Morocco plans to drill 30 wells this year, but risks remain
Interest in Morocco's hydrocarbons sector is growing. Yet with only a number of high-profile exploration failures to its credit, will explorers take the chance?
In March, Morocco's energy and mines minister, Abdelkader Amara, announced that energy firms are planning to drill 30 wells in the country this year. This marks a surge in upstream activity in the North African country. Since gaining independence in 1956, just 300 wells, about five a year, have been drilled in Morocco.
Interest in Morocco's upstream has spiked recently. Investment in the country's energy sector doubled last year to more than $600 million. In the past two years, new players have arrived and those already present are ramping up activity. In January, Cairn Energy spudded the JM-1 well, in one of the three offshore Juby Maritime blocks it took on with its takeover of Nautical Petroleum in 2012. In October last year, US-based oil frontier-focused exploration firm Kosmos signed a deal with supermajor BP to explore three offshore blocks - Essaouira, Tarhazoute and Assaka - in the Agadir basin, offshore the country's central coast. BP has a 45% share in the first two blocks and a 26.3% stake in the latter. In January 2013, Chevron took three offshore blocks, also in the Agadir.
While there is a global move towards frontier exploration, that alone does not explain the new interest in Morocco's upstream. The emergence of neighbouring plays - the Atlantic Transform Margin to the south, for example -- and the possibility of geological analogues with South America's prolific offshore fairways, however, could be significant factors. "The shale revolution in North America has given rise to questions about whether there could be similar deposits on the other side of the Atlantic in Morocco," says Rabie Khellafi, an upstream analyst covering the Middle East and North Africa region at research firm GlobalData. Jonathan Redfern, chair of petroleum geoscience at the University of Manchester and an expert on Morocco, says major discoveries offshore Brazil and East African are important.
Energy companies take this seriously: "Morocco was formed by the Americas, Europe and Africa moving apart and it is conjugate to Nova Scotia. For us that is significant," says Larry Bottomley, chief executive of Chariot Oil & Gas, a UK-based firm focused on the Atlantic Margin, which holds three licences offshore Morocco.
With higher oil prices, energy firms are better able to justify higher-cost frontier exploration. A favourable legal and fiscal environment has increased Morocco's appeal too. "We can say that Morocco has a significant arsenal of regulations that can be considered as satisfactory and safe," says Redouane Mahrach, a lawyer at Casablanca-based firm RMS Lawyers. "From a fiscal point of view, this sector has very attractive aspects such as exoneration of taxes for the first 10 years." At the end of the initial 10-year period, corporation tax is payable at 30%.
Anne Lapierre, a Casablanca-based energy corporate lawyer for Norton Rose Fulbright, describes Morocco's oil and gas tax framework as 'every favourable to foreign investors'. She says: "The first company to find commercial reserves will be very happy because high level profits will flow. Indeed the fiscal rules are such that a commercial discovery of gas in Morocco would be significantly more profitable for an energy firm than the appropriation of profits in neighbouring countries."
According to research by oil firm Longreach Oil & Gas, the discovery of one barrel of oil in Morocco is worth 13 found in Algeria. The calculation is based on the state's participation being limited to 25% in Morocco and royalty taxes at 5% for oil and 10% for gas, meaning the state's stake in any given project never exceeds 35%. Coupled with Morocco's 10-year tax holiday this makes the fiscal environment extremely attractive to oil firms. In Algeria, the minimum state participation is 51%, royalty fees can reach up to 20% and there is no tax holiday.
Charles Proctor, president of Genel Africa, an Anglo-Turkish energy firm with stakes in three licences offshore in Morocco, describes Morocco's Hydrocarbon Code as "the platform for one of the most attractive environments in the world". He adds: "Regulations are robust, the state authority ONHYM is professional, while the fiscal regime is attractive enough to encourage investment and make the threshold for a commercial discovery relatively low."
Unrest in neighbouring oil and gas exporters Libya and Algeria has made stable Morocco a more attractive bet for energy firms as well. Libya's oil production, devastated by militia's targeting of export facilities, has plummeted from 1.35 million barrels a day (b/d) after the civil war of 2011 to around 260,000 b/d now. Algeria's oil production has fallen to about 1.1m b/d, 15% less than the average between 2005 and 2010. Gas production also dipped 1.7% to 81.5 billion cubic metres (cm) between 2011 and 2012, almost 8% beneath the 88.2bn cm it produced in 2005.
It is doubtful that Morocco could become a major exporter any time soon, however. "Morocco is currently an importer of oil and gas," Khellafi says. "Any modest gas discovery would have to supply to Moroccan market. In the same vein, in order to have any hope of getting to the European market, in terms of oil, Morocco would have to make a multi-billion barrel discovery."
Morocco imports around 93% of its energy. Total consumption was 115.33m barrels of oil equivalent (boe) in 2010, the most recent date for reliable data, compared with production of 8.09m boe. Energy demand in Morocco is growing by 8% a year. Mohamed Zine, from consultancy IHS Energy, takes a similar view. "It is too early to talk about Morocco as an exporter. The country may have significant resources of shale gas though," he says.
Energy companies are equally cautious when articulating Morocco's potential. Genel's Proctor says: "Clearly we believe that the country has significant potential as a hydrocarbon province but, with a number of wells being drilled this year, we will be in a far more informed position to make a useful assessment at the end of this year. It's impossible to know until wells have been drilled and the results understood."
Furthermore, Morocco has yet to yield a major discovery, and those explorers active in the country's play have experienced setbacks recently. Cairn abandoned the JM-1 well in March, after hitting rocks with limited porosity. It is the second such blow for Cairn; in December 2013, its first well on the Foum Drea Block was a duster.
Despite this, Cairn remains optimistic about the existence of gas reserves in the area. It said it encountered gas shows in the JM-1 well, which indicates the existence of a deep-water hydrocarbon system. Cairn hopes that a well its partner Kosmos plans to spud on the Cap Boujdour Block during the fourth quarter will deliver. Cairn has a 20% stake in Cap Boujdour. Pre-drill estimates peg the prospect's potential at around 500m barrels of oil equivalent.
Kosmos itself said in its first quarter report that it had been forced to abandon the FA-1 well, its first in Morocco, after failing to find commercial volumes of hydrocarbons. The well, in the Foum Assaka Block, offshore Morocco, was drilled to 3,830 metres before being plugged and abandoned. However, Kosmos said drilling indicated that a working petroleum system exists in the area.
Vice president Thomas Golembeski said: "Importantly, FA-1 encountered oil and gas shows while drilling and in sidewall cores suggesting the presence of a working petroleum system. The well also provided key seismic calibration information. "The well results are now being integrated into our ongoing petroleum system analysis. This data will be valuable ahead of the next tests of this petroleum system in 2015 and beyond."
Kosmos is carrying out geophysical work, including 3-D seismic, across its Moroccan acreage. The surveys of the Essaouira and Tarhazoute blocks will be finished late in the second quarter of 2014. Unless a commercial discovery is made soon, the University of Manchester's Redfern warns some explorers might soon lose heart: "If Morocco experiences three or five dry wells, then we will probably start to see a few companies start farming out and pulling out," he says. "But - it took 20 years or more to strike gas in Mozambique and Tanzania and people were saying it was a no-hoper. Morocco could be a similar scenario."
Zine from IHS also says the 'chance of finding significant conventional resources is getting slimmer', but adds that the country is looking into shale gas and future oil production could come from reserves of oil shale."In Morocco, it isn't a drilling problem, although there is an issue that more wells need to be drilled to fully test the basin. It's a seismic problem and how to interpret the responses. Seismic technology is continually improving and companies operating in Morocco have acquired new seismic," says Redfern, adding that he is working on a project with Chevron and other operators to undertake extensive fieldwork onshore that will improve understanding of the offshore geology and hopefully results in better seismic interpretations. "[There] is [a] very complicated geology in Morocco because of the presence of salt, and there is an ongoing search for a high quality reservoir in the basin. It needs to be better understood and that means more research and more data," he adds.