Sunday, 8 August 2021

Govt over-value Aker's SDWT block - Alliance of CSOs ask


Zaratu Yussif 

The Alliance of Civil Society Organizations (CSOs) working on Extractives, Anti-Corruption and Good Governance have raised questions on the request by the Ghana National Petroleum Corporation (GNPC) to buy stakes in two oil blocks at amount of $1.65 billion.

In a press statement issued last week, the CSOs doubted the valuation of the South Deep Water Tano (SDWT) by Aker Energy and subsequent endorsed by GNPC. This was after the Energy Minister, Mathew Opoko Prempeh submitted a memorandum to the legislature seeking approval to purchase a 70% stake in the South Deep Water Tano (SDWT) operated by AGM Petroleum Ghana Limited and a 37% stake in the Deep Water Tano/Cape Three Points (DWT/CTP) operated by Aker Energy Ghana Limited.

The Alliance of CSOs, numbering over 15, said, they recognised the many questions that can be raised on the transaction as presented to Parliament. However, we focus on six key questions that expose the transaction to be in the opposite trajectory to the interest of the country as follows:

"Are the fields really worth US$2 billion?

GNPC's proposal cites valuations from third-party analysts. However, the valuations ignore the possibility that the oil price might not be as high as assumed, that reserves might be less than assumed or that costs might be higher than assumed. Before development, there is very little certainty about these factors."

The CSOs justified their doubt by alluding that, Globally, Ernst & Young found that 65 percent of big upstream projects ran over budget (and) by a hefty 53 percent on average. Another study noted that all successful new oil producers in Africa, Ghana included, netted less revenue than they expected, partly due to higher costs. GNPC should be familiar with this reality, given Ghana's experience with all three producing fields.

Adding that, all good analysts will present different valuations given different prices and other assumptions. Instead, this proposal ignores this practice. 

Below are sequence of questions asked by the CSOs to emphasize their doubt about the budget and transaction arrangement.

"How much value is assigned to unconfirmed SDWT reserves that may not be developed?

One of the main uncertainties is how much actual oil can commercially be extracted from the field. The proposal provides little information on how these prospects are being valued because a lot more work that is technical remains undone. Why is the GNPC betting on these prospects that have not been appraised?

"The SDWT discoveries risk not being developed if purchased by GNPC. According to the Commission, the water depth is currently between 2700 to 3500 meters with initial discovery information of 127 million barrels of oil equivalent. According to Aker in their Appraisal Program submitted to the Petroleum Commission in 2019, there is currently no qualified technology for such a depth of water and hence will require the development of technology, an independent qualification or approval of such technology before use in SDWT. This will require further investments by GNPC to improve on reserves that have not been estimated as part of this deal. In essence, it may not be commercially viable to develop SDWT, Nyankon discovery, with just an initial estimation of 127 million barrels. Yet, Aker is selling those resources to GNPC as part of the transaction with a promise to fast track the development by 2024.   

"Do Aker's cost claims add up? Aker claims it has invested about US$800 million so far on the blocks in a document submitted to Parliament. While GNPC claims it has verified the expenditures, it still appears inflated if juxtaposed against the amount of work done by Aker and the value of its acquisition three years ago. 

"Aker Acquired Hess's interest in the DWT/CTP for US$100m in 2018. Before selling its interest to Aker, Hess had appraised the field with estimated recoverable oil of 450 million barrels. In total, Hess drilled 12 wells (seven exploratory wells and five appraisals well).  With that amount of work done, the highest valuation Hess got was about US$400 million in 2016 when it farmed out 40 percent to Lukoil and Fuel Trade for the entire field. Akers claim it has spent about US$420 million on five well drilled on the two blocks. 

"In another document presented to the country's Economic Management Team (EMT), the US$420 million relates only to the three wells on DWT/CTP. Given that the DWT/CTP cost is shared among the partners of the block the total expenditure claims for the wells could be in the region of US$600 or US$750 million compared with US$400 million by Hess for 12 wells, depending on which of the documents used. This is very high regardless of which of the information is used. 

"The remaining US$280million must be accounted for properly. GNPC claims that money was used for "certain activities essential for establishing resource in the blocks". This is overly ambiguous and cannot be accepted as a cost with this kind of description which questions the distinction between that activity and data acquisition and studies done as part of exploration and appraisal. 

"Is Aker getting a great deal at the expense of Ghana?

"It is worth asking why Aker has struggled to find investors to develop these fields. If few others find the fields attractive, why should GNPC? 

"GNPC is providing a better deal to Aker than it could find elsewhere to raise capital to invest and bear risk. This proposal gives Aker the funds to procure an FPSO at US$600 million and lease to the project for risk-free benefits, finance its development cost for the minimal stake at US$140 million and keep US$560 million in the bank. 

"With these high-cost claims, Aker makes a profit of about US$500 million on the proposed acquisition value of US$1.3 billion. If the cost is imposed at US$965 million as presented to the EMT, Aker still makes about US$350 million of profit for selling part of its stake in the blocks.  The gains for Aker increase astronomically when analyzed on additional information we have, which suggest that the cost of US$420 million being pushed on GNPC is the cost available to the Commission for the entire field, and the prorated cost for GNPC should instead be about US$155 million for the stake.

"Whose money is it any way?

One of the main costs that the proposal ignores is the cost of capital. By lending this money, the government is increasing the national debt by 5 per cent and could increase Ghana's sovereign debt costs while redirecting money that could have benefited other sectors of society. Some of these may have greater long term growth potential and more ability to transform Ghanaian's everyday lives and economic prospects than oil and gas, which creates relatively few jobs for citizens and provided the biggest benefit to a relatively small group of people—for instance, those who work for companies that receive "local content" subcontracts on projects.

The government could charge a high interest to GNPC, but the proposal ignores this cost. GNPC is making a risky bet, but betting the public's money, not their own.

"Is it worthwhile, realistic—or even advisable—for GNPC to pay so much public money for the chance to become an "operator"?

"GNPC is attempting to convince Parliament that it will learn to become a world-class upstream operator through this acquisition. However, the structure of the transaction only makes GNPC Explorco a relatively passive "joint operator", with limited opportunity to learn by doing. The proposals we have seen don't accurately detail how Aker would transfer the needed skills, knowledge or technology into Ghanaian hands. Instead, it proposes setting up a Special Purpose Vehicle (SPV), which Aker will control with 60 percent interest, and GNPC Explorco will have 40 per cent. This structure cannot make GNPC the operator it wants to become as the SPV is not the same as Explorco."

The CSOs in conclusion indicated that, the Memo to Parliament is a significant eye-opener for well-meaning Ghanaians to closely monitor the relationship between Aker and the State. "GNPC has failed to examine the issues in the transaction properly. The decision to support GNPC to become an operator is not a new conversation. Ten years ago the country decided to support GNPC to become an operator by allocating a portion of oil revenue. So far, about US$1 billion has been given to the Corporation, but it has failed to drill one well. The country needs a clear pathway for supporting the national oil company, rather than using billions of dollars of the public's money in risky bets that might instead go to support Ghana's health, education and economic development." 

"Otherwise, the guise of the energy transition will only be a smokescreen to waste more resources and line the pockets of foreign companies and people who may be short-changing the country deliberately. 

"We, therefore, request Parliament to institute a full-scale investigation into the transaction to verify the actual cost incurred by Aker so far on the Blocks, clarify the inconsistencies in the presentations by GNPC and allow for open consultation and hearing to provide opportunities for independent expert opinions. We also urge the media to provide adequate space and time for a thorough examination of the issue in the country's supreme interest."