Kosmos’ $4 billion sale of a stake in an oilfield in Ghana to Exxon has hit a political roadblock, indicating that stakeholder (not just drilling) skills are required to profit from West African oil.
This is the fifth article in our ‘License to Operate Flashpoint’ series analysing socio-political risks around resource projects in the news.
Why is this project interesting?
- West Africa is abuzz with oil excitement. Offshore discoveries from Sierra Leone to Ghana suggest a major new oil frontier is opening up, with Ghana’s Jubilee fields – estimated at 2bn barrels – among the largest.
- Dallas-based Kosmos Energy, which holds 23.5% of Jubilee, hit headlines last year when it announced a $4bn sale of its stake to ExxonMobil – representing a huge return on its original investment, and one of Exxon’s biggest acquisitions in a decade.
- Shortly afterwards, however, Ghana’s government turned against the deal. Reports in February 2010 suggest it may be seeking to block the sale to Exxon entirely.
What exactly went wrong?
- The government has claimed it was given inadequate information about the transaction by Kosmos and little time to react. It also recently launched a corruption probe into EO Group – a company with reportedly close ties to the previous administration – investigating charges that it used “undue influence” to help Kosmos obtain its original stake. Both Kosmos and EO strenuously deny the allegations.
- Importantly, Ghana’s government wants Kosmos’ stake in Jubilee to be sold instead to the state-owned Ghana National Petroleum Corporation (GNPC). It insists Kosmos will receive a fair price for this. However, Kosmos has suggested “some factions in the country” are trying “to undermine the company so that its assets can be [pushed] below fair market value”.
What are the lessons for other oil and gas companies in West Africa?
- Wherever the truth lies, the Ghanian government’s opposition to the Exxon deal illustrates how politically charged West Africa’s oil finds are proving. Whether or not the allegations are designed to affect the sale, the government is clearly willing to rock the boat with international investors in order to secure a bigger stake in Jubilee – and other countries in the region may adopt a similar approach. In general, the nationalist pressure faced by governments to revise contracts in their favour once oil is found can prove overwhelming.
- In such a context, companies need to do everything they can to avoid providing any excuse for governments to move against them. This includes keeping politicians, officials and executives of state companies painstakingly up-to-date and engaging in regular, proactive consultation with them. Ensuring any transactions undertaken are fully transparent and allow no room for misinterpretation is also important (This is not to suggest Kosmos has acted otherwise.) For potential acquirers of assets such as Exxon, meanwhile, due diligence over the in-country challenges facing their targets is essential.
- The mining industry has long been aware of these sorts of sensitivities in Ghana, with foreign mining firms criticised or called upon (fairly or not) to contribute more to national development. For oil firms entering West Africa, it is worth striving to minimise similar controversies, even if they cannot avoid them entirely.
¹ This simplified version of a ‘heat map’ is one element of LicenseSecure™, a model developed by Critical Resource to help companies responsibly strengthen the ‘license to operate’ (i.e. local, national and international stakeholder support) for resource projects. This particular ‘heat map’ is based on outside-in analysis – neither Exxon nor Kosmos is a current client of Critical Resource. A full LicenseSecure™ study involves in depth, on-the-ground research, and analyses company policies and activities as well as external factors.Declaration of interest: Critical Resource has provided information to Exxon and Kosmos Energy on LicenseSecure™.Ghana flags photo © istockphoto.com/peeterv.