- CSOs have other quarrels with GNPC, such as the expenses it claims the Aker companies have made so far, which contradict filings the companies have made in their home countries, and which have grave revenue implications for Ghana down the line. There is a fear that GNPC’s posture in that regard could lose the country $600 million
He says we are making too much of a fuss about a derailed train that is about to crash. The government only has a mandate from Parliament to raise “up to $1.45 billion” to on-lend to GNPC for investment in the two oilfields steeped in controversy, Pecan and Nyankom, but it hasn’t spent the money yet, so what is our problem?
First, Mr Otchere-Darko ignores the genesis of this whole affair to make his position feel obvious and reasonable. Civil society organisations (CSOs) have won a hard fight globally to be at the table when natural resource deals are being discussed. They are not supposed to be on the sidelines watching the deals get cooked and only start agitating when the mess has been served and the public is being forced to eat.
The Government of Ghana decided to subscribe to something called the Extractive Industries Transparency Initiative, which enjoins it to sit with business on one side and civil society on the other side when crafting natural resource transactions and policies. No one forced this norm down Ghana’s throat. It recognised from the natural resource-fuelled conflicts all over the world that prior and extensive consultations are critical in avoiding the dangerous waters in which some societies found themselves when they ignored the need to get citizen groups actively involved in shaping natural resource policies and transactions.
Collision course over collusion
Barely a year after a bruising tussle with CSOs over the Agyapa deal, the government jumps into a similar transaction, and gives Parliament barely two hours to review the merits (again, reminiscent of Agyapa). Parliament, in turn, solicits no input from any segment of society, yielding an outcome complete with the same features of valuation-confusion, passive beneficiaries and historical amnesia, and yet one of its leading strategists is feigning surprise that activists are up in arms? This beggars belief.
The second piece of context that Mr Otchere-Darko ignores is the unique history of these two oil assets. The “how we got here” narrative is worsened by the sheer fact that CSOs have long been on a collision path with GNPC and Aker about what we believe are serious collusive practices to rip Ghana off.
In June 2019 and December 2019, the Government of Ghana went to Parliament to make shocking changes to agreements governing our relationship with Aker’s key actors. The combined effect of these changes led to Ghana sacrificing shares it owned in the two oil assets and drastically reducing the say it has in how they are managed.
These actions by the government were at the behest of GNPC. When the same GNPC comes back to advise the country of a need to spend hundreds of millions of dollars buying back the same shares and management involvement that Ghana barely a year and half ago relinquished, we have a right to be outraged. Especially when the country is losing hundreds of millions of dollars due to the earlier climbdowns. Shockingly, Otchere-Darko doesn’t even recognise this aspect of the CSOs’ angst.
Third, the CSOs are not aligned with the substance of GNPC’s fundamental posture as he portrays. The majority of us do not believe that the government should take a majority in Nyankom yet. This is a highly risky asset because it has not been de-risked through sufficient exploratory and confirmatory drilling. Only two wells have been sunk there, but one was a disappointment.
The engineering required to get oil out of Nyankom is highly complex, suggesting likely recovery issues down the line. On this score, there is a fundamental policy disagreement with GNPC. Rather than an outright majority, we favour an options-based contracting approach with very little financial commitment upfront. Especially when the current owner has an obligation to keep developing the field to de-risk it or relinquish same back to Ghana.
Even if GNPC was to buy more of the field today, as it wants to do, oil production is not expected until 2026. If the field is indeed as lucrative as some suggest, then the current majority owners will de-risk it further. If it is as risky as we believe it is, then it will be relinquished to Ghana anyway and the country won’t need to pay ridiculous amounts of money just to incur the high risk of developing the asset on top.
Another reason why the government doesn’t have to do the deal in a rush as far as Nyankom is concerned is the fact of the availability of other compelling options. GNPC has tried to paint a picture in which only Nyankom and Pecan can be developed as standalone operations. They have also consistently pushed this view where only Aker can offer the so-called “apprenticeship” that GNPC apparently solely needs. Both arguments are tenuous.
There are “free” fields lying around in our waters that with a little ingenuity can be developed as “marginal fields”. The rewards for these fields may not be as great as the Jubilees, TENs and Sankofas (the three main producing assets in Ghana today), but if GNPC wants to “learn by doing”, it can easily start with those. Dzata, relinquished by Vanco/Lukoil quite a while ago, is one such example. Other prospects that won’t be free but will certainly be cheaper are Wawa and Akasa, owned by Kosmos, both of which have been “stranded” now for almost a decade. Some of these fields, even the marginal ones, are close to production infrastructure, allowing for infrastructure-sharing to overcome the “standalone operation” worries of the GNPC.
The juiciest of all these prospects is Erin/Camac’s block, where as many as 14 wells have already been drilled, several of them tested for production, and evidence of contingent resources established to the tune of 500 million barrels of oil. This is a field where discoveries have been made since the 1970s. Compare its pedigree with Nyankom’s one well drilled and volume estimates that may well be about only 10% to 20% of Erin’s (Nyankom’s 127 million barrels of oil estimate being bandied around after just one well sunk is viewed with suspicion in the industry). Best of all, Erin is reportedly bankrupt and may relinquish this field with some prompting. If GNPC wants to “learn by doing”, this is very likely to be a cheaper play in terms of the initial rights.
About apprenticeship, it is evident that GNPC is not being sincere. It has had a decade to turn its joint venture with Technip, one of the world’s most sophisticated oilfield engineering services companies, into a robust technology capacity play, and has chosen to underinvest. We understand that it is even yet to pay for its rights to take up 51% of its stake in the joint venture. Its Gosco subsidiary has had the status of an operator in a block for half a decade now and refused to invest to develop the technical partnerships needed to develop the block. From all the facts available, GNPC is clearly not a company actively looking for apprenticeship.
Apprenticeship, at any rate, shouldn’t be used as a cover to blow hundreds of millions of dollars on assets when the intended “master” – Aker – is itself reliant on these same oilfield engineering contractors that GNPC has ample access to. For example, in order to find out how much oil is in the fields under discussion, Aker recently gave contracts to Haliburton to do some probing. Ghana is courting Haliburton to set up an oil hub in Ghana. Why precisely does Ghana need Aker as an intermediary in building the same relationships?
If Ghana simply needs technical apprenticeship, it is just a matter of refocusing the resources GNPC has been spending to increase its clout in the Ghanaian corporate sector, such as giving loans to commercial banks, buying game reserve lodges, and wasting cash on distressed gold mines. Whilst such activities clearly increase the leverage of GNPC’s top brass in Ghana’s clientelist political economy, they do nothing for building technical operatorship capabilities. Not surprising, then, that after inserting a clause in the Nyankom block’s 2014 agreement for GNPC to become an operator in seven years, the organisation instead chose to reduce both its stake and say in the block.
The above discussion was about Nyankom. Now to Pecan, where the business case for the government increasing its stake is admittedly more robust. We, nevertheless, still have fundamental disagreements with the government, and the GNPC advice it is relying on, about strategy. We insist that the valuation be guided by factors of analysis currently missing. One such factor is our leverage with Aker.
Aker managed to arm-twist Ghana to rewrite the Pecan agreement on the basis that Ghana having less stake and less say in how the field is developed is how the fields will be made more attractive for investment. Against better advice from the CSOs, GNPC goaded the government into conceding. Now, after struggling to raise the money to invest despite doing everything, including cutting back on developing the three commercial finds to focus on just one et cetera, Aker has now returned seeking to front-load some gains, cut its risk massively and leave Ghana holding the can. What should a patriotic Ghanaian negotiator do in such circumstances if there were no undertones of collusion? If GNPC wasn’t motivated by the use of “operatorship” and “energy transition” talk to just get its hand on loads of money to spend on increasing its commercial clout?
Let us remember that it was this same GNPC that took $47 million of government money in 2015 specifically to buy 10% of this same Pecan field and then spent the money on something else. Today it wants to buy 27% more for nearly a billion dollars, claiming that the stake is actually worth more than $1.5 billion.
Ghana’s best interests
CSOs cannot be chill about this as Otchere-Darko advises because we have history to guide our thinking. GNPC has shown itself to be a two-facing, forked-tongue operator. We cannot assume that it is operating in Ghana’s best interests. It is up to GNPC to convince the public despite their historical misbehavior. Through their advocacy, CSOs want GNPC to keep looking over their shoulder as they go about this transaction.
Particularly also when GNPC has already contrived a valuation of $1.583 billion for Pecan and thus set a high bar for the negotiations. The collusive nature of this whole enterprise was not even hidden: GNPC teamed up with Aker to hire Lambert Advisory, gave the London-based consultants a set of assumptions together with selective data, and told them to come up with a valuation in two weeks. In these circumstances, CSOs must aggressively push their own narrative based on the data available to them. They must question the assumptions driving the process as a whole, and seek to influence the final shape of the transaction.
It is completely befuddling that Mr Otchere-Darko, who spent a decade and half contending with state institutions like the Electoral Commission about the integrity of their data and the propriety of their actions, now thinks that the best course of action open to CSOs is to quietly wait on the platform as the derailed train hurtles down the track to wreckage ahead. Is that how CSOs, when Otchere-Darko was in the fold, tackled STX?
Given what CSOs know about how the $1.583 billion valuation for Pecan and $804 million valuation for Nyankom came about, why should they all of a sudden be inclined to believe that Bank of America Securities (an entity affiliated to some of the some advisors that worked on Agyapa) will help get Ghana a fair deal, when its terms of reference are as opaque as all the previous advisory enterprises that got us here in the first place? Would a dedicated CSO movement not seek to influence the process before some other rabbit is suddenly pulled out of the hat?
The position of the CSOs on Pecan’s fair valuation is straightforward. The engineering dynamics so far favour a break-even cost of producing oil on the field of $35. This is what the extensive record of studies from Hess to Aker shows. The sudden, unproven claim that Aker has found some innovative concept that can do the production at $30 break-even is dubious.
Further, we have the guidance of the former minister of energy that recovery rates in Ghana’s waters are in the region of 25% (this, by the way, when he was highly motivated to convince Ghanaians that the Aker blocks are not all that valuable, hence the need to give away our rights in them to appease Aker to raise the investment needed for their development).
Since Aker bought the Pecan block in 2018, it has drilled only two truly successful wells and the best net pay analysis we have seen suggests that resources added were as low as five million barrels and capped at 15 million barrels. In essence, the commerciality of the field is unchanged from what Hess left behind (recall that Hess sold its rights for $100 million). Since the time when Aker thought that the outstanding work and risk warranted paying only $100 million for the right to bear the additional risk of commercialising the asset, nothing much has happened to suddenly transform those same rights into billions of dollars. Whatever contingent resources have been added to the marketing deck are flimsy at best.
We are therefore inclined to use the 246 million barrels of proven/probable (2P) volumes estimate and the $50 long-term price of oil favoured by analysts such as Wood Mackenzie, who believe in any “energy-transition” effects impacting demand as much as supply (unlike Lambert). In that posture, we are fortified by corroborating forecasts by the likes of BP and the World Bank. We will accept the 10% discount rate used by Lambert (though we are more bearish than they are).
When the numbers are reworked this way and the cash flow from Ghana’s planned stake of 37% discounted to the present, the fair value of the field ranges between $202 million and $400 million, depending on how one tweaks the variables. CSOs therefore have a fundamentally different perspective from GNPC, the government’s primary advisor on this matter. CSOs have other quarrels with GNPC, such as the expenses it claims the Aker companies have made so far, which contradict filings the companies have made in their home countries, and which have grave revenue implications for Ghana down the line. There is a fear that GNPC’s posture in that regard could lose the country $600 million. One cannot, therefore, in good conscience, tell CSOs to just relax.
By making our case forcefully for the assumptions driving the deal, and its secondary effects, to be made transparent and interrogated aggressively, CSOs are setting the stage for a showdown over any strange and fantabulous buy price recommendations that Bank of America Securities may come up with. In essence, this time, CSOs are working to prevent any situation that might make it easier for GNPC to use another Lambert Advisory-type opinion to shore up a weak, and quite frankly sham, negotiation strategy.
While CSOs are absolutely open to serious engagement with GNPC and other public sector actors working on this situation, the starting premise is to influence the outcomes in the light of public interest. Hopefully Mr Otchere-Darko can facilitate that engagement without seeking first to preset the terms of engagement.
CSOs thank Mr Otchere-Darko for his generous offer of strategy lessons on how they should engage in this quest to defend the public interest of Ghana. For now though, we are passing.
Bright Simons is a vice-president of the leading think tank IMANI Africa