License retention and gas play fuels exploration surge in West Africa

FOLLOWING the sustained drop in oil prices since June 2014 by more than fifty percent, with potential for still yet lower prices, exploration and production companies have continued cutting their capital expenditures.

Projects in the West Africa offshore region have been among the most vulnerable, especially in the first half of the year. Exploration activities in frontier countries declined significantly as several projects were deemed unprofitable at current price. However, optimism seems to be on the rise again as a wave of exploration drilling are receiving management approvals mostly targeting license retention.

In comparison, North Africa seems to be attracting more pure exploration play capital due to recent discoveries offshore Egypt, Tunisia and Morocco. However, West Africa’s rising gas demand is prompting companies to seek out gas licenses in key West Africa countries, with some accompanying exploration activity.
ExxonMobil and its partners on block LB-13 in deep-water offshore Liberia have concluded a work programme for 2016 that will see the company drill a well to determine commercial viability of hydrocarbon reservoirs on the license. The Mesurado-1 well, which had been earlier scheduled for late 2014/early 2015 had been delayed by the country’s ebola crisis. The exploration programme is expected to cost about $120 million.

Similarly, Africa-focused firm, Royalgate Energy is expected to drill two wells in block Z offshore Equatorial Guinea. The block, which is in close proximity to Nigeria’s Niger Delta offshore region, is believed to hold over 3 tcf of natural gas reserves in place, following the Gardenia discovery made in 2004. The company intends to commence its drilling programme in Q4 2015. The activity could potentially be a gas play targeting upcoming gas processing capacity in the West Africa region.

Following their recent discoveries, partners Cairn Energy of the UK and Australia’s FAR Oil and Gas are set to commence a three-well drilling programme offshore Senegal. The Ocean Rig Athena was mobilised from Luanda Angola in October, with drilling expected to begin in November and completed by mid-2016. The three wells will comprise one new exploration well Bel-1 and 2 appraisal wells. The programme is targeted at expanding resource base information and enhancing block development potential.

Other producers such as US Independents, Vaalco Energy, Kosmos Energy and UK Independent Genel Energy are also planning exploration wells on some of their blocks in the region. Vaalco is set to spud an exploration well on block 5/06 offshore Angola late 2015. The well will bring Vaalco closer to its four well commitments before November 2017. Kosmos is drilling a second well offshore Mauritania in Q4 targeting 300mmboe of gas and liquids. Genel Energy and its partner Vitol are also expected to drill an exploration well on their CI-508 license in ultra-Deepwater offshore Cote d’Ivoire during the fourth quarter of 2015.

However, alongside the relative rise in exploration activity, farm-outs are also occurring, mostly targeted at risk-sharing and in some cases, complete exit from the region. US Independent Cobalt Int. Energy is set to exit its Angola stakes to focus on its US Gulf of Mexico assets. Australian explorer, FAR Oil and Gas reached an agreement in September to acquire over 75 percent of Trace Atlantic stake in Djiffere block in shallow water offshore Senegal. Pilatus Oil and Gas is also seeking to farm out some of its stake in the Ngoki license onshore Congo republic; the company currently hold 90 percent of the blocks interest. Vaalco is also planning to farm out some equity stake in block 5/06 offshore Angola. Vaalco currently holds 40 percent stake in the block.

A significant portion of the exploration activity offshore West Africa seems to be targeted at gas reserves, especially offshore Senegal and Equatorial Guinea. This ties in with the growing demand for gas ahead of major gas processing projects offshore Ghana, Cameroon and even Equatorial Guinea. South Africa has also indicated intention to import LNG for use in its domestic economy. Furthermore, with the potential to lock-in stable incomes from gas supply contracts, oil companies in the region are starting to place more emphasis on the gas segment of their assets.

While these developments are encouraging, analysts fear the region may lose its competitiveness due to regulatory problems. ‘While the planned exploration drilling activities are encouraging, the fact most are targeted at retaining licenses is a point of concern,’ says Ecobank in a research note. ‘Compared to North Africa, where a considerable amount of pure exploration play is being recorded, West Africa may be losing its competitiveness due to regulatory bottlenecks and oil market challenges. To a large extent, the ability of the companies looking to farm out stakes to attract strong partners however signifies that the region still retains significant interest,’ it adds.

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