Chinese oil giant CNOOC is threatening to outbid Exxon for a stake in the Jubilee oil field in Ghana.
Exxon has bid $4 billion for this 23.5% stake, which is currently owned by Dallas-based Kosmos Energy.
Judging from the WSJ’s report, it sounds as though the Ghanaian government may welcome the interest from CNOOC.
A rival bid could set up months of legal and political wrangling, said one person familiar with the matter, because Kosmos feels it can sell the stake to whomever it wants, so long as the Ghanaian government gives its consent. The Ghanaian government “can’t be unreasonable in their refusal,” this person added.
News of the Exxon agreement infuriated the Ghanaian government and GNPC, which had been trying to negotiate to increase its 13.8% stake in the field. “I don’t see the Exxon-Kosmos deal as done,” said GNPC chief executive Thomas Manu said in an interview this weekend. The Ghanaian oil minister also expressed his unhappiness with not being notified that Kosmos had made a deal with Exxon and said he believed the country had the right to block the offer.
Besides the political angle, and the continuation of the China-is-buying-all-the-world’s-oil story, the bidding over the Jubilee field also indicates how much more expensive it’s getting to buy oil rights.
Economist James Hamilton notes how far behind its old daily production projections Exxon currently stands.
Hamilton also points to this analysis Alan von Altadorf, suggesting that Exxon was already betting on $100 oil for the Jubilee stake to pay off. Note that it was written before news of this CNOOC bid:
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.
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