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Ultra-deepwater Namibe in doubt, despite ExxonMobil deal

US major’s investment boosted prospects of Angola’s beleaguered oil sector, but its blocks are unlikely to be economically viable without a crude price rebound

Despite ExxonMobil signing a risk service agreement to become the operator of Namibe deepwater blocks 30, 44 and 45 in late October, it remains far from certain that oil will be produced in the foreseeable future.

Namibe’s output will depend on the size and nature of any discoveries as well as the quality of the reservoirs, says Emma Richards, a senior industry analyst at Fitch Solutions.

ExxonMobil’s Namibe blocks are located 50-100km from Angola’s coast at depths of 1,500-3,000m, far beyond Angola’s proven oil reserves in the Lower Congo and Kwanza basins.

“Ultra-deepwater wells are extremely costly to drill, and there is not much scope for that type of big-ticket spending” Richards, Fitch Solutions

Namibe is geographically conjugate to Brazil’s Santos basin, which has led to speculation that it could hold sizeable reserves. However, “that belief is largely untested”, says Richards, noting any exploration drilling will likely be delayed.

Brazil and Guyana have some of the world’s most competitive deepwater resources globally, she says. But even these have full-cycle breakeven prices of around $30-40/bl.

Therefore—even if Namibe was able to match both the costs and scale of the West Atlantic discoveries—it will be difficult to proceed with such projects if oil prices remain rangebound. The World Bank forecasts crude will average $44/bl in 2021, broadly in line with consensus.

“It would be a close call whether or not those resources would be developed if prices stayed as they are,” says Richards. My feeling is that they would not be.”

If the blocks were not developed, it would heap further gloom on Angola’s oil industry. The economic value of its production shrunk 37.8pc in the second quarter of 2020, and production had already been in steady decline before the coronavirus pandemic.

Nonetheless, the ExxonMobil agreement—made two years after penning a memorandum of understanding to explore the southern Angolan basin—led Paulino Jeronimo, president of the Angolan National Oil, Gas and Biofuels Agency, to predict more contracts would soon be signed with other oil companies.

“Ultra-deepwater wells are extremely costly to drill, and there is not much scope for that type of big-ticket spending when IOCs are cutting their capex so aggressively,” Richards says.

“Current prices are extremely restrictive of exploration in general, and most new acreage picked up over 2020-21 will be taken up on the assumption of a longer-run recovery in the market. Certainly, there is nothing to encourage ExxonMobil to try and fast-track its activities on these blocks in the current price environment.”

Uncertain future

Even if ExxonMobil were to confound expectations and push ahead with Namibe, the giant field is no quick fix—in Africa, it takes an average of c.10 years to go from oil discovery to first production, says Adam Pollard, a senior upstream analyst at consultancy Wood Mackenzie.

Richards describes her outlook for Angola’s oil sector as “generally bearish”, citing the lack of investment over several years and declining production. Angola’s output was 1.25mn bl/d in September 2020, down from 1.77mn bl/d in 2015, according to Opec’s annual report. Fitch expects Angola’s output to fall below 1mn bl/d over the next decade.

37.8pc – Q2 decline in value of oil production

“That [decline] is based on the post-FID project pipeline, which has more or less been exhausted by now,” adds Richards. “If exploration picks up, with the likes of ExxonMobil, Total and Eni showing interest, then any major discovery could see our forecast reverse.”

The coronavirus led Total to halt its planned 2020-21 Angola offshore drilling programme. The French company has now resumed offshore drilling, becoming the first oil company to restart non-essential offshore activity in Angola, but it is prioritising development wells over exploration wells. 

This prioritisation is “fairly typical during a downturn,” says Richards. “As companies look to conserve their capital and focus their investment on projects that are cash-generative in the near term.”

Total has an exploration well on block 48 that will be drilled at a world record depth and which, if it came in, “in would be a big shot in the arm for the country”, adds Wood Mackenzie’s Pollard. “It is frontier exploration and could be a few years before any development sees the light of day, but it would still be positive news.”

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