Africa Drilling Lacking Despite Cheap Rigs, Higher Oil Price

LAGOS (Capital Markets in Africa) – A recovery in oil and gas exploration in Africa is yet to happen, despite the best efforts of producing nations to raise prices.

Only a dozen rigs were operational in African waters on average over the last year as saving cash remained a priority even for prolific explorers such as Italy’s Eni SpA. The rate of drilling this year is barely a 10th of the activity before the price slump, according to consultant Wood Mackenzie Ltd.

“There’s still appetite for frontier exploration,” Gail Anderson, research director for sub-Saharan Africa upstream oil and gas at Wood Mackenzie in Edinburgh, said by phone. “But it’s a bit more selective and looking for regions where the costs of entry are low.”

After the worst downturn in a generation, the outlook for the oil industry is brighter. The Organization of Petroleum Exporting Countries and allies including Russia have been cutting oil production to eliminate a surplus, an effort that has held benchmark Brent crude above $50 a barrel for most of the year. Yet the process has been slow — OPEC expects to finally clear the surplus by the third quarter of next year — and companies haven’t rushed back into exploration.

A couple of years ago “you could see tumbleweeds blowing around the exploration departments of most companies,” said Larry Bottomley, chief executive officer of Chariot Oil & Gas Ltd., a small Africa-focused explorer. That’s no longer the case, but “moving these big companies is like moving the QE2 or a big liner — it takes a long time to get them to turn around.”

Signs of a resurgence in exploration were beginning to emerge last year, Bottomley said. In addition to the recovery in prices, costs have plunged, allowing the drilling of four wells today for the same price as a single well two or three years ago. Larger firms won’t be able to put off replacing their reserves for much longer, he said.

“To find something, you have to drill a well,” Keith Hill, CEO of Africa Oil Corp., said in a presentation at the Africa Oil Week conference in Cape Town on Monday. The company expects to have a pipeline-development plan for its discoveries in Kenya ready within three to six months, he said.

Recent deal-making on the continent reflects the beginnings of such a turn. Norway’s Statoil ASA bought a 35 percent interest in two offshore South African licenses last month from Exxon Mobil Corp., which retains 40 percent of the blocks. France’s Total SA, which has a long history of African exploration, also bought stakes in fields off South Africa and in neighbouring Namibia.

“The downturn has been severe and sharp and it’s going to take a while yet for us to come out of that cycle, but we are seeing this happen in terms of acquiring acreage,” said Anderson of Wood Mackenzie. “Obviously the companies have to study the acreage before they put a well down.”

Drilling in sub-Saharan Africa is still down dramatically, with just nine exploration wells completed so far this year compared with 100 in 2013, she said. “Next year and beyond I would expect it to improve.”

There are 13 rigs currently operating offshore from Africa, an improvement from nine earlier this year, but well below the 30-year high of 48 in 2014, according to data from Baker Hughes Inc. The reduction in activity has had a material effect on output, with Wood Mackenzie expecting 2017 production to be about 700,000 barrels-a-day lower than it was forecasting before the downturn.

Activity may soon get a boost from a couple of external factors. Nigeria has improved security after a spate of militant attacks on pipelines, allowing companies like Seplat Petroleum Development Co. to start ramping up drilling. The maritime boundary dispute between Ivory Coast and Ghana, which held up exploration in one of the continent’s most promising areas, was resolved last month.

Tullow Oil Plc will resume drilling on the Tweneboa, Enyenra and Ntomme fields, which hold an estimated 2 billion barrels of oil and 1.2 trillion cubic feet of natural gas, after the International Tribunal for the Law of the Sea ruled that the fields were in Ghana’s waters. There’s a lot of interest in that area in the current market, Anderson said.

“This is sort of frontier acreage in countries that are considered to be fairly low cost to enter,” Anderson said. While major producers such as Nigeria and Angola are struggling to entice explorers because fiscal terms such as royalties or taxes are tough, less well-established countries such as Senegal look much more attractive, she said.

Source: Bloomberg Business News