Choppy waters ahead for Equatorial Guinea as production declines
Minister of mines, industry and energy, Gabriel Obiang Lima, is taking a hard line with investors amid low oil prices and falling output
Gabriel Obiang Lima is a frustrated man. Equatorial Guinea’s energy minister spoke candidly to PE about what he described as “dilly-dallying” from international oil companies such as ExxonMobil, Marathon, China National Offshore Oil Corporation and Noble Energy, who he said also showed flagrant disregard for his office. The oil-dependent economy looks set to contract through 2020, under pressure from low oil prices and declining production.
Obiang Lima said his ministry was disinclined to grant ExxonMobil an extension on the Zafiro deepwater field in Block B where the US major operates with an 80% interest, once it expires in 2023.
Production peaked at the field in 2004 at 280,000 barrels per day (b/d), though output now stands less than half that.
There were strong implications from the minister that in order to secure the extension, ExxonMobil would need to agree to a modification of the terms favourable to the government. “We will take it (Zafiro) back, we will probably have to work with other companies to continue with the development. It is not easy but we believe that, if we have more discussions with ExxonMobil, we may nevertheless end up with an agreement.” ExxonMobil declined to comment.
Similar frustrations became evident in relation to Marathon’s Alba field, the country’s most prolific gas asset to date. Discovered in 1984, the Alba wet gas field started production in 1991. It produces around 70,000 b/d, mostly liquids. The associated natural gas that was historically flared from the field is now the main source of feedstock for the $1.4bn Punto Europa LNG plant on Bioko Island. Production from the field also feeds a $400m methanol plant and an onshore LPG processing plant. The need for gas flaring at the field has been removed.
“They (Marathon) are saying that Alba is a marginal field but from what kind of marginal field can you run a methanol and an LNG plant?” the minister asks. “We are not seeing value for Equatorial Guinea.” The LNG is purchased by BG at very low prices – even by the standards of today’s depressed spot market.
The minister also wants to see Cnooc move faster on its evaluation of Block S. The frustration appears to result in part from the belief that Cnooc may be trying to acquire its stake in the Ceiba field from US producer Amerada Hess. The government is disinclined to approve such a transfer of interest, preferring instead to acquire the US independent’s interest either on its own or with Cnooc, presumably according to the rights it enjoys under the production-sharing agreement.
“I suspect that they are having discussions with Amerada Hess to buy the Ceiba field. I want to be very clear about this. It is not going to happen. If someone wants to buy Ceiba, it is going to be us, Equatorial Guinea. If the Chinese want to buy it, they will buy it with us. If it is not like that, I will not approve it.”
Amerada Hess is the operator of the Ceiba field and Okume complex just offshore of Rio Muni in Block G with an 85% interest. Tullow Oil holds 15% and Equatorial Guinea’s GEPetrol has the remaining 5%. Production at Ceiba has been declining since 2007, when it averaged 42,000 b/d. It now produces just 26,000 b/d. Hess declined to comment: “In the normal course of business, Hess looks at opportunities to optimise its portfolio, but does not comment on rumours or speculation.”
Cnooc drilled its second well in Block S, near the Ceiba field, in mid-August. Results have not been made public, but when the company drilled its first well in the block in October 2014, it found only non-commercial amounts of crude oil.
The minister also suggested that Noble Energy, which has found hydrocarbons in an area straddling the Cameroon- Equatorial Guinea boundary line, was playing the governments off against each other.
“They are playing double games. They are going to Cameroon and talking with them. They are coming to Equatorial Guinea and talking with us. We are neighbours. Doing something like that will only create tension,” he said.
Noble has a 50% interest in the YoYo mining concession offshore Cameroon where gas was discovered in 2007, and in the Tilapia exploration block. In its 2015 annual report, the company said it was working to “finalise a data exchange agreement” between Equatorial Guinea and Cameroon.
If the drilling proves successful, the Cameroon assets could provide an alternative production source for Noble when its Equatorial Guinea fields start to decline. The company holds a 40% stake in the Aseng field in Block I and a 45% interest in the Alen field in Block O. The fields began producing in 2011 and 2013, respectively.
The company is also working on other development opportunities including the Diega field in Block I and Carla in Block O. But the minister threatened to halt any of Noble’s future plans. “They need to present the Diega and Carla plans for development. We will put a freeze on activity and we won’t approve any more developments for Noble Energy until the issue with our neighbour, Cameroon is resolved.”
A spokeswoman for Noble said the company had no producing assets in Cameroon and was not working on any sanctioned projects.
On a more positive note, the minister said he was confident Ophir Energy’s Fortuna FLNG project in Block R would progress to allow a final investment decision in mid-2016, paving the way for first gas in 2019.
Worthy of note, however, is his concern that Ophir has yet to discuss the fiscal terms required to secure buyers for the LNG offtake. “We need to be involved with the off-takers. The question is, how do you talk to an off-taker if you don’t have agreed fiscal terms?” he said. Ophir in July said its focus had switched to securing buyers for the LNG and to bringing in an equity partner prior to its mid-2016 FID.
On 11 November, the company announced that it has finalised commercial terms and is in the process of signing the heads of agreement (HOA) for the offtake of gas from the Fortuna project.
In September the International Monetary Fund said the country’s economy is set to contract by about 9% in 2015, and a further 2% per year during 2016-20, owing to lower capital expenditures and falling output.
Oil output rose dramatically from when Zafiro came on stream in 1995 until 2005, when it hit a record high of 376,000 boe/d. By then, the country was the third largest oil producer in sub-Saharan Africa. But the field started to age and there has been a lack of significant discoveries, with output now standing at 240,000 boe/d.
That said, Obiang Lima needs to be taken seriously. “The minister is not playing. Not to take him seriously would be a mistake,” said NJ Ayuk, managing partner at Centurion, a law firm which advises the government on oil and gas contracts.
The minister said he will launch a new licensing round for all of the remaining deep and ultra-deepwater blocks in 2016. A few wells will be drilled next year with two operators, RoyalGate Energy and Brazil’s G3 Oleo and Gas confirming that they will both drill. RoyalGate Energy said it will drill on block Z and G3 will drill on block EG-01.
In the meantime, the ministry has yet to sign off on five other blocks that were auctioned in a round that closed last year. The blocks – EG-18, EG-17, EG-09, EG-08 and EG-07 – have lured the attention of mainly Nigerian companies while the majors were conspicuous by their absence. Obiang Lima had suggested he hoped to sign off the deals by the end of November.
As oil production dwindles, The country’s gas resources are set to become its primary source of income and development. It is building a 24-MW gas-fired power station in Bata, and hopes to create its own downstream petrochemical industry. The Riaba area has been singled out to host a petrochemical platform where Archean Fertilizer won a contract to carry out feasibility studies last year.
The country also harbours an ambition of becoming a hub for crude oil storage. The Bioko Oil Terminal will be built at Punto Europo on Bioko Island, ideally located to service key oil supply and demand centres throughout Africa. Taleveras Group, a Nigerian oil trading firm, signed a memorandum of understanding earlier this year with the ministry of mines, industry and energy, to construct the terminal. It will have a storage capacity of 1.2m cubic metres of refined products and crude.
The minister said several other companies had expressed interest in the project, including Johannesburg-listed SacOil Holdings, which has just signed a MoU to take part in the construction of the farm and Gunvor, the world’s fifth largest oil trader. The agency that manages South Africa’s oil stocks, the Strategic Fuel Fund Association, is also interested, as are Vitol and Trafigura.
Obiang Lima, who is also second son to president Teodoro Obiang Nguema, proved beyond doubt that his words should be taken seriously. Hours after the interview, the ministry issued a release confirming that the ministry would not approve Hess’ sale of Ceiba to foreign bidders; that it would not approve Noble’s developments, and that ExxonMobil’s Zafiro contract would not be extended.