Both Kosmos Energy and Tullow Oil closed major seven-year reserves-based financings last year, at the height of the liquidity crunch, for their shares of the $3 billion phase 1 Jubilee oil field development, offshore Ghana.

Tullow got better pricing – around 150-200bp lower than Kosmos – and pulled in many of the same lenders. But there are significant differences in risk between the two deals. Kosmos is a single asset financing and does not have the cross-collateralisation from existing assets in Tullow's deal structure. Kosmos is also a non-operating and minority partner in Jubilee (Tullow is the operator and major shareholder with 34.7 %, while Kosmos holds 23.4%).

The Jubilee field is located on the West Cape Three Points Block and adjacent Deepwater Tano Block. The development is based on a conventional subsea design located in approximately 1,300m of water using a turret-moored floating production, storage and offloading vessel (FPSO).

The phase-one development plan calls for up to 17 wells, five water injection wells and three gas injection wells. The development process has been designed so that the gas produced will be available for export to shore and/or reinjected into the reservoir, eliminating gas flaring. Kosmos estimates that the Jubilee Field could potentially hold recoverable oil and gas reserves of between 650 million barrels to 2 billion barrels of oil equivalent.

Kosmos initially funded its share of development with equity – in 2008 Warburg Pincus and Blackstone added $500 million to the $300 million that they and Kosmos management had already invested. However, Standard Chartered had been working with Kosmos since November 2008 to structure a long-term reserves-based debt financing.

The $750 million loan is split into a senior 7-year tranche of $600 million and a 7.5-year junior tranche of $150 million because the deal had no borrowing base capacity for the full $750 million. The bank club comprises the IFC, Africa Finance Corporation (AFC), Societe Generale, Calyon, Cordiant Capital, ABSA, BNP Paribas and Standard Chartered.

All banks participated in the senior debt, but only the IFC, BNP Paribas, Standard Chartered and AFC took a piece of the higher-priced junior debt. Pricing starts at 500bp over Libor for the senior debt, rising to 550bp over term. The junior debt starts at 650bp over Libor, rising to 700bp over term.

The financing is a hybrid borrowing base/project financing. The $600 million senior debt is secured against proven and probable reserves, whereas the $150 million junior debt, which is essentially a bolt-on debt-service facility, is unsecured. Debt availability under the reserve base is restricted to funding development costs until completion of phase 1 of Jubilee.

The bank price deck for 1P reserves stands at around $35 per barrel. Some value was given to 2P reserves. The deal is fully hedged, with all banks taking part of the hedge in line with their degrees of commitment.

Because financing closed without the usual conditions precedent fulfilled, the deal included an early-draw tranche of up to $300 million to allow the sponsor earlier access to debt, rather than continually drawing on equity. The early draw tranche had fewer conditions to be met than the rest of the debt – just government approval for the field development plan and signing of an FPSO contract. Government approval was given two days after financial close but the early draw was still not used until later in 2009 when problems with the perfection of security were ironed out, although, ironically, prior to signing of an FPSO contract.

The financing suffered delays because of the Ghanaian government's lack of comfort with the reserves-based security structure, despite the financing relying on production figures of 120,000bpd and wells tapped indicating production as high as 500,000bpd. Kosmos could not put financing in place without knowledge of imminent government approval for the field's development. Because of the uncertainty over the timescale for the government approvals the project closed with a start date of January 2011, but Kosmos now expects first oil by October 2010.

The potential upcoming sale of Kosmos' Jubilee stake may also have been a factor in the slowness of government licensing. Kosmos has mandated Standard Chartered and Barclays to organise the sale and the Ghanaian government has indicated its interest in buying the share for GNPC. Exxon bid $4 billion for the share but has been blocked by the Ghanaian government asserting its rights to make its own pre-emptive bid for Kosmos.

Speculation in the press is that the government is hoping to strong-arm Kosmos into a sale to GNPC, and possibly a foreign joint venture partner, at a knock-down price and then sell on to some of the bidders that expressed initial interest last year – Shell, Chevron, ExxonMobil, Eni, Oil & Natural Gas Corporation, BP and CNOOC for example. But given Kosmos has fulfilled all conditions precedent on the debt, it now has the funding to fulfil all its Jubilee obligations and can afford to wait for the best offer on the table

Indeed, Kosmos has just signed a $75 million loan from Credit Suisse as an add-on to its Jubilee oil field borrowing base facility. The new loan is on the same terms as the original facility and more lenders may yet join in the coming months. The new debt will be used for general funding or to meet Kosmos' share of FPSO costs should the Jubilee sponsors switch from leasing an FPSO to acquisition.

Kosmos Energy
Status: Financial close 13 July 2009
Description: Reserves-based debt facility for development of Jubilee oil field in Ghana
Sponsor: Kosmos Energy (Warburg Pincus, Blackstone)
Total debt: $750 million
Financial adviser: Credit Suisse (involved in cashflow modelling but not in the final structuring)
Mandated lead arrangers: Standard Chartered (global coordinator, co-technical and modelling bank and senior facility agent), BNP Paribas (security trustee, junior facility agent and hedging coordinator), Societe Generale, (lead technical and modelling bank), IFC, Barclays/Absa Bank, Africa Finance Corporation, Calyon and Cordiant Emerging Loan Fund III
Sponsor legal counsel: Slaughter & May
Lender legal counsel: Clifford Chance
Technical consultant: Shaw Consultants International
Reserves Engineer: NSAI
Insurance: Moore McNeil
Model Auditor: Operis