AKM Presentation On State Capture In The Oil Industry

Over the last two weeks, there have been a lot of discussions surrounding the company Aker and their activities in the country.

In the midst of these discussions, I have accused of misrepresenting the facts pertaining to the current public discourse on Aker, leading to misconceptions and misunderstandings by ACEP, a think tank that in the past was headed by the current sector minister Amewu and his deputy Amin.

The issues border on Aker’s takeover of the Hess interest in the DWT/CTP Block - forgive my colleagues at GNPC for these difficult acronyms - in 2018 and its activities since then.

It took me almost 4 years while I was at GNPC to get my tongue around these acronyms; I still, just like most people, refer to these Blocks by the name of the Operator in the Contractor Group. For e.g. the eniGhana Block instead of OCTP, i.e. offshore Cape Three Points.

The oil industry - both downstream and upstream are laden with nomenclature that confuses not only those outside the industry but even most in the industry - this, I believe is deliberate. But I digress; as this is a different discussion worthy of its own forum!

Back to the topic at hand today; recently - just last week - Aker was in the news again and this time discussions were about Aker’s takeover of the AGM Block and its request to GoG to revise significantly, the fiscal terms of the existing AGM Petroleum Agreement through AGM.

These two need to be addressed independently as they both give rise to exciting case studies which bring to fore certain technical, legal and commercial issues that would help us structure our petroleum agreements better in the future.

However, these issues being discussed are not new to me as I raised questions around the time Aker bought out Hess’s interest in the DWT/CTP about a year ago with the minister, and with Aker themselves.

But today, in this maiden Thought Leadership forum in the Oil & Gas series, I would like to:

• Walk those of you here at the ringside through a 15-minute crash course on Petroleum Agreements

• Then, talk about the issues at hand first raised publicly by Imani for another 15 minutes

• And finally for about another 10 minutes give you my take on what I call State Capture going on in this industry

I shall try - and it is extremely difficult to do - to let you experience the life of a Petroleum Agreement in its abridged form; with the hope that at the end of today you shall all be partially versed in the Oil and Gas industry and more particularly on this Aker issue.

The upstream oil business is quite a simple business. I often liken it to the development of real estate - a developer acquires a piece of land, obtains the necessary permits, and employs an architect/contractor, who then engages all the artisans, and voila!, Presto!, you have a building! Of course, financing is a very important key factor which I will later talk about.

The Developer is GNPC/CONTRACTOR group - a person or persons who is given the license by Govt to explore, develop and produce petroleum (oil and gas) that covers an area, which we call an Oil Block.

The Architect/Contractor is the Operator- most likely in the Contractor group.

The Contractor/Operator recruits all the artisans - who are the oil services companies.

How does this apply to Ghana’s oil and gas sector? Well, The main permit is the Petroleum Agreement (PA) which up until 2016 by law, had a lifespan of 30 years – this is now 25 years since Act 919 was passed - provided the contractor group discovered oil in the exploration period, declared it was commercial after appraisal period, brought in a Plan of Development; and subsequently developed the field which then started producing oil/gas.

The PA is the document that spells out the details of what can be done in each period of the PA. This is backed by the O&G laws Act 919 (2016) and the PNDC Law 84 before that, from 1984.

What most people do not know is that it takes a contractor about 10-13 years after signing a Petroleum Agreement before it sees first oil –mI.

This sums up a Petroleum Agreement aka PA and 4 key terms here which form its main body.

Interject Q & A:

• So what are the exceptions that a GoG can grant a Contractor the rights to extend a Petroleum Agreement or to change terms on a Petroleum Agreement?

• Who is the approving authority for each exception and what is this backed by? Law? Or Regulations?

This leads us to the Exploration Period, which is normally 7 years with 3 distinct periods -Initial period, 1st extension, and 2nd Extension.

Each of these periods specifies the work that will be done, called the WORK PROGRAM (WP), and the Minimum Spend, the minimum amounts that would be spent.

The Minimum Spend is absolutely important because it is backed by a performance bond or guarantee. Thus, if the Contractor fails to complete the work, the agreed WP will be cashed in so as to enable GNPC to do that work on its own or with another set of contractors.

The work program details work like seismic data acquisition -2D or 3D- and its associated works of processing and interpretation of the seismic data, drilling of wells etc.

The Appraisal Period then follows. After each discovery (normally within the exploration period), it is required that an appraisal is done within a specific time bound frame.

The Operator applies to PC (Petroleum Commission) and is granted approval to do specific things within a discovery - very important you remember this part: an appraisal is done within the geological boundaries of discovery.

A side note here is that a discovery is a geological pool that is stand-alone and not linked to any other geological pool.

This normally requires certain activities such as:

• the drilling of additional wells to ascertain the oil-water contact which helps delineate the size of the reservoir – this is the basis for economic evaluation

• one also needs to understand the best methodology to optimise the sweep of the oil out of the reservoir so as not to damage the reservoir over the life of the PA

The Appraisal period can last 1-2 years after each appraisal is granted, which is usually within the exploration period.

So after an appraisal is done, what next? The Plan of Development (PoD), worked on after commerciality, is declared post-appraisal completion.

I would like to tie this in with the situation here in Ghana and the issues that have been raised by Imani who sparked this wonderful debate over the last 2-3 weeks.

1. Exploratory Wells deemed Appraisal Wells

• PC gave Aker permission to carry out an appraisal program to drill wells to evaluate the full size of the discovered fields

• some ‘appraisal’ wells were successful- i.e. they found commercial finds in some of the wells drilled, while others were not i.e. there were no commercial finds in the wells drilled

• However, Oil finds from successful ‘appraisal’ wells were not found to have any link, termed “connectivity”, to any existing discoveries for which appraisal was approved and as such can only be deemed as exploratory wells

• All costs associated with these ‘appraisal wells’ -now are confirmed as exploratory wells- cannot be charged as “cost oil”. This is because they are exploratory wells that were drilled outside the Exploration Period and as such cannot be charged to the Pecan field development

• Aker has requested a deferred development of the other 5 discoveries to some future dates without agreeing with GoG, and without being very clear, on what actual work needs to be done to enable them to commit to actual work program activities and associated spends within a defined time framework for each of these 5 discoveries.

What this basically means is that Aker has taken a free option as to whether to develop these remaining 5 discoveries to tie back to PECAN discovery, which is the only one the PoD covers.

Please note that the PoD does not give any commercial and technical specifics on these 5 other discoveries except a probable plan that they will be possibly brought on stream at some far distant date.

Also noteworthy is the fact that Aker has bluntly refused to work with Springfield to bring a joint work program towards a unitization of the discovery field Beech, one of the aforementioned other five discoveries which straddle both the Aker and Springfield blocks.

2. Relinquishment

• PoD submitted but Aker has made it clear that they will be doing further exploration, although it is deemed ‘appraisal’, which they are seeking approval for

• The Law and Regulations are very clear on relinquishment - all discoveries that are not deemed commercial at the time of presenting the PoD need to be relinquished; this was done in the Tullow, Kosmos, and eniGhana operated blocks

• Aker has a right to request GoG to allow it to enter into a new PA for those fields and parts of the Block that had been relinquished

• In most PAs the Contractor Group, through its Operator (in this case Aker) can ask for a new PA to cover these areas of interest; eniGhana did this for the recently awarded Block 4 (2015)

• If the law and regulations are applied properly then the PoD will cover less than 60% of the area of the Block as presented by Aker in its PoD

• If allowed to go ahead and develop these 4 other known discoveries –which had been declared commercial by Hess – within their own time frame, Aker will go ahead and no matter the cost, whether successful or not, be able to deduct all these costs as part of the original Pecan development, thereby increasing the cost of the Pecan development and reducing govt’s revenue. This is where the State needs to take control of the process.

Exploratory Well versus Appraisal Well

Was the Aker appraisal well Pecan South 2A an appraisal well or an exploration well?

The answer to this lies in whether there is dynamic pressure connectivity between this well and the wells in the Pecan discovery and if the geological structures are the same or not;

If it is proven that there is no connectivity between these wells then the Pecan South 2A is a new discovery which means it is an exploration well.

Under what circumstances can the Exploration Period be extended?

The next question is “can this Exploration well fall within the old PA or is a new PA required, and can the cost of this well be charged to the Pecan development?”

It can only fall in the old PA if the exploration period can be extended; remember the exploration period ended in 2013 and was only extended for the Appraisal work of existing discoveries to be completed; Appraisal was completed in 2015 by Hess after which they declared commerciality and were thus required to bring in their Plan of Development (POD);

Hess stalled in bringing the PoD mainly because they claimed that they could get a Financial Investment Decision (FID) only after the ITLOS verdict was known; they wanted to be sure which government - Ghana or Ivory Coast - they would be dealing with;

The Minister gave them up to 10months after the ITLOS final ruling to bring a POD for all the discoveries they deemed commercially viable;

ITLOS ended in Sept 2017

Hess announced in early 2018 that it was selling its interest in their Block to Aker Energy

Just to be very clear here, there should be no suggestion that Hess acted illegally from 2013-2016;

Why did Ghana lose the 10% Commercial interest of 10% in the Hess block ceded to EXPLORCO

In 2014 when Lukoil bought interest in Hess Block (DWT/CPT)? Government negotiated and agreed with Hess to grant GoG an option to acquire 10% of the Block .

GNPC formed a subsidiary called EXPLORCO to hold GoG’s additional interest with the aim of maximising Ghana’s revenue from the find.

GNPC provisioned $47m to pay for it. This was approved by Parliament in the GNPC Budget for 2015 and 2016 for which payment was due in 2017 after the ITLOS ruling. The intention was aborted by the Government in 2017. Although put in the budget approved by the GNPC Board in late 2016, it was not part of the final budget taken to Parliament mid-2017.

In 2017, GNPC surprisingly wrote to Hess informing them that GNPC would not exercise the option to purchase 10% of the Block due to lack of funds.

GNPC had over $150m in cash on their balance sheets as of the end of 2016 10% Chronology of events

1. The Minister approved the Lukoil farm-in into the DWT/CTP Block Operated by Hess in 2014 on two main conditions

a) that they needed to abide by the new law that required a local partner to take up a min of 5 %; this was despite the fact that Hess themselves were grandfathered just as Tullow, Kosmos and Eni were

2. the second condition was that Govt would increase its Interest from the original 10% to 20% by taking an option to acquire a 10% paid Interest; GNPC was designated as the entity Govt nominated to handle the acquisition

These two conditions were approved by the minister who then requested GNPC to acquire the 10% paid in interest;

GNPC sought Board Approval and this was approved in the 2015 budget

Due to ITLOS, Hess decided unilaterally to delay the POD until the outcome of the ITLOS case; ITLOS finally gave its verdict in September 2017;

GNPC also needed Hess to commit to the POD before it could pay for the 10%; GNPC invoked the option to buy the 10% interest in the DWT/CTP Block

Also, GNPC needed to carry out an audit of the actual spend by Hess on the Exploration and Appraisal before it made the payment for the 10% Interest of the Block;

GNPC once again sought approval from Parliament to spend these funds in 2016 and since the spend did not occur in 2016 because ITLOS was not over, it once again also incorporated it into its budget for 2017 approved by the Board in December 2016;

It is thus puzzling how this amount was removed from the 2017 Budget that was sent to parliament for approval in 2017

The allegation that GNPC did not have funds to fund this spend for the 10% Interest of the Block is false; this can be validated by the Bank balances of GNPC at the end of 2016;

It is surprising that GNPC wrote to Hess/Aker stating that GNPC did not have the Funds to acquire the 10% Interest in the Block;

Was any economic analysis done by GNPC to validate why the 10% interest should not be taken up ?:

- What was the rate of return?

Was Approval sought from Minister who had given GNPC the original approval to pay for the 10% Interest in the Block?

If so, did the Minister get Cabinet approval? Was the Minister of Finance aware that GNPC had turned down an option to acquire 10% of the Block?

Lastly was Parliament informed that GNPC would not take up the option?

If the answer is no to any of these questions then the letter that was sent to Hess/Aker was illegal as it did not have the authority to say that GoG was not exercising the option to purchase the 10% Interest in the Block

If the issue alone was that GNPC did not have the funds then MoF could have been asked to fund on behalf of GoG

Interestingly Hess had offered GoG to buy the 10% for $47m while it sold 50% to Aker for $100m

This itself is more the reason why a complete audit and a value for money analysis would have been required before anyone would approve to pay for or approve not to pay for these interest;

How are oil field developments funded by Oil Companies and country’s NOCs? - why does Ghana choose not to fund exploration activities?

The petroleum model that Ghana and many countries have adopted is to not fund risky exploration activities; nevertheless, this does not bar Ghana from funding development activities

However, when the fields have been de-risked, ie discoveries have been made, then the country, acting through the NOC, can raise funding using its interest in the reserves from financial institutions to fund development activities; this is exactly what all the oil companies do

The next misconception being paraded around is that there has been no drilling activity since new PAs were signed in 2014/2015;

So, How did ITLoS affect exploration in Ghana from 2014-2017?

ITLOS (Ghana’s Ivory Coast border dispute) stopped activity in nearly all these areas from 2015-2017

Some work was done in some of the blocks - mainly seismic work including shooting, processing and interpretation;

Most of these 13 blocks were given out in late 2014 and some in 2015;

ITLOS started in Sep 2014 and ended in Sept 2017

Because of ITLOS no new drilling was allowed - this was the frozen period

Most of the Contractors (operators) wrote to Govt asking for an extension due to a freeze by ITLOS on Exploration activities

They must have resumed activity if the minister responded to their requests

AGM Block - Ghana’s share in Block reduces from 49%to 18%(25%)

AGM asking GoG to review its stake downwards is akin to a road contractor bidding low in a tender and then asking for a variation; however even the contractor Normally does this when they have completed a significant portion of the contract; in AGM’s case they are to spend $259m to prospect over the 7 years. If they find oil , but can’t declare commerciality ie the economics does not work (say the development economics falls short of needed 20% RoR), the PA allows GoG to then negotiate with the contractor; the only other time the Contractor can come to GoG to renegotiate is 5 years to the end of the PA

So what should have happened

AGM should have continued with its exploration work program and spent the minimum $259m in de-risking the field as promised by doing its seismic data collection and drilling the Wells in each of the three distinct exploration periods.

If discoveries were made and the economic valuation proved that the field discovered could not be produced under the current terms of the agreement, the government could enter negotiations with AGM so as to arrive at fiscal terms that would make fields commercial and would allow the investors financial institutions invest in the Block; this is how the PA is set up under the laws of the country.

Basically what has happened is AGM has been given a new lease on life through a “sole retender” and GoG has reduced its stake of 43% to 18%; and by doing so has brought in a new local partner, Quad Energy, that was set up barely one month before government brought this ridiculous amendment that parliament so shamingly approved given the questions and issues raised;

Disturbing Trend in the Oil Services Business

There is a disturbing trend that has been happening in our industry since 2017 Many foreign oil services companies that have existing Ghanaian local partners in their joint ventures before 2017 have been marginalised in getting business approved, not had their licenses renewed in a timely basis, or have been asked to change their local partners.

State capture

It is alleged that there exists an agreement between GoG (either directly or indirectly through the petroleum commission) and Aker where Aker, in its $4bn development of the Pecan discovery, will be allowed to use its preferred vendors in its contracting strategy rather than go through the tender process as prescribed by law;

If this is so then Aker, being essentially an oil services company, and not a known oil E&P Company, could basically capture most of the lucrative initial contracts in the development of the Pecan field which is estimated to be somewhere close to $4.0bn and estimated to be completed within 3 years;

What this also means is that these preferred companies could be encouraged to now form local partnerships with companies that have no expertise in the industry as there is no transparent local content procedure;

If these local partners , who most who have no expertise will be fronts, are even given 20% local content participation in each contract, that means that almost $800m worth of contracts will accrue to these local companies; given that the average net profit in the industry is 20%, it means that these local companies are set to make north of $150m in profits over the next 2 years

Already we are seeing many licenses not being renewed or renewals being delayed for no tangible reason, and many foreign companies being asked - sometimes not so subtly - to change their local partners because the existing ones are unknown to the powers that be ; some foreign companies have flatly refused to comply while some have complied by this threat; pls note that notice is given to these foreign companies that have either changed the local partners without good and substantial reason, and those who are contemplating this, that we shall be reporting them to their local regulators and also to their versions of the UK Serious Fraud office, FCPA ØKiKROM and the like.

ALTHOUGH THESE DIRECTIONS ARE POLITICALLY EXPEDIENT TO THE POWERS THAT BE, THEY DO NOT BENEFIT THE COUNTRY IN ACHIEVING THE GOALS OF THE LI. IRONICALLY, THESE ACTIONS AID THE FOREIGN COMPANIES IN TAKING ADVANTAGE OF THE LOCAL INDUSTRY BY SLOWING DOWN THE TRANSFER OF TECHNOLOGY TO LOCAL GHANAIAN COMPANIES. ONE HAS TO KEEP IN MIND THAT PER THE LI, AT LEAST 50% OF MOST OF THE OIL SERVICES WORK PERFORMED BY THESE FOREIGN COMPANIES ARE SUPPOSED TO BE PERFORMED BY LOCAL GHANAIAN COMPANIES;

This will not create a fair level playing field for all the numerous oil services companies that Ghana’s industry lured to invest billions in assets and in people over the last decade; Ghana will not be a destination of investment by decent companies but will rather be infested by companies that are only prepared to play ball with the powers that control the industry; and herein lies the danger;