Tullow & Partners To Lose $1 Billion From ITLOS Decision
Now that the cacophony has died down a bit, we can ask ourselves: are we any clearer about what the International Tribunal on the Law of the Sea‟s (ITLOS) decision really means for Ghana, the oil companies with blocs in the disputed area, and, in particular, for Tullow, the operator and largest leaseholder of the main oil field in the area?
Some relatively informed opinion and commentary have managed to filter through the noise, but so far nothing that can be regarded as actual analysis based on actual project data associated with work in the disputed area.
So, in this brief report, we shall be taking the challenge to analyse the impact of the provisional measures granted to Cote D‟Ivoire (CDI) by the Special Chamber arbitrating the Ghana – CDI maritime dispute at the ITLOS in Hamburg.
For those who haven‟t yet read the decision, here are the measures again:
(a) Ghana shall take all necessary steps to ensure that no new drilling either by Ghana or under its control takes place in the disputed area as defined in paragraph 60 [the entire area that CDI says it rather than Ghana should have];
(b) Ghana shall take all necessary steps to prevent information resulting from past, ongoing or future exploration activities conducted by Ghana, or with its authorization, in the disputed area that is not already in the public domain from being used in any way whatsoever to the detriment of Côte d‟Ivoire;
(c) Ghana shall carry out strict and continuous monitoring of all activities undertaken by Ghana or with its authorization in the disputed area with a view to ensuring the prevention of serious harm to the marine environment;
(d) The Parties shall take all necessary steps to prevent serious harm to the marine environment, including the continental shelf and its superjacent waters, in the disputed area and shall cooperate to that end;
(e) The Parties shall pursue cooperation and refrain from any unilateral action that might lead to aggravating the dispute.
It is clear that measures (d) and (e) were made deliberately vague to encourage dialogue between Ghana and CDI. There is little analytical value in assessing their impact.
Regarding measure (c), the Judges themselves were of this opinion: “Côte d‟Ivoire has not adduced sufficient evidence to support its allegations that the activities conducted by Ghana in the disputed area are such as to create an imminent risk of serious harm to the marine environment.”
The measure can therefore be described as merely precautionary. It is unlikely that it will lead to any change in the status quo existing in the disputed area. It is measures (a) and (b) that have created all the confusion in the air, and for good reason.
These measures do indeed affect the status quo, and substantially too. Measure (b) is virtually word for word the request from CDI. The request from CDI to the Judges, as shown in the oral pleadings of Sir Michael Wood, on behalf of CDI, was based on this cause: “Ghana and the 10 companies it has licensed have already obtained sensitive information from their 11 exploration activities, information belonging potentially to Côte d‟Ivoire, information that can be used to the detriment of Côte d‟Ivoire.
Even if Ghana were ordered to stop gathering information from now on, the damage to Côte d‟Ivoire would still increase day by day if Ghana continues to process the data that it has already acquired. All collection andprocessing of data should stop immediately.”
It was based on this description of why continuous collection and processing of data in the disputed area is detrimental‟ to CDI that the Judges ordered measure (b). That presupposes that the Judges accept the reasoning of CDI.
Data here refers to such vital information as seismic imaging results, wireline logs, geothermal scans, fluid analysis, radioactive measurements, telemetry of all kinds, strain gauging results, indeed a wide range of the most amazingly complex repositories of information one can imagine.
If a Judge orders that such information not be used to the detriment of CDI, then it presupposes that it could, otherwise there would be no sense to such an order. The verification procedures to ensure that such detriment does not result might involve Ghana, and the companies it has licensed such valuable data to, beginning to share such data with CDI. The information asymmetry currently benefits Ghana, but this measure could completely reverse it to an equilibrium state.
In practical terms, CDI could now come to understand more about the resource potential of different parts of the disputed area, which should prepare it more effectively for the main hearings which are about to commence. Some of the 10 companies may rather shut down some or all of the eleven ongoing exploratory activities simply to avoid handing over data to CDI, if that becomes the only way to confirm that such data is not being used to their detriment.
But thinking about it analytically, it is unclear how companies can continue to do the very things that CDI complained about when asking for the measure, and yet satisfy the requirements of the measure of not using the „data to the detriment‟ of CDI, simply because CDI interpreted „detriment‟ to mean the sheer fact that such data could be in the hands of the private sector in the first place.
The provisional measures are intended to ensure that should CDI win, its victory would not be futile.
In respect of the data matter, CDI argues that should such information be acquired by private companies they would know too much about the disputed area (now transferred to CDI) so as to render CDI‟s sovereign advantages worthless.
However eventually detriment comes to be defined and mutually prevented, business as usual‟ cannot be a legitimate expectation on the part of Ghana's authorities, which makes the measure a disturbing development.
The most important of all the measures however is (a). The measure derives largely from this consideration of the Tribunal: “Considering that there is a risk of irreparable prejudice where, in particular, activities result in
significant and permanent modification of the physical character of the area in dispute and where such modification cannot be fully compensated by financial reparations.” (paragraph 89).
The order may be summed up pretty simply in this maxim: “Whatever harm has happened has happened, but going forward there should be no more harm.” That is why the consideration was balanced with another one (paragraph 100), which states that where drilling is complete, activities that are not as physically damaging to the continental shelf can continue, since abandoning such activities mid-stream will create even worse problems for all concerned, including CDI, should it win and the disputed area is transferred to it.
The ban on new drilling activities constitute however the bulk of the impact of the decision on Ghana, the bloc license holders, and, particularly, Tullow. Unfortunately, it is the analysis of the effects of this ban that has been worst served so far due to the neglect of project data.
The main projects in the disputed area impacted by the decision are:
A) T.E.N (the compounded Tweneboa-Enyerra-Ntomme discoveries)
B) WAWA and
C) The Hess exploration
Further exploratory drilling is required in both the WAWA and Hess holdings in order to fully determine the extent of reserves. The almost 3 year delay, and potential restrictions on data gathering or analysis, have adverse effects on the investment planning for the full appraisal of these fields.
But it is T.E.N that has been the cause of both jubilation and anguish following the announcement of the ruling.
Many financial journalists around the world immediately started to push the angle (egged on by Tullow‟s statements) that since T.E.N would not be halted by the decision, this was a victory for Tullow, its partners in the project (Kosmos, GNPC, Anadarko and PetroSA), and Ghana (as a recipient of future taxes and royalties).
Other commentators, mainly in Ghana, began to speculate about the no-drilling impact. Yet, the critical thing to do, or to have done, is to look at the drilling program of the
T.E.N field as outlined in various project development, scoping, and assessment reports prepared by or on behalf of Tullow by its assigns. The scoping studies that have guided all the regulatory compliance activities in the T.E.N project to date are in the public domain or easily accessible by contacting the Petroleum Commission of Ghana.
The drilling program is likewise public. Also well-known are the farm-down (attempts to sell some of the nearly 50% of shares it holds in T.E.N) challenges facing Tullow, as well as the planned production cycle in the T.E.N field.
A relatively straightforward amalgam of these pieces of information easily provides any analyst with a good idea of the financial impact of the „no drilling measure on Tullow, inclusive of the impact it will have on the company‟s quest to find new partners to share in the costs of developing T.E.N in return for shares in the field.
The most critical piece of data is the „base load case‟ for T.E.N. This is the most realistic set of projections of how much exploitation activity will yield the most realistic path to plateau production in 2017 for Tullow. In brief, the „base case‟ is the medium production profile‟. That is simply to say: the ‘realistic’, as distinguished
from the „pessimistic‟ or „optimistic’ scenario. It is fair to say that the realistic production cycle of the T.E.N field requires 15 oil production, 15 water injection, 1 gas production and 2 gas injection wells. This is projection in Tullow‟s own documents.
The wells that have already been drilled for the mid-2016 first oil timeline are: 3 oil production, 4 water injection, 1 gas production, and 2 gas injection, wells. The Plan of Development (the engineering and project blueprint based on which all activities are proceeding) called for an immediate commencement of drillin activities from mid-2016 through 2018 (in fact drilling rigs have already been contracted) in order to assure the base case scenario.
Though most commentators have pointed to late 2017 as the likely end point for proceedings in the maritime dispute arbitration, anyone who has looked at the case file that has built up to date, and considered that the Tribunal is in unchartered waters (several aspects of proceedings are novel to the Tribunal) ought to be more cautious and project a mid-2018 completion point for the case.
Considering the above, should first oil really start to flow in mid-2016 (which is already 1.5 years later than planned, and may well be missed), but regardless when it does, the T.E.N partners are bound to lose 2 years of project time, placing huge stress on Tullow‟s farm-down, and the partners‟independent fund-raising efforts to develop a field that is costing nearly 20% more to develop than the „world-class‟ Jubilee field, but is projected to produce at less than 70% of Jubilee‟s performance.
Most analysts projected a loss of $1.5 billion had the T.E.N partners been ordered to completely halt development on the field for the duration of the proceedings. Tullow itself gave a broad range of between $1 billion and $2 billion.
The tribunal did not do stop T.E.N from going ahead. It merely precluded the base case scenario for T.E.N. The consequence is that the first oil production levels shall be maintained during the life of the proceedings. First oil production levels, judging by the well productivity issues in nearby Jubilee, but even discounting the remediation and acidification exercises that took place there, regardless of how aggressive ramp-up occurs, cannot justify the full investment profile of the project.
The analysis of test flow data show that the three production wells may peak at 20,000 barrels per day (a super-optimistic scenario would be 60,000 barrels, but this would be a reckless estimate, judging by what we are obtaining from the 12 producers in the more productive Jubilee).
If break-even cost per barrel is $50 (could be more judging by the lower-cost Jubilee‟s $45), then at a realistic medium-term price of crude of $75, we are talking of annual gross revenues of $182.5 million until the case is decided. Peanuts for a $5 billion. To put it in perspective: at that rate of income generation, it would take the T.E.N partners almost 5 years to pay for just the wells.
The analysis further shows that by restricting the base case scenario, the ITLOS Judges have thus cost the T.E.N partners at least $1 billion in losses, of which Tullow, as the lead operator, would be saddled with at least $500 million. As shown above, this is not computed solely from the estimated average recoverable barrels of 10 million barrels per year (production output follows a bell-curve, by the way), but also from contract restructuring, and capital and debt servicing costs.
The halt to all extended reach drilling, and interference in the timeline of the Wawa field appraisal and development (including potential integration into T.E.N) were largely discounted.
The impact on Ghana‟s fiscal situation is likely to be fairly low, however, due to the current tax structure prevailing in the petroleum industry, which lowers the taxable amounts of income in the early years of production.
This brief report was produced by Konfidants, a Swiss-Ghanaian transactional advisory firm based in Accra and Lugano. It is meant for a general audience. Researchers and all those interested may reach out to us for the appendices and references: www.konfidants.com