Why Ghana Bounced Kosmos

In the Matter of Dispute Over Oil Search
Why Ghana
Bounced Kosmos
By J. Ato Kobbie, Managing Editor, [The Business Analyst]

Ghana’s case in the matter in which the Minister of Energy, Dr. Joseph Oteng-Adjei, rejected a plan of development (POD) submitted by Kosmos Energy on a Mahogany East field, as well as turning down a force majeure invoked by the US oil independent in July, 2011, appears to be water-tight.
Mahogany Discovery
It all started when Kosmos Energy, on January 8th, 2009 announced the discovery of oil by its Mahogany-3 Well in the West Cape Three Points Block (WCTP) offshore Ghana.
Under the terms of the Kosmos-operated WCTP petroleum agreement (PA), the Minister is to be notified of any discovery made and Contractor (Kosmos) shall conduct appraisal in respect of such discovery to determine whether the discovery is commercial or not.
If the discovery is declared commercial then Contractor shall submit a Plan of development (POD) to the Minister of Energy for approval.
Kosmos, after notifying the Minister of Energy of the Mahogany discovery, undertook an initial appraisal, via Mahogany-4 well, following which it notified him that the initial area of the discovery was commercial.
Kosmos therefore proceeded to submit a POD over that area and also requested for an extension of the appraisal period to enable it conduct further appraisal work on areas outside this initial area.
Sources close to the Ministry of Energy indicated that the Minister, Dr. Joseph Oteng-Adjei had granted the extension requested by Kosmos, directing the company to submit a full development plan for the Mahogany discovery, with liberty to apply for further extension to clear any uncertainties that remained.
According to the source, the Minister was shocked when upon completion of the extended appraisal, Kosmos, instead of complying with his directive as stated above, submitted a POD for a ‘Mahogany East’ area (having carved out the eastern end of the Mahogany field) to him for approval, when there was neither a discovery called ‘Mahogany East’ nor a commerciality declared for it.
The source indicated that Dr. Oteng-Adjei had no difficulty at all, in rejecting this POD, as he had not been previously notified of a ‘Mahogany East’ Discovery and worse still, a conduct of appraisal activities within the development, as Kosmos had incorporated in that plan, never represented an efficient way of exploiting the resources.
Kosmos, however maintained that it had submitted the right documentation and subsequently issued a notice of dispute, which required consultation between the parties to resolve the matter, failing which any party may refer the matter to arbitration for settlement.
A request by Kosmos that the Minister gave conditional approval of the POD as it was, was turned down as Government and the Ghana National Petroleum Corporation (GNPC) did not find it acceptable since it still required the Minister to approve a POD when both the Contractor and GNPC had agreed there was the need for further appraisal work to reduce uncertainties that characterized the discovery.
The Minister and GNPC insisted that it was necessary that the appraisal was conducted before submission of a POD, as required by the terms of the PA, pointing out also that a comprehensive appraisal when undertaken would reveal also if there was dynamic communication between the Mahogany discovery and the Jubilee Field to necessitate a separate development of Mahogany or not.
It would be recalled that Mahogany-1 exploratory well, was the first Jubilee discovery by Kosmos, and was appraised by the Mahogany-2 well.
CEDRELA
In announcing the dispute surrounding the drilling of the Cedrela-1 exploration well, Kosmos, in a press release on July 7th, two weeks to the expiration of its exploration license, stated 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.
But Ministry of Energy and GNPC sources had told The Business Analyst that 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. [See The Business Analyst, July 13, 2011]
According to the sources, Kosmos, after meeting its work obligation under the PA, proposed to drill an additional exploration well prior to the expiration of its Exploration licence on 22nd July 2011.
The sources point out that even though at the Joint Management Committee (JMC) level the drilling of Cedrela was rejected and voted against by GNPC due to lack of technical and economic justification by Kosmos, it still proceeded with steps to carry it through.
Reasons for rejection
The government of Ghana and GNPC, however countered the force majeure invocation by Kosmos on the grounds that it was under no obligation to drill the well.
The Ghana team argued further that the cedrela-1 well was not a permitted activity as it was not unanimously approved by the WCTP joint management team, as required under the PA.
Team Ghana again argued that even if the well had been obligatory, no work had in fact commenced and as such force majeure cannot ‘be invoked to enable an extension of the exploration period.’
Kosmos, however, maintained that Cedrela was an approved activity and that the events surrounding the rig constituted force majeure, for which reason the exploration period had to be extended, hence issuing a notice of dispute.
The petroleum agreement covering the WCTP block was signed on July 22nd 2004 with a seven-year exploration period, which ends on July 21, 2011 after which the US company and its partners automatically relinquish areas that are not deemed to be ‘Discovery, Development or Production areas, except where a force majeure (an act of God) had altered the time frame.’
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.
Reporting on the dispute in its filings with the US Securities and Exchange Commission (SEC) Kosmos had stated that together with the WCTP Block partners, they were in discussions with the Ministry of Energy and G N P C to resolve differences on the issues in dispute.
Sources close to the Ministry of Energy confirmed that discussions were still ongoing to resolve the differences.
Kosmos, holds an 18% interest in the Deepwater Tano (DT) Block, and on February 23, 2012, exercised a right to accept the terms and conditions of the proposed transfer of Sabre Oil and Gas Limited ("Sabre") 4.5% 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.
Kosmos, however, have to shrug off competition from the Petroleum, Oil and Gas Corporation of South Africa (SOC) Limited (PetroSA), which has a pending sale and purchase agreement with Sabre Oil and Gas Holdings related to the shares.
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 (WCTP and Deepwater Tano), 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 the 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-l well, just across the block in Tullow Oil's DT block also striking oil in sizeable quantities. The two fields were unitised 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. Tec h n i c a 1 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.
A 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.
Settlement Agreement.
In a previous Kosmos Energy and Ghana dispute, the parties entered into a settlement agreement in December 2010, just days to the former’s filing of notice with the US Securities and Exchange Commission (SEC) towards its initial public offer of shares on the New York Stock Exchange (NYSE), after over a year-long battle with the national oil company, GNPC and the Ministry of Energy. j.atokobbie@yahoo.com