Is Exxon Betting on $100 Oil? 43 comments
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The Jubilee oil field offshore Ghana was discovered by Tullow in partnership with Anadarko in 2007. It's a remarkable story in several respects. The deepwater Tano Basin had been previously surveyed and drilled by Phillips in the 1970s, by Arco in the late 1980s, and successively by Amoco, Hunt, and Dana Oil in the 1990s based on two 3D seismic surveys commissioned by Ghana's national oil company. Tullow did a splendid job of finding a reservoir that everyone else missed.
Privately-held Kosmos Energy LLC of Dallas was awarded a block in 2006 that overlaps about 2/3 of Jubilee and became an investment partner with Tullow and Anadarko. I haven't looked at the details of that deal, but Kosmos had $100 million in private equity cash to fund four exploration wells.
That $100 million is now worth $4 billion, according to the Wall Street Journal.
Exxon is close to inking a $4 billion deal to acquire a stake in the Jubilee oil field off the coast of Ghana, the oil company’s biggest investment in a decade. Exxon would buy the 23.5% stake held by Kosmos Energy.
Let's say hypothetically that Jubilee has 400 million bbl recoverable, and that Tullow's estimate of $5 billion subsea and topside expense is correct. Exxon (XOM) paid $4 billion for a 1/4 share of production and probably have to pony up another $1 billion as its share of development expense. That values Jubilee at $20-$25 billion if you consider cost overruns and interest expense on borrowed money. Let's assume that the Republic of Ghana is going to get something in taxes, royalties, fees, local goods and services, training, and special gifts under the table. So Jubilee is a $28 billion asset. 400 million bbl x $50 = $20 billion Ooops. Obviously there's something wrong with my arithmetic. Maybe Exxon's $4 billion includes its capex contribution, which values the project at $20 billion total (breakeven at $50 a barrel). I'm certain Tullow and Anadarko will flip their shares to CNOOC and Shell, both of which expressed interest and prompted Exxon to move fast and first. Some industry analysts expect Exxon to make a corporate takeover offer for Tullow, which is exactly how supermajors grew oil reserves in the past couple decades -- by merger and acquisition. But Exxon's $4 billion says they aren't betting on $50 oil, the long term average. They need $100 a barrel to make Jubilee a risk-free investment with 10% annual return in my opinion. Disclosure: no position in companies mentioned, ETFs, or oil options.
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Doesn't sound like much of a water drive to me, and if memory serves Tullow's wells didn't see OWC. Might be sealed.
Jeep,
I would not put Ghana in the same category as corrupt (or more corrupt) African nations. Ghana is a relatively a safe and secure African country to do business in. Ghana is a relatively non-corrupt country compared to its African neighbors and many other nations around the world.
Check the Corruption Perception Index:
en.wikipedia.org/wiki/...
USA is #18
Ghana is #69
Nigeria is #121
I think Exxon is a smart company for chosing to do business there and they will have an easier time in Ghana than Shell is having in Nigeria right now.
Very good points. I had figured that the gas injectors are basically to deal with the associated gas, and that the water injectors are to ensure proper pressure maintenance from the start, but those assumptions might be mistaken. Wouldn't it be nice if oil companies disclosed all this type of information in one place so one wouldn't have to hunt for it all over the Internet? Here we are trying to draw inferences to determine whether Jubilee is a very big prize or a nice, but middle size, off shore field and we lack important pieces of the puzzle.
Given the flow rates--and the implication that those flow rates are meaningful--ie can be sustained--I suspect there probably is a water drive, but I suppose with enough permeability and a big enough gas cap that might not be the case.
Still, I suppose I end up concluding that all the excitement can't rationally be about a 500 million bbl field, and so the probability is that it is significantly larger, but your point is a valid one. What if we are only talking about 10-20% recovery rates? If that is the case, what can XOM be thinking except much higher oil prices?
Those are valid points and I hope your conclusion is correct. Since we won't drill of our coasts (except for the western GOM) we need to be able to buy offshore African oil, and corruption and the like undermines the ability to produce oil (while also destroying almost everything it touches).
And it is true, that Ghana is a better place to do business than Nigeria. But, resource nationalism is an ugly thing and when oil companies are successful in their drilling efforts, countries are often tempted to take a much bigger share of the pie. Witness Gordon Brown in Britain (who has curtailed new North Sea drilling all by himself with his huge tax increases), or what many Congress critters are proposing to do in the US, or the disaster unfolding in Mexico. According to the press there are signs of that in Ghana already--rumblings that Ghana might need to change the terms of the deal to make it "fair." Resource nationalism is not corruption per se (though I would argue it is a type of moral corruption) but it creates chaos (and hurts the long-term interests of the countries that promote it).
I also think that the oil risks regular corruption. Was it Cyndi Lauper who sang "money changes everything?" It would not surprise me that the huge amounts of money involved prove to be too tempting for low paid civil servants. Do any of us doubt that if oil were discovered in Lake Michigan we would see Chicago's normal high level of corruption move to Lagos standards?
So I hope you are right--for our sake and for Ghana's. But I wouldn't bet on it.
"There may or may not be preemptory rights," Mark Gilman, energy analyst at The Benchmark said.
"Even if they are not built in, we're dealing with a sovereign nation."
[Upstream Online]
I am not an expert, but I do have some thoughts:
1) ExxonMobil has shown that it is willing to sit on an investment for 10-to-20 years before harvesting. They have a very long-term view on this. Won't it take a few years to build the infrastructure to move large quantities anyway?
2) I think you are underestimating both the amount of recoverables here and the average price of those. What if you changed your math to 1.75 b x $100? I think the entire West Cape Three Points (aka CTP West; Kosmos = 30.875%) and Deepwater Tano (18%) blocks will end up being closer to that than your 400-to-500 m. CNOOC was right there in the bidding, so they have roughly the same value.
3) What if Kosmos wanted to force Ghana to monetize their investment and got the boys at XOM to help them do so? I could see Blackstone and Warburg Pincus pushing Kosmos to figure out what the property/investment is worth. This will force the market to put a price on the assets, to which Kosmos could then cancel the sale to Exxon or GNPC, and then do an IPO, or coming back and selling to somebody new. This action also helps out players like Vanco, Vitol, Tullow, Sabre, Hess, Anadarko, and Afren, etc., price their assets to some degree. Ghana can now use Exxon and CNOOC assessment for collateral in New York if they want or need to.
Continuing the off-topic. That is very interesting. Where do you get those figures; what kind of potential flow rates; and are they reachable by directional drilling onshore?
On Oct 09 02:44 AM Alan von Altendorf wrote:
> off topic, IMO 200 mmbbls in the St Peter sand under Lake Michigan,
> 300 million in the Michigan Formation under Lake Huron. We have our
> own Jubilee in state waters of the US state that needs it most.
On Oct 09 11:44 AM Alan von Altendorf wrote:
> Jeep, just a guesstimate based on historical onshore production in
> Michigan from those two formations. The provincial govt of Ontario
> estimates 11 million cubic meters of oil in Lake Huron.
Our politicians are really completely dysfunctional when it comes to these issues, aren't they?
On Oct 09 05:04 PM Alan von Altendorf wrote:
> Absolutely verboten. I'd bet $5 mil on Saginaw Bay jackups.
State-run Ghana National Petroleum Corp (GNPC) believes Kosmos Energy's deal to sell its stake in the huge Jubilee oil field to ExxonMobil is illegal and is ready to buy the stake itself, a GNPC source said. [Upstream Online www.upstreamonline.com...]
The Ghanaian government is angry at Kosmos for what it perceives is a flouting of its laws -- in particular the sharing of oilfield data. Ghana's oil minister and the head of GNPC have both said they do not consider the Kosmos-Exxon deal done, and that they have the right to cancel any contract...
In June, relations between Kosmos and Ghana officials hit a rocky patch when the Ghanaian minister of energy felt insulted during negotiations with Kosmos officials.
"He doesn't understand African courtesies when negotiating," the person said, referring to the Kosmos executive. "So he easily infuriated the minister." A week later, the minister and the CEO happened to be seated next to each other on a flight to London and an awkward exchange took place...
[Rigzone / Dow Jones / Wall Street Journal]
Unfortunately your point of the rule of law has applications far beyond Accra, and we are going to run out of oil far too soon precisely because governments no longer are obligated to follow the rule of law when they claim to be defending the interests of the people.
The question here, of course, is whether Ghana's government is going to kill the goose that lays the golden egg before it can begin laying.
"Sinopec, represented by Neil Bush, the younger brother of former US President George W. Bush, recently made an offer to state-run Ghana National Petroleum Corporation to form a joint bid for a stake in the Jubilee field...
"Several other foreign oil companies, including Franch giant Total, UK supermajor BP and China’s Cnooc Ltd., have sent representatives to Ghana for talks with the government about acquiring a stake in the field." [Offshore wire]
Alan:
Too much bidding for 400 million bbl recoverable, I think. It's all a guess, of course, but are you beginning to think that the majors are all figuing more towards the 1.8 billion amount?
Nor do I think they have more than 400 million recoverable, which puts the price tag at $40 upfront plus more in the future. I think it's Peak Oil hysteria bidding greenfield plays up to $100 a barrel.