[ 2012-07-15 ]

How Overpriced is Ghana's Jubilee Oil Field Expansion Project?
IMANI recently issued a statement about what we
believe are major fiscal risks that need to be
managed by government. One of the two major risks
we cited is the declining level of production in
the Jubilee field. In simple words, the amount of
oil being produced in Ghana's only producing oil
field is *falling*, and therefore generating less
cash than expected for the government's budget.
Production has fallen from a peak of nearly 90,000
barrels per day in 2011 to nearly 60,000 barrels
today.

Even though the focus of the article was on the
importance of Government taking urgent steps to
rein in its expenditure to prevent slippages in
major macroeconomic indicators and at the same
time communicating more clearly with Ghanaians
about how it intended to boost productivity in our
oil fields, we also mentioned, almost in passing,
that we believe the Jubilee project is
overpriced.

In that article, we justified our belief that the
Jubilee development program was uncompetitive by
comparing the cost/output ratio with similar
projects elsewhere. In simple words, we looked at
how much money had been spent on Jubilee and how
much oil was being produced, compared those
figures with the case elsewhere, and concluded
that the project strategy was not giving Ghana
value for money.

It is important to note that the more money that
is spent on the project the longer it takes for
the field to be profitable, the lower the taxes
Ghana can collect, and the longer it takes for
even those meagre taxes to show up.

We have received many reactions to that article,
including some reassuring ones about how
government of Ghana is stepping up to some of the
challenges identified.

But we received a couple from some apparently
well-informed readers who took issue with our
approach of benchmarking Jubilee costs against
projects elsewhere. Despite our explanations that
we selected projects that were more complex than
Jubilee the challenge was thrown to us to evaluate
the scale of the projects in Ghana in of and by
themselves before coming to the type of
conclusions that we did. We have taken up that
challenge.

We have looked at the Jubilee Phase 1a (Jubilee
expansion) costs, and we are afraid to say: all we
see are major discrepancies. We hope the Ministry
of Energy - the entity that approved the project -
shall help all of us clear these seeming
discrepancies.

Authoritative reports indicate that $1.1 billion
shall be spent on Jubilee Phase 1a to drill 8
wells in total and to procure the necessary subsea
systems that shall convey the oil from under the
sea to the processing platforms on the surface.

We have looked at the contracts that have been
awarded by the Jubilee field operators and spent
some time going over the reported activities being
undertaken as part of the plan of development.

We noted some reports sugegsting 18-months of
total project time. But we could not square these
with other statements from the operators that
first oil from the new phase shall begin flowing
by end of 2012. How can a project which began on
March 2012 and is expected to be commissioned by
the end of 2012 last 18 months?

What is important, at any rate, is the average
drilling schedule of the wells, which is about 4
months per well. With four rigs working
simultaneously, that makes 8 months of continuous
drilling time. Our own assessment is that
completion might take a bit longer and that first
oil should be expected in 2013 rather than
end-2012 but that does not in any way detract from
the 4-month per well drilling schedule.

Trends in the equipment market over the last 6
months establish a dayrate for floating rigs of
about $220,000. That is to say, the cost of hiring
a floating rig to drill each well is $220,000 per
day. For 8 wells over 4 months each, that comes to
a total of $215 million in drilling costs. Add a
fudge factor of $35 million to compensate for West
Africa's notorious drilling environment, and you
get $250 million.

There are a number of nuances that put this matter
in perspective. Firstly, the Jubilee phase 1a
wells are in water depths of 1100 meters (3609
feet), and that is less than 4000 feet. Drillships
capable of drilling in water depths of more than
4000 feet typically quote more than twice the
dayrate of drillships that operate in *less* than
4000 feet of water. We know that the Jubilee wells
are in 3609 feet of water because Modec, the
company that installed the FPSO, says so. This is
a huge cost factor.

Secondly, the failure of Jubilee phase 1 to ramp
up production to 120,000 barrels means that the
existing FPSO is completely suitable to handle all
the new production from the 5 production wells
(the other 3 are for water injection to boost
pressure). So no new FPSO work is anticipated.

The other major set of activities in phase 1a
concerns well completion/equipping and the
procurement of sub-sea infrastructure.

On February 6th of this year, Technip, the
engineering services company, announced that it
had won the full technical contract to roll out
the entire subsea infrastructure. The cost? 122.5
million dollars (100 million euros).

To estimate the costs for completing and equipping
(including casing and 'christmas trees') the
wells, we apply the industry-respected Mechanical
Risk Survey (MRI) and Joint Assessment Survey
(JAS) methodologies to the West African market to
obtain 30% of total well costs, i.e. an additional
$70 million is required for completion and
commissioning works on the wells.

This brings the total independently verifiable
cost to $407.5 million. Let us add $42.5 million
for management, consultancy (including the
Intecsea contract) and contingency. That still
brings us to just about $450 million.

What are the other, unadvertised, expenditures
that have ballooned the costs to $1.1 billion?
*That is MORE THAN TWICE the costs that have been
publicised*. Ghanaians deserve to know the full
details. Are the operators budgeting more than
$650 million in additional contingency because of
a lack of confidence in their own technical plan
and vendors?

We have searched as diligently as we can but we
still cannot identify those additional specific
project components that make up the outstanding
$650 million in expenditure quoted for Jubilee
Phase 1a.

Can the Ministry of Energy publish the full plan
of development for Jubilee Phase 1a, or at least
itemise the project components and their
corresponding costs? IMANI should appreciate the
education, and we are sure the general public
would too.

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

Source - IMANI Ghana

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