Game changer - Oil & Gas Regional Focus: East Africa

If you find it, they will come writes VSA Capital’s oil analyst, Malcolm Graham-Wood

In the space of a few years, East Africa has become a feeding ground for most of the world’s oil majors, which have sniffed out resources of oil and gas on a truly gargantuan scale. And on the East Coast, in the warm waters of the Indian Ocean, natural gas has been discovered by the tcf-load.

This conveniently faces the lucrative markets of India and the Far East and is now a truly valuable commodity. We look at the countries and companies which are setting the pace in the region, and how it may change its nature.

Because of the nature of the projects, particularly in offshore natural gas fields, this is going to be territory for the big boys, as witnessed by the recent bid by Royal Dutch Shell for Cove Energy.

We will work through the countries that have seen the biggest finds, and where operations will be the most far-reaching, looking at which companies have made it their business to explore the region.

The way this has panned out only confirms the view that the bravest and wealthiest often ‘make out’ in frontier areas, of which East Africa is a perfect example: indeed once the first discoveries of offshore gas were made, it has been almost entirely restricted to the majors. With PNG and Australia also bringing forward significant natural gas projects to rival Qatar and the Middle East, the supply part of the equation for the Pacific Rim is, if not safe, to a large extent secure for the decades to come.

East Africa

Our overview of East Africa shows that significant discoveries have been made, safe in the knowledge that LNG trains can be constructed and customers will be found for long-term contracts. In terms of numbers, as we have said, the area has already offered the possibility of 140tcf of natural gas, and this only from Tanzania, Mozambique and Kenya, with the latter the least certain. If you add in other countries’ finds, and the possibility of oil as well, this is truly a hydrocarbon province being developed in front of our eyes.

Our look at East Africa could stretch quite a long way inland and include a number of projects which are slightly further down the line than the more high-profile discoveries of the last few months, but for now we are sticking to the bigger plays.

Away from the coast, Tullow has been encouraged, as have other players, by the discovery of the Lake Albert Basin in Uganda, which is being replicated in Kenya. Tullow has farmed down its acreage here to CNOOC and Total, which brings further majors into the region.

In Ethiopia, Tullow and Afren are unsurprisingly leading the way, and there is activity in Somalia, autonomous Puntland and Somaliland. In Madagascar, Afren, BG, Ophir and Madagascar Oil are chasing what are believed to be very substantial reserves.

Exxon is in possession of some of the largest offshore blocks.

Madagascar Oil is AIM-listed and focussed on heavy oil, as well as conventional oil and gas deposits, onshore Madagascar. After a period of contention, the validity of its PSCs for Blocks 3105, 3106 and 3107 has been confirmed and its work programmes are set to go ahead. It expects to achieve first oil production in the country this year.

BG owns a 30 per cent stake in an Exxon-operated block offshore the north-west coast of Madagascar, while Afren has a 90 per cent stake in Block 1101, onshore northern Madagascar and adjacent to Exxon’s Ampasindava block, which it may drill in 2013.

Kenya

After coffee and tea, Kenya is now looking at the possibility of a substantial oil and gas industry to its economy, as the oil companies move in.

Tullow Oil, which has made a name pioneering the frontiers in Africa, is one of the leading players here, hoping to reciprocate the success it has enjoyed in the Lake Albert Basin, Uganda. Tullow has only recently started drilling in Kenya, but it has already seen two significant successes, and has claimed that Kenya already looks to be bigger than the whole of the Uganda play.

Other players committing to Kenya include Premier Oil, which is also following the rift play in its offshore acreage.

Unsurprisingly, BG is also active in Kenya, having moved in last year when it acquired interests in Blocks L10A and L10B. It holds 40 per cent and 45 per cent in these blocks, respectively, and will be the operator of both.

Two things stand out here: first, BG is with Premier in these blocks; and second, Cove Energy pops up in both blocks as well. If we assume that Royal Dutch Shell succeeds in its bid for Cove, this will see another major getting into an East African country.

Finally Afren, which crops up all over Africa, is also represented both onshore and offshore in Kenya, as it continues its diversification programme from Nigeria. With 100 per cent of Blocks L17/L18, 50 per cent of Block 1, and 20 per cent of Block 10A, its exposure is with EAX and Tullow.

Kenya is reported to have at least 60 trillion cubic feet (tcf) of natural gas.

Tanzania

Tanzania is where some of the biggest finds have been made, again after, in BG’S case, a relatively recent arrival on the scene. BG farmed into Ophir’s acreage in Blocks 1, 3 and 4, offshore southern Tanzania, by acquiring 60 per cent of Ophir’s interests in the Mafia Deep Offshore Basin for 85 per cent of costs and the initial work programme. Drilling commenced in October 2010, and two gas discoveries were made in the Pweza and Chewa wells. This was followed up by discoveries in 2011 at Chaza, and drilling in late-2011 and early-2012 has significantly altered the situation, as reports have shown that, with another discovery, at least 7.5tcf of gas is in place. After initial drilling, BG became the operator in July 2011.

Moreover, BG and Ophir Energy have recently announced a further significant discovery on their Mzia-1 prospect, offshore Tanzania. With estimates of gas in place of between 2tcf and 6tcf, and a median estimate of 3.5tcf, this discovery, in the Upper Cretaceous sands, is a new play-opener for the consortium. Adding the new find to their existing discoveries makes at least 10tcf of natural gas and has continued to de-risk this massive play.

Companies are focussing on the natural gas discoveries, offshore Tanzania, as it is clear that they can support a significant LNG development (as evidenced by the potential for two LNG trains with the new BG/Ophir find). It has been thought for some time that in the deepwater areas offshore Tanzania there is the possibility of oil in place but while the development of LNG plant is being evaluated, that will take precedence.

Statoil is also involved in Tanzania, and has a discovery with Exxon which, in its own right, is reported to be at least 5tcf.

In addition to these companies, Tullow is again represented. It has concentrated on the Lindi block, where it had previous oil shows without commercial quantities. Afren is also present, with contiguous acreage with its Kenyan blocks. The Tanga Block also has an Afren interest of 74 per cent and the Orpheus Prospect is expected to be drilled later this year Tanzania is reported to have at least 20-30tcf of natural gas.

Mozambique

Mozambique has undoubtedly been the biggest success story in East Africa, with the discovery of the huge Prosperidade Complex in the deepwater Rovuma Basin, operated by Anadarko.

Prosperidade Complex has already been given 17-30tcf of natural gas recoverable resources, and 30-59tcf in place.

Accordingly, two separate LNG projects have already been sanctioned.

Since this success, the partnership has identified more than 20 additional exploration prospects and leads in the area.

The reserves above exclude the further discoveries in what is known as the Tubarão prospect, which itself looks like it could become a significant discovery.

ENI has also made a ‘giant’ find at its Coral 1 prospect, offshore Mozambique, where it says it has 75 metres of gas pay in a single, high-quality Eocene sand.

ENI believes that Coral could contain 7-10tcf of gas in place, with Area 4 now likely to contain 47-52tcf in place.

And of course, you can’t discuss Mozambique without talking about Cove Energy, which has become the most interesting stock for a long time. Cove Energy recently announced another whopping discovery offshore Mozambique with the Anadarko operated Atum exploration block near the recent Golfinho find. With 300 net feet of pay the company estimates recoverable gas reserves of 10-30tcf, Area 1 now has resources of between 30-60tcf and potential upside of 100tcf.

Realising that it was too small to play in the ‘big boys’ game the company put itself up for sale earlier this year. After a spirited bidding war, three groups appeared to be fighting it out: Shell, which showed first and is the likely winner with a £1.1 billion bid proving the adage of it being a big boy’s game; followed by PTTEP; and then a potential consortium of ONGC and Gail from India. The process was temporarily halted as the Mozambique tax situation was clarified, but once that was sorted out, the process restarted.

Afren is also involved in Mozambique, as is PETRONAS, which shows how wide the net is being cast.

www.vsacapital.com

VSA Capital Limited (VSA) is a London based investment bank providing corporate finance and corporate broking services to companies operating in the natural resources sector; specialising in metals and mining, oil and gas and timber and agriculture.