The transparency, savings and pricing: ENI operated 'Sankofa Gye Nyame' Gas project

There have been lots of assertions that Sankofa Gye Nyame (SGN) projects’ gas price is higher than the price of Gas that is landed in Ghana from Nigeria or is higher than the price of Jubilee gas or TEN gas.

In the development of a project, whether ENI was to develop the project or GNPC was to develop the project, the cost would be about the same or maybe even less when ENI develops it because ENI is the single-A rated company or at worst B+.

If ENI goes to raise money for the project, it would raise money at a far cheaper price than Ghana will raise because this is a 25 year project at least. So we have to look at the total economics of the project and then decide whether we want to embark on this project or not and that was the main criteria for negotiation between ENI and the government of Ghana unlike Jubilee which is an oil project.

There was no gas in the calculation of whether they would do this project or not. ENI had to make a decision whether they would invest in ‘SGN field development which has about 150million barrels of oil (oil in condensate combined). It also had gas of approximately an additional 180/190 million barrels of gas equivalent. That was the data they submitted to us in the plan of development.

If you look at the amount of the gas, it is much larger than the oil and the revenue or the economics of the oil alone will not be able to support the development of this project. So the only way this project could be developed is if gas and oil field are developed as an integrated project and that was the decision the government took at that time, that yes we want the gas to be the driver of this project. In summary, it is predominantly a gas field development that was approved. The oil is going to be 40,000 barrels a day for about five years and it drops to 20,000 for the next 3 years or so and finally dwindles to 10,000 and no financial institution or no investor would invest in the project only based on the oil flows.

The only way an investor would invest in this particular project is if the gas was included. Now we had a big problem with the gas because they had an alternative to liquefy the gas and export it which would then make the risks and economics similar to that of an oil only development;

Remember, with oil, it’s quite easy to finance because there is a very little country risk in the off-taker. First of all, the field is offshore gas. Secondly, the off-taker would be an international trader or a refinery of repute like TOR. So anybody who is financing this project would look at the risks and economics of the project and the rate of return and also the financing cost. They would also want to know whether financing institutions would be able to get enough banks who have country risk for that tenure.

Remember, most banks have country risk for one year, some even six months. When you go to three years, the number of banks drop exponentially. When it goes to five years I can count on my fingers the number of banks that would finance a Ghana project with that tenor. When it goes to ten years now we are left banks I can count on my fingers on one hand.

It also depends on what support government is going to give to the project. If government is not going to give any support there would be no bank. I can assure you that for a 10 year gas development project with no government support there will be zero Banks interested.

This particular sector is very technical. , it is very financial and a lot of people are misconstruing based on literature that they are reading. I even heard somewhere someone said the cost of recovering oil from the ground is $10/bbl. Jubilee field which is a world class field has reserved, we can’t even count. It’s going to produce 120,000 barrels a day for the next 10 years or so. The cost of producing oil from jubilee is more than $24/bbl.

Jubilee is a world class field. There are no many world class fields in the world. TEN nor SGN are not a world class fields. The cost of producing this oil has been misconstrued to make people think that the people negotiating on behalf of the Government of Ghana know nothing and don’t have data to support the negotiations. The negotiations that are done whether you do it by tender or you do it by concession or by direct negotiations is all dependent on the economics. How much is the investor prepared to take as the rate of return for the risk he is taking? Ghana government’s risk is almost zero risk in Ghana yet investors in GoG 10year bonds in ghana are paying 19% in cedis and almost 10% for same risk dollar bonds. An investor who is coming here and added risk of an offshore field, deep water - very risky conditions - they expect higher rate of returns.

The price of gas from such a development will depend on the amount of reserves you have, how fast you are going to produce them, and the cost of the project, and the return to the investor. There is no magic, if you change the rate of return you get a different gas price. If you change the cost of development, you get a different gas price. If you change the amount of reserves you get a different gas price. At the time when the petroleum PoD was brought, certain assumptions were made, they assumed how much reserves they can extract from the field based on the science - not the actuals but projections backed by science. This is the proposal that was in the PoD. They assumed the cost of the project of about 7.3bn which includes the cost of the FPSO lease and operations for 20 years.

All of that was assumed in the PoD document that went to the ministries. Of course, the ministry had to consult all the companies like GNPC, Petroleum Commission, most likely in parliament. It’s a public document. It is stated exactly how this project is going to be financed based on how the assumptions are made. It was also stated that if there were any costs savings it would reflect in the price of gas not the price of oil. The project cost would split between gas and oil. Any savings on the project would only affect the gas price and that is where the focus should be because there were significant savings at the time of doing this project oil prices were about 4 dollars. The time the PoD was submitted the oil prices were in the 80/90 dollars range . By the time of executing the project prices of oil had dropped and prices had also dropped on the services. In the negotiation on the gas price the first data that were received were savings of 691 million which translated into some good savings of 55 cents per hundred million. All of a sudden the savings dwindled from 691 million to about less than 200 million. Why? How transparent was that? There were other costs to be incurred. In the agreement, GNPC was supposed to bear those costs. Why?

If you have a project, an overall project where the rate of return is greater than 10% and you can finance less than 10% why would you let somebody finance it. GNPC decided that they could raise some money 5/6 % maybe lower than government and finance these additional part of the project which were not as risky as drilling the ENP. GNPC was supposed to raise the money. GNPC had the money. GNPC had access to the money to raise. What did GNPC do with the money, they lend it to BOST instead of using the money for the project. So at the time that they were supposed to finance it, they didn’t have the money to do it. So they had to go back to ENI. When they went back to ENI, this savings dwindled from 691million to less than 200million. So the price that were set at 9.8 which would then have benefited for the deductions from the savings of 691million now is going to result in less than $1.5mmmtu which is another problem we have. We should have allowed the total reductions based on the 691million. Then gone and sat down with ENI and our financiers to see how we are going to finance the remaining amount of how much it was going to cost. If we had done the calculation we would have realized that it was better for us to reduce the gas price than to allow ENI or somebody else to invest in this.

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