US$8.4bn petroleum revenues hang in the balance

…as Sankofa, Afina oil fields unitisation continue to delay

Government stands to rake in US$8.4billion revenue from the proposed unitisation or merger of the Sankofa and Afina fields; but the continued delay in the process puts such huge revenues at risk, especially in COVID-19 times such as these, the energy think-tank Institute for Energy Security (IES) has said.

The amount comprises royalties, bonuses, fees and levies, as well as additional oil entitlement; and income tax will be realised during the lifespan of the fields, it said.

“IES’ study finds that the state stands to derive upwards of US$8.4billion from the unitisation of the Sankofa and Afina fields, as opposed to US$2.065billion that it will derive from production at the Sankofa fields, assuming no incidence of unitisation,” said its Executive Director, Nana Amoasi VII.

He however warned that the country is likely to miss a huge opportunity to rake in billions of dollars from the upstream petroleum sector. This is due to delay on the part of Eni Ghana Exploration and Production Limited (ENI) and Springfield E&P (Springfield) to cooperate and unitise the Afina and Sankofa fields over a year on.

In April 2020, the Ministry of Energy in a letter signed by former Minister Peter John Amewu directed the two firms to unitise their fields. The decision resulted from a series of engagements and analyses of post-drill data, which showed that the Afina discovery in the WCTP-2 belonging to Springfield and Eni’s Sankofa field in the OCTP contract areas were one and the same.

A year after the unitisation directive, the two are yet to sign the Unitization and Unit Operating Agreement (UUOA) to give full effect to government’s directive to unitize, and the subsequent imposition of terms and conditions for the unitization of the Afina discovery in the West Cape Three Points (WCTP2) and the Sankofa field in the offshore Cape Three Points (OCTP) contract areas.

Following from this, IES says it counts the delay in signing the UUOA to complete the unitization of the Afina and Sankofa fields as a loss of opportunity for the country to reap maximum benefits from its petroleum resources.

The table below shows the projected total government take for both no-incidence-of-unitisation and incidence-of-unitisation scenarios, at the end of the project cycle. It considers the Sankofa development in its current state, estimated to continue as planned, and considers the Afina side development tied to Sankofa.

“The Institute’s analysis establishes the fact that unitisation will lead to maximum economic benefits for the state, and for all the parties involved in the production of the unitised accumulation. These benefits will be derived from, among others, sharing development facilities – which naturally drives down costs and ultimately improves economic returns,” it reiterated.

The state will also benefit from significant reduction in operational and capital costs of the unitised fields, as well as increases in royalties, taxes, Additional Oil Entitlement (AOE), fees and levies, it said.

With the unitisation concept, the unitised area – usually a reservoir – is treated as a single unit for development purposes. It is as if the separate leases and licences are merged into one single lease or licence, with a single unit operator appointed to manage development of the field.

Per IES’ investigation, the reason for Eni and Springfield’s inability to comply with government’s directive is primarily due to Eni’s rejection of government’s position on the matter. It said the latter has insisted there is no dynamic or hydrocarbon communication between the Afina discovery and the Sankofa field.

However, the Institute says its review of the Petroleum (Exploration and Production) Act, 2016 (Act 919) and the Petroleum (Exploration and Production) (General) Regulations, 2018 (L.I 2359), the laws that regulate unitisation in Ghana, show that dynamic or hydrocarbon communication is not a requirement for unitisation.

Section 34 (1) of Act 919 specifically provides that: “Where an accumulation of petroleum extends beyond the boundaries of (straddles) one contract area into one or more contract areas, the Minister in consultation with the Commission may, for the purpose of ensuring optimum recovery of petroleum from the accumulation of petroleum, direct the relevant contractors to enter into an agreement to develop and produce the accumulation of petroleum as a single unit”.

“From this provision, it is obvious that the only requirement for unitisation in Ghana is for an accumulation to extend from one contract area into another,” it added.

Unitisation is not new in the country’s upstream sector. The Jubilee Field, when discovered in June 2007, was found to be straddling two contract areas – Deepwater Tano (DWT) and West Cape Three Points (WCTP) Contract Areas operated by Tullow Ghana and Kosmos Ghana respectively – and was thus unitised and approved for development in 2009.

Following that, first oil was achieved in December 2010; and it has since produced oil in excess of 311 million barrels – raking in over US$5billion for the country through Carried and Participating Interest (CAPI), Royalties, Corporate Income Taxes (CIT) and Surface Rentals.