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African competition hots up

It's a tough environment for exploration, but some countries are making headway

A near halving of the oil price since late 2014 has been accompanied by a similar-sixed fall in drilling costs. But it's going to take more than that to woo cash-strapped companies to a growing queue of African countries eager to attract investors to their frontier acreage.

As the industry's growing investments in Senegal, Mozambique and Uganda have shown, what's really needed to pique interest is a major discovery. But persuading international oil companies (IOCs) to fund exploration in high-risk unproven blocks isn't easy when oil prices remain around $60 a barrel.

It's telling that the first major oil or gas finds in all three of those countries were made before the oil-price crash, since then the amount of frontier exploration has nose-dived globally. When African hydrocarbons stalwart Tullow Oil outlined its plans for the next two or three years, it made clear that its limited financial resources would be targeted in the first instance towards field developments in Ghana, where it is already producing and wants to boost revenues. Tullow's exploration programme in Kenya and elsewhere is a secondary concern.

The days when companies and their shareholders thought exploration was the way to expand their reserves base are over, for now at least.

"Three years ago, the big discovery was what people were looking for, but for the time being, with the current oil price, value seems to be holding sway over volume. Incremental drilling, near-field drilling, appraisal or just de-bottlenecking existing developments is where they are at now," says David Thomson, lead sub-Saharan Africa upstream analyst at consultancy Wood Mackenzie.

This leaves Africa with unexplored frontier acreage in a difficult position. Existing oil producers, eager to boost waning revenues by attracting exploration to their own frontier acreage, are competing with these upstarts.

Persuading IOCs to fund exploration in high-risk unproven blocks isn't easy

Relative newcomers Sierra Leone and Liberia are among those poised to launch offshore licensing rounds, joining better-established players such as Côte D'Ivoire, Namibia and South Africa, which are trying to revive interest in their under-explored blocks. Onshore, Chad and even its neighbour Mali are among those seeking to attract further investment.

So, what does a government have to do to hold the attention of the IOCs?

The first prerequisite is to be in the right neck of the woods in terms of prospectivity. For that reason, both Guinea Bissau and the Gambia could be exploration targets in the coming months. The former lies next to hydrocarbons-rich Senegal and the latter is completely surrounded by it.

Senegal's neighbours make their case

Swedish privately owned firm Svenska Petroleum Exploration and its partner Australian-based Far have been planning a drilling campaign on their acreage in Guinea Bissau, since Cairn Energy—in a group with field pioneer Far—made the first discovery on Senegal's now-blossoming SNE development, 200-300km to the north.

Following a revision in licence terms, the joint venture now has until 2020 to drill at least one well on each of its Sinapa and Esperanca Licenses with a minimum expenditure commitment for each license of $3m. Based on accumulated surface data, including 3-D seismic, Far suggests the areas in Guinea Bissau in which it has an interest could hold "best estimate" reserves of 0.954bn barrels of oil.

The Gambia is even better placed to benefit from the Senegal effect, given some of its acreage is contiguous with the Senegalese blocks housing the SNE development. Far holds the majority interest in two blocks in the Gambia, while four other blocks were thrown open to bids in August 2017. Far has said a drilling campaign could start late next year in the shelf edge geology of its acreage, which the company describes as being "on trend" with the SNE discovery.

In a similar fashion to Senegal's neighbours, Côte D'Ivoire's government is hoping some of the shine from successful exploration in neighbouring Ghana will rub off on its efforts to reboot interest in its less explored acreage.

Cutting costs for IOCs

If a government can't point to a massive find on its doorstep or to promising geology—and even if it can—then keeping the costs down for prospective explorers is the other main avenue to a competitive edge. IOCs investing in frontier acreage in countries such as Sierra Leone and Namibia can expect more attractive deals from governments than better-established players, such as Angola.

Since lower oil prices arrived, state oil companies in some countries have needed to adjust their licensing terms to stimulate exploration. For example, the terms on Svenska and Far's Guinea Bissau licenses were recently adjusted to include more favourable arrangements for deep-water investment, including a reduction in production royalty rates payable to the government, according to Far, which did not provide further details.

Keeping other costs down also stands frontier countries in good stead. Senegal could boast a sizeable, well-equipped deep-water port in the capital Dakar, which was only around 100km from the first offshore SNE discoveries, making it an ideal location for Cairn to build up its local depot. And, of course, prospective blocks on offer in relatively shallow water would be cheaper to drill than those in ultra-deep water.

Clarity and consistency in the government's approach may be as important as the low costs. Potential investors will seek an efficient, unbureaucratic approach from the state oil company and a stable regulatory environment, along with evidence from other industries that corporate law is upheld and that the government honours it deals.

Companies are unlikely to invest in high-risk frontier acreage if a country has a reputation for trying to renegotiate production-sharing-contract terms part way through a licensing period because, for example, the state wants to increase its share of the take due to reduced oil prices and revenues.

Wood Mackenzie's Thomson points out that, although Angola offers some of the harshest fiscal terms in sub-Saharan Africa, the country has won some kudos among investors, because state oil company Sonangol has a reputation for not reneging on its agreements. "Security of contract is absolutely paramount for the IOCs," he says.

Sierra Leone's licensing round

A willingness to fund new seismic surveys and then provide potential explorers access to the results in well-organised data rooms at a reasonable cost also reflects well on the intentions of governments. As a precursor to its forthcoming licensing round, Sierra Leone's Petroleum Directorate took back ownership of 3-D seismic data collected by TGS Nopec and opened data rooms in Freetown and London to show the results of this and other surveys, which include 15,000 line km of 2-D seismic and more than 10,000 sq km of 3-D seismic, along with data from all wells from drilling in 2009-13.

The country's fourth licensing round runs from 15 January to 31 May 2018, covering areas of undeveloped discoveries from previous drilling campaigns, including shallow water, deep-and ultra-deep-water acreage.

$3m - Minimum spend for Senegal's Sinapa and Esperanca licenses

UK-based Getech Group, which is coordinating the licensing round with the Petroleum Directorate, stresses that the country is "located on a margin that is bookended by major discoveries in Senegal/Mauritania and Ghana", adding that "Sierra Leone's offshore waters contain proven petroleum systems that we believe to be conjugate to major discoveries in South America".

A major challenge will be convincing oil companies that the country is near enough to either Senegal or Ghana to warrant the comparisons, or that its geology has enough in common with either—a cause not helped by the fact that the various drilling programmes between 2009 and 2013 failed to make a commercial-sized discovery.

Another obstacle will be to convince IOCs that Sierra Leone, still in a period of reconstruction after an 11-year civil war that ended in 2002, has reliable institutions with the capacity to host the oil industry. Liberia, which has adjacent frontier acreage, suffers from similar image problems. Its civil wars ended in 2003.

While such perceptions may be unfair for two countries that have made progress since their conflicts, major spenders in the oil industry will need convincing to plough money in Sierra Leone or Liberia with oil prices at current levels. More attractive options are available elsewhere in the region, never mind the rest of the world. If you're after low-risk steady returns then the US shale sector may be more of an eye-catcher, for example.

Onshore risks

The need to offer a stable, viable operating environment complicates the investment outlook for several African countries.

Chad already has established oil production, but the chances of building on it have been hampered by poor government relations with investors. The country is embroiled in a dispute with Glencore over a failure to make repayments on a $1.4bn loan made by the commodities trader to the government to help it fund the acquisition of Chevron's stakes in oil projects. The government wants to give the crude-marketing rights acquired by Glencore to ExxonMobil, which operates fields as part of the Doba consortium, which produces some 63,000 barrels a day, or just under half of the country's total output, according to government figures.

Chad and its neighbour Mali, which is also promoting its oil acreage, are both prone to deadly attacks by Islamist militants. This heightens perceived risks for investors that offset the attractions of relatively cheap exploration and production, at least where an export pipeline is accessible, as the Chad-Cameroon pipeline is in southern Chad.

Namibia back on the radar?

By contrast, Namibia looks like a beacon of stability, and, like Sierra Leone, promotes its offshore areas using the "mirror" theory—the hypothesis that its acreage may share geological characteristics with the South American littoral, with which it was adjacent 150m years ago. Aside from Brazil's offshore trove, Namibia can, of course, also point to the success of neighbouring Angola.

But that optimism has yet to be backed up with much in the way of substantial finds, despite intermittent bouts of exploration over the years, especially in Namibia. The failure to commercialise Namibia's Kudu gasfield—which has proven reserves of some 1.3 trillion cubic feet—since its discovery in 1974, despite several attempts, hardly provides much encouragement for IOCs.

Namibia has embarked on a new drive to stimulate investment, following promising results from a well drilled in the Walvis Basin by Brazil's HRT in 2013 and then disappointment in the following year, when a well drilled by Repsol, also in the Walvis, came up dry.

Shell, Galp, Tullow, Total and ONGC are among others with interests in offshore blocks, though drilling plans generally remain vague. London and Toronto-listed Eco Atlantic has said it hopes to drill a well in early 2018 on its Osprey prospect in the Cooper block in the Walvis—a block which has best-estimate prospective resources of around 0.75bn barrels, according to the company.

Source: Petroleum Economist

This article is part of an in-depth series on Africa's upstream. Next article is: Côte d’Ivoire's exploration drive rebooted

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