5 April 2010 | By Tom Phillips
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The opening of new oil fields has sparked fresh interest in Africa from international law firms. By Tom Phillips
The oil rush is on and this time a UK company is behind it. The discovery of large oil reserves in Uganda and Ghana by Chiswick-based Tullow Oil looks set to drive investment to these hitherto economically under-developed nations.
Tullow Oil’s asset in Ghana centres on its Jubilee Field site (see box, page 25), a site described as “world class” by the company and capable of producing, at the last announcement, 1.8 billion barrels of oil.
Tullow’s Ugandan operation in two fields in the Lake Albert Rift Basin were snapped up from under the noses of Italian rivals Eni, causing a storm in the oil markets and making Central and Western Africa attractive to international law firms.
Tullow says it has raised at least $1.35bn (£900m) to buy the 50 per cent stakes from its partner, Jersey-based Heritage Oil. However, the Ghanian government did not want Tullow to have a monopoly, so the company is selling two-thirds of its Uganda fields to CNOOC, China’s state-owned energy company, and Total, a French-owned private company.
Tullow’s 11-strong legal team, headed by general counsel Graham Martin, instructed oil and gas transactions specialist David Asmus, then a partner at Baker Botts, to work on the unitisation agreement with Kosmos over ownership of the oil in the field. The company also used Norton Rose banking partner Ruchit Sheth for work on a banking facility in Ghana.
Tullow success story
The Uganda and Ghana finds have seen Tullow’s value grow an incredible 1,200 per cent since 2004. To fund the Heritage buyout, the company made a share issue of $1bn at the start of this year, which made investors giddy with excitement.
Ashurst advised the underwriting banks Merrill Lynch and RBS Hoare Govett as joint global co-ordinators and joint bookrunners, with BNP Paribas and Calyon acting as joint bookrunners. The Ashurst team was led by equity capital markets partner Steven Fox and corporate partner Daniel Bushner. Tullow, meanwhile, instructed Dickson Minto with corporate partner Colin MacNeil at the helm.
Fox describes Tullow as a “fantastic” success story. (Ashurst also acted for Tullow on the potential dispute with Eni arising from the former’s buyout of Heritage, instructing litigation partner Ronnie King).
“Tullow is a success story for various reasons,” says Fox. “Some based on luck and some on judgement, but that’s the nature of the oil and gas exploration industry.
Exploration work is at worst a punt and at best a huge success. Tullow is well placed in the market but will need help putting in the infrastructure. The challenge will be putting in place this infrastructure when people are concerned over the environment. The other concern is the stability of the governments. There has been enough written about what oil does to peoples’ heads.”
While the UK Government is often described as the most unstable when it comes to oil because of its frequent changes to the taxes, many Africa nations, including Ghana and Uganda, have suffered from a much more violent instability in the past.
With the Bribery Bill currently sitting at the House of Lords, UK companies working in unstable African nations could soon face stricter rules on the way they do business. Tighter legislation on issues such as facilitation payments look set to bring the UK into line with the US and its well-established Foreign Corrupt Practices Act rules on doing business abroad.
“Oil and gas companies, generally speaking, take the [corruption] issue very seriously,” says Fox. “The threat of being held to account by a new government is a massive disincentive. Companies have in place systems to ensure they aren’t involved in corrupt practices.
He adds that the input from US partners, who are well-versed in doing business in oil-rich but unstable countries, will also be taken into account.
“As these companies grow, they’ll have to invest significantly in these processes. The Bribery Bill won’t affect the way they work per se - it will attract a greater degree of probity but it won’t affect the way legitimate companies transact.”
By the fourth quarter of this year the oil will be flowing out of Ghana, but will the investment be flowing back in? Lawyers who work in Africa or have experience of the region believe it will.
“The recent discoveries of large oil reserves in Uganda will have a significant impact on the pace of economic, social and political developments in the country,” says Paul Bugingo, energy infrastructure and project finance partner at Denton Wilde Sapte (DWS). “Most significant will be the ability of Uganda to develop its infrastructure without over-reliance on donor aid.”
In Uganda, DWS’s associate office, Kampala Associated Advocates, is the local legal adviser to Tullow Oil. Furthermore, one of its partners, Elly Karuhanga, is the president of Tullow Oil (Uganda).
“The pedigree of investors lining up to invest in Uganda’s oil sector will be a great source of expertise on which the government can call on,” says Bugingo. “The key challenge will be to establish the appropriate institutions to properly manage the oil wealth.
“One institution that will be needed is a national oil company. It will be critical to build and attract the right expertise to this and also to other state bodies such as the Ministry of Minerals and Energy.
“Uganda’s oil discoveries should also usher in a new era in regional cooperation [within the East Africa region] as cross-border infrastructure, such as pipelines, is needed, as well as greater capacity at ports such as Mombasa.”
Voice of caution
But not all lawyers are so convinced that the oil finds will be such a boon for their nations. Elikem Kuenyehia, managing partner at Oxford & Beaumont, the only Ghanaian firm based in London, does not believe the hype surrounding the Jubilee Field strike in his home nation.
“Frankly, I think this oil find is much ado about very little,” he says. “My understanding is that, with the current find, the expected revenue amounts to about 10 per cent of our GDP. So clearly it won’t change our economy fundamentally unless, of course, there are other finds.
“The real danger, though, is that we put too much emphasis on oil to the detriment of other productive sectors of the economy such as agriculture. This is already beginning to happen with people focusing a bit too much on oil and gas.”
However, Kuenyehia believes Ghana has the basic framework in place to become a thriving economy, oil or not.
“Ghana has proven itself an investment oasis in West Africa and has a long track record in attracting first-class international companies,” he argues. “Other companies will continue to follow Tullow’s lead, particularly in the areas of provision of oil and gas services and financing.
“On the one hand are the fundamentals: a thriving democracy, macro-economic stability, protection of individual rights and property, an educated workforce. On the other hand are the gigantic opportunities: a huge and growing infrastructure gap, a growing middle class, greater use of technology and telecommunications.”
DWS’s associate office in Ghana, Bentsi-Enchill Letsa & Ankomah, is acting for US-based independent oil and gas developer Kosmos, backed by private equity from Blackstone and Warburg Pincus.
The company holds a 23.4 per cent interest in the development of the Jubilee Fields Phase 1 project (Tullow holds a 34.7 per cent, with four other parties holding smaller stakes).
Kosmos has given work to UK firms in the past, with Slaughter and May advising it on a $750m reserves-based debt facility, opposite Clifford Chance, which acted for the lenders made up of the usual suspects such as Standard Chartered and BNP Paribas. Clifford Chance oil and gas partner Russell Wells led that firm’s advice.
One of Wells’s colleagues, private equity partner Kem Ihenacho, is working on private equity opportunities for some of the smaller players in the Ghana oil strike. He believes the oil finds have increased law firm interest in the country. And the benefits might not be just for international law firms.
“If an international lawyer was divesting a finite resource in Africa, Ghana would now be further up the list of interests,” says Ihenacho. “There are no large law firms in Ghana and it’s worth a large African firm opening an office there. The concern for all these nations is how much money actually goes into the country.
“I’ve heard good things about Tullow,” he adds. “It seems to be focused on building a continuing business. That the local communities, who are most affected, take their share is one of the biggest concerns.”
The finds by Tullow and the subsequent billions of dollars heading towards the affected countries have strengthened the resolve of the governments of Africa’s other, as yet untapped, nations to focus on oil exploration. DWS has advised on oil and gas projects in Ghana, Nigeria, Angola, Tanzania, Sudan, DRC, Mozambique, Rwanda, Zambia, Cote d’Ivoire, Equatorial Guinea, Cameroon, Libya, Algeria and Egypt.
DWS’s Bugingo says: “It’s important to note that other countries in the region are also looking to exploit recent discoveries of oil and gas, albeit such reserves are in lesser quantities than those discovered in Uganda, DRC, Kenya, Rwanda and Burundi. Of course, Tanzania and Sudan have well developed oil and gas reserves.”
Jubilee field: Ghana’s oil industry takes off
Ghana will officially become an oil exporter in the fourth quarter of this year when the offshore Jubilee Field starts production.
Tullow Oil’s 2007 strike lit up the oil market following years of attempts by rival oil companies to discover oil in the West African nation.
According to Tullow, Jubilee Field has potential resources of 1.8 billion barrels. Initial production is estimated to yield 120,000 barrels a day.
The field was named after the 50th anniversary of Ghana’s independence. Tullow operates one of the field’s two blocks, while Kosmos operates the other. The blocks were later found to be part of the same oil field and so the companies entered into a ’unitisation’ agreement over ownership of the oil.
The site has garnered investment from the World Bank in the form of the International Finance Corporation (IFC). At the start
of 2009 the IFC said it would supply a further $110m (£72.95m) to the Jubilee Field site. The money would go towards the development for the ’floating, production, storage and offloading’ unit.
This money will take the IFC’s total investment in the project to around $300m, with reports suggesting that a further $500m package could be syndicated out to lenders by the credit agency to complete the mammoth construction.
Last month, Africa Finance Corporation (AFC), which helped raise loans to fund the development of the Jubilee site, announced plans for further investments in Ghana’s energy industry.
AFC, formed in 2007, is partly funded by the governments of the Gambia, Guinea, Guinea-Bissau, Liberia, Sierra Leone and Nigeria. Private investors such as Lagos-based United Bank for Africa, First Bank and Access Bank also provide funding.
Something else that may attract further investment to Ghana is the natural gas that will be produced as a byproduct of oil extraction. The gas may
be used to fuel the Kpone electricity power plant, in which AFC holds a 46 per cent stake, and other electricity plants across the country.