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?<\/p>\n
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.<\/p>\n
So, in this brief report, we shall be taking the challenge to analyse the impact of the provisional measures granted to Cote D\u201fIvoire (CDI) by the Special Chamber arbitrating the Ghana \u2013 CDI maritime dispute at the ITLOS in Hamburg.<\/p>\n
For those who haven\u201ft yet read the decision, here are the measures again:<\/p>\n
(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;<\/p>\n
(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 C\u00f4te d\u201fIvoire;<\/p>\n
(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;<\/p>\n
(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;<\/p>\n
(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.<\/p>\n
Regarding measure (c), the Judges themselves were of this opinion: \u201cC\u00f4te d\u201fIvoire 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.”<\/p>\n
The measure can therefore be described as\u00a0merely precautionary. It is unlikely that it will lead to any change in the status quo existing in the disputed area.\u00a0They aree measures (a) and (b) that have created all the confusion in the air, and for good\u00a0reason.<\/p>\n
[contextly_sidebar id=”q0nBfjb4rZRn4UjikRCBP7kuwkTjzbuA”]These measures do indeed affect the status quo, and substantially too.\u00a0Measure (b) is virtually word for word the request from CDI. The request from CDI\u00a0to the Judges, as shown in the oral pleadings of Sir Michael Wood, on behalf of CDI,was based on this cause: \u201cGhana and the 10 companies it has licensed have already\u00a0obtained sensitive information from their 11 exploration activities, information\u00a0belonging potentially to C\u00f4te d\u201fIvoire, information that can be used to the detriment\u00a0of C\u00f4te d\u201fIvoire.<\/p>\n
Even if Ghana were ordered to stop gathering information from\u00a0now on, the damage to C\u00f4te d\u201fIvoire would still increase day by day if Ghana\u00a0continues to process the data that it has already acquired.<\/p>\n
All collection and\u00a0processing of data should stop immediately.\u201d\u00a0It was based on this description of why continuous collection and processing of data\u00a0in the disputed area is \u201cdetrimental\u201f to CDI that the Judges ordered measure (b). That\u00a0presupposes that the Judges accept the reasoning of CDI.Data\u201f here refers to such vital information as seismic imaging results, wireline logs,\u00a0geothermal scans, fluid analysis, radioactive measurements, telemetry of all kinds,\u00a0strain gauging results, indeed a wide range of the most amazingly complex\u00a0repositories of information one can imagine.<\/p>\n
If a Judge orders that such information not be used to the detriment of CDI, then it\u00a0presupposes that it could, otherwise there would be no sense to such an order.<\/p>\n
The\u00a0verification procedures to ensure that such detriment does not result might involve\u00a0Ghana, and the companies it has licensed such valuable data to, beginning to share\u00a0such data with CDI.<\/p>\n
The information asymmetry currently benefits Ghana, but this\u00a0measure could completely reverse it to an equilibrium state.<\/p>\n
In practical terms, CDI could now come to understand more about the resource\u00a0potential of different parts of the disputed area, which should prepare it more\u00a0effectively for the main hearings which are about to commence. Some of the 10\u00a0companies may rather shut down some or all of the eleven ongoing exploratory\u00a0activities simply to avoid handing over data to CDI, if that becomes the only way to\u00a0confirm that such data is not being used to their detriment.<\/p>\n
But thinking about it analytically, it is unclear how companies can continue to do the\u00a0very things that CDI complained about when asking for the measure, and yet satisfy\u00a0the requirements of the measure of not using the \u201edata to the detriment\u201f of CDI,
\nsimply because CDI interpreted \u201edetriment\u201f to mean the sheer fact that such data\u00a0could be in the hands of the private sector in the first place.<\/p>\n
The provisional\u00a0measures are intended to ensure that should CDI win, its victory would not be futile.<\/p>\n
In respect of the data matter, CDI argues that should such information be acquired\u00a0by private companies they would know too much about the disputed area (now\u00a0transferred to CDI) so as to render CDI\u201fs sovereign advantages worthless.<\/p>\n
However eventually “detriment comes to be defined and mutually prevented\u00a0business as usual cannot be a legitimate expectation on the part of Ghana\u201fs\u00a0authorities, which makes the measure a disturbing development.<\/p>\n
The most important of all the measures however is (a).The measure derives largely from this consideration of the Tribunal: \u201cConsidering
\nthat there is a risk of irreparable prejudice where, in particular, activities result in\u00a0significant and permanent modification of the physical character of the area in\u00a0dispute and where such modification cannot be fully compensated by financial\u00a0reparations.\u201d (paragraph 89).<\/p>\n
The order may be summed up pretty simply in this maxim: \u201cWhatever harm has\u00a0happened has happened, but going forward there should be no more harm.\u201d<\/p>\n
That is why the consideration was balanced with another one (paragraph 100),\u00a0which states that where drilling is complete, activities that are not as physically\u00a0damaging to the continental shelf can continue, since abandoning such activities\u00a0mid-stream will create even worse problems for all concerned, including CDI,\u00a0should it win and the disputed area is transferred to it.<\/p>\n
The ban on new drilling activities constitute however the bulk of the impact of the\u00a0decision on Ghana, the bloc license holders, and, particularly, Tullow.\u00a0Unfortunately, it is the analysis of the effects of this ban that has been worst served\u00a0so far due to the neglect of project data.<\/p>\n
The main projects in the disputed area impacted by the decision are:
\nA) T.E.N (the compounded Tweneboa-Enyerra-Ntomme discoveries)
\nB) WAWA and
\nC) The Hess exploration<\/p>\n
Further exploratory drilling is required in both the WAWA and Hess holdings in\u00a0order to fully determine the extent of reserves. The almost 3 year delay, and\u00a0potential restrictions on data gathering or analysis, have adverse effects on the\u00a0investment planning for the full appraisal of these fields.<\/p>\n
But it is T.E.N that has been the cause of both jubilation and anguish following the\u00a0announcement of the ruling.<\/p>\n
Many financial journalists around the world immediately started to push the angle\u00a0(egged on by Tullow\u201fs statements) that since T.E.N would not be halted by the\u00a0decision, this was a victory for Tullow, its partners in the project (Kosmos, GNPC,\u00a0Anadarko and PetroSA), and Ghana (as a recipient of future taxes and royalties).<\/p>\n
Other commentators, mainly in Ghana, began to speculate about the no-drilling\u00a0impact.Yet, the critical thing to do, or to have done, is to look at the drilling program of theT.E.N field as outlined in various project development, scoping, and assessment\u00a0reports prepared by or on behalf of Tullow by its assigns.<\/p>\n
The scoping studies that have guided all the regulatory compliance activities in the\u00a0T.E.N project to date are in the public domain or easily accessible by contacting the\u00a0Petroleum Commission of Ghana.
\nThe drilling program is likewise public. Also well-known are the farm-down\u00a0(attempts to sell some of the nearly 50% of shares it holds in T.E.N) challenges facing\u00a0Tullow, as well as the planned production cycle in the T.E.N field.<\/p>\n
A relatively\u00a0straightforward amalgam of these pieces of information easily provides any analyst\u00a0with a good idea of the financial impact of the \u201eno drilling measure\u201f on Tullow,\u00a0inclusive of the impact it will have on the company\u201fs quest to find new partners to\u00a0share in the costs of developing T.E.N in return for shares in the field.<\/p>\n
The most critical piece of data is the base load case\u201f for T.E.N. This is the most\u00a0realistic set of projections of how much exploitation activity will yield the most\u00a0realistic path to plateau production in 2017 for Tullow. In brief, the “base case\u201f is “the\u00a0medium production profile\u201f.<\/p>\n
That is simply to say: the \u2018realistic\u2019, as distinguished\u00a0from the “pessimistic\u201f or “optimistic\u2019”scenario.<\/p>\n
It is fair to say that the realistic production cycle of the T.E.N field requires 15 oil\u00a0production, 15 water injection, 1 gas production and 2 gas injection wells. This is\u00a0projection in Tullow’s own documents.<\/p>\n
The wells that have already been drilled for the mid-2016 first oil timeline are: 3 oil\u00a0production, 4 water injection, 1 gas production, and 2 gas injection, wells.The Plan of Development (the engineering and project blueprint based on which all\u00a0activities are proceeding) called for an immediate commencement of drilling\u00a0activities from mid-2016 through 2018 (in fact drilling rigs have already been
\ncontracted) in order to assure the base case scenario.<\/p>\n
Though most commentators have pointed to late 2017 as the likely end point for\u00a0proceedings in the maritime dispute arbitration, anyone who has looked at the case\u00a0file that has built up to date, and considered that the Tribunal is in unchartered\u00a0waters (several aspects of proceedings are novel to the Tribunal) ought to be more\u00a0cautious and project a mid-2018 completion point for the case.<\/p>\n
Considering the above, should first oil really start to flow in mid-2016 (which is\u00a0already 1.5 years later than planned, and may well be missed), but regardless when\u00a0it does, the T.E.N partners are bound to lose 2 years of project time, placing huge\u00a0stress on Tullow’s farm-down, and the partners\u201findependent fund-raising efforts to\u00a0develop a field that is costing nearly 20% more to develop than the world-class\u201f<\/p>\n
Jubilee field, but is projected to produce at less than 70% of Jubilee\u201fs performance.\u00a0Most analysts projected a loss of $1.5 billion had the T.E.N partners been ordered to\u00a0completely halt development on the field for the duration of the proceedings. Tullow\u00a0itself gave a broad range of between $1 billion and $2 billion.<\/p>\n
The tribunal did not do stop T.E.N from going ahead. It merely precluded the base\u00a0case scenario for T.E.N. The consequence is that the first oil production levels shall\u00a0be maintained during the life of the proceedings. First oil production levels, judging\u00a0by the well productivity issues in nearby Jubilee, but even discounting the\u00a0remediation and acidification exercises that took place there, regardless of how\u00a0aggressive ramp-up occurs, cannot justify the full investment profile of the project.<\/p>\n
The analysis of test flow data show that the three production wells may peak at\u00a020,000 barrels per day (a super-optimistic scenario would be 60,000 barrels, but this\u00a0would be a reckless estimate, judging by what we are obtaining from the 12
\nproducers in the more productive Jubilee).<\/p>\n
If break-even cost per barrel is $50 (could\u00a0be more judging by the lower-cost Jubilee\u201fs $45), then at a realistic medium-term
\nprice of crude of $75, we are talking of annual gross revenues of $182.5 million until\u00a0the case is decided. Peanuts for a $5 billion. To put it in perspective: at that rate of\u00a0income generation, it would take the T.E.N partners almost 5 years to pay for just the\u00a0wells.<\/p>\n
The analysis further shows that by restricting the base case scenario, the ITLOS\u00a0Judges have thus cost the T.E.N partners at least $1 billion in losses, of which\u00a0Tullow, as the lead operator, would be saddled with at least $500 million.<\/p>\n
As shown above, this is not computed solely from the estimated average recoverable\u00a0barrels of 10 million barrels per year (production output follows a bell-curve, by the\u00a0way), but also from contract restructuring, and capital and debt servicing costs.<\/p>\n
The\u00a0halt to all extended reach drilling, and interference in the timeline of the Wawa field\u00a0appraisal and development (including potential integration into T.E.N) were largely\u00a0discounted.<\/p>\n
The impact on Ghana\u201fs fiscal situation is likely to be fairly low, however, due to the\u00a0current tax structure prevailing in the petroleum industry, which lowers the taxable\u00a0amounts of income in the early years of production.<\/p>\n
This brief report was produced by Konfidants, a Swiss-Ghanaian transactional\u00a0advisory firm based in Accra and Lugano. It is meant for a general audience.<\/p>\n
Researchers and all those interested may reach out to us for the appendices and\u00a0references: www.konfidants.com<\/p>\n
–<\/p>\n
Source: Konfidants<\/p>\n
\u00a0<\/strong><\/p>\n","protected":false},"excerpt":{"rendered":" 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 […]<\/p>\n","protected":false},"author":14,"featured_media":17156,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":[],"categories":[],"tags":[43,22,38,4],"yoast_head":"\n