would have been significantly greater but

for higher financing cost due to unplanned

borrowing resulting from late settlement of

government receivables. At the gross margin level,

the company also maintained a net increase of 2%

as select products continued to enjoy higher

margins.

People

Our operations and our people underwent

considerable change as a result of the value

creating Branch Project transition. Over 60

members of staff left the company, after securing a

strong union negotiated severance package. This

negotiated settlement remains valid for the next

two years in recognition of the further operational

changes that profitability improvement will bring in

the near future.

The savings from the change are already kicking

in, as the company has maintained a 10%

reduction in operating expenses despite the

release of severance payments.

Despite the rationalization, the company continues

to build for the future with functional training

activity at record levels, utilising local and foreign

service providers.

Process

Finally, the year saw the final and successful push

for NIS ISO 9001: 2000 qualification. With this new

discipline in place, Oando Marketing is set to

embed the consistency of service and profitability

delivery and block the leakages in the system that

have proved challenging in the past.

Our Plans For 2007

Our aim in 2007 is to rationalise scope to deliver

improved liquidity and profitability to the Group and

to shareholders. Targets have been set for a

reduction in operation costs in excess of that

achieved in 2006; this should deliver further value

as the company switches to a more reliable and

lower cost branch structure. Tight working capital

management as well as the newly agreed

government receivables framework will lessen our

interest burden. We will also continue to revisit our

Key Business Controls to ensure we are well

protected against fraud, shortages, loss of

products and theft of assets. We are confident of

increased profitability and liquidity in 2007.

OANDO’S TRADING BUSINESS

Oando Supply and Trading Limited and Oando Trading

Limited (Bermuda) represent the products trading arm

of the Oando group. Our business activity covers

trading of refined and unrefined petroleum products to

Refiners, Marketing and Trading Companies

worldwide. Supply and Trading is responsible for

deliveries into Nigeria, whilst Trading is responsible for

supply into other markets. Products traded include

gasoline, gas oils, kerosene, aviation fuel, distillates,

naphtha, fuel oils, bitumen, base oils, bitumen,

liquefied petroleum gas.

The business also maintains a presence in the world’s

products freight market in terms of vessels chartered

on spot and time charter basis for delivery of oil and oil

products to various customers worldwide. The

business represents a diversification of earnings

stream for the Group and an opportunity to participate

in the high volume but low margin trading business.

2006 in Review

Issues Arising During The Year

The price of petroleum products in the international

market continued to rise throughout 2006, off the back

of Crude-oil prices which rose to more than $77 a

barrel before settling down at relatively lower prices.

The main contributors to the increase were the

escalating conflict in Lebanon, Nigerian pipeline

sabotage issues, the war in Iraq and supply concerns

in the West which were exacerbated by hurricane

threats.

The Nigerian government introduced the Petroleum

Subsidy Fund (PSF) at the start of the year to

encourage importation by private marketers. This fund

serves as a compensation for losses made from selling

cargoes at the low regulated pump price as compared

with the high price of petroleum products purchased

from the international market. Unfortunately, the high

number of cargoes delivered under the Fund resulted

in exacerbating the already choked usage of jetties,

further increasing the demurrage exposure associated

with importing products into Nigeria.

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support capabilities required to evolve our strategic

intent to be the supplier of choice.

By consolidating on existing markets and tapping

into the growing upstream market, we foresee a

future of increased activity for Oando Supply and

Trading.

OANDO ENERGY SERVICES

Oando Energy Services Limited was incorporated in

2005. Our mission is to be “an Integrated Energy

Services Company in the Product Supply Value

Chain delivering well-packaged and better world-

class ‘product service bundles’ to the Sub-Saharan

Upstream Oil Sector”.

Activities During The Year

In 2006 operations centered on four main Product

Service Lines (PSLs):

• Upstream Fuels

• Total Fluid Management

• Oil Well Cement

• Drill Bits

All the PSLs are largely at developmental stage

except for Upstream Fuels, which also has been

the mainstay of the company since inception.

Business Review (By Exisiting PSLs)

1. Upstream Fuels

As a clear demonstration of the company’s

positioning in the industry, OES delivered

74,000 metric tons during the year under

review. Several operational and business

challenges were encountered and duly

resolved. We are currently implementing

processes and procedures to reduce the

The trading business was able to achieve the above

performance by trading substantial volumes of

gasoline into Iran during the 1st quarter of the year

and taking advantage of the opportunity presented by

the PSF in Nigeria.

Our Plans For 2007

Our primary market has grown increasingly

competitive with the advent of the Petroleum Subsidy

Fund (PSF). Hence, Oando Supply and Trading is

positioning itself as the supplier of choice for energy

industry products to compete in this terrain. Our

positioning and future growth will be built on a three-

pronged strategy i.e.

• Unlocking and creating captive sources of

sustainable supply of competitively priced

refined products

• Implementing adequate and effective risk

management coupled with aggressive

expansion of customer base in the local market

• Expanding the regional and international

markets served

Our sourcing strategy is to leverage on our size and

capabilities in securing long-term off-take volumes

from refineries along the coast of West Africa. Similar

opportunities will be sought around the world where a

strategic fit emerges. Advantages will include

competitive pricing, increased flexibility and

exclusivity at source.

Through upstream alliances, we will penetrate and

build the trading business in order to extend our

product scope and refocus on higher margin

markets. We will also concentrate on alliances,

which offer us opportunities to leverage on

synergies with which to harness service and

Business Review

The company traded in both the international and the

local markets in 2006. The first half of the year was

dominated by trades into the international market,

however in the second half; the company refocused on

expanding and consolidating its dominance in the local

market.

Oando Trading also capitalized on trading

opportunities in other coastal West African countries

such as Burkina Faso and Cotonou which are hubs for

distribution of products into other landlocked West

African countries.

Locally, Oando Trading was able to take advantage of

the opportunity presented by the Petroleum Subsidy

Fund and sold large volumes of PMS to marketing

companies who were eligible to import under the Fund.

As with 2006, the $5 billion turnover criteria set by

NNPC for oil trading firms to supply them with

petroleum products remained unchanged. Very few

foreign trading companies met this criteria and no

Nigerian company qualified. The company considers

this policy as unfair to local companies that have

established the ability to handle volume imports and

indeed continue to do so. We urge the Federal

Government of Nigeria to intervene with a view

towards reversing this discriminatory policy.

Performance

Despite the constraints, Oando Trading Business

achieved a turnover of N102 billion in 2006, a rise of

73% above 2005 turnover of N59 billion. Volumes

traded were 1,231,796.87mt, an increase of 34.36%

over and above the 914,821.69mt traded in 2005.


impact of such incidents in our operations, as

we are determined to further double volumes

in 2007.

2. Total Fluids Management

OES, in alliance with Halliburton, delivered

products and services worth N3.5 billion to

upstream sector clients in 2006. Our major client

during the year was Chevron Nigeria Limited

with 7 Oil wells, some of which were completed

in the year. We also serviced ESSO Exploration

and Production Nigeria Limited on 3 wells in the

first quarter of 2006.

A total of 40,148 bbls of base oil was supplied to

the alliance by OES (sole supplier in the

alliance) with a contribution of N810m to the

revenue.

7,700 metric tons of barite (both ore and milled)

were sourced in the year in readiness for use on

various contracts. OES intends to maintain the

aggressiveness in barite procurement in 2007.

Some of the challenges in this PSL include: late

contract take-off (not based on schedule), high

trade accounts receivables requiring concerted

efforts to bring under control and long lead time

for bid progression from pre-qualification to

award of contracts.

3. Oil Well Cement:

Business activities commenced within this PSL

in April 2006. A total of 11,862 metric tons was

supplied to Halliburton in the year, generating

N420m revenue. Supply chain management

was a major challenge that faced the company

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completion of the Onne warehouse. This has

positioned the company as a reputable player in the

industry.

Progress on Tender to Contract/Call-offs

OES responded to all tenders from clients in respect to

existing and incubating businesses while keenly

monitoring progress on bids-in-process towards

awards of contracts. So far, we have had a very good

success rate.

Our Plans For 2007

Existing PSLs

In 2007, OES aims to expand activities in existing and

incubating PSLs by tendering for all bids relevant to

our business, in the bid to improve current market

share. We also plan to consolidate on the tremendous

progress made in improving business development

processes, staffing and EHSQ.

New PSLs

The company also plans to consolidate its presence in

the industry by aggressively pursuing other PSLs with

higher margins. These include:

• Drilling Rig Operations - We plan to pursue

entry into this business through the acquisition of

swamp rigs and recruiting a reputable

international drilling company as technical

partners and/or Operator and maintenance

manager. Negotiations are already underway

regarding the acquisitions. Technical partnership

discussions are expected to be concluded soon.

• Solids Control and Waste Management –

Plans are on to commence this PSL by the third

quarter of 2007, contingent upon the awards of

during the year, but this has since been

resolved.

4. Drill Bits:

With the commencement of this PSL in October

2005, year 2006 was a year of consolidation

and re-alignment of processes, staffing and

facilities to ensure its profitability. A total of 93

bits were sold in the year, out of which 19 bits

were used to service OES contracts while 74

bits were used on Halliburton contracts. Total

revenue booked on this PSL was N287m

Performance

In 2006, OES recorded a 56% increase in Turnover

over 2005. Profit before tax however reduced by 77%

to N10.3m while Profit after Tax also reduced by 80%

to N3.2m. This high reduction in profitability was

mainly because of business re-engineering

procedure that was undertaken by the company in a

bid to harness and fine-tune our business

processes. We strongly believe the impact of this

restructuring will become more prominent in future

years to come.

Policies, Structures, Processes and Procedures

The fourth quarter of 2006 witnessed the initiation and

alignment of OES processes, procedures and policies

with the Oando group, with the aim of reducing costs

and improving overall efficiencies. Significant progress

was made in putting in place proper structures and

processes covering Supply Chain processes, EHSQ,

Staffing, Compensation and detailed Job descriptions.

Capital Investment

The main capital investment in 2006 was the

Dril

l Bit


In Ghana, Oando has made several representations

to the Ghanaian Government with respect to their

plans to privatize the Tema Oil Refinery (TOR) and

we await the commencement of their privatization

programme. However, as with most national assets

that are deemed to be “strategic”, we do not expect

the TOR process to be completed until 2008.

Our Plans For 2007

Going into 2007, the much delayed PHRC

privatization process has again be revived by the

current administration with a promise to see it to

conclusion before the handover of power in May

2007. When the process is reactivated, Oando will, of

course, continue to pursue this opportunity.

Over the coming year, we plan to finalize the conceptual

design of the Greenfield facility which will be further

refined in detailed engineering in the coming years. Our

expectation of commencement of construction is

presently 2010.

Oando continues to view refinery assets, PHRC and the

“Greenfield” refinery in particular, as crucial components

of Oando’s growth story.

OANDO GAS & POWER

Oando’s Gas distribution & Power business is directed

by Oando Gas & Power Limited.

GAS DISTRIBUTION

Gaslink Nigeria Limited is one of four companies

exclusively involved in piping and distribution of Natural

Gas direct to consumers in Nigeria. We operate Oando‘s

20 year Natural Gas Sales & Purchase Agreement

(NGSPA) with the Nigeria Gas Company (NGC) Limited,

a subsidiary of Nigerian National Petroleum Corporation

contracts for which we have already tendered.

Technical partners have also been identified.

• Casing and Tubulars – Plans are also on to

commence in the third quarter of 2007, equally

dependent on the outcome of tenders that we are

presently involved in.Technical partners have also

been identified.

OANDO REFINING DIVISION

Oando’s Refining Division was established in 2005

and is charged with spearheading Oando’s entry into

the refining sector as well as managing Oando’s

assets and investments in the sector thereafter.

2006 In Review

Though some advances were made, which we expect

to capitalize on in 2007, 2006 proved to be a

challenging year for Oando’s Refining Division.

Despite our robust participation and performance in

the Port Harcourt Refinery Company (PHRC)

privatization process that culminated in Oando

successfully gaining pre-qualification to acquire the

refinery, the process was halted twice in the eleventh

hour.

In addition to the PHRC privatization process, Oando

continues to investigate the “Greenfield” refinery in

Lekki as well as monitor the privatization process of

the Tema Oil Refinery (TOR) in Ghana.

On the “Greenfield” refinery, Oando has recently been

successful in securing a large equity and technical

partner to work with in developing this long term

project. Our partners have recently commissioned their

own large refinery and are committed to developing

similar projects in Nigeria and West Africa in

partnership with us.

(NNPC). The NGSPA grants Gaslink the exclusive right

to market Natural Gas in the “Greater Lagos Area”. In

carrying out this contractual mandate, we design, build

and operate gas distribution network in the allocated

franchise area.

2006 In Review

Issues Arising During the Year

The strategic importance of gas supply and the dangers

inherent in reliance on a sole supplier to our business

was brought to light in the course of the year. To mitigate

against this risk, we commenced studies on other gas

sources and opened discussions with gas producers in

order to assure supply to our customers. We are at

advanced stages of discussion with two companies.

One of the major objectives pursued in 2006 was the

expansion of our distribution facilities through execution

of Greater Lagos Phase 3 project. Although relevant

orders have been placed, the construction process was

delayed due to increases in price and scarcity of steel

and pipes in the world market. Our pipes are currently at

production stage and project execution is scheduled to

commence by April 2007.

Business Review

Gaslink’s strategic thrust in 2006 was focused on

consolidation on the feats recorded in the past,

optimisation of existing assets to deliver optimum

values to stakeholders and pursuit of new

developments. The company performed well on most

indices in 2006 and the market continued to respond

well to natural gas as an energy source. The

Government’ economic reform program with regards to

the Gas sector is also taking shape.

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In view of this, new customers were connected while

existing ones deepened their natural gas utilisation.

Furthermore, NNPC announced an upward adjustment

of Low Pour Fuel Oil (LPFO) which forms the basis of

natural gas pricing in the country. The combined effects

of volume and price increases impacted positively on

the operating results for the year 2006 over 2005, with

about 100% increase in turnover and profit before Tax

(PBT).

To take advantage of the West African Gas Project

(WAPG) which is at the concluding stages of

construction, we initiated business contacts into the

West African countries during the year and

consequently made some progress in establishing

relationships in Ghana, Togo and Benin. These are

neighbouring countries that will benefit in terms of

Natural Gas Utilization from the construction of the

West Africa Gas Pipeline. We hope that definite

mandates will be secured within the coming year in

these countries.

The company held its first technical forum in October

2006 as part of capacity building for stakeholders in the

gas industry. This forum was to sensitize existing and

potential customers and members of staff to the latest

technology in natural gas infrastructure and health and

safety issues. Commendations were received from

participants as an acknowledgement of the success of

the event. The company also issued its first handbook

on natural gas to its customers.

As with prior years, Gaslink enjoyed harmonious

relationship with its host communities during the year

and therefore witnessed no disruptions to its

operations. During the year, a borehole was sunk for

one of the host communities as a means of improving

the quality of lives within our immediate environment.

We plan to continue to identify and provide value-

adding infrastructure for other communities in the

course of the coming year.

In an attempt to expand the usage of natural gas in the

country, Gaslink also commenced feasibility studies into

Compressed Natural Gas (CNG) for vehicular and

stranded customers’ usage.

Our Plans For 2007

The company’s overall objective for 2007 is to enhance

stakeholders’ value. Underpinning this will be the

following:

• Accelerating construction of phase 3 by mobilizing

multiple spreads and progressive releases of

volumes

• Adding at least 35 additional customers, including

high volume gas users, in 2007

• Continuing to seek new gas sources and signing

an off take agreement with at least one

• Intensifying the drive to establish a presence in

the West Africa sub region and to win at least one

Local Distribution Zones in either Benin Togo or

Ghana

• Developing the CNG pilot project in 2007

• Increasing our investment in training and

development, embarking on ISO certification and

participating in the group’s deployment of ERP

implementation

• Acquiring at least one additional franchise area in

2007

POWER

Oando’s Power business is being incubated within

Oando Gas & Power to take advantage of upcoming

deregulation and privatization of the Power sector in

Nigeria.

2006 In Review

Our focus in 2006 was planning and preparing for

entry into generation and distribution sectors of the

Nigerian Electricity Supply Industry (NESI) and

participating in the privatisation process organized by

the Bureau for Privatization of Enterprises (BPE)

towards the eventual sale/concession of the PHCN

successor companies.

Oando Power has identified the industrial sector as

one in need of an immediate power supply solution. A

number of companies in this sector presently self-

generate mostly utilising diesel or LPFO. In

conjunction with Gaslink, Oando Power has proposed

to provide a gas-fired solution to a number these

companies.

In this regard, Oando Power participated in the tender

for the provision of a 12MW of captive power solution

to the Lagos State Water Corporation and emerged

with the best technical bid. In addition to this, the

company opened up discussions with several other

industrial companies in close proximity gas fuel

sources with a view to providing captive power

solutions.

In preparing for the eventual acquisition of the

distribution and generation companies of the PHCN,

the company has formed definitive relationships with

renowned players (technical and financial) with an


appetite for investing and operating in Africa. We have

also embarked on a capacity building process in order

to prepare a robust platform for the impending tender

exercise.

Outlook for 2007

With the recent appointment of a transaction adviser

for the disposal of the PHCN successor companies,

the stage is set for the BPE to commence the

privatisation exercise. Oando Power has positioned

itself to be the preferred bidder for some of the

distribution and generation assets slated for

privatisation in 2007.

Oando Power remains committed to its vision ‘to be

the preferred energy supplier in the Nigerian ESI’.

UPSTREAM DIVISION

OANDO EXPLORATION AND PRODUCTION

Oando Upstream division presently comprises of

Oando Exploration & Production Limited (OEPL)

Oando Production Development Company (OPDC)

OEPL was created to tap into the vast natural

petroleum resources of the Niger Delta and that

offered by the Gulf of Guinea. This complements

Oando’s Group vision of capturing margins across the

entire energy value chain. Following inception, OEPL

has increased our oil and gas prospect inventory base

through the acquisition of OPL 278. OEPL is actively

seeking growth through participation in bidding rounds

and Farm- In Opportunities.

OPDC, the second upstream oil and gas business

unit, has 45% interest in the Obodeti / Obodugwa field

(OML 56 awarded in the 2003 Nigerian Marginal Field

Round). OPDC is fast tracking the field development

in 2007 to maximize returns to shareholders and

increase the income streams into your company.

These two business units will manage the vision of

capturing margins from the production of oil and gas

assets. They will also focus on acquiring oil and gas

assets with strategic value like gas to support our

value creation across the company especially Gaslink

and Oando Power.

The Upstream organization has been strengthened by

the recruitment of key personnel skills to support this

drive.

2006 In Review

• OML 56

Development of the Obodeti/ Obodugwa marginal

field continued in 2006 (with partners Energia as

Operator), despite community problems experienced

in the area.

• OPL 278

Oando was awarded OPL 278 in the 2005 Nigerian

Bid Round as Operator with 60% stake. A Production

Sharing Contract (PSC) was signed and evaluation of

initial seismic data for the block was completed in

2006. A full 3D seismic data acquisition is planned in

2007, whilst the exploration drilling program is

expected to commence in 2008.

• OPL 282

Oando has 4% indirect interest in OPL 282, as part of

the Local Content Vehicle (LCV) with Arc Oil and Gas

under the Umbrella of Alliance Oil Producing

Company Ltd. Nigerian Agip Oil Company is the

Operator of OPL 282 with a 90% stake. In 2006, the

Production Sharing Contract (PSC) for the block was

signed and the exploration phase initiated, with plans

to acquire full 3D seismic shortly.

• Other Oil and Gas Assets

OEPL actively sought the acquisition of a gas asset in

2006 to complement the value link with Gaslink. An

acquisition of one such asset is at its closing stages

and will significantly improve the gas development

opportunity in the South Eastern Niger Delta.

Outlook for 2007

OEPL/OPDC will continue on the path to add

significant value to the assets in Oando’s portfolio.

Acquisition/interpretation of seismic data for OPL-278

and field development of the Obodeti/Obodugwa field

will be paramount in 2007. Oando will also continue

to look for avenues to spread risk by seeking credible

partners. We will take advantage of opportunities to

continuously increase our asset base by participating

in bid rounds and Farms-ins with suitable partners

and selecting properly evaluated assets.

Mr. J. A. Tinubu

Group Chief Executive

DIRECTORS IMAGE IN PROGRESS

Board of Directors

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Major General M Magoro (Rtd) •PSC, OFR – Galadiman Zuru, Chairman

A retired general of the Nigerian Army. He was one time

the Federal Commissioner of Transport, Minister of Internal

Affairs and Member of the Supreme Military Council. In

addition, he has served on the boards of the Nigerian

Railway Corporation and the Nigerian Ports Authority. He

currently sits on the boards of several other companies as

well as the Peoples Democratic Party (“PDP”) board of

Trustees. He has held the position of Chairman of Oando

since 2000

Mr JA Tinubu †

Group Chief Executive

Mr. Wale Tinubu is the Group Chief executive officer, Oando Plc. He

holds a Bachelor of Laws Degree from the University of Liverpool and

an LLM from the London School of Economics. He commenced his

career with the law firm K.O.Tinubu & Co. and was one of the founding

members of the Ocean and Oil Group, where he was responsible for

the strategic expansion of that group. Prior to assuming his present

position, he served as Oando’s Executive Director, Finance and

Administration. Mr. Tinubu is currently the Chairman of the boards of

Gaslink Nigeria and Tilca Nigeria Limited and sits on the boards of

several other companies in the Oando Group. He the Chairman of the

CEOs of the major oil and marketing companies meetings and a

member of the Institute of Directors of Nigeria.

Mr GO Boyo Esq †

Deputy Group Chief Executive

He is the deputy group chief executive officer. He obtained his

Bachelor of Laws Degree from Kings College, University of

London. He started his career with Chief Rotimi Williams’

Chambers, a leading Nigerian law firm, where he specialised in

shipping and oil services and worked on several joint venture

transactions between the Nigerian National Petroleum

Corporation and major international oil companies. He joined the

Ocean and Oil Group in 1994, where he developed and managed

the operations department before his appointment in July 2001 as

Executive Director, Marketing of Oando. Mr Boyo serves on the

boards of companies in the Oando group.

Board of Directors


Mr A Akinrele (SAN) •

Non-executive director

Mr. Akinrele is a partner in the law firm F. O. Akinrele & Co. He

holds a Bachelor of Laws Degree from University College,

London and an LL.M from the University of Cambridge. He is a

member of the Nigerian Bar Association, a Senior Advocate of

Nigeria and a Fellow of the Chartered Institute of Arbitrators in

the United Kingdom.

HRM Oba MA Gbadebo •


Prior to his coronation as the Alake of Egba Land in 2005, His

Royal Highness had a successful career in the Nigerian Army

culminating in his appointment as the Principal Staff Officer,

Supreme Headquarters from January 1984-September 1985.

The Alake holds a Bachelor of Arts degree from the premier

university in Nigeria: University of Ibadan and has served on

the boards of several companies including: Ocean and Oil

Services Limited, and Global Haulage Resources Limited. He

was also awarded military honours such as the Forces Service

Star (FSS) and the Defence Service Medal (DSM).

Prince FN Atako, JP *


Prince Atako is a seasoned financial analyst and a member of

the Nigerian Stock Exchange and sits on the board of many

companies. He obtained a Bachelor’s Degree in Public

Accountancy and an MBA in Finance & Investments from The

Baruch College of the City University of New York, New York,

USA. He served in various capacities both in the private and

public sectors.

• Non-executive Directors

* Independent Non-executive Directors† Executive Directors

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Mr VO Ibru •


Holds a Bachelor of Science Degree in Finance and a Bachelor

of Science Degree in Decision Sciences, from the University of

San Francisco, California, as well as a Masters Degree in

Business Administration from the International Graduate School

of Management (IESE), Navarra, Spain. Mr Ibru is currently the

Chief Operating Officer of Oceanic Bank International Plc (“the

Bank”), where he has worked for over 16 years in various

capacities. He currently supervises the Bank’s head office

operations, and several key divisions including Information

Technology, Human Capital Development and Financial

Control. Mr Ibru serves on the boards of Aero Contractors

Nigeria Limited and Minet Insurance Brokers amongst others.

Mr AH Mahmud *


He is the principal partner in the law firm of Mahmud Ahaneku

& Co. Holds a Bachelor of Laws Degree from the Ahmadu

Bello University, Zaria and is a member of the Nigerian Bar

Association. He served on the board of the Gongola State

Broadcasting Corporation from where he was appointed to the

Gongola State Executive Council. Alhaji Mahmud is a former

Senator of the Federal government of Nigeria.

Mr OP Okoloko •


He was the Managing Director and Chief Executive Officer of Oando

Energy Services Limited from 2001 to 2006. Mr Okoloko joined the

Ocean and Oil Group in 1994 as a founding member and focused on

the trading and energy services business lines. He holds a Bachelor of

Science Degree in Economics from the University of Benin. He started

his career working with Bounty Alarms, an independent marketer of

AT&T security systems in the United States of America, where he rose

to the position of Sales Training Manager. Mr. Okoloko is currently the

Managing Director of Notore Chemical Industries Limited.


Mr I Osakwe *


Mr Osakwe is a Chartered Accountant as well as a Financial

and Management Consultant. He holds a Bachelor’s and a

Masters Degree in Chemistry from the University of Oxford,

England and is an associate Member of the Institute of

Chartered Accountants for England and Wales. Ike Osakwe

has worked in various audit and consultancy firms and has

carried out extensive management systems, operational and

accounting review assignments within Nigeria and

internationally. He serves on the boards of Thomas Wyatt

Nigeria Limited and Fedex (Red Star Express) Limited. He

served as the Chairman of UBA Trustees Limited from 1994 to

1996.

Mr O Osifo •


Holds a Bachelor of Science Degree in Mechanical Engineering from the

University of Lagos, a Master of Science Degree in Management Science &

Operational Research from the University of Warwick and a Master of

Science Degree in Finance from the London Business School. Mr. Osifo is

the Managing Director of Travant Capital Partners, a financial advisory firm.

Prior to this he was the Managing Director of Ocean and Oil Holdings

(Nigeria) Limited from 2001-2007. He worked at HSBC in London for eleven

years in the Treasury and Capital Markets Division and subsequently in their

Investment Banking Division. Mr Osifo currently serves on the boards of a

number of companies including, Broll Nigeria Limited, Avante Capital

Partners Limited, Avante Property Asset Management Limited, Denham

Management Company Limited and other companies in the Oando group.

• Non-executive directors

* Independent non-executive directors† Executive directors

2006 Annual rpt pg1-23 - Oando PLC | one of Africa’s ... · World Bank estimates global GDP grew by 3.9% during the year, compared with 3.5% in the previous year, and this was largely

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