Kosmos Reports on Disputes

Two notices of dispute, fired by Kosmos Energy, Ghana's West Cape Three Points (WCTP) Block Operator, to both the Ministry of Energy and the Ghana National Petroleum Corporation (GNPC) on June 30, 2011 and August 24, 2011 respectively, stand out as areas of conflict between the US independent oil company and Ghana in its 2011 annual report filed with the Securities and Exchange Commission (SEC) on March 1, 2012.

Kosmos, the Jubilee Field Technical Operator, filed the annual report, in compliance with requirements for listing on the New York Stock Exchange (NYSE), where it enlisted last year, detailing its performance in the year, as well as plans for the coming years.

The first notice of dispute has to do with disagreement over the denial of consent to a plan of development (PoD), whilst the second relates to Kosmos' inability to drill a Cedrela-1 exploration well, just before its 7-year exploration licence on WCTP Block expired.

Kosmos, which operates the WCTP block with 30.9 % interest, indicates that together with the block partners, it was in discussions with the Ministry of Energy and GNPC to resolve these differences.

According to Kosmos, the Mahogany East area, which is a combined area covering parts of the Mahogany discovery and the Mahogany Deep discovery area, was declared commercial in September 2010, and a PoD was submitted to Ghana's Ministry of Energy as of May 2, 2011.

It said “In a letter dated May 16, 2011, the Minister of Energy did not approve the PoD and requested that the WCTP Block partners take certain steps regarding notifications of discovery and commerciality; and requested other information.

“The WCTP Block partners believe the combined submission was proper and have held meetings with GNPC which resolved issues relating to the PoD work program.”

Continuing, Kosmos said, “From May 2011, the Ministry of Energy, GNPC and the WCTP Block partners continued working to resolve other differences; however, the WCTP PA contains specific timelines for PoD approval and discussions, which expired at the end of June 2011.”

According to Kosmos, “On June 30, 2011, we as Operator of the WCTP Block and on behalf of the WCTP Block partners, delivered a Notice of Dispute to the Ministry of Energy and GNPC as provided under the WCTP PA, which is the initial step in triggering the formal dispute resolution process under the WCTP PA with the Government of Ghana regarding approval of the Mahogany East PoD.

“This Notice of Dispute establishes a process for negotiation and consultation for a period of 30 days (or longer if mutually agreed) among senior representatives from the Ministry of Energy, GNPC and the WCTP Block partners to resolve the matter. We and the WCTP Block partners are in discussions with the Ministry of Energy and GNPC to resolve differences on the PoD.”

Kosmos holds interests in the WCTP and Deepwater Tano (DT) blocks, the latter operated by Tullow Oil.

Kosmos operates the WCTP Block under a petroleum agreement which has a duration of 30 years from its effective date (July 2004). However, in July 2011, at the end of the seven-year exploration phase, parts of the WCTP Block on which the US independent oil company had not declared a discovery, development or production areas, except where a force majeure (an act of God) had altered the time frame were to be relinquished in compliance with the agreement.

Kosmos reports that it is disputing the relinquishment of the area it planned to drill the Cedrela-1 exploration well.

It would be recalled that Kosmos, in a press release on July 7th 2011, stated that it had delivered a force majeure notice to the government of Ghana and GNPC, following an incident that rendered Transocean Marianas, a semi-submersible drilling rig, which it had contracted to drill a well within its WCTP block, inoperable.

“In July 2011, immediately prior to Kosmos receiving the drilling rig from another operator, damage to the rig incurred during preparations to move the rig to the WCTP Block operations rendered the rig incapable of drilling the Cedrela-1 exploration well prior to the end of the WCTP exploration period on July 21, 2011,” Kosmos reports

Kosmos argues that as a result of this unforeseen delay in the drilling of the Cedrela-1 exploration well, the Company, as Operator for the WCTP PA Block partners, delivered a Notice of Force Majeure.

The Ministry of Energy and GNPC did not agree that this event constituted a Force Majeure situation, with sources saying there was no basis whatsoever to invoke a force majeure as Kosmos was under no obligation to drill the Cedrela-1 exploration well it intended to drill with the Transocean Marianas.

Kosmos reports that “On August 24, 2011, we as Operator of the WCTP Block and on behalf of the WCTP Block partners, delivered a Notice of Dispute to the Ministry of Energy and GNPC as provided under the WCTP PA, which is the initial step in triggering the formal dispute resolution process under the WCTP PA with the Government of Ghana regarding our rights to drill the Cedrela-1 exploration well.

“This Notice of Dispute establishes a process for negotiation and consultation for a period of 30 days (or longer if mutually agreed) among senior representatives from the Ministry of Energy, GNPC and the WCTP Block partners to resolve the matter,” Kosmos reports, adding that the issue continues to be discussed in an effort to reach a mutually agreed upon resolution among the parties, citing risk factors in its first filing with the SEC early last year.

A force majeure, which is also termed an Act of God, is 'an event which cannot reasonably be anticipated or controlled by parties to a contract and which makes it impossible to fulfil an obligation under the said contract.

Kosmos and its partners' interest in the Jubilee Field, as well as in existing discoveries within the WCTP and DT remained intact.

The company reports also of its rights, together with the WCTP Block partners to negotiate a new petroleum contract with respect to the WCTP Relinquishment Area, which right they exercised in July 2010 and formally submitted a proposed new petroleum agreement for the WCTP Relinquishment Area in early 2011.

“We and our WCTP Block partners, the Ghana Ministry of Energy and GNPC have agreed such WCTP PA rights extend from July 21, 2011 until such time as either a new petroleum agreement is negotiated and entered into with us or we decline to match a bona fide third party offer GNPC may receive for the WCTP Relinquishment Area,” Kosmos reports.

Kosmos, holds an 18% interest in the DT Block, and on February 23, 2012, exercised a right to accept the terms and conditions of the proposed transfer of 4.5% Sabre Oil and Gas Limited ("Sabre") interest in the DT block, under the DT Joint Operating Agreement, which gives each of the Block partners a right of first refusal regarding the transfer of such interest to a third party, assuming the block partner is willing to match the terms and conditions.

Kosmos says it expects that transaction, which is subject to Government of Ghana consent, to close during the second quarter of 2012, which would increase its interest in the DT Block and Jubilee Unit to 22.05% and 25.82258%, respectively

Under an Unitisation and Unit Operating Agreement (UUOA) signed among the Jubilee Partners on July 13, 2009 with the Ministry of Energy, GNPC and the partners in the two blocks, the discovered fields have been jointly developed to optimize resource recovery.

Tullow Oil became the Unit Operator, with Kosmos Energy as Technical operator. The Jubilee field is currently producing crude oil at about 70,000 barrels/day and straddles the WCTP and DT blocks. The field, which was expected to peak at 120,000 barrels per day in 2011, did not meet that production target.

In June 2007, the Mahogany-1 well, which was Kosmos' first exploration well within the WCTP block, discovered oil in large commercial quantities, followed two months later, in August, by the Hyedua-1 well, just across the block in Tullow Oil's DT block also striking oil in sizeable quantities. The two fields were unitized in 2008 for joint development as the Jubilee Field, after successful appraisals.

Jubilee Oil is being produced by the floating production, storage and offloading vessel Kwame Nkrumah MV 21, offshore western Ghana.

Technical Production commenced from the Jubilee Field on November 28, 2010 and the field was officially commissioned for First Oil on December 15 of the same year.

The Jubilee Partners have among them nine discoveries since Jubilee, which are at various stages of development.

Some of the companies currently engaged in exploration, development, or production activities in Ghana include: Afren Plc, Anadarko, Challenger Minerals, Eni, Hess Exploration, Kosmos, Lukoil Overseas, Lushann Eternit, Mitsui Group, Oranto, Stone Energy, Tap Oil, Tullow Oil, Vanco Energy, and Vitol Upstream. [email protected]