AFR Article...
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The FAR side of Coleman's Senegal spat
Matthew Stevens
Columnist
Aug 20, 2019 — 12.00am
Through three years of sparring with Woodside Petroleum after it became FAR Limited’s partner in oil development in Senegal, the junior’s chief executive Cath Norman has sustained a routinely patient public decorum.
That edifice of calm cracked just momentarily when Norman was asked for response to vigorous criticism of FAR by her peer at Woodside, Peter Coleman.
Through the pages of The Australian Financial Review, Coleman was accused of being “very disingenuous” in offering powerful criticism of FAR over its continuing effort to prosecute its claim to rights over Woodside’s 35 per cent share in the big oil discovery that Norman’s plucky frontier explorer found back in 2014.
On Monday Norman politely declined our invitation to expand on the level of Coleman’s disingenuity. Norman, who is a former Olympic volleyball player and so used to the relentless ping-pong of a competitive life, said: “No, I don’t think so, we have all agreed that we should say nothing more.”
So what is really going on here?
Well, there are two very clear streams of consciousness on the progress of the SNE joint venture to development and the risks posed by FAR's decision to take the matter of its rights over Woodside’s interest to the International Court of Arbitration in Paris.
The Woodside lens
Looked at through the Woodside lens, an irrational FAR – which is an under-sized, one-asset business – has decided to pursue a course that risks mutually assured destruction that could see the extant joint venture lose tenure over its oil.
But assessed from the FAR side of the hill, the 2016 deal that introduced Woodside to the SNE project abused the rights of other joint venturers and the thesis of risk that Coleman presented last week reveals, at best, an arguably forgivable distance from a full understanding of the protections of the agreements with the government of Senegal.
On Thursday last week a Woodside boss frustrated by the gathering complexities of life within four distinctly different joint ventures lashed out at little FAR, which is a 15 per cent owner of the now Woodside-operated joint venture that is deep into the pre-development cycle that should introduce Senegal to the international oil production map.
Coleman claimed that FAR’s continuing legal challenge to the $US630 million ($940 million) deal that introduced Woodside to real oil in Senegal had undermined efforts to secure project finance that we understand could be used to cover up to 50 per cent of the SNE project’s $US3 billion first-phase development costs.
Further, Coleman claimed that FAR’s “trivial” legal claim to rights over Woodside’s share of the SNE joint venture would not be settled by the International Court of Arbitration until a date after the drop-dead date of the production sharing contract with the government of Senegal.
“To be honest with you … it's not clear to me how FAR is going to resolve this at this point,” Coleman told investors last week. “The arbitration has been heard, but the ruling itself is unlikely to come down before the end of the year. If it does, it will be very late in the year. We have a PSC [production sharing contract] that expires in early December, so any ruling that comes down after the PSC expired is kind of a useless ruling anyway.
“I'm actually not quite sure, and I'd flick it back into their quarters to how they're going to solve the problem that they've caused here for the joint venture,” Coleman concluded.
We will always have Paris
For all of that uncertainty, Coleman indicated that Woodside was still aiming to conclude a final investment decision and deliver the government with an application for a production licence before the PSC expires.
To be clear on the timelines here, the PSC is due to expire on December 4. Woodside says that the government has made it very clear that it expects to be provided with a “total project funding solution” by that date.
The problem identified by Coleman is that the arbitration in Paris might not conclude until December 28. And, worse, if the decision lands in FAR’s favour, there will need to be a second round of arbitration to assess how the abuse of right might be mitigated.
Given the uncertainty Coleman illuminated, it is rather puzzling that Woodside says that it has not invited the government to extend the term of the PSC and has no plans to make that request.
Interestingly enough, while Woodside is joined to the arbitration matter, the contest is actually between FAR and Conoco. They each presented their case to a three-person panel in Paris over three days in early July. A round of post-hearing submissions will be presented to the Court of Arbitration by August 28, with final rebuttals to be presented by September 28. After that the court has three months to deliver a decision.
Now there is a view that the matter at hand is comparatively straight forward so the panel might offer a finding ahead of its post-Christmas deadline.
But, as Coleman said, final investment decisions and the flood of documentation they trigger are not matters that can be dealt with in days.
Why FAR will not walk the Coleman talk
So, if Coleman is correct to identify December 4 as a drop-dead deadline, then the only obvious pathway to avoid the tenure risk that Woodside’s man has called out would be for FAR to walk away from the arbitration process.
But, as far as we can determine, FAR is not minded to do that, first because the company is convinced of its case, second because there is material value in success and third because it is convinced that there is plenty of wriggle-room in the PSC and its terms.
FAR’s sanguinity is sustained by a belief, first and foremost, that expiration of the PSC offers the government a call on tenure that it is not going to make. But, confidence in the security of tenure is further buttressed by the fact that the joint venture last week presented the government with a formal development plan.
We are assured that there is a standard clause in the PSC that prevents the termination of the licence while the government evaluation process is in train or subsequent to development plan approval.
As it turns out, there has actually been a lot of project progress despite the visible tension between SNE’s new operator (Woodside) and the company that found the thing in the first place.
Contracts for sub-sea works and well drilling have been signed subject to final investment decisions by the project proponents. The last big-ticket procurement challenge is securing a lease on a floating production, storage and offloading vessel (FPSO) and while the market is beginning to tighten that task is said to be now well in hand.
The joint venture is moving through its capex optimisation stage, which will likely further trim the standing budget of $US3 billion, and the project assurance task is probably a month from completion. Once that is done, the joint venture will get its arms around the firm budget and return economics that are required to fulfil the funding task that Coleman says has become so complicated.
The menu of challenges
From what we understand, the joint venture and SocGen are working on a range of funding options that include project financing and finalisation of the capex and assurance work streams which trigger a new and final round of discussions with banks and export credit agencies. From what we understand, project financing can cover only 50 per cent of the phase-one budget.
There is a rich menu of challenges here. The biggest equity holder in the venture is Cairn Plc. It owns 40 per cent and is waiting on project certainty to monetise a portion of that to cover its share of the funding. FAR is said to be leaning towards the project financing option but has others under contemplation. And Woodside, meanwhile, has a balance sheet and cash-flow position that means it could cover its share and a whole lot more without recourse to the banks.
And then there is Senegal. The state owns 10 per cent and has a call over a further 8 per cent. Given the oft-repeated $US3 billion capex number holds, then Senegal’s investment burden stands at around $US550 million, which is a huge number even for one of West Africa’s most secure and inviting sovereigns.
Reportedly Lazards in Paris is busy working up solutions to Senegal’s funding task. Presumably, that means the government is well and truly aware of the risks created by the ** between its partners in SNE. And, for mine, that only makes more a mystery of Woodside’s apparent reluctance to contain risk it perceives to the joint venture’s licence by requesting an extension to its standing agreements.
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