Exploration stalls in Africa as oil price declines

Exploration stalls in Africa as oil price declines

by Paul Burkhardt, 2015-01-23 06:52:59.0

AFRICA’s oil and gas boom is in jeopardy. The dash for resources that saw explorers invest billions of dollars to tap promising oil fields from Ghana on the west coast to Tanzania on the east, is stalling as the global drop in crude prices pushes drillers to reconsider the high costs of exploration on the continent.

For many drillers, 2014 was already failing to reach the promise seen in 2013 when half of the world’s 10 largest oil and gas finds were made in Africa.

With oil prices dropping below $50 a barrel, analysts say they expect a more concentrated pullout this year.

“Now that we’re at another weak oil price, every company will be reviewing discretionary spending,” said BMO Capital Markets analyst Brendan Warn.

In Africa’s frontier environment, drilling may bring a higher reward, but since most exploration takes place offshore, single wells can cost hundreds of millions of dollars, increasing the industry’s susceptibility to lower oil prices.

Chairman of Global Pacific & Partners (which advises African governments) Duncan Clarke said cuts had already begun. They include “budget cutbacks, asset sales, some corporate consolidations, more farm-outs, slower acreage pick-up, tougher operating conditions, and weaker overall margins for producers,” he said.

Following major discoveries in 2013 in countries including Tanzania and Kenya, the Baker Hughes Rig Count reported 154 rigs in Africa last February, the most since 1983. By December, that had declined to 138.

Ophir Energy, a UK explorer that has made several large finds in Tanzania, ended its 2014 drilling campaign in Gabon in June, after a series of dry holes.

Repsol, Spain’s biggest oil producer, spent almost $100m on a well that missed in offshore Namibia.

Tullow Oil, a British oil company that was among the most active explorers in Africa, said last week it would not drill a single offshore exploration well in the continent this year, as it reduces investment in response to lower prices.

For Africa to revive the momentum of its oil and gas industry, governments needed to look at the terms they offered explorers and adapt them to reflect lower prices, Tullow CEO Aidan Heavey said.

“As more and more companies are pulling back, you’ll see that countries will have to change their terms,” Mr Heavey said last week. “We will be renegotiating our exploration licence terms.”

Tullow has cut its exploration and appraisal budget of $1bn more than two-thirds and will focus on onshore drilling in East Africa, where it has been able to reduce well costs to $7m each.

“It’s going to be the operators who are going to have to control costs,” the head of oil and gas advisory for sub-Saharan Africa at Deloitte & Touche, Claude Illy, said. Exploration would be cut “quite drastically”, he said

The silver lining for companies obligated by lease terms to drill could be lower service costs.

“Exploration in general will receive less funding due to the fall in oil prices,” Chariot Oil & Gas CEO Larry Bottomley said on January 9 in response to questions. “What we have seen, though, is a significant decrease in exploration costs, specifically seismic and drilling, so although there are fewer dollars, those dollars will go further.”

The cost of conducting a 3D seismic survey had dropped to $3,500 a square kilometre from $10,000 a year earlier, Ophir CEO Nick Cooper said in November at an oil convention in Cape Town. Ophir was not available immediately to respond to a request for updated costs.

Drilling service companies such as Milan-based Saipem might see orders drop 30% with oil at less than $80 a barrel, said Sanford C Bernstein analysts in a January 19 research note, and the cost of hiring offshore rigs might fall 40%.

Not all companies have put off plans. “The majority of our current development and near-term exploration drilling is offshore Nigeria, where typically the production costs are a little lower than other exploration areas,” Camac Energy spokesman Lionel McBee said. “In this price environment, we’re not going to be expanding exploration drilling. We’re sticking to our development programme.”

Some projects, such as completing of SA’s first deepwater well, which Total suspended due to technical issues last year, may not be realised for as long as the under-$50 environment lasts. The company did not reply to an e-mail inquiry about drilling plans in SA.

Bloomberg

A general view shows an oil rig used in drilling at the Ngamia-1 well on Block 10BB, in the Lokichar basin, which is part of the East African Rift System, in Kenya. File picture: REUTERS / NJUWA MAINA

A general view shows an oil rig used in drilling at the Ngamia-1 well on Block 10BB, in the Lokichar basin, which is part of the East African Rift System, in Kenya. File picture: REUTERS / NJUWA MAINA

AFRICA’s oil and gas boom is in jeopardy. The dash for resources that saw explorers invest billions of dollars to tap promising oil fields from Ghana on the west coast to Tanzania on the east, is stalling as the global drop in crude prices pushes drillers to reconsider the high costs of exploration on the continent.

For many drillers, 2014 was already failing to reach the promise seen in 2013 when half of the world’s 10 largest oil and gas finds were made in Africa.

With oil prices dropping below $50 a barrel, analysts say they expect a more concentrated pullout this year.

“Now that we’re at another weak oil price, every company will be reviewing discretionary spending,” said BMO Capital Markets analyst Brendan Warn.

In Africa’s frontier environment, drilling may bring a higher reward, but since most exploration takes place offshore, single wells can cost hundreds of millions of dollars, increasing the industry’s susceptibility to lower oil prices.

Chairman of Global Pacific & Partners (which advises African governments) Duncan Clarke said cuts had already begun. They include “budget cutbacks, asset sales, some corporate consolidations, more farm-outs, slower acreage pick-up, tougher operating conditions, and weaker overall margins for producers,” he said.

Following major discoveries in 2013 in countries including Tanzania and Kenya, the Baker Hughes Rig Count reported 154 rigs in Africa last February, the most since 1983. By December, that had declined to 138.

Ophir Energy, a UK explorer that has made several large finds in Tanzania, ended its 2014 drilling campaign in Gabon in June, after a series of dry holes.

Repsol, Spain’s biggest oil producer, spent almost $100m on a well that missed in offshore Namibia.

Tullow Oil, a British oil company that was among the most active explorers in Africa, said last week it would not drill a single offshore exploration well in the continent this year, as it reduces investment in response to lower prices.

For Africa to revive the momentum of its oil and gas industry, governments needed to look at the terms they offered explorers and adapt them to reflect lower prices, Tullow CEO Aidan Heavey said.

“As more and more companies are pulling back, you’ll see that countries will have to change their terms,” Mr Heavey said last week. “We will be renegotiating our exploration licence terms.”

Tullow has cut its exploration and appraisal budget of $1bn more than two-thirds and will focus on onshore drilling in East Africa, where it has been able to reduce well costs to $7m each.

“It’s going to be the operators who are going to have to control costs,” the head of oil and gas advisory for sub-Saharan Africa at Deloitte & Touche, Claude Illy, said. Exploration would be cut “quite drastically”, he said

The silver lining for companies obligated by lease terms to drill could be lower service costs.

“Exploration in general will receive less funding due to the fall in oil prices,” Chariot Oil & Gas CEO Larry Bottomley said on January 9 in response to questions. “What we have seen, though, is a significant decrease in exploration costs, specifically seismic and drilling, so although there are fewer dollars, those dollars will go further.”

The cost of conducting a 3D seismic survey had dropped to $3,500 a square kilometre from $10,000 a year earlier, Ophir CEO Nick Cooper said in November at an oil convention in Cape Town. Ophir was not available immediately to respond to a request for updated costs.

Drilling service companies such as Milan-based Saipem might see orders drop 30% with oil at less than $80 a barrel, said Sanford C Bernstein analysts in a January 19 research note, and the cost of hiring offshore rigs might fall 40%.

Not all companies have put off plans. “The majority of our current development and near-term exploration drilling is offshore Nigeria, where typically the production costs are a little lower than other exploration areas,” Camac Energy spokesman Lionel McBee said. “In this price environment, we’re not going to be expanding exploration drilling. We’re sticking to our development programme.”

Some projects, such as completing of SA’s first deepwater well, which Total suspended due to technical issues last year, may not be realised for as long as the under-$50 environment lasts. The company did not reply to an e-mail inquiry about drilling plans in SA.

Bloomberg

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