The Great Compromise Over Jubilee

Government of Ghana (GoG) has updated its stance on the GNPC – Kosmos - ExxonMobil triangular impasse. The updated position contains many new and interesting things. But as one famous academic examiner was wont to say about many a thesis, what is new isn’t interesting and what is interesting isn’t new.

We all knew that GoG has been scampering across the globe in various attempts to raise financing to “pay off” Kosmos. What was fascinating to hear, and from a senior executive of GNPC, was that GoG had secured a commitment to purchase the field as far back as September, but now needed to “refresh” the facility.

Considering how eager GNPC has been to go public with its intentions to buy the Kosmos stakes, admitting, however vaguely, that GNPC still has some capital raising to do would definitely be seen as a chink in the armour of the national oil company.

It is easy to feel sorry for GNPC. As this battle intensifies, its list of allies are guaranteed to grow thin very rapidly as splinters in the administration deepen, and the economic pragmatists begin to outnumber the resource nationalists.

A perfunctory check of GNPC’s records reveals an interesting roster of nationalist-inclined former executives who were blessed with the tutelage and patriarchy of Tsatsu Tsikata. Names like Kyeretwie Poku, Goosie Tanoh, Moses Asaga, etc. strike a pleasant chord, we presume, with those who have always seen a marriage between socialism and large scale enterprise as perfectly sound in the glorious pursuit of the “commanding heights” of our economy. The GNPC was, and seems to remain, the nurturing grounds of resource nationalists, economic statists and proponents of the doctrine of the “technocratic vanguard”.

Once upon a time, the GNPC sold technical expertise to the Angolan national oil company, eager buyers in the Persian Gulf, and elsewhere. They even had a small, but rugged, drillship that they could lease in addition to said expertise. Those flourishes may have been whittled down by hard times but the culture at the corporation: the unyielding clannishness, the secretiveness, the unwavering belief in collective genius, and the mild whiff of socialist techno-economics, still endure to frustrate pragmatists, like the Kofi Wayos of this world, who see business as a plain vanilla hard knocks affair.

For now, Government of Ghana seems willing to allow GNPC’s its fair share to fighting words. But our analysis is that the economic pragmatists, among whom one may now count latter-day converts like GNPC Chairman, Ato Ahwoi , and the President’s closest Advisors, the likes of Dr. Cadman Mills and Ishmael Yamson, are growing in intellectual influence. The Resource Nationalists have been unable to produce convincing proof that their anti-ExxonMobil stance - heroic and daring as it may seem - is fully coherent and backed by a sufficiently well-resourced strategy. It is still not clear that the Chinese, Koreans, Malaysians, Indians and Brazilians who have all at one point or the other expressed interest usually after having been approached would see a non-controlling stake in Jubilee as formidable enough a proposition to make that rich and wide-ranging counter-offer that shall enable His Excellency to invoke the national interest super-objective without sounding hollow. And to risk the wrath of American capital interests while at it.

Everyone knows that Tsatsu has specialised in courting the Chinese. The trouble with the Chinese though is that while they are dismissive of political and even security risk they are as tough as nails when it comes to commercial terms, and they are wont to prefer byzantine financial arrangements in which they always seem to come up on top however hard one works to get the better of them. As far as they are concerned, signing a deal is only the beginning of the real legwork. This attitude can prove frustrating for the average African technocrat with limited exposure to eastern business culture and trained in the western mould of dealmaking.

You can bet the GNPC folks aren’t enjoying their tango with the Chinese. At any rate the complex shareholding structure of Jubilee is not something the Chinese would appreciate, and seek on the asset’s account to engage ExxonMobil in a full-blown, geopolitically intense, bidding war. If GNPC manages to wrest it on their own first, then that’s another matter, but only in the context of wider and wide-ranging, and thoroughly profitable, interests across Ghana’s oil basin and not in the piecemeal fashion presently being contemplated by GNPC (if you want a template of how the Chinese like to do oil business, look at Sudan and Angola). And they wouldn’t want any high-pitched political bickering wrecking their eardrums because of our noisy democracy either.

Given, nevertheless, GNPC’s risky but calculated recent chess moves, the effect of which have been to position GoG’s pride firmly on the nay-to-Kosmos side, any resolution in favour of the pragmatists could be problematic.

An uneasy stand-off between GoG on the one hand and Kosmos, ExxonMobil and Kosmos’ venture capital owners on the other hand, appears the most natural of outcomes in the immediate future, until something triggers the inflection point.

What, then, are the sheathed daggers underneath the cloaks of the protagonists?

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*KOSMOS & ITS ALLIES*

Many people mistakenly assume that it is the GoG’s initial Petroleum Agreement with Kosmos that is of greatest relevance in this matter. Nope. The real thorn is the unitisation agreement, and the implied joint venture pact amongst the Jubilee partners (GNPC, Kosmos, Anadarko, Tullow, Sabre and EO).

Some readers may recall an early note of caution we sounded when the unitisation agreement was being drafted. What most people don’t realise is that the relative shareholdings in Jubilee could change based on the evolving picture of the true distribution of the oil resource. Jubilee straddles the two main blocs – West Cape Three Points and Deepwater Tano. Kosmos was and remains the operator of the former while Tullow was and remains the operator of the latter. Tullow is the operator of Jubilee field, which was cobbled together from acreage strewn across the two blocs. In agreeing on the relative stake of each partner in the “combined” Jubilee field, the key consideration was their respective shareholding in each separate bloc (essentially you added their equity in each and divided by two). However, it may well be the case that the oil is not uniformly distributed between the two blocs, giving cause for protracted litigation amongst the parties about the current shareholding, if the incentive, such as Kosmos’ recent travails, so exist.

Since the Jubilee consortium is registered in the Netherlands, the Dutch courts may well provide additional competent forums for adjudication.

Kosmos could very easily derail the timeline to first oil by launching a legal battle in The Hague over shareholding, thus undermining the smooth financing of the field development. As the “technical operator” – whatever that means – it is also responsible for leading the “integrated project team” in its own backyard even though the field operator is Tullow. This is clearly an “entitlement” it can wage legal war to “assert” if it decides to disrupt the development schedule.

Exactly a year ago, the Texan company raised $750 million to bolster its financial capability, bringing its total debts in respect of its West African operations to about $1.6 billion. With the decision to lease rather than buy the FPSO outright, Kosmos, like the other major partners, is less hamstrung by cash needs than it was even a year ago (when it was actually an inch short on funds to meet its share of development costs, a fact it blames on GoG), has a bit of financial space, and can afford to play for the high stakes. It may decide to continue meeting its share of participating costs even as it continue to insist on what it believes are its commercial rights.

By having been relatively successful in casting its disagreements with GoG in geopolitical terms, Kosmos and its allies may well have weakened GoG’s prospects of raising finance in Europe and the United States and narrowed their options to even riskier geopolitical partners like China and South Korea. The decision by ExxonMobil to remain steadfast in its commitment to its term sheet with Kosmos, in the face of the relentless GNPC PR assault, has furthered strengthened the arm of Kosmos to pursue such geopolitical designs, and ward off all but the sturdiest of non-American claimants to its jewels in the Jubilee treasure chest.

*GOVERNMENT OF GHANA*

GoG’s biggest weapon is simply its ability to withhold its goodwill. ExxonMobil will not dare ignore the need for the soundest of relations with the government of a country in which it intends to do business. This need for goodwill boosts government’s far weaker position in the use of legal options to press its case. The last thing GoG will be willing to do is to test the unitisation agreement in court and provide Kosmos with the ammunition it needs to launch a few blisters of its own at the timeline to first oil.

Outright expropriation of the field, even with “fair market” compensation is clearly out of the question, and continued stalling merely deepens the uncertainties surrounding the nascent upstream sector and slowly, but steadily, erodes investor confidence and maybe even the country’s credit rating (due to a jack-up of political risk). Moreover, the longer the impasse lasts the deeper the cracks on government front grow.

While at this stage, the other key Jubilee partners – Tullow and Anadarko – seem quite unfazed by all the confusion surrounding the Kosmos stake, the truth is that it won’t be long before they start worrying about the potential of the rift to begin negatively affecting their own share prices or, if it gets very bad, damaging their investments.

Tullow itself has widely been rumoured to be interested in divesting some of its stakes and wouldn’t like the impression to be created that such deals are impossible except on the whim of the national oil company which behaves like a regulator in all but name (many people believe that Tullow nearly came close to sealing some sort of deal with ENI before several factors intervened against going ahead). Both Andarko and Kosmos will secretly be gunning for a mega sale (some have mentioned a ludicrously high – in our view - $6.5 billion in recent weeks) as that should boost the overall value of the field, and hence their own investments as well.

Tullow in particular is dependent on outlandish valuations of its African assets since analysts have all but written of its imminently money-losing assets elsewhere. Given recent indications that extreme upper estimates of the field’s upside may have been exaggerated (notably the Dohoma-1 disappointment), such reassurances would be rather valuable. Some have mentioned, though, that ExxonMobil’s entry may threaten Tullow’s operator status. The truth though is that the “operator” role is effectively shared with Kosmos and shall thus be partly assigned to ExxonMobil. While ExxonMobil’s designs for Ghana are hard to guess at this stage, one presumes it is a launching pad for wider forays into the Gulf of Guinea playground away from the traditional shelves of Nigeria and Angola. The new plays in the region are quite different and delightfully complex enough to afford a rich learning experience for the giant multinational.

Keeping with the opacity that has surrounded every aspect of this whole Jubilee saga since the first successful well was drilled, it is not clear whether Kosmos shall, in short order, be divesting its other acreage outside Jubilee as well, or whether it has made any such intentions known to GoG and the other partners. It is not clear how potential assets such as Odum, which lies squarely in West Cape Three Points, where Kosmos is the operator and owns close to one-third of all discoveries, feature in the unfolding strategy. In that sense, GoG’s goodwill could be critical in the approval of future development and disposal plans.

*COMPROMISE*

The only compromise that seems feasible in light of the sentiments that both sides have invested in this dispute, and the serious pride therefore at stake, can only be one in which GoG manages to extract some financial concessions from Kosmos in the form of additional buy-in, some fines for the alleged data confidentiality infringement, and, most controversially, a windfall tax call on the $3 billion or so of profits that may accrue to the owners of Kosmos should the sale successfully close. These financial concessions could then go to pay for a token buy-in, as speculated above.

Of course, such a possibility would only be countenanced by Kosmos if the buy-in was really token in size; though on the GoG side, even a minor additional stake could easily be spun as a victory over the “imperialists”.

The thing is that GNPC won’t take such a compromise well at all. The state-owned oil company aspires after the likes of PetroBras and, closer to home, Sonangol. It wants to develop, as it has often said, its own deepwater capabilities so it can slice off a couple of the more promising, unexplored, blocs for its own exploration work. No other prospect is in sight for raising the amounts of money it needs, save for this Kosmos “bonanza”.

The only thing, therefore, that would make everybody come out of this sticky saga smelling of roses will be the one that allows GNPC to soothe its ego. Here is where looking at a windfall tax without any of the buy-in sticking-points might be a good idea. The details will of course be labyrinthine, but the principle will certainly involve the IRS’s Large Taxpayers Unit performing much intricate surgery on the GIPC needlework at the heart of Kosmos’ local incorporation. The GNPC would then receive some decent cash with which to build a kitty for the quest of reliving at least a part of its glorious past. Should it get some cash it would do well though to learn a few lessons from its big-talking Nigerian counterpart, now wallowing in more than $5 billion of debt, after years of “production sharing” nationalism. An entity ultimately controlled by government is not always the most efficient in managing risk – especially commercial risk.

While Kosmos’ owners will be much aghast at such a blatant interference in their commercial well-being, they might find, especially if the sum is far from outrageous, that sharing a bit of the wealth they have made from a government concession with the government that gave it is a faster and simpler, and therefore cheaper, form of compromise than sitting out months of pointless “negotiations” when money that can be put to better use is locked up off the craggy, unwelcoming, coast of a peeved African state.

*Courtesy of IMANI Ghana, and Africanliberty.org*