Contents:

EXECUTIVE SUMMARY Chapter 1: BACKGROUND Resources and politics Figure 1.1: Angola-Location and principal characteristics Land and demographics Figure 1.2: Angola-Population density, by province Table 1.1: Demographic indicators, 2001 Economy Table 1.2: Economic indicators, 2000/01 Table 1.3: Contributions to GDP by sector, 1999-2001 Chapter 2: OVERVIEW OF OIL AND GAS PRODUCTION Crude Oil Table 2.1: Sonangol concession blocks Figure 2.1: Crude oil production, 1990-2002 Table 2.2: Oil production in ‘000 b/d, 1998-2001 Table 2.3: Oil and gas production, Angola, Africa and the world, 1997 and 1998 Natural Gas Geological Structures Figure 2.2: Simplified geological time scale Chapter 3: DESIGNATED CONCESSION AREAS A detailed description of E&P concessions in Angola, including a block-by-block description of operators and partners and the activities undertaken Draws conclusions regarding the future of deepwater and ultra-deepwater E&P Chapter 4: OIL EXPLORATION AND PRODUCTION Mergers and acquisitions Corporate exploration and production companies Angola Japan Oil Company:Ajoco (Japan) BHP Billton (Australia/UK) BP plc (UK) Canadian Natural Resources (Canada) ChevronTexaco (US) ConocoPhillips (US) Daewoo Corporation (South Korea) Energy Africa (South Africa) Eni/Agip (Italy) ExxonMobil (US) Falcon Oil Holdings (Panama) Gulf Energy Resources (US) INA Naftaplin: Industrija Nafte (Croatia) Marathon Oil Company (US) Mitsubishi Petroleum Development Company (Japan) Naphtha Israel Petroleum Corporation (Israel) Neste Petroleum (Finland) NIS Naftagas (Yugoslavia) Norsk Hydro ASA (Norway) Occidental Petroleum Corporation (US) Ocean Energy (US) Pedco: Korean Petroleum Development Corporation (South Korea) Petrobras Internacional (Brazil) Petro-Inett Corporation (France) Petroleos de Portugal: Petrogal (Portugal) Petronas: Petroliam Nasional (Malaysia) Prodev International (Switzerland) Repsol - YPF (Spain) Roc Oil Company Limited (Australia) Royal Dutch/Shell International (Netherlands/UK) Saga Petroleum (Norway) Sonap (Angola) Statoil (Norway) Svenska Petroleum Exploration (Sweden) Teikoku Oil Co (Japan) TotalFinaElf (France) Conclusions Technical and support service companies A detailed review of the activities of technical and support companies in the Angolan oil scene ABB Vetco Gray (Switzerland/US) B J Services Company (Scotland) Bouygues Offshore (France) Coflexip Stena Offshore (France) ETPM (France) FMC Energy Systems (US) Global Marine (US) Halliburton Company (US) Oceaneering International (US) Ocean Rig ASA (Norway) Petroleum Geo-Services (US) Pride International (US) Schlumberger Oilfield Services (Germany) Stolt Comex Seaway (UK) Western Geophysical (US) Table 4.4: Seismic surveys Table 4.5: Offshore Angola - 2D and 3D exploration programmes Table 4.6: Baker-Hughes Rig Count, 1991-99 Chapter 5: MANAGING THE OIL AND GAS INDUSTRY Sonangol as concessionaire Signature bonuses (Box) Table 5.1: Shallow and deepwater PSAs Figure 5.1: Angolan PSA Sonangol as corporate parastatal Figure 5.2: Sonangol group structure Sonangol as developer and operator Options for Sonangol Critical issues for Sonangol Chapter 6: CONTEXT ISSUES Oil price considerations Table 6.1: Quarterly average oil process in $/bbl, 1998-2002 Figure 6.1: Oil price trends relative to Opec band Risk Prospectivity Fiscal considerations Political risk Figure 6.2: Risk management components Civil war Environmental Pollution Chapter 7: CONCLUSIONS Managing oil revenue Transparency Opec Political stability Infrastructure Economic diversification Regional participation Access to World Bank/IMF financial assistance

Summary:

Angola’s rich tropical resource base constitutes a potential opportunity for economic development, which ranks among the highest in sub-Saharan Africa. In particular, Angola has enormous wealth in terms of oil and diamonds. However, since gaining independence from Portugal in 1975, the country has been devastated by a debilitating civil war, to which huge amounts of money have been allocated for the purchase of weapons, ammunition, fuel and the logistics of troop movements. CIVIL WAR The initial post-independence political rivalry between the governing party, the People’s Movement for the Liberation of Angola (MPLA), and the National Union for the Total Liberation of Angola (Unita) degenerated into conflict, aggravated and sustained by the wealth generated by oil and diamonds. Throughout the 1990s various peace accords and attempts at reconciliation between the antagonists, promoted primarily by the UN and the US, failed dismally. Towards the end of 1999 and into the first quarter of 2000, government forces inflicted heavy damage on Unita through sustained attack and follow-up. This drove the conflict across the country’s borders with Namibia and Zambia and threatened further to destabilise an already volatile regional conflict centered on the fighting in the Democratic Republic of Congo. The death of Jonas Savimbi in February 2002 brought the hostilities to an end, but exposed the extent of enormous suffering among the Angolan people. Angola’s total population is around 13m and its demographic indicators reflect a typically impoverished developing country, lacking in the essential components of a sound foundation for future growth and development. The country’s economic base is in disarray because of the war, and most of the population can barely eke out a subsistence living. The effects of hunger, poverty and malnutrition are all too evident, despite the substantial income generated from oil and diamonds. OIL Although oil was discovered in Angola early in the 20th century, and confirmed in the 1950s, it was not until the late1960s that serious production began. Initially confined to onshore activities in the vicinity of the capital city of Luanda, it soon became evident that the most lucrative hydrocarbon deposits were located offshore from the enclave province of Cabinda in the fairly shallow waters of the Congo basin. Under post-independence Angolan law, ownership of all hydrocarbon deposits is vested in the state, which formed the parastatal oil company Sociedade Naçional de Combustiveis de Angola (Sonangol) to manage the emerging oil industry. Sonangol is designated as the exclusive concessionaire of all Angolan hydrocarbon deposits and reserves under Law 13/78. From the outset, Sonangol adopted a clear strategy of engaging international oil companies in joint undertakings to conduct exploration and production activities. These arrangements initially took the form of joint ventures (JVs), subsequently replaced with production sharing agreements (PSAs).Oil exploration and production in Angola is conducted on the basis of concession blocks, which cover areas of up to 5,000 sq km, and are among the largest in the world. Following the original offshore concession awarded to the ChevronTexaco subsidiary Cabgoc and designated as block 0, Sonangol released a number of offshore concession blocks, which are detailed in Chapter 3.Oil production in Angola increased steadily from 230,000 b/d in 1985 to over 500,000 b/d in the early 1990s, and to 700,000 b/d in 1998/99. Production is expected to exceed 1.5m b/d by 2003/04.The nature, extent and complexities of onshore and offshore oil exploration and production in Angola are described in Chapter 3, which consists of a block-by-block review of oil company activities and equity interests, both as operators and partners, as at the end of 2001. While more than 75% of Angola’s current oil production comes from the relatively shallow water block 0, future production prospects are firmly associated with deepwater and ultra-deepwater plays. Despite the technological, financial and political risks associated with oil exploration and production in Angola, it is evident that these have been factored into oil companies’ investment decision making, and sustained developments are expected over at least the next decade. CORPORATE INTERESTS The success of oil exploration and production in Angola over the past 25 years has depended heavily on the involvement of major international oil conglomerates, together with a handful of independents and some relatively minor interests. Chapter 4 traces the involvement of almost 40 corporate interests in the Angolan oil industry and emphasises the broadly cosmopolitan nature of those interests, all of which have had to conclude contractual relationships of one kind or another, largely in the form of PSAs, with Sonangol.Equally important to the industry is the wide range of technical, engineering and service support functions necessary to sustain the operational activities and to add value to the exploration, development and production activities. These involvements are outlined in a review of the activities of major technical support interests, many of which have also formed co-operative associations with Sonangol and include technology transfer, training and management development arrangements for Angolans. In recent years the oil industry has been characterised by a series of mergers, acquisitions and takeovers, hostile and otherwise, which have resulted in major shifts in the ownership and control of global oil and gas interests. These developments are outlined in so far as they affect companies involved in the Angolan oil industry.The involvement of three major corporations that emerged from recent mergers is perhaps of particular importance to the future of the oil and gas industry in Angola. These corporations are ChevronTexaco, TotalFinaElf, ExxonMobil and BP. ChevronTexaco ChevronTexaco has been active in Angola since the 1950s, originally in the form of the Gulf Oil Company, and subsequently through the separate operations of Chevron and Texaco until their merger in 2001 to form ChevronTexaco. Many of the country’s oil and gas exploration and production procedures, including the nature of contractual relationships with Sonangol, were pioneered by ChevronTexaco interests. The Cabinda Gulf Oil Company (Cabgoc) was originally formed to manage and develop Chevron’s interests in Angola and operates two key licences for ChevronTexaco in Angola: block 0 with a 39.2% equity share, and block 14 with a 31% equity holding. ChevronTexaco’s technological diversity and financial capacity is best reflected in the fact that block 0 is essentially a shallow water concession, while block 14 lies in deepwater, immediately to the west of block 0. Such spatial consolidation of its interests is probably also indicative of a key strategic decision by the company regarding its investment interests in Angola. While Chevron’s block 0 production areas are expected to tail off over the next three to five years, the Kuito development in block 14 began production in early 2000 and is set for prolific production well into the future. A principal advantage of the Chevron-Texaco merger in the Angolan context, lies in the potential for extending a 1999 joint planning agreement between Texaco and Sonangol to establish an LNG/LPG project, based on associated gas produced from existing and new field developments. Texaco adopted a leading role in working with Sonangol to address the problem of associated gas in Angola, and to turn it into a productive resource. Natural gas output in 1998 was estimated to be well over 300bn cu ft, of which more than 85% was flared, with severe environmental consequences. Since there is little infrastructure to process the gas, it is generally considered to be a nuisance and is disposed of by flaring. While some of the gas is used on the oil fields in re-injection operations to facilitate the flow of oil in a well, this accounts for only a small fraction of the associated gas that is produced. TotalFinaElf TotalFinaElf ’s exploration and production interests in Angola date from the 1960s and the company operates through a number of locally registered entities, particularly through Elf Exploration Angola.The corporation’s prize acquisition in Angola was the 35% operatorship secured for the deepwater block 17, where major discoveries have been made in every year since 1995. The Girassol field where recoverable reserves are estimated at up to 1bn barrels of 32º API oil, commenced production of 180,000 b/d in February 2002. Additional block 17 production from the Jasmin, Lirio and Rosa fields is planned to maintain a steady production rate from the Girassol field cluster for 10 years. This is a reflection of TotalFinaElf’s strategy to build production up to a stable plateau and then to maintain it over as long a period as possible, which is in line with Sonangol’s preference for extended production. ExxonMobil ExxonMobil has a comprehensive portfolio of equity interests in deepwater and ultra-deepwater blocks and controls operatorships on blocks 15, 20, 24 and 33, which represent a balance between medium- and longer-term expected returns.Between1998 and 2001, ExxonMobil announced 12 significant discoveries on block 15, which constitute the basis for a clustered well development strategy, beginning with Kizomba A and Kizomba B. Tensions between ExxonMobil and Sonangol regarding short- and longer-term development strategies reflect an inherent difference between shareholder expectations for investment return maximisation and national oil company preferences for an extended development plateau. BP BP is a major player in the Angolan oil industry and its predecessor companies have had business interests in the country since 1974.BP is the operator on block 18, which it shares with Shell Development Angola BV as its 50% partner. The lease for block 18 was awarded to BP and Shell in 1996; and, between 1999 and 2001, six significant discoveries were recorded in the Greater Plutonio Prospect, estimated to hold up to 1bn barrels of +30º API gravity oil. First oil production from the wells in the Greater Plutonio Prospect is anticipated in 2005, probably based on an FPSO development. SONANGOL Sonangol’s role as concessionaire for all Angolan hydrocarbon deposits and reserves involves it in PSA negotiations with prospective operators and partners, based on complex and often extended bidding rounds. The circumstances associated with this process are described in Chapter 5, together with an assessment of Sonangol’s functions as a parastatal organisation, and as a developer and operator. Sonangol has entered into a wide range of diverse operational, exploration, research, training and production-related joint venture undertakings with corporate, academic and government interests from all over the world. These interests make Sonangol much more than an administrative regulator and concession allocator in the oil and gas industry; it is also an active and powerful player in its own right.Moreover, it is most unlikely that Sonangol’s role as a state owned national oil company will change in line with privatisation initiatives planned in terms of the requirements of the International Monetary Fund (IMF). Indigenous entrepreneurs do not have the resources and the capacity to buy into the oil and gas industry, which is an extremely costly business; thus a privatised Sonangol would probably be under foreign control, which is not acceptable to the government. CONTEXT ISSUES Angola’s oil and gas industry is affected by several context issues and externalities, some of which generate multiplier effects over which the government and the private sector have only a limited measure of direct control or influence. These issues, discussed in Chapter 6, include the international oil price, the issue of risk in investment, the aftermath of the civil war in Angola, and environmental pollution and degradation. CONCLUSIONS Angola’s future development depends on the approach that is adopted to several fundamental issues. These include the following:§ The uncertainties associated with an oil dependent economy mean that it is imperative for sound management practices associated with oil-based revenue.§ In particular, there is a need for greater transparency in the government’s financial management and accounting practices. The nature and intent of the KPMG Oil Diagnostic review constitute an opportunity for the state to establish improved institutional and regulatory controls to facilitate transparent oil revenue management.§ There are few evident incentives, if any at all, for Angola to join the Opec initiative. Given the development imperatives that confront the Angolan government, the imperative is to maximise oil production without the constraints that would be imposed by Opec quota arrangements.§ Internal political stability is an essential pre-condition to resolving the Angolan paradox of deeply entrenched poverty in a country with a massively wealthy potential resource base. Resolving the Unita problem by facilitating its transformation into a legitimate political party is fundamental to this imperative.§ The extent to which state resources are diverted from military expenditure to the construction, re-construction and rehabilitation of key infrastructural facilities and services is central to this requirement.§ The end of the civil war means that Angola must start a sustained programme of social, economic and infrastructural rehabilitation in order to rebuild the country. Repairing the damage inflicted on Angola’s productive capacity, on its physical resource base and, above all, on its people must be accorded the highest priority by the government, in association with multinational corporate interests and international development agencies. It is essential to establish an integrated economic system, based on value-adding, job creating forward and backward linkages to provide a basis for sound and sustainable growth and development. Angola’s oil and prospective gas production provide a basis for such integrated development, but the scope of development must extend to manufacturing and processing associated with other primary production resources, particularly in the fields of mineral beneficiation and agro-processing.§ Angola exists in a regional context that is characterised by political instability, conflict, corruption and poverty, which has militated against the resolution of internal social, economic and political problems. Active participation in, and commitment to, the Nepad and African Union initiatives are vitally important to establishing a sound basis for improving the country’s image in these respects.§ Access financial assistance through World Bank and International Monetary Fund programmes necessitate the formulation of a clear Poverty Reduction Strategy Paper (PRSP), which describes macroeconomic, structural and social policies to promote broadly-based economic growth and poverty reduction.Addressing these issues requires significant commitments by the government of Angola. They are, however, essential for medium- to longer-term economic recovery and sustainable growth and development. Compliance and commitment may well be necessary conditions, but they are not necessarily sufficient. Much depends on the collective political will to build a unified Angolan nation.