Equatorial Guinea takes steps to stem output decline

By Paul Burkhardt and Angelina Rascouet on 10/24/2017

JOHANNESBURG and LONDON (Bloomberg) -- Equatorial Guinea, OPEC’s newest member, is taking steps to stem the decline in its oil production following the acquisition by Kosmos Energy Ltd. and Trident Energy Management Ltd. of fields currently operated by Hess Corp.

For two to three years there has been a trend of U.S. companies operating in Africa, but not re-investing there, said the nation’s Minister of Mines, Industry and Energy Gabriel Obiang. The purchase of Hess’s 85% stake in the Ceiba and Okume offshore fields by the smaller companies could improve output in the short to medium term, he said.

“For Equatorial Guinea, for Nigeria, for any producers it’s the same story -- we have been two years reducing costs, drilling very few wells,” Obiang said in an interview in Cape Town. “We clearly have to be realistic that we’re going to be affected by the reduction in our wells, in our operations.”

Equatorial Guinea joined the Organization of Petroleum Exporting Countries in May, making the group the largest it’s ever been. The nation’s oil production is capped at 128,000 bpd until the end of March as part of the group’s effort to eliminate a supply glut. In the longer term, it plans to increase output to 300,000 bpd and offered permits last year to bring in foreign investors for exploration. Winners of the licensing round included ExxonMobil Corp. and Ophir Energy Plc.

New plans

Oil prices have finally stabilized, Obiang said. “The price that we’re having right now, we’re coming to the conclusion that we need to be realistic and learn to live with that price.” The country is adjusting all its planning according to that, he said.

Kosmos and Trident have created a joint venture that will buy an interest in three exploration licenses off Equatorial Guinea, on top of buying Hess’s stake in the producing fields, the companies said in a  statement. Kosmos will focus primarily on exploration and Trident will mainly be in charge of production. Trident is backed by private-equity firm Warburg Pincus and founded by Jean-Michel Jacoulot, the former chief executive officer of privately-held French explorer Perenco.

The gross acquisition price is $650 million, while Kosmos will pay $240 million in cash to Hess when the deal closes at year-end due to adjustments related to cash flow since the transaction was first agreed on Jan. 1. The deal purchase will add cash flow in a region that’s a major focus for Kosmos, Brendan Warn, an analyst at BMO Capital Markets, said in a note on Tuesday.

Tax settlement

The transaction could proceed because the government of Equatorial Guinea reached a $220 million settlement on “tax issues” with the two partners in Ceiba and Okume -- Hess and Tullow Oil Plc -- the ministry said in an emailed statement on Monday. Two years ago, the country refused to approve the sale of Hess’s producing offshore assets to foreign bidders.

“Hess has been a key leader in the oil and gas industry and instrumental to the country’s growth over the long term,” Obiang said in the statement. “We are pleased the companies worked with us to revolve this situation amicably.”

Africa is increasingly a destination for shipments of liquefied natural gas to generate power, Obiang said in the interview. Equatorial Guinea is supporting an initiative to regulate the market on the continent both with the use of an indexed price and a structure that will include all parties from suppliers to end users, he said.

Equatorial Guinea could become a supplier of LNG through Ophir’s Fortuna offshore project. A final investment decision is expected by the end of the year or the first quarter of 2018, he said.

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