By Bright B. Simons & Franklin Cudjoe

Since our last comment on Ghana's nascent oil industry, which raised questions about the production timelines and economic projections of the oil production companies, we have been inundated with feedback identifying aspects of the issue we had omitted in our analysis.

It is not our intent to respond to these various criticisms - positive and negative - even though some of them are very pertinent, in particular those concerning our neglect of Kosmos Energy in our last evaluation of the situation. However, the response has indicated for us the extent of interest amongst Ghanaians of all walks of life, and so, within our public education mandate, we will in this overview attempt to give as much information as we can about the players, trends and critical developments within the petroleum industry (naturally, this will raise issues of length and suggest serialisation, a matter we are happy to leave to the editors' judgment). Such an endeavour is perhaps even more important given the suggestion in the President's State of the Nation's Address that the Administration view proceeds from oil development as integral to its social relief policies.

Because the government has hinted at pending reforms of the Ghana National Petroleum Corporation, we will await further details on that front before addressing the characteristics of this important player.

1. KEY DEVELOPMENTS

Much of Ghana's emerging oil industry is rooted in the discovery and early development successes of the jubilee field located in an area bestraddling the West Cape Three Points and Deepwater Tano contract blocs. The seabasin ranges from a depth 1000m to 1700m, and the location of commercial petroleum deposits extend a further 1500m to 3000m underneath the seabed. Cote D'ivoire is about 70km away from the field's western extremis, and Takoradi is about 130km to the East.

The two blocs straddling the field are licensed, in varying percentages, to the following exploration companies.

Concessions

West Cape Three Points Anadarko - 30.875% Kosmos Energy -30.875% Tullow - 22.896% Sabre Oil & Gas - 1.854% E.O. Group (only Ghanaian private interest) - 3.5 percent Ghana National Petroleum Corporation - 10%

Deepwater Tano Anadarko - 18% Tullow - 49.95% Kosmos Energy - 18 percent% Sabre Oil & Gas - 4.05% Ghana National Petroleum Corporation - 10%

The development of the Jubilee field is currently in the first phase, involving the drilling of nine production wells and an additional eight support wells (for water and gas injection primarily). Output from the production wells will be carted by means of a sub-ocean infrastructure connected to a floating production, storage and offloading vessel (FPSO) to allow for commercial processing and subsequent discharging of the produced petroleum into sea tankers. The current projected working estimate is 120,000 barrels of crude per day, about 4% of Nigeria's average production. The conversion of a single-hulled, second-hand tanker into an FPSO by MODEC of Tokyo is underway, with John Wood PLC of the UK reportedly responsible for the topside design.

Constraints on the availability of equipment means that the development of the field has so far been sub-optimal, and while the main operators, Tullow and Kosmos, continue to assure observers that their announced timelines are still credible, we and many others have maintained significant doubts.

2. KEY PLAYERS

Kosmos

Kosmos Energy in the Fall of last year made a request to the International Finance Corporation for up to $100 million to help it defray part of the $900 million development costs of the Jubilee field that is its burden in the overall outlay of $3.4 billion being shared among the 5 active partners in the project. While the money will definitely come in handy now that it has been approved (Tullow also received about $115 million), the main strategy appears to be the use of quality debt to boost the credit standing of the Texas-based oil exploration company in order to increase its prospects of securing multiple times that amount from the capital and debt markets.

Kosmos has denied that its concessions off Ghana's coasts are for sale, which cleverly deflects attention away from the more important question of whether it is considering private placements as a means of relieving some of its current financial pressures. There is no doubt that the company has entertained and according to some reports even solicited the interest of a number of bigger players, ranging from Italy's ENI, Chevron and China's three oil titans. In fact the $3 billion valuation placed on the company's concessions first emerged in the Chinese business broadsheets. Well-placed sources suggest that divesting some of its stakes in the concessions pre-date its current money-raising difficulties (Difficulties that are belied by the Texas-based company's relocation to a new 50,000 square feet of office space in Dallas a few months ago), and that mid-range operators like Malaysia's PetroNas were early suitors.

Kosmos Energy of Texas operates its oil concessions in the country through Kosmos Ghana which it wholly owns through a tax shelter in the Cayman Islands, in standard international business practice. The parent company was formed in 2003 by Jim Musselman, Brian Maxted, Paul Dailly, and two others with $300 million in cash and the human capital of about 20 technical experts. After hitting oil in Ghana, its backers, Warburg Pincus and Blackstone Capital Partners, an affiliate of the Blackstone Group, injected a further $500 million into the company. Warburg manages more than $35 billion of assets around the world, while The Blackstone Group is responsible for assets of about $119 billion.

Kosmos has concessions in other countries here in West Africa and also above the Sahara. Its activities in Western Sahara has however come under strong criticisms for alleged complicity in human rights abuses. Kosmos' social and environmental mitigation strategies for the jubilee development project were also faulted by certain social and environmental pressure groups, though the evidence was considered thin by most independent observers.

Nevertheless, the company is particularly proud of its growing track record of hitting oil in spots long declared commercially nonviable by traditional oil exploration companies. Indeed Kosmos' current executives led Triton Energy Ltd's exploration and production success, prior to its sale to Hess Corporation in 2001 for about 3x the original investment. A big chunk of their piece of the pie went into the start-up capital of Kosmos Energy.

Musselman and co. also like to point to their success leading Triton Energy's exploration and production efforts off the Equatorial Guinean shore based in the latter stage on the implementation of the same kind of FPSO currently planned for Ghana (note though that the Equatorial Guinea finds are in shallower waters).

Tullow Tullow has already shed plans for early oil production in uganda, and a Canadian company, Strategic Oil & Gas, has reneged on a deal to buy into the Anglo-Irish exploration and production (E&P) company's Kiarsseny Marin concession off the coast of Gabon. It also had to, somewhat sheepishly, abandon its attempts to raise much needed funds by selling off its stake in the Mboundi concession to the Korean National Oil Company after sustained pressure from the Congolese government. The Anglo-Irish E&P company has nevertheless been successful in executing a private placement of nearly 10% of its shares for the sterling equivalent of $600 million. The money has brought a little much needed relief to the company, but it has also attracted loud howls of protests from investor rights groups who have decried Tullow's use of the so-called "cashbox mechanism", a neat trick that allows companies to legally contravene the requirement of giving existing investors pre-emption rights in any sale of equity greater than 5% share capital. Tullow is definitely not out of the woods yet, notwithstanding its recent $115 million loan acquisition from the IFC. Its initial plans to produce 40,000 barrels of oil from Uganda's biggest field in the Lake Albert basin has been complicated by a government-backed strategy of refining nearly all that output within Uganda to fire thermal plants and produce some diesel for domestic consumption. Tullow is trying very hard to convince the government to focus on exploration and therefore on the expansion of reserves. [Our earlier comment focussed nearly exclusively on Tullow. Readers may refer to it accordingly: www.africanliberty.org/node/576]

Anadarko Petroleum

Andarko which has been ecstatic about the results of the Hyedua-2 appraisal in recent weeks is in comparison with the other foreign partners the least vocal about the general prospects of Jubilee, yet with its more than 2.4 billion barrels of proven reserves, is no bit-player. In fact, valued at close to $20 billion, it is the heavyweight amongst the partners.

It has made suggestions however that it expects the Tweneboa, Teak and Onyina prospects to demonstrate similar fertility to Jubilee's.

A cynic may argue that Anadarko's relative restraint may actually be merely proper. It has received some rather savage lashings by brokerage analysts over the course of the past few weeks, despite beating earnings expectations in recent quarterly results. Annual average earning growth of 28% over most of the past decade notwithstanding, a seeming weakening in revenues has aroused concern. In its last quarterly results for 2008, the company's discretionary cash holdings plummeted by around 64%, leaving a gaping capital expenditure deficit. Among the exploration companies of concern in this note, only Anadarko has been bold to commit to significant cuts in capital expenditure cuts this year, though its CEO, Jim Hackett, wont give any concrete figures. Some of its close compatriots are slashing expenditure by more than a quarter, compared to 2008.

3. KEY TRENDS

In view of Africa's control of 8% of world oil reserves (a somewhat smaller share in population percentage terms), a projected $200 billion is expected to flow into continental government kitties over the course of the next decade. This has prompted some experts to argue that oil will generate the greatest cash inflow into the continent ever recorded, in quantities more than 10 times the total amount of annual multilateral aid.

A cynic may point out that aggregate capital flight out of Africa alone is roughly $300 billion, and that over the past five decades the continent has received nearly $700 billion in so-called "development aid" seemingly to little economic effect. But that will be straying from the point, which is that oil money will be significant in the years ahead.

However, we have argued, in our earlier note for instance [www.africanliberty.org/node/576], that in the short to medium term, even for the largest producers, not to talk about upstarts like Ghana, oil income will not be determinative in the economic relief strategies of various African governments, including Ghana's, however much policymakers wished matters were different. In the next few paragraphs we will add a few more points.

Production Estimates & Timelines

It is not for nothing that the US Securities & Exchange Commission (SEC) bar public oil and gas exploration companies from using the same hyper-optimistic, forward-looking, language that they employ in their marketing brochures and press releases in their form 10-K and other regulatory disclosures. Indeed American securities law prevents this slick way of addressing commercial risk. Only actual commercial production or comprehensive appraisal programs can suffice to provide determinative estimates of likely output volumes. It is important, to repeat our earlier calls, that Government of Ghana be very conservative when factoring oil income into its multi-year development strategies.

Credit Crunch

Kosmos' difficulties nowadays are a far cry from 2003 when as many as 8 private equity firms lined up to offer the Texan company cash for its exploration efforts. One of its founders once boasted: "over the long term, we are confident that there is an abundance of private equity in the marketplace to ensure Kosmos' future." Though to their credit we must also mention that they've always also said they wont rule out the stock markets (IPO) as a means of raising capital, despite never having outlined a definite strategy of how they might approach this. One could read this to mean that the company has always known about private equity bosses being capable of irritating fickleness, and therefore of neglect of their pet investments.

Be all that as it may, the fact of the matter is that exploration companies like Kosmos are in an inherently speculative industry, so banks and traditional financing companies are usually loath to advance unsecured funding, while private equity firms tend to behave like Venture Capitalists in their dealings with the likes of Kosmos, providing stage by stage capital rather than full-bodied financing - this can easily throw well-laid exploration timetables off-chart.

Kosmos, Tullow and Anadarko are thus far from the only companies to experience the harsh effects of the credit crunch.

Consider that In 2008 capital expenditures in the oil and gas E&P sector soared 28%, and contrast it with the current situation of widespread cuts - averaging 30% according to some reports - across the industry. Barclays Capital is on record as predicting a further decline of 12% this year (to $400 billion), in a sharp reversal of nearly a decade of consecutive rises.

In the same report, it is said that the sharpest drop will be experienced in the United States - the home of Kosmos and Anadarko - where 26% will be shaved off expenditures, bringing the figure for 2009 to $79 billion, from the $109 billion recorded in 2008.

Already some E&P companies are folding up altogether. It came as little surprise when Oilexco, a North Sea player that had gone on a license buying spree a few weeks ago, recently announced that it had gone bankrupt. Ernst & Young seemed obliged to deepen the pain. In their response they predicted such bankruptcies becoming a trend for smaller independents. Though in their magnanimity, they also offered the consolation of takeovers and mergers as a way out for the industry.

Equipment Market

In the tight equipment market, which shows no sign of loosening despite falling oil prices and presumably a lowering of offshore drilling activity, leasors are seeing double-digit growths in dayrate prices, with some midwater floaters fetching an astounding $500,000 a day. One reason could be expectations of renewed offshore activities in the Americas as political interests from Brazil to the US lobby governments and the private sector to step up production. Indeed a 40% compound increase in offshore drilling costs is expected over the period between now and 2012. Exploration companies are forced under these circumstances to commit to multiyear contracts somewhat like the housng rental markets of Accra. Such lock-ins only exarcebate the situation. Worse of all, manufacturers just cant seem to make the wretched machines in time.

And that is not very good for companies like Kosmos and Tullow who are gearing up for aggresive drilling across the Gulf of Guinea coast and farther afield. Kosmos once said that it expected to have as many as four rigs under contract. But the tightness in the market means the company is having to share rigs. It recently announced that it will be sharing one such rig leased from Atwood Oceanics Pacific Ltd with Noble Energy. That rig alone will cost the Texan company in the region of $400 million.

There is ample evidence that stubbornly high equipment rates wont come down fast enough, to the chagrin of exploration players.

Oil Prices . As oil prices fail to lift, nearly all Brokerage Analysts are reevaluating earlier rosy forecasts for exploration and production companies. Most of these analysts have based their models on $100+ market prices. With no expectations of a major security or weather -related supply disruption in the near to medium term (though such phenomena can hardly be predicted with any real degree of accuracy, analysts' perceptions alone can be determinative), current low prices are likely to persist.

Merill Lynch and Moody's expect prices to average $50 in 2009, but Goldman Sachs is sticking out its neck for a $30 average. We concur more with the latter's estimate than with the former's.

One only needs look at the USA which consumes a 1/4 of the world's oil. It continues to report increasing inventories, a situation that is replicated, to somewhat lesser degree, across the OECD, implying a supply glut.

It is true that Britain's respected IEA recently put OPEC's production target for 2009 as falling short of demand by 1 million barrels, therefore suggesting the possibility of a medium-term alleviation of price tightness, however, as even the most cursory observer will tell you, OPEC members chronically cheat on their quotas, and growing hedge reserves and increased production storage could augment spare capacity and interfere with the impact of even more aggresive cuts by the cartel.

If the supply crunch predicted by the IEA and others materialises in late 2010, then of course most of the constraints being discussed here will loosen up, but that offers no favorable outlook for the production timetable as it presently stands.

Nor is the IEA report at any rate the last word on the matter. For while there's a lot of talk about oil supply peaking, which is becoming part of the US Democratic Party's mantra of energy independence, the situation in actual fact is that an upsurge in Gulf of Mexico production means the USA may actually witness a boost in domestic production even before the vexatious issue of Alaskan fields receives any broad consensus.

To compound matters, the backlash against complex derivatives may have another negative impact on oil prices, as it increases pressures on American regulators to restrict trading and ownership of some energy funds and futures.

Simply put: talk about an imminent supply crunch is exaggerated, and oil prices may not go up any time soon.

4. KEY THREATS

The fact that all the companies now operating offshore in Ghana are independents is a bit worrying in a certain regard. They take a hit when oil prices decline but lacking downstream operations such as refining and marketing they dont enjoy the improvement in margins in those areas resulting from lower spot prices. It would be difficult for government to devise a deliberate strategy to encourage broad-spectrum playes into the country's oil sector as this will be determined by market conditions arising from the pace of commercial production, but it will be important for policymakers to keep their eyes on the ball. This "threat" is by the far the most benign of the industry's strategic worries though.

Already there has been border skirmishes between Uganda and DR Congo over the Lake Albert basin reserves, in which according to the Congolese 8 of their soldiers were murdered. Tullow, one of the main exploration companies in the area, was drawn right into the middle of the conflict. The funny thing is that Lake Albert is very much still in the exploration phase of development. In the coming years oil prospects across the Gulf of Guinea is likely to become highly intertwined advising close attention from our security strategists.

A milder form of the above challenge is that of inter-party risks among the various oil exploration companies. The credit crunch is likely to affect the various companies sharing the country's offshore concessions in relatively different ways leading to the possibility of differences arising over operational tactics and even strategy. Protracted legal tussles and chronic arbitration could in those circumstances become very real threats.

We will elaborate more on these threats as we offer our recommendations.

5. KEY RECOMMENDATIONS

* We urge the government to consider developing a structure for the emergence of a petroleum-related, human resource agenda for the nation. It appears highly unlikely that more than 100 Ghanaians will benefit directly from the emergent industry's high-skill job portfolio ((unless by "employment opportunities" the IFC in its recent comment meant something other than "employment positions"). A concerted effort needs to be made to boost prospects in the indirect employment area.

* We consider the use of the Norweigian model in Government of Ghana's strategy for the sector highly inappropriate and almost misguided. Norway is the world's third largest exporter of gas. It has 80,000 people employed in its oil industry. It produces nearly as much oil as Nigeria. It's industry is way larger than Ghana's and its public policy is consequently geared to a high production context. The financial tools and instruments available to such a country cannot be very relevant to a country that will be producing about 100,000 barrels a day for the first 2 or 3 years. Until Ghana's production is closer to around 500,000 barrels, the country will be receiving too little from petroleum (we estimate less than $100 million per annum in the initial years as public take) to be able to command the policy resources of the Norweigians. The argument might well be made that we could and should track the historical development of the Norweigian industry, but this too is problematic, since it will involve ignoring much of the global context during said historical evolution. We may be better off learning from the modest successes and mistakes of countries closer to our geopolitical and petro-economic context, such as Cote D'ivoire, Cameroon and Congo-Brazzaville. In 2018 thereabouts, our industry will be in a position to benefit considerably from engaging Norweigian precedents. Till then, save for our academic institutions which should be free to explore developments across the world, including in Norway, the national policy development machinery should focus scarce management time and policy resources on examining our petro-economic neighbourhood.

* We urge government to consider the creation of an energy desk within the national security apparatus to monitor three trends: - Nautical border disputes with Cote D'ivoire and Togo. The Oranto license in the latter and Afren's in the former should be observed closely for trends. - Intra-party disputes amongst the oil exploration companies, seeing as the current situation is one of multi-owner blocs and inter-bloc fields. - Improvement of the national naval surveillance capacity to prevent politically inspired sabotage.

* The Chief Justice should, with support from the Energy and Justice Ministries, institute a special oil and gas arbitration studies program for selected senior judges to equip them to deal with any increase in oil and gas - related dispute and litigation in a timely and competent manner.

* Government should be mindful of the fact that crude oil and natural gas require different development strategies, which should be reflected in policy design and regulatory structure.

It is the intention of our organisation to explore stakeholder opinions and perspectives on these various matters through the convening, in the near future, of a workshop on above-mentioned themes.

Bright B. Simons and Franklin Cudjoe are affiliated with IMANI: Center for Policy & Education. IMANI was this year ranked as the 6th most influential think tank in Africa by Foreign Policy Magazine.