Economist Blames Forced Eni/Vitol-Springfield Unitisation For 5-year Investment Decline in Upstream Oil Sector
Economist and Political Risk Analyst, Dr Theo Acheampong, has revealed the reason behind the lack of investment in Ghana’s upstream oil industry for the last four to five years.
Speaking during the NorvanReports & BudgIT Ghana X Space Discussion on Friday, July 11, 2024, Dr Acheampong quipped the forced unitisation between Eni/Vitol and Springfield by the Government along with inconsistent policies in the upstream sector is responsible for the dried-up investments in the sector.
“In the last 4-5 years, the upstream industry has gone through some bad times as many investors I have spoken to don’t want anything to do with the country.
“They tell me that the Government is hounding investors and as such don’t want to come and invest in the country and are therefore pitching camos with other countries and this is due to the forced unitisation and inconsistent policies in the upstream sector,” he remarked.
Speaking further during the X Space discussion, Dr Acheampong pointed out that a proper appraisal of the Afina oil field owned by Springfield to determine its connection with the Eni/Vitol fields was not done.
Asserting that Government failed in its duty to ensure that a proper appraisal of the Afina oil field was done by Springfield and its partners.
“As a country, we did not do what was expected of us but rather force Eni/Vitol’s hand to do the unitisation and this is evident from the arbitration documents,” he quipped.
An appraisal of an oil field helps determine how much oil is available in the field and can be subsequently produced, it also helps determine the technology and method of production to be used for extracting the oil.
On the forward, Dr Acheampong noted that the Government must sit with Eni/Vitol to discuss the way forward doing away with its antagonistic posture towards Eni/Vitol.
“Government needs to go back to the table with Eni/Vitol and resolve the issue and change its antagonistic posture towards Eni/Vitol,” he noted.
The NorvanReports & BudgIT X Space Discussion was on the topic, “Counting The Cost: When Government Ignores Expert Advice In Resource Dispute.”
Case Analysis: Eni Ghana Exploration and Production Limited and Vitol Upstream Ghana Limited v. The Republic of Ghana and Ghana National Petroleum Corporation
I. Background
This arbitration arose from a dispute over unitisation directives issued by Ghana’s Ministry of Energy (MoE) concerning oil fields operated by the Claimants (Eni and Vitol) and Springfield Exploration & Production Limited. The Claimants argued that these directives violated the Petroleum Agreement and Ghanaian law.
II. Key Issues
- Whether the Unitisation Directives violated the Petroleum Agreement and Ghanaian law
- Whether the Claimants suffered compensable damages
- Validity of the Respondents’ counterclaims
- Allocation of costs
III. Tribunal’s Analysis and Decisions
- Violation of the Petroleum Agreement:
The Tribunal found that Ghana breached the Petroleum Agreement by issuing the Unitisation Directives. The key reasons were:
a) The MoE’s discretion to direct unitisation under Section 34(1) of the Petroleum Act was not triggered, as the existence of a straddling accumulation was not established. b) The imposition of unitisation terms violated procedural and substantive rules under the Petroleum Act and Petroleum Regulations. c) The determination of initial tract participation was arbitrary and lacked justification.
- Damages Claim:
The Tribunal dismissed the Claimants’ damages claim as premature and unsubstantiated because:
a) The Unitisation Directives have not yet been enforced. b) The claim was based on unproven assumptions about future events. c) The Claimants failed to account for potential adjustments through the True-up Payment mechanism.
- Counterclaims:
The Tribunal rejected the Respondents’ counterclaims, finding that:
a) The provisions of the Petroleum Agreement invoked by the Respondents did not impose an obligation on the Claimants to comply with measures contrary to the stabilization regime. b) Non-compliance with unlawful Unitisation Directives could not be deemed a breach of the Claimants’ contractual obligations.
- Costs:
The Tribunal ordered each party to bear its own costs, with Ghana required to pay 50% of the Claimants’ share of the arbitration costs. This decision was based on:
a) The mixed outcome of the case, with Claimants prevailing on liability but not on damages. b) The reasonable conduct of both parties during the proceedings. c) The comparable reasonableness of both parties’ claimed costs.
IV. Key Takeaways
- The case highlights the importance of following proper procedures and substantive requirements when implementing unitisation measures in the oil and gas industry.
- It underscores the significance of stabilization clauses in protecting investors’ rights under petroleum agreements.
- The decision emphasizes the need for concrete evidence of harm when claiming damages, particularly in cases where disputed measures have not yet been fully implemented.
- The case demonstrates the complex interplay between contractual obligations and state regulatory powers in the natural resources sector.
- The Tribunal’s approach to costs allocation reflects a balanced consideration of the overall outcome and the parties’ conduct throughout the proceedings.
V. Potential Implications
- The decision may influence how states approach unitisation processes in the future, emphasizing the need for thorough technical assessments and procedural compliance.
- It may encourage investors to seek declaratory relief in similar situations where damages are not yet quantifiable.
- The case could impact how stabilization clauses are interpreted and applied in the context of state regulatory actions in the oil and gas sector.
- The Tribunal’s approach to damages may set a precedent for similar cases where disputed measures have not yet been fully implemented.
