ENI Gas Deal Must Be Reviewed -- Groups

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Petroleum Minister, Emmanuel Armah Kofi Buah has rejected demands by energy experts, civil society groups and the recent demand by the opposition New Patriotic Party for a review of the petroleum deal with Italian firm, ENI.

The NPP has tasked the Italian Prime Minister Matteo Renzi to prevail upon ENI and government to review the agreement because of unfavorable terms.

ENI and its partners have signed an agreement with government for the exploitation of the Offshore Cape Three Point Block.

Also, last year, renowned Non-Governmental Organisations in the country have raised concerns about the US$ 7 billion Eni/Sankofa gas deal signed between ENI, VITOL and GNPC.

According to the Africa Center for Energy Policy analysis of the deal, the fiscal benefits of the entire project based on the working interests of the parties give ENI Ghana and Vitol Ghana (Contractors) 56% of total cash flows and profits of US$7billion, equivalent to the cost of the project.

It explained that, based on after tax working interest, the contractor group will be entitled to US$14.3 billion (56%) of total cash flow over the project life whilst the state is entitled to US$11.1 billion (44%).

This reveals that, the country’s take is lower than what pertains in previous contracts.

Given that the project is a US$7 billion project, the contractors will be making profit of US$7billion. This makes the project a profitable one at an oil price of US$90 per barrel and gas price of US$9.8 per mmBtu, Dr. Mohammed Amin Adams, Executive Director of African Center for Energy Policy had revealed.

However, another local policy think tank, Imani Ghana has demanded that, the Government of Ghana must make full disclosure on the US$7 billion gas deal.

The Founding President Franklin Cudjoe had said, the Government must learn from the current suspicion-riddled power purchase deal with AMERI Energy and try to avoid a similar fate with the ENI/Sankofa gas project.

Speaking at the 5th IMANI Inspirational Public Sector Leadership Awards last week, Mr Cudjoe stated that, “it will be in the interest of the government and Ghana to consider critical commentary that have been made on energy projects such as AMERI power and ensure that the biggest one to come, the US$7bn Eni project, is equally devoid of suspicion.”

“Most importantly, government should publish all these contracts so we can all make positive contributions and remove the elements of surprise. It makes no good reading suspicions in the international media about your country’s energy deals when we can avoid them altogether by first accounting to us locally. Government should make us prouder defending them internationally by giving us the tools of non-negotiable transparency,” Mr Cudjoe said.

According Mr. Buah, “The Government of Ghana’s provision of financial terms to ENI and its partners of 20% return on investment, instead of the normal 12.5%, is an unusually high rate for commercial transactions of this nature, especially as GNPC assumes all the risk in the project.

“The negotiated gas price of $9.8/MMBtu for gas from the Sankofa fields is too high by world standards, of between $5-7/MMBtu. It is even higher than the price of gas sold to Ghana from Nigeria, which stands at $8.3/MMBtu, delivered at Takoradi. It is even more expensive than our own Atuabo Gas price of $8.8/MMBtu delivered at Takoradi. At the negotiated gas price of $9.8/MMBtu, it puts to great risk Ghana’s potential of becoming the Petrochemical hub of the region to Nigeria, due to that country’s lower gas prices,” the NPP said in a statement.

Reacting to the concerns of the opposition party, Mr Boah said the deal is in the best interest of Ghana.

“...Has somebody sat down and calculated the benefit of this project which is easily going to give us more power than the power we have right now?

“We are coming up with a very comprehensive analysis to allow the people of Ghana understand what our position is...I think that this project no matter how you look at it, is good for the people of Ghana,” he said.

ENI recently gave the government of Ghana the assurance of its commitment to the development of the West African oil producer’s oil and gas industry despite the continuously falling price of crude oil on the world market.

ENI’s Executive Vice-President for the oil firm’s sub-Sahara African Regional Branch, Mr. Umberto Carrara, gave the assurance to the Government of Ghana when he paid a courtesy call on Petroleum Minister Emmanuel Armah-Kofi Buah earlier this month.

He said despite the fact that the oil price fall has forced many Exploration and Production (E&P) companies to cut tens of billions of dollars in capital spending, ENI will remain committed to its operations on the Offshore Cape Three Points (OCTP) Sankofa Gas Project.

This assurance statement has raised follow-up questions as to why the keen interest of Eni Ghana to still remain committed to the development and production of the gas field, despite the unattractive pricing of the commodity on the market which is likely to affect the profit margins of the company.

Further analysis of the terms and conditions of the Agreements and Term Sheets by Economy Times showed that, the deal is fraught with badly negotiated terms, and at most is serving the interest of the Contractors rather than Ghana’s.

The findings from the analyses show that the government offered over-generous terms to the Contractors just to satisfy Ghana’s thirst for gas supplies. In trying to satisfy the country’s demand for gas, the incentives provided to the Contractors exceeded what pertains in international transactions of similar nature.

It could be recalled that, President John Dramani Mahama recently witnessed the signing of Agreements between GNPC and the Offshore Cape Three Point (OCTP) Partners; ENI Ghana and Vitol Ghana over a US$7 billion integrated oil and gas development in the Sankofa-Gye-Nyame Fields.

The Agreement covers terms and conditions for the financing of the project by the Contractors and for the sale of the Contractors share of gas produced to GNPC.

Prime Minister Renzi, addressing Ghana’s Parliament in his last week visit to Ghana, gave assurances that the US$7 billion Offshore Cape Three Points (OCTP) Sankofa Gas Project sponsored by the Italian oil firm ENI, will continue despite tumbling crude oil prices.

But the NPP in a statement said “the Government of Ghana’s provision of financial terms to ENI and its partners of 20% return on investment, instead of the normal 12.5%, is an unusually high rate for commercial transactions of this nature, especially as GNPC assumes all the risk in the project.”

The Ministry of Petroleum, in a statement signed last week by the Minster, Emmanuel Armah Kofi Buah said Government did not provide a guaranteed 20% return on investment to the partners, adding that the rate of return on investment for the project is less than 12.5%.

The government statement said “usually individual partners use different criteria for deciding whether or not to proceed with a project.”

Find below Government’s full response to the NPP concerns

The Ministry of Petroleum’s attention has been drawn to a statement issued and signed by the Director of Communications for the New Patriotic Party, Nana Akomea on the OCTP gas project. The NPP statement sought to create some confusion in the minds of well-meaning Ghanaians particularly as the issues raised are not factual and therefore misleading.

The Ministry therefore wishes to set the records straight by responding to the issues as raised in the statement.

NPP: The Government of Ghana’s provision of financial terms to ENI and its partners of 20% return on investment, instead of the normal 12.5%, is an unusually high rate for commercial transactions of this nature, especially as GNPC assumes all the risk in the project.

RESPONSE: The Government did not provide a guaranteed 20% to the partners. The rate of return on investment for this project is less than 12.5%.

Usually individual partners use different criteria for deciding whether or not to proceed with a project. In doing so, they normally discount past cost on investment. In the pricing negotiations for this project the parties considered the full cycle economics which includes past costs, future costs and potential returns. Under this approach the rate of return was less than 12.5% within an environment of high oil prices. So given significant reductions in oil prices today the return to the investor will even be lower on a full project life cycle basis.

It is also not true that GNPC is assuming all the risk in the project. The partners took a significant portion of the exploration risk amounting to about a billion dollars and are expected to spend about 95% of the development cost for 50% of the overall benefits.

NPP: The negotiated gas price of $9.8/MMBtu for gas from the Sankofa fields is too high by world standards, of between $5-7/MMBtu. It is even higher than the price of gas sold to Ghana from Nigeria, which stands at $8.3/MMBtu, delivered at Takoradi. It is even more expensive than our own Atuabo Gas price of $8.8/MMBtu delivered at Takoradi. At the negotiated gas price of $9.8/MMBtu, it puts to great risk Ghana’s potential of becoming the Petrochemical hub of the region to Nigeria, due to that country’s lower gas prices.

RESPONSE: The price of gas in the Sankofa Gas Sales Agreement is determined by a number of factors.

This includes:
The headline price, which is US$9.8 per million British thermal unit.

The cost of developing the field and operating it for 20 years.

Interventions by the GNPC to reduce financing costs, which would reduce the gas price by as much as US$1.65 per million British thermal unit (MMBtu).

The concept of world average price for gas as a comparator is erroneous since we are dealing with the price of delivered gas at a particular delivery point. For example, if gas is produced in the US, by the time it arrives in Ghana in the form of LNG, would have been priced at more than US$15 /MMBtu. Even at today’s oil price (say, US$30), LNG landed price in Ghana would be more than US$8/MMBtu.

In addition, comparing Atuabo gas to the Sankofa gas is misleading. Atuabo gas is associated gas, which was priced at zero. The zero price was negotiated for a foundation volume of 200 Bcf. This was possible because the associated gas was a bye product of a very lucrative oil project. Beyond 2020, when the foundation volume would have been exhausted, the price of Jubilee gas would cease to be zero. Another key feature of the Sankofa gas price is the fact that about 50% of the proceeds would accrue to the State in various forms, including taxes, royalties, as well as GNPC’s 20% stake in the project.

NPP: This agreement compels GNPC to buy up to 90% of ENI produced gas at a higher negotiated price of $9.8/MMBtu for 20 solid years. This gas sales same agreement is further guaranteed against default by three guarantees – the government of Ghana, the World Bank and GNPC – amounting to some $750 million.

Furthermore, GNPC, after buying the gas from ENI at a guaranteed price stands the risk of losing its market (VRA, IPPs, petrochemical industries) to other cheap gas suppliers.

RESPONSE: The Agreement reached contains a take-or-pay volume of 90%. Such requirements are standard terms in gas sales agreements in our part of the world where the gas market is not developed. In return we are assured of 90% availability of gas from the ENI field, which compares favourably with other less reliable supply sources whose effective prices are higher if we factor in the cost of short term alternatives.

It should also be noted that the 90% is also a commitment by the Contractor to supply same volumes, failure of which attracts penalties in the form of lower price for the gas.

The price of Jubilee and WAGP should be adjusted for the costs of other, more expensive, alternatives as Jubilee and WAGP are highly erratic. It must be stated that to date, Ghana has not been able to implement the terms of contract with WAGP. This has been a major contributor to the prolonged energy challenges that have bedeviled the country. In addition, interruptible supply of gas affects the operational efficiency of power plants, thereby leading to higher cost of power.

The issue of security for the project – from the World Bank, Government and the GNPC – is standard industry practice and is typical in gas commercialization projects in countries where the gas market is not developed. This explains why the World Bank supports this arrangement. It is important to emphasize that the Government’s portion of the security is only the last resort which only kicks in when the value chain ceases to work. That is why Government is implementing the bold reforms within the energy sector to forestall such occurrences. In essence if the value chain works, and SOEs in the chain are viable, there would be no need for this level of security.

NPP: Ghana also guarantees additional free cash flows to the company by allowing them to write-off 7% interest on all commercial loans from project revenues, when the normal provision is between 2-3%. This also reduces Ghana’s potential tax revenues from this project by over $160 million. No other companies, whether from Jubilee or TEN, have been given this same rate of 7%.

RESPONSE: It is equally not true that Ghana guarantees additional cash flow through write off of 7% interest on commercial loans exclusively to this project. There is evidence that other companies in the Petroleum sector have borrowed at near or higher rates than the 7% referred to and have benefitted from tax deductions as provided under the law governing petroleum operations.

NPP: The cost of the development of the Jubilee Fields, with more reserves of oil equivalence and with a water depth of 3,630 ft., came to $4 billion. The cost of development of the TEN oil fields, also with more oil reserves of oil equivalence, came to $4.9 billion. The cost of development of ENI’s Sankofa is $7 billion, with less reserves of oil equivalence and at relatively lower water depths of 2,706 ft. We wonder the quality of due diligence done, if any.

RESPONSE: Comparing the development costs of Ghana’s three leading fields – Jubilee, TEN and Sankofa, is completely out of context. Jubilee and TEN are essentially oil fields, whereas Sankofa is principally a gas project. The investment requirement for any field depends not only on reserves and water depth, but also the complexity of the sub-sea infrastructure, proximity to existing infrastructure (in the case of gas, pipeline network).

Additionally, the statement compares only one phase of Jubilee development to the total ENI project. Jubilee in fact is a phased development project. The full cycle Jubilee development project cost is not USD4billion as indicated in the statement. It is rather expected to be around USD8billion whereas the ENI full cycle development cost is estimated at USD7.9billion. As already stated we are already seeing significant reductions in the cost of the ENI project which will have a positive impact on the final gas price.

Economy Timesfurther analysis of the terms and conditions of the Agreements and Term Sheets by Economy Times showed that, the deal is fraught with badly negotiated terms, and at most is serving the interest of the Contractors rather than Ghana’s.

The findings from the analyses show that the government offered over-generous terms to the Contractors just to satisfy Ghana’s thirst for gas supplies. In trying to satisfy the country’s demand for gas, the incentives provided to the Contractors exceeded what pertains in international transactions of similar nature.

It could be recalled that, President John Dramani Mahama recently witnessed the signing of Agreements between GNPC and the Offshore Cape Three Point (OCTP) Partners; ENI Ghana and Vitol Ghana over a US$7 billion integrated oil and gas development in the Sankofa-Gye-Nyame Fields.

The Agreement covers terms and conditions for the financing of the project by the Contractors and for the sale of the Contractors share of gas produced to GNPC.

Again, the analysis of the deal revealed that, the Government’s fiscal support package, which included an exempt debt-to-equity ratio of 2:1 at 7% interest on the commercial loans of the Contractors, would lead to significant revenue losses to the state over the project life of 20 years, since interest expenses are tax deductible. According to the agreement, the state must guarantee that at any time, the free fiscal support to the Contractors remain US$125 million to make the initial gas price of $9.8 per mmBtu.

This could run into several millions of dollars when gas prices fall. In the event that the contractors source the loans from their affiliates, the gains to the Contractors could increase at Ghana’s expense.

The dangerous part of the term and condition of the contract is that, the Government is required under the Security Package and Fiscal Support Agreement to issue five (5) different Sovereign Guarantees estimated at about US$1.5 billion in addition to World Bank and IDA guarantees. This situation over-exposes the state to too many risks and demonstrates the lack of investor confidence in the Ghanaian Government.

Dr. Amin Adams in the past challenged that, GNPC is required to make an upfront payment in cash to the Contractors or allow the Contractors to over-lift GNPC’s share of oil at the beginning of production of oil, for the purpose of making Gas price of US$9.8 per mmBtu viable.

However, although the amount is expected to be recovered at the end of production, the recovery amount does not attract interest charges. This is not consistent with sound financial management, he noted.

The Government is required to allocate the maximum 55% Net Carried and Participating Interest to GNPC beyond the 15 year period for the capitalization of GNPC as provided in the Petroleum Revenue Management Act 2011 (Act 815) or PRMA. This violates Section 7.3 of the PRMA and will therefore amount to an illegality.

According to the details contained in the Ghana gas masterplan, gas from the fields will be processed in the FPSO and transported via a pipeline to onshore gas-receiving facilities located near the village of Sanzule in the Western Region of Ghana. The gas will further be compressed and injected into the Western Corridor Gas Pipeline and supplied to domestic industrial customers. Crude oil will be stored in the FPSO and will be supplied to international markets by means of tankers.

Ghana's Ministry of Energy has further agreed to enhance the gas transmission system with compression stations and connections to industrial users, to complement the OCTP project.

The Offshore Cape Three Points (OCTP) Integrated Oil and Gas Project includes the combined development of the Sankofa Main, Sankofa East, Gye Nyame, Sankofa East Cenomanian and Sankofa East Campanian fields. The former three are non-associated gas fields while the latter two are oil fields. The development of the fields started in January 2015.

The fields are located within the OCTP block in the Tano Basin, at water depths ranging from 600m to 1,000m and are approximately 60km off the coast of Ghana. The area covered by the fields is approximately 694km².

Eni's subsidiary, Eni Ghana Exploration and Production, is the operator of the block and holds a majority stake of 47.22% in the same. Vitol Upstream Ghana holds a 37.78% interest in the block and state-owned Ghana National Petroleum Corporation holds a 15% interest, with an option to further increase its share by an additional 5%.

The overall investment on the project is estimated to reach US$7bn. The World Bank is providing a partial risk guarantee for the project.

The offshore fields are estimated to hold approximately 1.5 trillion cubic feet (tcf) of gas and approximately 500 million barrels of oil. The reserves are expected to continuously feed Ghana's thermal power plants for more than 20 years.

Oil production from the project is expected to start in 2017 and peak at 80,000 barrels of oil a day in 2019, whereas gas production is expected to start in 2018, with a daily production capacity of 170 million cubic feet. This would be enough to generate an additional 1,100MW of power for Ghana.

The development plan calls for the installation of subsea production systems, in addition to flowlines and risers connected to a leased floating, production, storage and offloading (FPSO) vessel.