– THE FULL TEXT REVEALED!
… An Assessment Of The Effect Of The Kosmos/ExxonMobil SPA On GNPC And Government’s Strategy
SOURCE: New Crusading Guide
Published below is the full text of a ‘secret strategy paper’ prepared by some faceless GNPC Gurus to assist the Government’s Negotiation Team negotiating with ExxonMobil, on the Sales and Purchase Agreement (SPA) signed between the former and Kosmos Energy, which was submitted to the Government of Ghana (GoG) on June 29, 2000, for the latter’s consent as stipulated by the July 22, 2004 Petroleum Agreement and the Petroleum Law of the country (PNDC L 84).
Readers will recall that excerpts of this ‘secret strategy paper’ which is clearly tailored to delay and scuttle the GoG/ExxonMobil negotiation, were used as the basis of our lead story headlined: “GNPC OUTDOORS ‘SECRET STRATEGY’…To Outwit Prez. Mills, Kosmos & ExxonMobil While The Chinese Wait In The Wings After Collapse Of BP/‘Dream Team’ Deal. September 1, 2010 Is Target Date!, which was published by The New Crusading GUIDE in its Wednesday edition of July 21, 2010.
Please stay tuned for more revelations and ‘exclusives’!
On June 29th 2010, Kosmos submitted an SPA dated 28 June 2010, between Kosmos Energy Operating and ExxonMobil Exploration to the Minister and GNPC for consent to transactions contemplated under the SPA, “to the extent required under Project Documents”.
This paper highlights how the SPA and its terms affect the Jubilee landscape, and submits recommendations on how the shift should inform GNPC and Government strategy.
*BACKGROUND – THE LANDSCAPE BEFORE 29 JUNE 2010:
Between 1 October 2009 and 29 June 2010, Kosmos and ExxonMobil claimed that they were tied to each other through their (undisclosed) Exclusivity Agreement. They also claimed that this tie could last “several months beyond First Oil”. GNPC also understood from Kosmos that the tie was capable of being severed by a “fiduciary out” mechanism allowing Kosmos to negotiate with GNPC if a sufficiently attractive “unsolicited offer” were put forward. GNPC rejected this Exclusivity Agreement on several grounds including that it seeks to subordinate Ghanaian statutory law governing a strategic Ghanaian resource to a private contract made between 2 US companies under US law. Despite our concerns GNPC agreed in consultation with the Presidential Oversight Committee to make an unsolicited offer to Kosmos as a way out of an increasingly expensive and public impasse.
Throughout April and May 2010, GNPC pursued this offer in the context of its earlier strategy of a “Dream Team” combining the entrepreneurial and financial strength of a Chinese state-owned international with the technical strength of a World Class Deepwater Operator. This approach would provide the best fit and alignment with GNPC’s own strategy of acquiring deepwater operational capabilities within the shortest possible time and values. It would ensure respect for Ghana’s laws and interests, understanding of the needs and perspectives of an emerging national oil company supporting a national development agenda and prioritisation of the development of Ghana’s hydrocarbon potential for mutual benefit once the Kosmos stake had been secured.
As part of this “Dream Team” strategy, one of the entities GNPC had been in discussion with was BP, which has developed a holistic strategy which included other assets in Ghana and beyond, combined with a fast paced development of GNPC’s operating capabilities. In addition BP had fully assessed the ExxonMobil legal position and developed a strategy for confronting this frontally with GNPC and our CNOOC. Unfortunately the oil spill in the Gulf of Mexico escalated to such an extent that both GNPC and BP recognized that a partnership in Jubilee at this time was an unrealistic proposition.
The elimination of BP as a potential partner caused GNPC to shift in late May from a tripartite approach to Kosmos to one in which GNPC would:
• finalize Chinese funding for a Kosmos offer;
•
• submit a solo offer to Kosmos “as soon as possible” and
•
• (only after Kosmos has been acquired) pursue entry discussions with a “blue-chip” deepwater operator (both Statoil and Shell have both approached GNPC recently).
Accordingly, GNPC has now concluded an MOU with CNOOC designed to give GNPC a full 12 months, if needed, to conclude discussions with the selected blue chip deepwater operator.
Having settled on a structure GNPC needed to go through the process required to complete a fully financed offer package. For example in the absence of any information about the price agreed between Kosmos and Exxon, GNPC had to work with its advisors and partners to determine what price to include in its offer to Kosmos. This was not a simple matter. On the one hand if GNPC failed to match the (unknown) Exxon terms, its offer would probably be missed by Kosmos and Exxon in their propaganda campaign. On the other hand GNPC obviously did not want to pay more than the asset was worth and had reason to doubt the conventional wisdom regarding a price in the mid 4 billion dollar range. GNPC also needed to satisfy its lenders and potential partners about its commercial prudence.
*THE POST JUNE 29 JUNE LANDSCAPE:
The SPA executed between Komos and ExxonMobil changes the environment in which GNPC’s strategy must play out.
*1: KOSMOS IS TIED TO TIGER UNTIL 1 SEPTEMBER 2010:
It is no longer advisable for GNPC to submit an offer to Kosmos before 1 September 2010. The SPA does not allow Kosmos to engage in any negotiations with GNPC while the SPA remains in force. On the contrary, it obliges both ExxonMobil and Kosmos to do all they reasonably can to implement the ExxonMobil purchase, for as long as the SPA remains in force.
Our analysis of the SPA has led us to conclude that if GNPC were to submit an offer letter to Kosmos before the expiry of the SPA the following events would occur:
*(a): Kosmos would notify GNPC that it is unable to consider the offer while the SPA remains in force;
*(b): Kosmos would be required (happily or not) to furnish a copy of the offer and supporting documents to ExxonMobil. ExxonMobil would have options (either legal or tactical) which would otherwise not be available to it and whose exercise would not help GNPC achieve its objectives (even if they may not ultimately help ExxonMobil either).
Apart from seeing GNPC’s terms, ExxonMobil would also have been presented with what, in ExxonMobil’s eyes, would be the most compelling evidence to support allegations of “tortious interference” that ExxonMobil could ever hope to fall into its lap. (It is difficult to see how ExxonMobil could accuse GNPC of tortious interference). This may give ExxonMobil unnecessary leverage against those (including GNPC advisers) who are used to playing hard but expected to play within the rules.
*2: KOSMOS IS APPARENTLY NOT TIED TO TIGER AFTER SEPTEMBER 1:
While it is undeniably frustrating that Kosmos and GNPC cannot negotiate while the ExxonMobil SPA is in place, the SPA sends a second important signal. Kosmos has the right to terminate the SPA on 1 September 2010 if the “conditions” have not been satisfied by that date. The “conditions” include:
*a. the grant of consent to the transactions by GNPC;
*b. the release of existing parent company guarantees in relation to the Petroleum Agreements and substitution of replacement guarantees;
*c. waiver of pre-emption or failure to deliver counter-notice of pre-emption by contractor parties to the DWT Petroleum Agreement within the required period, and
*d. receipt by ExxonMobil of a legal opinion from a named firm regarding Foreign Corrupt Practices Act issues in a form and substance satisfactory to ExxonMobil.
If Kosmos exercises its termination right come September, then, absent any “side agreement” with ExxonMobil that GNPC has not seen, Kosmos would be free to entertain an offer from, and conclude a sale to GNPC at any time afterwards.
The potential existence of “side agreements” is important for two reasons:
*a. The SPA itself suggests that there are side agreements (or “Transactions Documents” as they are defined) which we have not been shown. We recommend that the Minister request these documents at his meeting with ExxonMobil on Tuesday.
*b. It is highly likely ExxonMobil would have been smart enough to retain some “Exclusivity” mechanism which allows it to leverage their position even if the SPA terminates. “Exclusivity” could have been the price ExxonMobil secured in return for agreeing to “rescue” Kosmos from its funding crisis in October 2009.
Even if the Exclusivity Agreement between Kosmos and ExxonMobil is resuscitated, it is unlikely not to include the “fiduciary out” exclusion GNPC focused on before. It must be likely therefore that Kosmos will become free to negotiate with GNPC (provided GNPC submits a sufficiently attractive offer) on or after 1st September, 2010.
The Minister and GNPC should consider formally requesting Kosmos to terminate the SPA after 1 September 2010. If Kosmos are to terminate the SPA when that right arises, they may need to be satisfied that GNPC can deliver on a fully termed, attractive offer. There is an obvious tension here between GNPC’s desire to prove this to Kosmos and their obligation to disclose any offer to ExxonMobil while the SPA exists. How GNPC tackles this will depend on Kosmos’ response to the Minister and GNPC’s request to terminate the SPA. GNPC can legitimately expect Kosmos to figure out a way in which they can get comfortable enough to terminate without exposing themselves to litigation from ExxonMobil so long as we have a strong, credible proposal. The stronger GNPC’s position, the more likely Kosmos is to find a way through.
*3. THE CONDITIONS FOR A SUCCESSFUL OFFER TO KOSMOS ARE NOW A LOT CLEARER:
The Kosmos-ExxonMobil SPA clarifies what GNPC and GOG must do to secure a deal with Kosmos after 1st September. For Kosmos to believe it is in its interests to terminate its SPA with ExxonMobil on 1 September it will need to see:
*a. a fully financed offer (i.e. backed by a commitment letter from the banks);
*b. offer terms which are competitive with those in the ExxonMobile SPA after taking into account any net effects of the offer – the most significant of which are likely to be
i. tax; and
ii. any break fee payable by Kosmos to Tiger; and
*c. a climate in which, so far as possible, a sale to Tiger continues to look “undoable” or at least very difficult.
We discuss these in detail below:
*FULLY FUNDED OFFER:
GNPC has now secured the funding to meet this requirement.
*COMPETITIVE PRICE OFFER:
Kosmos would like to be able to sell, but has had ample time to work up other potential options (i.e. IPO, something that is now doable following apparent resolution of the US Department of Justice FCPA issue) which would be preferable to telling shareholders/fund investors it has sold for a lower price than the price they’ve been led to expect under the ExxonMobil deal.
The SPA is useful in that it at least provides concrete information about the valuation Kosmos (and ExxonMobil) place on Kosmos’ Ghana assets. The headline price under the ExxonMobil SPA is $3.82bn as at 30th June, 2009, which our advisors believe equates to a final price of slightly over $4.0bn as at 31st December 2009, and close to $4.3bn as at 30th June, 2010. There are two important qualities:
*a. The Kosmos-ExxonMobil sale price is clearly expected to be tax free at least to the seller (i.e. ExxonMobil has accepted tax liabilities for its account). It is structured as a sale of Kosmos Energy International (an offshore parent). The seller is another offshore parent – Kosmos Energy Operating, a company not known to either GNPC or the Minister. The tax issue is a contentious and very important one for Ghana. All other ingredients being in place, we expect Kosmos to take the same approach as Heritage in Uganda and sell only subject to an arbitration they feel confident of winning. The unauthorised and in GNPC’s opinion illegal reorganisations Kosmos carried out in 2009 (and the extent to which they should really be regarded as tax avoidance steps) should provide significant merit for the Government’s arguments.
*b. There is no break fee in the SPA. There may however be something similar to a break fee in the undisclosed “Transaction Documents”. Kosmos may still have to pay something to bring the ExxonMobil Exclusivity Agreement to an end. On the other hand the absence of a break fee in the SPA suggests this maybe less of an issue than had been feared.
*GOVERNMENT’S POSITION:
Success will require the Government to continue to hold the line in its approach towards the Kosmos/ExxonMobil deal. If Kosmos/ExxonMobil believe that there is a reasonable chance that the Minister will decide in the end to allow the deal to proceed, that can only encourage both of them to “hang on” and wait for that consent. This means that there must be consistency about our message to Kosmos that consent will not be granted and the Ghanaian side must fully aligned with no indication of dissent.
*4. THE SPA ALLOWS GNPC ADDITIONAL TIME TO CONCLUDE FORMAL LOAN PROCESSES:
GNPC has secured the financing from the syndicate of Chinese banks required to demonstrate to Kosmos that we can conclude a purchase. There would however be added benefit if the detailed documentation under negotiation (bridge loan facility agreement, back-to-back SPA with CNOOC, funding agreements for future capex needs) and which will be concluded shortly is subjected to the due processes set out in Law 64. The final agreements must be formally submitted to the GNPC Board for approval before execution. Thereafter the bridge loan facility agreement must be submitted to the Minister for Energy who after his own scrutiny will formally recommend it to the Minister for Finance for approval. We believe, having kept all levels of governance informed about these transactions as they develop, that these approvals will be swiftly forthcoming. It is none the less important that the process be respected and the September 1 date gives GNPC the opportunity to do that properly. GNPC should be able to complete all this documentation within the next two to three weeks.
*5. BUYING SABRE:
One way in which GNPC can strengthen its credibility and bargaining position is to buy Sabre. This would prove it has the ability to secure financing. Additionally, the attendant acquisition of Deepwater Tano pre-emption rights would
*a. change outside perception of GNPC’s position on Jubilee; and
*b. provide ExxonMobil with pause for thought if there is any possibility that its own purchase process might have to start again or the possibility that it might be considering further purchase. Both of these factors would be likely to have some weight in any decision Kosmos has to make about whether to terminate its SPA ExxonMobil once it is entitled to do so.
GNPC believes firmly that it should buy Sabre if it can secure the financing and that it should do so before 1 September (or still better, if feasible, before Sabre pre-emption rights over the Kosmos – ExxonMobil sale expire). Securing additional financing from the Chinese or other sources which we are pursuing would be the fastest way of putting GNPC into a position where it can move on this initiative.
