PE/project conundrum...up to Banks and the Govt.

Hi Space Cadet et al.,

A new thread in response to a good question raised by @Space Cadet on the https://hotcopper.com.au/posts/34720528/single.

This is more of a 'reality' post than a 'hype-the-hopeful' one.  Its probably not what everyone wants to hear and God knows, I certainly DONT want to hear Cujo and GO capitalise the negative, but if we discuss some of the possible realities of PE then we have a better chance of managing our expectations.

Far have said that they don't expect a result from the court until later in CY 2019 (5 months ago, I was quite optimistic by suggesting it wouldn't happen in 2018).  And lets not forget that FAR stated that they are only seeking an interpretive ruling (not an award ruling) that their rights are preserved.  This means that if the court rules in FAR's favour that, FAR can then enter into a negotiation period with WPL/COP which can only have 2 possible outcomes: 1) FAR and its backer stump up or 2) An equity/payout swap is negotiated (extra time will be needed for this and anyone's guess)

There are 4 key problems with the first outcome:

1) Swap out of Operatorship.

WPL have effectively been in the co-pilot seat for effectively 2 years.  They would have been allocating resources and personnel to twin and prepare CNE's IP, systems, infrastructure, legals and financials for eventual handover.  It would not surprise me that the majority of the Operators team are already WPL people.

Point is: it is not an easy or quick task to swap out from one operator to another.  From a project and government view point, its seriously problematic.  I've experienced this once during a project development phase.  The continuity and knowledge gaps that opened up were frightening and the distrust that developed at the Operator and Owners levels was palpable.  Swapping out Operators during steady production is challenging enough, but the risks increase by another magnitude during the development phase.

2) It takes time to get comfortable in the operators seat

Lets assume Far's 'backer' has a great CV or deep-water project development and operational experience.  I estimate it would take at least 9 months for the backer to pull key personnel from existing projects/ops, and get them up the knowledge/system/process/country curve to get to anywhere near comfortable with any sign-offs.  Even if all personnel are already earmarked, confidentiality clauses in the JVA would prevent any sharing of technical data before hand (and god knows, FAR would NOT want to beach the JVA now).  So no backer is going to take sign-off responsibility for legal, insurance and risk reasons until they are ready.

All Operator agreements do have comprehensive and solid Transfer and Handover Clauses which, in essence, mean the Old Operator cant transfer responsibility until the New Operator is entirely satisfied that it has ALL the information, systems, insurances (these are very important...remember Deepwater Horizon?), third party and internal agreements it needs to take on the game.

Yeah...I'd give that part at least 9 months.

3) JV and Govt has to approve new Operator

The Operator Agreement is separate from the JVA, but the JVA will spell out how it can broadly be assigned among the JV partners. It resides with the Initial Operator (usually the major project interest holder) unless they assign it away or their interest falls below a certain level...usually 25-30%). So when CNE sold down its interest to COP, it also separately offered (it didnt have to but COP probably demanded it) the Operatorship. Operator transfers sometimes require a super majority of JV approval (usually >50%), so FAR's approval would not likely have been required. It is possible that CNE's approval may be required for any further transfer.

But regardless of the JVA conditions, a New Operator isn't going to even order new stationery until they have both signed Government approval and the necessary licences to operate full-blown operations.

4) Gov'ts primary goal: No delays

I speculated in early June that I believe (its not a fact!) that the Senegalese Govt will support and tolerate the arbitration PROVIDED that it does not interfere with moving the project forward.  The recent announcement from FAR extending an outcome to beyond the JVA's and Gov't's expected FID date may place that schedule at possible risk for 3 reasons:
a) Govt needs to sanction and licence the chosen Operator
b) Banks will need access to WPL's/COP's interest and title
c) Banks will need security/assurances of Operator

The Banks (b and c) arent really the problem.  Its the timing of the possible outcome.

5) Banks only operate in stable conditions.

All the banks want is for a JV to hold the goal posts/conditions steady for enough time so they can tick all their boxes...and there are a lot of them.  Move one of the goal posts and its back to the credit committee you go!

The PE is openly on the table and the Banks must take it into consideration.  They will want to know, confidentially of course, who the potential PE party(ies) is/are and factor it into their due diligence.  FAR and its backer(s) will have been doing a lot of work on this already to identify and help mitigate the banks due diligence concerns.  I believe FAR may need this tacit approval from the banks in order to satisfy any 'fit-for-operator' conditions that may be associated with PE preconditions in the JVA.

But the Banks would have strongly recommended a 'no-go window' to FAR: I'm guessing some 6-8 months prior the FC until maybe 6-12 months after.  But its impossible to say.

Conclusion

I really think the financing now has to be approached on the basis that WPL proceeds as 35% interest holder and Operator and CNE and FAR as is.  Otherwise its simply just too complicated for the Banks and time sensitive against the Govt to contemplate a change or delays during this critical project period.

Lets face it, FAR's ability to squeeze an arbitrated outcome and a negotiate result from COP/WPL (let alone settle in a new Operator) within sufficient time prior to the Gov't's timetable were slim to none.

Both the Banks and the Gov't will be strongly suggesting and preferring that this matter now be settled after the project kicks off...unless the matter can be categorically cleared within the next 3 months (< zip).

Oddly, the ICC delay now probably helps take the pressure off FAR as being the instigator of any potential project delays which would have been causing some angst with the govt.  Something that CN has been very vocal about avoiding.  

Once again, I suggest (as so does CN) that we tune down our expectations in terms of timing for an outcome on PE.

So Go....Samo!!!

Cheers