Discoveries boost Angola upstream mood
Prospects for a first licensing round in almost a decade will be buoyed by new finds
Angola will hold an auction of upstream exploration licenses in October—a first under the presidency of Joao Lourenco and a first in almost 10 years. A series of new oil discoveries by Italy's Eni should bring some much-needed feel-good factor.
Angola is sub-Saharan Africa's second-largest oil producer, but output has dwindled as the crude price slump from mid-2014 made the country's relatively high cost deepwater reserves a less attractive prospect. Crude oil production fell to 1.42mn bl/d in June 2019 from 1.77mn bl/d in 2013, according to Opec data.
"With the blocks that are in operation now, the geology is becoming more complex and the fields are more spread out, so you really need to think about how the infrastructure is put in place to connect these fields and get this oil out of the ground and to market," says Virendra Chauhan, an oil analyst at consultancy Energy Aspects. "That only adds to costs and means international oil companies (IOCs) will be reluctant to pull the trigger unless the economics are very attractive."
In response to these challenges, President Lourenco has enacted reforms since his election in September 2017, cutting taxes and creating a standalone industry regulator in order to kickstart the new exploration needed to halt Angola's production decline.
“The geology in Angola is very challenging” Chauhan, Energy Aspects
"Angola is not self-sufficient and cannot survive without foreign investment despite having huge natural resources," says Goncalo Falcao, head of the Angola practice at law firm Mayer Brown. "In an increasingly competitive continent, Angola needs to present itself as a changed country.
"The 2014 crisis had this wonderful effect of making Angola's elite realise how vulnerable they are and how fast they will collapse if they do not revamp the country and provide a reliable and low-corruption business environment."
In June, Eni said it had made a fifth discovery in Angola's Block 15/06 since the company's joint venture with Sonangol relaunched a year earlier. In total, Eni estimates the five discoveries contain 1.8bn bl of light oil. Tests showed that the offshore Agogo-2 field held a further 650mn bl of oil, with further discoveries likely, it said in a July follow-up.
"The fields that Eni has discovered in that block are all of a reasonable size and the most interesting aspect is that they're close to Eni's FPSOs so it can fast-track them," says Adam Pollard, an upstream analyst at consultancy Wood Mackenzie. "That is exactly what Angola is looking for in the short-term—projects that can be brought onstream quickly."
In February, a presidential decree approved the country's 2019-25 concession award strategy, with the country saying in April it would award 49 new oil concessions by 2025—around nine in both 2019 and 2020, eight in 2021 and further 23 thereafter. The concessions will be awarded through public tender, limited public tender and direct negotiation.
Angola will host roadshows in Houston, London and Dubai in September and will launch a new bidding round on 2 October. Initially, there will be nine tenders for the previously unexplored Namibe basin and one for Benguela, according to Mayer Brown. These will be the first since around 2010-11. An onshore bidding round was slated to be held in 2013, but this was ultimately cancelled.
Eni may bid for the tenders. "We believe that in the deep-water there are unexplored or underexplored areas which might hold potential, for example in Namibe and ultradeep lower Congo basin," says the firm. "We will look at what the country will put out for bid and evaluate it carefully." ExxonMobil has signed a Memorandum of Understanding with Sonangol to "evaluate the hydrocarbon potential in the Namibe Basin".
“Angola is not self-sufficient and cannot survive without foreign investment” Falcao, Mayer Brown
And Chevron is also cautiously optimistic, "believ[ing] there is still a significant amount of remaining resources" in the Chevron-operated Blocks 0 and 14. "Chevron's top priority is to deliver low-cost, short-cycle developments to accelerate first oil and increase production. The company is also committed to supporting Angola in its overall strategy for the exploration, development and monetisation of gas," the US major says.
But some observers are less convincing on large IOCs' bidding appetite. "Everyone is waiting to see how the market responds to these new bidding rounds, because the expectation is for Angola to be much more flexible while negotiating the production sharing percentages," says Falcao.
Source: Petroleum Economist
Production sharing percentages vary according to individual contracts. Angola's normal tax rate is 50 percent, which is quite high, so IOCs tend to get a large production sharing percentage to compensate.
"The geology in Angola is very challenging—in a lot of instances you are digging several thousand metres below the seabed and are going into high pressure, high temperature environments, so the risks increase considerably for oil companies," says Energy Aspects' Chauhan. But the new IMO 2020 regulations will bolster the attractiveness of exploring Angola's oil, he says. Angolan crude is a heavy, sweet crude that yields low sulphur middle distillate.
Angola has cut its petroleum tax from 20pc to 10pc for oil discoveries that lie undeveloped due to reserves size—less than 300mn bl—or prohibitively high extraction costs. The petroleum income tax on marginal fields has also been reduced to 25pc from 50pc.
Eni welcomes these reforms, highlighting the tax cuts for marginal fields as "creating further opportunities". "Giving tax breaks on already-discovered marginal fields and letting companies explore within development areas are good ways to boost production in the short term—these can be tied back to existing facilities—but, longer-term, Angola needs to get companies exploring again in new areas, so this is where these bidding rounds come in," says Wood Mackenzie's Pollard.
Previous licensing rounds in 2010-11 focused Angola's Kwanza basin and led significant gas discoveries that were almost valueless for the oil companies because they had no rights to this gas, which was, at that point, reserved solely for Sonangol. That, too, has been changed.
"Now there is potential value, but you still need to create a market, either locally or by establishing an export route," says Pollard. "Kwanza was a pretty gassy basin and Namibe could prove to be the same."
Up to 95pc of Angola's production is offshore and decline rates are very high. Energy Aspects' analysis indicates the country must add 200,000bl/d of new production every year to offset its decline rates and stop overall production falling further. "If Angola doesn't make it more attractive for IOCs to enter, production will continue its precipitous decline," says Chauhan.
1.42mn bl/d: Crude production in June
"Unless it is a tie-back opportunity, i.e. a small development which may bring onstream 10,000-15,000bl/d very quickly, just like we have seen Eni do over the last few months, it is going to be difficult for Angola to attract large-scale investment from IOCs."
In 2018, the government restructured national oil company Sonangol, transferring various responsibilities to the newly-created National Agency of Petroleum and Gas—which will now manage bids for new oil concessions and production-sharing agreements—while Sonangol will solely be an exploration and production company.
As well as awarding new licences, the government has sought to boost output from existing fields, extending agreements with BP and ExxonMobil. An agreement with BP to develop a block in the Platina field, which would be the UK firm's first new operated development in Angola since 2013, is also inching closer.
But Angola is unlikely to return production levels to its 2014 highs anytime soon, says Chauhan, given that production has continued to decline despite the Kaombo fields—a joint venture between Total and Sonangol—ramping up to maximum capacity. "The future projects backlog is thinning out and there is not a big project—anything above 100,000bl/d capacity—coming up before 2021-22," he says. "So, it is likely to be a struggle for Angolan oil production for the foreseeable future."