General News of Saturday, 29 February 2020
I have read a response to my remarks about the Amendments recently made to Aker’s South Deepwater Tano (“SDWT”) and Deep Water Tano-Offshore Cape Three Points (DWT-OCP) Petroleum Agreements by the Ministry of Energy (“MoE”).
The statement is issued in name of the MoE but represents the agenda not of our hard-working, professional civil servants but of the political appointees superintending them. It is these politicians that must, and one day will, bear full responsibility for the Aker debacle and the many other scandals that have plagued the energy sector in the last few years. So even though my comments are formally directed to MoE they are intended really for the political leadership – the ruling NPP.
MoE’s response seeks to do two things.
Clumsily deflect attention away from a discussion of the Aker Amendments scandal with false and pitiful allegations about my supposed role, as GNPC CEO, in over-pricing Sankofa gas; and
Confuse the public about the substance and impact of the Aker Amendments and deceive the public into believing somehow that the Aker Amendments are good for Ghana.
I respond as follows.
Sankofa Gas Pricing
First, let me address the fetish that NPP spokespersons are making out of “take-or-pay” contracts. There is simply no way international oil companies or the banks that finance them (or indeed any prudent investor) will proceed with a multibillion-dollar investment without near-certainty about future revenue inflows. Take-or-pay is simply to ensure that financiers are paid whether product is sold or not.
Were there take or pay provisions in the Sankofa gas development agreements? Of course, there were. Ghana has a small, underdeveloped gas market and increasingly weak gas sector policymaking. The direct off-takers of gas (GNPC and Ghana Gas) are owned by the State and notoriously subject to “non-commercial” Government interference. The ultimate off-takers of gas (the power generating companies) are all very weak financially (and in some cases operationally). No one will build a 7 billion-dollar gas production system to serve this market without assurance that once the infrastructure is delivered the costs of building and maintaining the plant will be repaid – even if the Offtaker for whatever reason does not purchase the gas.
Second, let me clarify the position on gas-pricing. A focused team of highly experienced and capable professionals within the energy and finance sector (and not just Alex Mould), participated in the thorough negotiations to achieve the US$9.8/MMBtu ceiling price; to ensure a reasonable market Rate of Return (RoR) to the Contractor based on its estimates of development cost, pay-out time, and (multiple) risks of a significant deep-water development in a small and unproven market. GNPC was confident that it could lower development costs in several ways including by funding various work packages directly (GNPC has a lower cost of capital than Eni/Vitol) and rigorous project oversight through the Joint Management Committee to ensure efficient and timely execution. The Agreement therefore specifically provides that all savings from Eni/Vitol’s original cost projections would be used to reduce the gas price. Specifically, every 100 million dollars of project cost saved would translate to a $0.55/MMBtu savings in gas price. We succeeded in lowering the Sankofa development costs by approximately 691 million US Dollars. This entitled Ghana to a gas-price reduction of approximately US$3.8/MMBtu. This means a new price (and a new price floor) of less than $6/MMBtu. In other words, the cost of gas to thermal power generators should have dropped by about 40% relieving the deep distress of the power sector! This price saving could have been passed on to citizens in lower electricity tariffs or by investment in new power generation capacity.
Unfortunately, this 40% reduction in the Sankofa gas price through the prudent commercial structuring achieved by the GNPC team has NOT materialised. Why is this the case?
The primary reason for this is that the Ministry under its current leadership has simply dropped the ball! MoE has simply allowed Eni/Vitol to increase its development costs and spend the 691 million US Dollars saved, on new wells and other expenses that were not approved in the initial development plan. The NPP government has whittled away the savings made from $3.8/MMBtu to only $0.4/MMBtu! Of course, what should have happened was that the US$691million savings should first have been applied to reduce the gas price before allowing an increase in development cost.
Why would the Energy Ministry behave in this way? The corollary of take-or-pay conditions is that if the Contractor miscalculates the cost of development or mismanages the execution of the development project those additional costs are for the Contractors account and not for the account of the people of Ghana. Before these additional costs can be recognised the Contractor must prove that they could not have been avoided. The NPP government has no business playing Father Christmas to Contractors with our resources. It is precisely this tendency that has led to the Aker travesty. WHETHER THIS IS DUE TO ARROGANT IGNORANCE AND INCOMPETENCE, AN INFERIORITY COMPLEX IN THE FACE OF EUROPEANS, OR RECKLESS CORRUPTION REMAINS TO BE SEEN.
The second reason is of course that Government has failed without any reasonable justification to complete the pipelines required for evacuating Sankofa gas so it can reach the power industry.
Rationalising the Aker Amendments
The NPP government wants Ghanaians to believe that the transfer of billions and billions of dollars of national assets to Aker is good for us. Ministry of Energy’s statement offers several spurious arguments to back up this proposition.
First MoE claims that:
“The amendments to the Petroleum Agreements of Aker were to provide regulatory certainty and incentives to support the realisation of Aker’s Pecan Project and increase investment in the AGM Block respectively (my emphasis).”
Let us examine this statement.
As regards to providing “regulatory certainty” I note first that a government does not achieve “regulatory certainty” by amending a single petroleum agreement. It does so by amending the Regulations that have industry-wide application. THIS WAS PURE FAVOURITISM. However, it will lead to a stampede of IOCs looking for similar treatment (and perhaps that is what MoE wants).
Second, there was never any regulatory uncertainty regarding the Pecan development. Ghana’s approach to managing PA Contract Areas has not changed since 1984 and is indeed pretty standard throughout the international industry. GoG makes a large area available for exploration to a Contractor over a (typically) seven-year period broken into 3 sub-periods. To ensure that the Contractor deploys the resources that enable it to explore diligently and optimise the chance of discoveries the Contractor is required at agreed points to relinquish the parts of the Contract Area that it is not willing to commit resources on. It can then concentrate on the areas it thinks are most attractive. At the end of the 7 years, the Contractor is allowed to retain only the areas covering the geological structures in which they have made discoveries that they consider worth developing. Areas relinquished by Contractors go back into the “pot” to enable Government to market it to other oil companies. This ensures the most thorough exploration of our potential. Let us be clear:
Aker was aware of these rules before it decided to acquire the Hess stake in the DWT-OCP block.
Aker knew what stage of the Exploration Period Hess had reached. Aker knew Hess had made specific discoveries and appraised those it thought worth appraising. Aker knew Hess had begun preparation of development plans for the fields it considered worth developing.
Aker knew full well that the period for exploration of new prospects had ended.
Aker knew full well that to access additional acreage within the original contract area it would have to either participate in a bid round for those areas or at best seek a bilateral negotiation with MoE for them (possibly on different economic terms from the original Hess PA).
The rules were clear; the problem was simply that Aker sought special extra-legal treatment and MoE was willing to bend over backwards to please Aker.
Incentives for Aker.
When it talks about “incentives to support the realisation of Aker’s Pecan Project” Government is either unforgivably naïve or disgracefully dishonest (or both).
There is little chance that Aker would walk away from the DWT-OCP Block because the government refused to give it extraordinary exploration rights. If Aker did walk away it would simply lose its rights and would not be entitled to compensation. If Aker did walk away, Ghana’s industry would suffer minimal, if any, damage. Aker is not an Exxon or a Shell or a Total. It does not have any special oilfield development abilities that Ghana cannot do without. With proven resources and a development plan in place, Ghana could easily find another Contractor to come in and work with GNPC and Explorco on terms much more favourable to Ghana than those provided for in the original DWT-OCP Agreement. Any moderately seasoned negotiator would have called Aker’s bluff immediately. Indeed, Minister Boakye Agyarko did precisely that (before he was removed from office).
The claim that the Amendments were intended to achieve an ”… increase [in] investment in the AGM Block.” again is also false. If the intention was to increase investment, then the SDWT Amendment agreement would capture Aker’s enhanced work and expenditure commitments. No such commitments are given in the Amendment Agreements. Some of us are reliably informed Aker have promised the NPP government $750m loan and only God knows what they have promised individuals within the corridors of power. They have also promised all sorts of other investments plus a $15bn spend in the two blocks based on additional wells and new technologies. Aker may have made theses promises to senior Government officials and “advisors” but none of these are captured in the Amendment Agreement which is glaringly one-sided.
Ministry of Energy then goes on to claim:
These incentives have already yielded positive results for the country as AGM recently announced crude oil discoveries following an accelerated drilling campaign.
MoE is claiming (with no shame) that amendments to a Petroleum Agreement ratified on 22 December 2019 led to an oil discovery 6 months earlier in June 2019?! Even if MoE is referring to the Amendments it presented to Parliament in April last year the claim makes no sense. At the time that Aker started drilling in June, Parliament had not ratified any amendments. As I pointed out in my original article, Parliament made its ratification of the April 2019 Amendments conditional upon:
Restoration of GNPC’s additional interest entitlement (which the Amendment proposed to drop from 15% to 3%) to at least 10%; and
Resolution of the dispute between Med Songhai Developers Ltd (the original Ghanaian Project partner) over Aker’s attempts to push it out of the Project.
Parliament gave the Minister for Energy 6 months to report back on the fulfilment of these conditions. So as at June 2019, no amendments had been passed (and for the record, the Minister for Energy never reported back to Parliament as required). In any case, anybody who knows anything about the O&G industry knows that drilling programmes are not put together in 30 days. They are planned months and years ahead of execution. Aker had committed to the May-June drilling campaign long before the Minister took his first round of amendments to Parliament.
I should also point out that the 2 wells Aker drilled in June were not in any way “accelerated”. They were wells due in the Initial Exploration Period under the original PA. And since MoE is promising an accelerated drilling campaign it should tell the public when the next well is expected. Can MoE deny that Aker’s current programme does not include any new drilling before the third quarter of 2021? Is this the “acceleration”?
“Mr Mould claims that local content will be collapsed with the PA Amendments. What he fails to recognise is that it is the Minister who decides whether a PoD will be approved or not, and part of the PoD is the local content plan. As a matter of fact, Aker has established a new Company, Aker Ghana Investment Corporation (AGIC) to develop Ghanaian Tier 2 and Tier 3 suppliers. This is over and beyond the local content terms in the original Agreement”.
Let us examine this argument.
Power to Approve Development Plans
First, does the Minister’s power of approval of a Development Plan protect national local content aspirations? Let us look at what the Amendments say.
Clause 3.2 of the DWT-OCP Amendment Agreement amends Clause 8.16A of the PA to read:
Contractor shall have the right to amend, vary, or adjust the Development Plan within 12 months of the final investment decision by Contractor without the consent of the Minister, provided that such amendment, variation or adjustment shall not result in an increase in total capital expenditure in respect of the Pecan field. Contractor shall promptly notify the Minister in writing of such amendment, variation or adjustment.
In other words, Aker can rewrite the Development Plan (including the local content provisions) without reference to the Minister. It can (for example) reallocate costs and contracts away from local to Norwegian subcontractors as long as this does not increase overall costs. How then can MoE’s power to approve Development Plans be said to protect local content?
(Incidentally, this surrender of policymaking power by a minister is truly extraordinary. I cannot imagine that Aker would enjoy such treatment in Norway. I cannot believe that Aker would dare to suggest to the Ministry of Petroleum and Energy (“MPE”) that it should be entitled to unilaterally override the terms of a ministerial approval. What then is the point of the Minister approving a development plan? How could any minister propose such self-emasculation to Parliament? How can we the people entrust the protection of our national commercial interests to a minister who is so subservient to private companies ?)
To continue, let us look at Clause 5 of that Amendment Agreement which amends Section 20(3) – 20(7) of the DWT-OCP Petroleum Agreement. I will reproduce it in full. The Amendment specifically states that:
The procurement of goods, works, or services for petroleum operations shall be within the work programme and budgets approved by the JMC. The selection of suppliers and the award of contracts by Contractor under an approved work programme and budget shall not be subject to approval by the JMC or governmental authority.
Contractor shall establish a transparent procurement process whereby the JMC, the Petroleum Commission and the Minister are informed about the selection of suppliers and award contractors.
Contractor shall be entitled to employ a split-contract model. Under the split-contract model
if scope of work consists of goods, works or services originating Ghana as determine by Contractor (in-country scope) it will be awarded to a locally incorporated JV company licensed by the Petroleum Commission that has the technical capability to perform the scope of work; and
if scope of work consists of goods, works or services not originating in Ghana, as determined by Contractor, (out-of-country scope) it will be awarded to a foreign legal entity that has the technical capability to perform the scope of work.
The split-contract model shall apply to inter alia goods, works and services supplied for the FPSO, SPS, SURF, Drilling Rigs and Well Services.
Pursuant to Article 26.2 the obligation on a contractor or subcontractor to make contributions to the local content fund established under Act 919, does not apply to Contractor, its Subcontractors, and suppliers for goods, works or services, to be used solely and exclusively in the conduct of Petroleum Operations.
Subcontractors shall have the same rights as Contractor specified in Article 26.2 to select and award contracts and may use out-of-country scope (with foreign legal entities) and shall keep the Petroleum Commission and the Minister informed about the selection of suppliers and award of contracts.
Could Aker’s control over procurement be any more unfettered? Once a budget is approved the decision as to who gets the contract is entirely within Aker’s discretion. All they have to do is designate a particular service “out-of-country scope” and it is gone. MoE can do nothing. It is important to understand that on average field development costs in the wider Tano Basin (Jubilee, TEN, Gye Nyame-Sankofa) have been between 5 billion US Dollars and 7 billion US Dollars. It is important also to understand that unlike Tullow, Kosmos, Eni, Hess etc Aker is principally a service company. It has a fleet of subsidiaries that provide the services that most IOC’s have to contract out on an arms-length basis. It is no surprise that Aker seeks unfettered control over the award of contracts. The surprise is that the NPP Government is happy to go along with this approach.
Aker Ghana Investment Company
What of the “Aker Ghana Investment Corporation” and its development of “Tier 1 and Tier 2 suppliers”? My answer is that nobody will love Ghana more than her citizens. MoE’s reliance on AGIC reflects either naivety or betrayal. Where are Aker’s enhanced local content obligations? Where is the contractual framework for monitoring performance or sanctioning non-performance? Where is all this spelt out? When did “Tier 1 and Tier 2” typology become part of the language of our local content policy? There is nothing in the amended PA that addresses these issues. Again, whereas Aker has tied Ghana up into knots to protect its interests our Government is happy to rely on unenforceable promises and goodwill?
The point should be made (and this probably deserves an article on its own) that nothing in the non-binding sweet promises of Aker or its AGIC compares with the kind of indigenisation and local content boom that Ghana could have achieved through GNPC’s accelerated development strategy which had Explorco and the SDWT PA at its centre. In Explorco, we had a national entity holding a 24% stake in the PA and a Contractor committed to ceding operatorship and thus control of procurement within 7 years. Explorco necessarily would have invested in the growth of a fleet of Ghanaian service companies with which it would have begun to step out into the West African, continental and global market following a successful implementation of the SDWT project. Now MoE has taken Explorco’s 24% interest away from it and handed this over to Aker in return for an additional 5% carried interest for GNPC. IT IS TRULY SAD TO THINK THAT THE ENERGY MINISTRY AND FOR THAT MATTER PRESIDENT AKUFO-ADDO’S GOVERNMENT GENUINELY HAS SO LITTLE UNDERSTANDING OF THIS INDUSTRY AND SO LITTLE STRATEGIC CAPACITY THAT IT BELIEVES A 5% CARRIED INTEREST IS MORE VALUABLE THAN A 24% COMMERCIAL INTEREST THAT CARRIES OPERATING RIGHTS (AND COMES UP WITH SOME VOODOO-ECONOMICS “BENEFIT-COST RATIO” METRIC TO BAMBOOZLE THE PUBLIC. PERHAPS SOMETHING MORE SINISTER HAS HAPPENED. ONE DAY WE WILL KNOW.
I will not deal here with the alleged “factual errors” cited by MoE. This piece is long enough as it is. Also, many of the claims about “factual errors” are addressed in the clauses of the Amendment Agreement that I have quoted.
There is however one issue that I would like to draw public attention to. I am reliably informed that on Thursday 19 December 2019, the Minister presented the Aker amendment proposals to a joint sitting of the Parliamentary Committee on Finance and the Parliamentary Committee on Mines & Energy. My information is that based on the Minister’s complete inability to justify these radical and patently unpatriotic measures, the meeting roundly rejected the proposals on a bipartisan basis and directed the Minister to go and rethink the entire project. The Committees did not even bother to schedule another sitting to consider the proposed Amendments. Two days later, on Saturday 21 December, without a further meeting of the two committees, a “majority report” was submitted to the full house recommending ratification of the Amendments. Around midnight on Sunday 22 December, Parliament acting on this “majority report” ratified the amendments. It would be interesting to understand what miracle MoE and Aker worked in that 36-hour period to move Parliament (or rather the Majority) from outright rejection to positive endorsement.
The Aker amendments are simply a multibillion-dollar betrayal of the national interest. No amount of spinning or personal attacks can mask that fact. The more MoE or other players try to defend it the deeper the hole they dig for themselves.
Alex Kofi Mensah Mould
Accra, 29th February 2020.
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