Kosmos hit by rig contract as dry hole is announced in Suriname

Kosmos could be liable for a share of the onerous contract in Ghana entered into by Tullow Oil, operator of the Jubilee and TEN fields. This could equate to over USD100 million for Kosmos which would wipe out Q2 2018 revenues and earnings since the beginning of the year.

Tullow, on behalf of the field partners entered into a long-term rig contract for the West Leo rig in 2012 for work in the Jubilee and TEN area. In 2016, Tullow declared force majeure under the contract, driven by the border dispute between Ghana and Côte d’Ivoire which forbid any further drilling around the TEN fields until the matter was resolved.

Although the partners had a choice to redeploy the rig at the Jubilee field to undertake further work, it decided not to given issues with the FPSO turret and therefore uncertainty over ongoing development at the field. In an effort to save costs, the partners declared force majeure on the rig contract, which England’s Commercial Court has now ruled was not a valid reason to trigger force majeure. The liability between the TEN and Jubilee partners stands at USD254 million.

This comes on the back of bad news for Kosmos in Suriname where the Anapai-1 well was dry. This extends the dry run of Kosmos and follows the high profile dry well at Requin Tigre (see Kosmos' end of a winning streak with dry well at Requin Tigre).

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Tortue unitisation across Mauritania and Senegal

The governments of Mauritania and Senegal have signed an Inter-Governmental Cooperation Agreement in another step forward for the Tortue gas development which straddles the border of the two countries. The field will now be unitised with an initial split of resources 50:50 and a mechanism for future equity redeterminations based on actual production and other technical data.

FID of the field remains on track, targeting year end 2018 with first gas in 2021. The BP-led joint venture is looking at a near-shore FLNG concept which will reduce costs significantly.

The unitised ownership will be BP 61% operator, Kosmos 29%, and government partners retaining the remaining 10%.

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Kosmos' end of a winning streak with dry well at Requin Tigre

Kosmos Requin Tigre prospect was announced dry this morning. This was a "make it" well that had the potential to add 60bcf of gas in the Senegal/Mauritania trend and would have increased total gas discovered in the basin to over 100tcf. However, this dry well constrains Kosmos' growth in the basin with no further exploration drilling in area for now. The drillship will now proceed to test two oil prospects offshore Suriname commencing in early Q2 2018.

With three dry wells in a row, Requin Tigre, Hippocampe and Lamantin (the last two targeting liquids), Kosmos shine as an exploration company is now wearing off. It now follows in the footsteps of other E&Ps such as Tullow, which was once an exploration-led company but increasingly focussed on delivering on its projects and commercialising an inventory of discoveries.

For now, it appears that Kosmos' West African story is finished.

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Kosmos: An unfinished West African story

Kosmos has had a busy 2017 chasing a high risk high reward oil play and working up its Senegal/Mauritania gas resources.

In the second half of the year Hippocampe and Lamantin both came in dry ending the company's campaign for higher value oil. It can now focus on developing the c.40tcf of gas found at Tortue, Teranga, Yakaar and BirAllah. It has hopefully found the right partner in BP who farmed-in in late 2016. Although not generally seen as a big gas player, BP is increasingly focussed on gas as it turns to the future - the major is shifting to investing in large scale gas projects and look to increase global production to c.60% gas from the current c.50%.

When we met with Kosmos earlier this year, they noted that they had their choice of Supermajor when seeking a partner with attractive offers from the usual suspects. Kosmos see BP as the partner who is fully aligned with them, with BP going as far as setting up Senegal/Mauritania a separate profit centre to demonstrate their seriousness.

The West African gas play continues to be derisked with the 60tcf Requin Tigre prospect being drilled and results expected in early 2018 which would increase gas resources in the basin to c.100tcf if successful. This could add a significant leg to a multi-phase LNG project. However, a dry well would dampen the high mood in the basin with the growth outlook more constrained.

FID around Tortue is planned in 2018, although success at Requin Tigre could change the development order with Tortue (which straddles the Senegal/Mauritania border) delayed. It should also be noted that gas would come onstream at a time of a gas glut with LNG in North America, East Africa and Australia coming onstream.

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Kosmos dry well at Lamantin

Lamantin-1 on Block C-12 offshore Mauritaniawas was drilled to a TD of 5,150m and designed to evaluate a previously untested structure. The logs and samples collected suggests the reservoir objective was water bearing with small amounts of hydrocarbons. The well will now be plugged and abandoned.

Kosmos will drill the Requin Tigre prospect next and is targeting 60tcf. The well is epected to take around 60 days.

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Kosmos London listing at risk as company and advisors face potential legal action

Kosmos' secondary listing is at risk as the Saharawi government had strongly condemned the company's move to list on the LSE. The Sahrawi government has threatened the company's licences in the region as well as legal action against Kosmos and its advisors.

The listing would set a precedent for legal proceedings regarding companies operating in the disputed region which could drag out for years to come. The press release by the Saharwi government is below.

--------------------------------------

Media release – Communiqué

For immediate release


Saharawi government responds to the proposed listing of Kosmos Energy Ltd. on the London Stock Exchange

Bir Lehlu, Western Sahara (August 16, 2017), The government of the Saharawi Republic (the SADR) notes with concern recently expressed plans of the United States-based petroleum company Kosmos Energy Ltd. to trade in securities in a secondary listing on the London Stock Exchange (the LSE).

“Any effort by Kosmos to raise additional capital, including securities offerings and especially on an exchange which is, for the time being, subject to European law results in clear risks for the company and others financially interested in it. Kosmos continues with seabed petroleum exploration in the coastal waters of occupied Western Sahara with an established basis for legal action against the company and its supporting enterprises”, remarked Emhamed Khadad, the SADR official responsible for natural resources following Kosmos Energy’s recent announcement.

Western Sahara, routinely referred to as Africa’s last colony, has been illegally occupied across much of its inland area and part of its coast since 1975. A commitment by the United Nations organization to deliver a self-determination referendum to the Saharawi people who had been the sole, exclusive occupants of the territory, has been stalled as a result of continuing annexation efforts including resources development purportedly done to generate economic benefits for the territory. Four senior level international and national courts have confirmed an occupying Morocco to be without right or title to the territory. “What this means”, noted Khadad, “is that the rule of international law holds that the occupying state is unable to offer exploration licenses and, even less, hold out any rights to petroleum that could be recovered from the seabed.”

In a December 2016 judgment the Court of Justice of the European Union confirmed that Western Sahara is not a part of Morocco and that the kingdom is unable to exercise treaty authority over the territory in respect of trade matters.

A June 2017 judgment of South Africa’s High Court, concerning a shipment of phosphate rock exported seized after export from Western Sahara, concluded that:

“Morocco has no claim to sovereignty over Western Sahara ... Furthermore, it acquired the territory by force [and] we conclude that howsoever Morocco's presence in Western Sahara may be described, it does not exercise sovereignty over the territory".

(A copy of the decision in Saharawi Arab Democratic Republic and Another v Owner and Charterers of the MV 'NM Cherry Blossom' and Others [2017] ZAECPEHC 31 is available online at: <www.saflii.org/za/cases/ZAECPEHC/2017/31.html>.)

The 2017 and 2016 judgments follow one of the United Kingdom High Court in 2015 which confirmed the territorial status of Western Sahara as not being part of Morocco. A securities listing on the LSE, and related activity, faces the risk of precedent in the United Kingdom and by parallel and separate proceedings, in the Court of Justice of the European Union.

“There is no longer any speculation by the SADR government in its safeguarding of the sovereign resource rights of the Saharawi people that formal legal measures will be resorted to in the face of financial activity to capitalize the taking of our resources, and as against activities as such. International law is clear about such matters and we will continue to employ it in the face of a universally derided, illegal occupation”, observed Khadad.

# # #

For additional information and media contact:

Mr. Kamal Fadel
Saharawi Republic representative for Australia and New Zealand
Senior executive of the SADR Petroleum & Mining Authority
T: + 61 2 92 65 82 58

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Kosmos extends position in Mauritania

Kosmos noted in its Q2 results that it had farmed in to a 15% non-operated interest in Block C-18 Mauritania. The farm-in extends Kosmos' postion in this recently proflific play which contains the Tortue gas discovery to the south.

Tullow Oil holds 90% WI (State 10%) and will reduce its interest to 75% post transaction, whilst retaining operatorship. The block is deepwater (over 2,300m depth) and has recently completed a 600km2 3D seismic campaign.

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Yakaar - major gas discovery offshore Senegal

 Kosmos has made a substantial 15tcf gas discovery offshore Senegal. The Yakaar-1 well on the Cayar Offshore Profond licence intersected a gross hydrocarbon column of 120m and encountered 45m of net pay. The well confirmed the presence of thick, stacked, reservoir sands over a large area with very good porosity and permeability.

This discovery marks the continuation of Kosmos’ success in the Mauritania/Senegal river basin (Tortue, Ahmeyin, Marsouin and Teranga). Yakaar and Teranga together hold 20tcf (Pmean gas resource) and creates the opportunity for a second LNG hub in Senegal (in addition to the planned Greater Tortue Area).

Source: Kosmos Energy May 2017 company presentation

Kosmos has revised its exploration schedule since February 2017, introducing Hippocampe to the mix which has been prioritised ahead of Lamantin and Requin Tigre. Hippocampe is potentially a more valuable, liquid prone prospect and would likely be easier to commercialise in the case of success than the deepwater gas resources to date.

The drilling schedule over the next 12 months is now:

• Tortue-DST (imminent)
• Hippocampe-1 (Q3/4 2017)
• Lamantin-1 (Q4 2017)
• Requin Tigre-1 (Q4 2017/Q1 2018)

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Kosmos exploration - 2017 rising stars

With a strong balance sheet, cash flow generation in Ghana and exploration/development carry provided by BP through the recent Mauritania and Senegal deal, Kosmos is well positioned to
focus on its 2017+ exploration drilling plans, which will "test some of the largest prospects identified by the industry".

Despite its current gassy position in West Africa, management emphasises its confidence in finding higher value liquids: "Updated hydrocarbon charge model explains results to date and predicts phase - we believe there is a strong chance of finding oil or liquid-rich gas on the outboard basin floor fan fairways".

The high-graded 2017 prospect portfolio comprises:

Yakaar Prospect (Senegal): 15tcfe + 0.75-1.5bnbbl (gross unrisked) prospect located down-dip of the Teranga-1 gas discovery – combination structural-stratigraphic trap, well-defined on 3D with AVO support

Requin Prospect (Mauritania): 5–10tcfe + 0.25-1.1bnbbl (gross unrisked) prospect located outboard of the Tortue gas discovery – combination structural-stratigraphic trap, defined on 2D, 3D seismic currently being processed

Lamantin Prospect (Mauritania): 2-3bnboe (gross unrisked) prospect located in the north of the region – combination structural-stratigraphic trap with flat spot, defined on 2D, 3D interpretation currently in progress.

Requin Tigre Prospect (Senegal): 60tcfe + 3-6bnbbl (gross unrisked) resource potential located outboard of the Tortue gas discovery – combination structural-stratigraphic trap, defined on 3D seismic with AVO support and flat spot, awaiting final volumes to complete prospect evaluation and confirm well location

In terms of upcoming funding, the insurance payments should continue to cover the ongoing costs associated with the Jubilee repair. Continued TEN development drilling in 2018+ should help boost production and cash flow from Ghana. In addition the Atwood Achiever drilling contract expires in November this year and partner BP is set to provide in excess of USD900 million of cash and carry.

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BP Christmas shopping

BP has announced a series of high profile acquisitions in the past few weeks. The deals are in line with BP's longer term strategy of building in regions where they can gain "scale and materiality", although the company has moved more quickly than expected based on OGInsight's recent conversation with them, where BP said they were in divestment and portfolio rationalisation mode. This potentially signals a view of an improving oil price environment and willingness to move from balance sheet conservatism to growth.

At the end of November, BP acquired a 10% interest in Zohr from Eni. Since then, BP has announced two further acquisitions:

ADCO Concession

BP announced over the weekend that it had secured a 10% stake in the Abu Dhabi’s multi-billion barrel resource ADCO concession. BP previously held 9.5% in the concession prior to the expiry of its licence in January 2014. Other holders of the concession are currently Total (10%), INPEX (5%) and GS Energy (3%).

The concession is for 40 years and will add 1.8bnboe of 2P reserves to BP (net). The agreement includes various fields in the country with a total resource base estimated at c.20bnboe and represents a long term, low decline, sizeable resource for BP. The timing of the transaction will allow BP to book the reserves for the year end.

BP will pay a signature bonus of $2.2bn for its 10% stake, in line with the bonuses paid by other participants. However, the key noticeable difference is that BP will be paying in shares and will be issuing 393 million shares at £4.47 or a 9% discount, equating to 2% of its stock. The shares will be held by Mubudala and signals flexibility on the part of Abu Dhabi to secure a deal in a tough environment.

Mauritania and Senegal with Kosmos Energy

On 19^th December, BP announced that it had reached agreement with Kosmos Energy to acquire an operated interest in the Tortue field and surrounding blocks offshore Mauritania and Senegal. This will comprise of a 62% operated interest in C-6, C-8, C-12 and C-13 on the Mauritania side and 32.5% interest in Saint-Louis Profond and Cayar Profond on the Senegal side.

As part of the deal, BP will pay USD162 million upon closing of the transaction, appraisal carry of USD221 million and development carry of USD533 million bring total consideration to USD916 million. BP will also pay a contingent bonus of up to USD2/bbl for up to 1bnbbl of liquids structured as a royalty, should liquids be discovered. Kosmos will continue as exploration operator of the blocks.

The blocks contain the Tortue field, which is estimated to hold 15tcf of gas resources with potential for 1bnbbl of liquids. Project sanction is expected to be in 2018 with the most likely development scenario being a phased near-shore FLNG development.

Greater Tortue Area
Source: Kosmos Energy

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Troubles at Jubilee

Jubilee FPSO

On 18^th February, Tullow and Kosmos warned of a potential maintenance issue with the Jubilee FPSO’s turret. At this stage oil production and gas export is continuing as normal but the vessel is now set to be held in position by tugs rather than weathervane. The implications are that the turret may require maintenance that results in unscheduled shut-in and additional costs to rectify the issue. The length of any repair work is not yet known. Jubilee is forecast to contribute nearly half of Tullow’s H1 2016 production, and all of Kosmos’ H1 2016 production.

Following a recent inspection of the turret area of the Jubilee FPSO by SOFEC, the original turret manufacturer, a potential issue was identified with the turret bearing. As a precautionary measure, additional operating procedures to monitor the turret bearing and reduce the degree of rotation of the vessel are being put in place. SOFEC will now undertake further offshore examinations.

New field start-up have been a cause of concern for investors, as a number of recent offshore projects have cost more and taken longer to deliver. However, the news is a reminder of the risks of the focussed nature of E&P portfolios – many of the international E&P companies are dependent upon a single asset, and even the largest companies – including Tullow and Lundin (Edvard Grieg) remain heavily depend on just a couple of assets.

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