[ 2012-07-22 ]

GNPC Confuses Ghanaians About Abnormal Jubilee Costs
Rather uncharacteristic of the secretive
organisation, the Ghana National
Petroleum Corporation (GNPC) finally issued a
press statement to respond
to concerns raised by civil society about
Ghana’s underperforming oil
industry.

While the GNPC is to be commended for its
increasing responsiveness and
transparency, its grudging tone detracted somewhat
from its attempt at
responding to its critics and stakeholders.

The notion that all civil society organisations
(CSOs) should submit
themselves to a GNPC-preferred process when
raising legitimate issues of
public interest struck us as rather old-fashioned.
In the age of social
media, the general public is the appropriate
audience for such discussions
of national interest.

GNPC as a public enterprise has a public-funded
public affairs unit with a
duty to be proactive in engaging civil society
organisations and others
who take a keen interest in their work. It is not
these voluntary bodies
and groups of private citizens that must
“reach out” to the GNPC. It is
the GNPC that must reach out to the public, and to
the extent that CSOs
may be able to assist in that effort it is the
GNPC that must proactively
provide such CSOs with data and information.

IMANI’s mandate is to engage in a fearless
mediation between critical
technical agencies and the lay public whether such
agencies appreciate our
effort or not. We seek to ensure that technocrats
and bureaucrats do not
hide behind jargon to evade democratic
accountability. If that means that
our choice of language shall be described as
“unscientific” by the likes
of the GNPC, so be it. The truth is that the
information the GNPC has now
supplied to inform the public debate about
Ghana’s oil sector would not
have received broad coverage had IMANI not engaged
in strong advocacy to
demand such information.

Now, to the substance of the GNPC’s
statement.

Despite repeated use of such unflattering
adjectives as “uninformed”,
“unscientific”, “wrong”
etc., the GNPC’s statement failed to settle
any of
the critical questions raised by IMANI, and in
various aspects appeared
calculated to perplex rather than to enlighten. We
will illustrate our
meaning using the same headings and some of the
sub-headings favoured by
the GNPC.

*JUBILEE PRODUCTION PROSPECTS*

The GNPC was fulsome in praise about the record of
Jubilee’s development.
As far as they are concerned, the operational and
safety performance has
been remarkable. Such uncritical adulation masks
the fact that the
original Jubilee plan of development was
considerably scaled down in order
to “fasttrack” the path to first oil.


We have studied the documents presented in the
original road-shows
conducted in Europe, prior to the onset of
development work, and it is
clear that the final roll-out was scaled down to
less than 50% of the
original blueprint. This has exaggerated the
success rate of activities
whilst undermining project resilience.

It is trite knowledge that the number of
production/development wells is a
major determinant of total oil outflow, especially
in a new field. The
decision to drastically reduce the number of
production wells in Phase 1,
likely because of abnormally high unit well costs,
has led directly to the
loss of productivity occasioned by the technical
challenges that took some
of the wells from action. Put another way,
redundancy planning was poor.
It is clear that the fasttrack strategy was
technically over-optimistic
and strategically risky. It makes sense therefore
to question how lessons
learnt are being incorporated into the current
expansion phase (1a). The
monies being spent are monies that ultimately will
be deducted from what
is due Ghana, so it is important we know.

The GNPC conveniently stayed away from addressing
the issues that have led
to the Jubilee field performing at HALF its
projected capacity. It is not
that projections cannot be missed. The problem is
the EXTENT of deviation
from set targets. Such a stupendous failure to
meet projections cannot be
described in the adulatory tones the GNPC appears
to prefer.

We have asked the GNPC to explain clearly why
remedial work, attributed
solely to sand contamination, has led to such a
significant drop in
productivity (i.e. such a high proportion of wells
shut down or declining
in output), when there is evidence that in similar
scenarios elsewhere
remedial work has led to NO drop in productivity.
IMANI has carefully
reviewed industry literature on sand
contamination-related remedial work
in sections of the Centrica-operated Chestnut
oilfield in the North Sea,
among others, to confirm that loss of productivity
is not a *standard*
feature of flowline contamination by formation
sand. Why is the Jubilee
case so pernicious? The GNPC refuses to even
discuss the matter. Its
default style continues to be low transparency.

GNPC quibbles with IMANI’s concerns about
continuing over-optimism with
respect to ongoing remedial work and yet, in the
end, agrees with IMANI’s
view that medium-term output in the wake of Phase
1a first oil coupled
with successful remedial work shall hover below
80,000 barrels. As is its
style the GNPC refuses to acknowledge the
possibility of potential output
regression and continues to promote the 120,000
barrel per day medium-term
output trajectory despite several postponements of
this sacred milestone.
The truth is that similar promises have been made
before. The real
question is why various “ramp up”
scenarios and milestones announced by
the same GNPC-led joint management team have been
missed at least 4 times
already. That is what Ghanaians want better
explained.

Where IMANI mentions “new floors” of
below 60,000 barrels per day of
production, GNPC refuses to discuss the alarming
development, and seeks
instead to portray IMANI as incapable of
differentiating between yearly
averages and production troughs. This is strawman
argumentation unbecoming
of such a major parastatal.

*JUBILEE FIELD DEVELOPMENT COSTS*

GNPC sought to attribute what we maintain are
abnormally high costs in
Jubilee to normal seasonal variation due to the
price of oil. In this
comfortable theory of the national oil company rig
rates correspond solely
to crude oil prices.

We are surprised that a national oil company will
adopt so credulously a
theory that in the professional literature is
heavily qualified.

Work by experts such as N. M. Rach and others has
always emphasised a
multitude of factors in the determination of rig
rates, including the pace
of construction of new rigs (to take advantage of
rising day rates),
skilled labour availability (the average rig
technician can easily earn
more than $100,000 a year due to labour supply
issues), and capital costs.
How an official press release from the GNPC of all
organisations can
reduce this affair to oil prices alone beats our
imagination. We also
note, with sadness, that the GNPC does not even
bother to explain that in
every empirical examination of the correlation of
oil price movements and
rig day rates, a lag of up to 12 months has been
observed WHEREVER a
positive dependence has been observed. There is
therefore NO simple,
simultaneous and co-linear link between dayrates
and the spot price of
oil.

With this in mind, we can continue to examine the
other points made by the
GNPC.

It is baffling that an organisation required to
make public disclosures of
activities in the oil sector chose to resort to
general statistics in
order to clarify matters of public financial
interest.

Why didn’t the GNPC simply list the
semi-submersible and floating rigs
that have been contracted to work in Jubilee since
the onset of
development along with their dayrates? Is the GNPC
interested in financial
disclosure or merely in argument for argument
sake?

They clearly shied away from this because once
again another flawed theory
of theirs would have fallen flat on its face. In
seeking to justify
abnormal rig rates for Jubilee, the national oil
company decided to use
the geographical location of Jubilee as the cost
driver. How Ghana which
is located much closer to major rig markets such
as the North Sea, and
which is next door to Nigeria, a country with
massive deepshore prospects,
can be more geographically disadvantaged than
Angola beats our mind.

The truth that the GNPC did not want to confront
is that the rig market,
like all markets, works through quotes and
negotiations. It is up to
operators to devise the optimal mix of factors
while contracting to take
advantage of pricing variability and volatility.
If the cost drivers were
in the form preferred by the GNPC, Atwood would
not have rented out its
Osprey to operators in faraway Australia for 10%
less than it did to
Ghanaian operators, when the Osprey has nearly
TWICE the performance specs
of the Hunter being used in Ghana. In fact, the
same Atwood would not have
rented out its Falcon, a vessel of the same
generation 3 specs as the
Hunter, to operators in Australia for nearly 50%
less.

It is shocking that Ghanaian operators, under the
GNPC’s leadership, are
reporting operating day rates for generation 3
semi-submersibles higher
than generation 6 and 7 machines. At these
reporting day rates, and with
the acquisition costs of generation 5
semi-submersible rigs made by
shipyards like Hyundai going for less than $600
million (before capital
costs), it would have made strategic sense for
Ghana to acquire its own
3rdgeneration fleet, outsourced management, and
then leased the vessels
to the operators to cash in on this booming trade!
We say this tongue in
cheek but the $1.6 million, pre-completion, daily
drilling rate quoted by
the GNPC clearly deserves such a reaction.

Indeed, we note with great apprehension the lack
of compunction with which
the GNPC wants Ghanaians to accept that spread
rates of FOUR TIMES the rig
rates should be considered NORMAL (i.e.the cost of
hiring the rig as a
proportion of total logistics costs). There is
nothing more ABNORMAL than
this.

Extensive examination of cost profiles around the
world, including in
nascent offshore industries, has established a
firm general correlation
between rig rates and spread rates. Very *rarely*
are spread rates more
than double the rig rates. What the GNPC is
quietly conceding, the bluster
notwithstanding, is that our leasing costs for
rigs in Ghana are indeed
ABNORMALLY high.

The notion that spread rates should *necessarily*
increase during
completion is similarly novel, curious and highly
indicative of the
attitude to cost competitiveness adopted by the
GNPC, considering that
during completion direct drilling costs abate.
Once again, these alarming
deviations from global averages and best practices
in an age when
technology and management are leading to best
practice convergence around
the world and closing the gap between so-called
“nascent” and “mature” oil

industries are quite shocking.

What is happening in our oil sector is obvious to
anyone who is prepared
to examine the situation with a clear lens. The
desperation to meet
unrealistic timelines/milestones and the haphazard
strategy (nicknamed:
“development plans”) are jointly
contributing to a disastrous procurement
policy overseen by the GNPC.

IMANI was far from oblivious to the fact that
average day rates are not
the same as project by project operating day
rates, but it was necessary
to quote the benchmark averages in order to
dramatically illustrate the
deviations being observed in Ghana when finally
the GNPC feels obligated
to disclose the breakdown costs. We make no
apologies for working within
our means to strip public policy issues of
obscuring jargon in order to
spur public debate.

After this revealing commentary about their
notions of acceptable cost
performance, the GNPC then moved on to engage
IMANI in a bizarre argument
about Jubilee’s water depth. At certain
moments in their submission, it
was not clear whether the national oil company was
talking about operating
drilling depth, rated depth or water depth. Be
that as it may, it is
unclear why the GNPC – a parastatal - chose
to engage IMANI on an argument
about industry averages when what IMANI was doing
as a private
organisation is using well-sourced (Rigzone)
generic data to impel them to
disclose ACTUAL facts on the ground (or the seabed
as the case may be).
The GNPC’s approach was wholly unnecessary
and calculated to confuse the
public.

The rated and actual drilling depths of the oil
rigs are known to the
GNPC. It is in fact their duty to know. What they
needed to do was simply
to match the rigs active in Ghanaian waters to the
actual wells and tell
us the unit well costs. As it turns out at least
one of the
semi-submersibles deployed in Ghanaian waters is
rated at 5000 feet,
obviating the need for that entire portion of the
GNPC’s submission.
Clearly, there was no intent to enlighten, only to
confuse.




*SUMMARY*

At the heart of this whole controversy is
IMANI’s assertion that
operations in the Jubilee field are much too
expensive and need to be
brought down through superior strategy and
management (which obviously
include better and more transparent contracting
and procurement
processes). That assertion stands. It is easily
verifiable and has been
corroborated by the GNPC’s own grudging
admissions. It is the duty of the
GNPC to tell Ghanaians how it is working to ensure
high productivity and
cost-competitiveness in the oil fields, because
how much Ghana makes from
oil is completely dependent on these
twin-determinants.

IMANI’s concerns about the status quo were
based on hard evidence and
careful analysis. The GNPC’s response was
sometimes evasive, and every so
often plain incoherent. Our earlier article
modestly asked for education,
but we have received little from the national oil
company's statement.

Since the key questions remain unresolved,
Ghanaians deserve better and
more comprehensive explanations. In fact, a
national board of inquiry
composed of independent stakeholders needs to be
instituted to examine the
situation. While the burden of education falls as
a matter of law on the
GNPC, IMANI shall, from a pure patriotic
standpoint, take the national
company up on its offer to engage more
constructively and directly with
CSOs that wish to assist in public sensitisation.
What we learn we shall
share as we have always done. God bless Ghana.

Credit: IMANI Ghana (www.imanighana.org) and
www.Africanliberty.org

Email : info@imanighana.com
Web : www.imanighana.com

Source - IMANI

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