West Africa has a mature, well developed oil and gas industry dating back over 50 years to the discovery of oil in the Niger Delta by Shell (NYSE:RDS.A). Since then the region has never looked back; further finds followed across countries such as Cameroon, Ghana, Ivory Coast, and Mauritania, not to mention in OPEC heavyweights Nigeria, and Angola. Immediately South, in Namibia, this hive of activity falls mysteriously quiet. All may be about to change, however, with several rigs expected to arrive in the country from the end of this year into 2012. With Petrobras (NYSE:PBR) and BP leading the charge, the race for first oil in Namibia has begun.
Namibia is a stable democracy, having achieved political independence from South Africa in 1990. According to the Economist Intelligence Unit, the country is allocated a BBB rating, ranking it on a par with South Africa, and Brazil, in terms of business risk. Historically, Namibia has been heavily dependant on its mining industry, with uranium, gold and diamonds all major contributors to total GDP. Meanwhile, the oil and gas sector barely registers. Earlier this year, The Ministry of Mines and Energy announced to the world the conclusion of a study that identified the potential for some 44 billion barrels of oil offshore, yet despite a vast exploration area of some 500,000km2 this virgin territory is almost completely unexplored. In fact, only 15 wells have ever been drilled, of which 8 were on the giant Kudu gas field discovered by Total in 1974, which remains undeveloped to this day. Compare this with its neighbour to the North, Angola, a country with a thriving oil industry and status as the second largest producer on the continent. According to Opec, Angola has proven reserves of some 9.5 billion barrels of oil, 11 TCF of gas and an output of 1.7m barrels per day. With several notable discoveries in West Africa over the last few years, such as the Jubilee field in Ghana, the relative inactivity in Namibia seems puzzling.
A major reason for a lack of exploration thus far is the significant challenge presented by the depths at which prospective resources exist offshore. For example, potential targets in the Walvis and Orange basins lie over two thousand metres below sea level. Much of Angola’s production comes from shallow water blocks, in depths of less than five hundred metres. This initial success and resultant investment in infrastructure paved the way for the Majors to go after the huge structures in deeper water, leading to significant discoveries such as the 1 billion barrel Dalia oil field in Total operated Block 17. Finds such as this have understandably produced a frenzy of excitement in surrounding licenses. Nevertheless, deepwater drilling is often prohibitively expensive and stretches the limits of existing technology to the maximum. Fixed oil rigs are not an option in these depths, and so the only alternative is for enormous floating platforms anchored to the sea-bed, with well equipment installed on the ocean floor operated by remote controlled submarines. Unsurprisingly this leaves explorers facing astronomical sums; Chariot Oil & Gas (OTCPK:OIGLF), one of 21 players with operations in the Namibian oil and gas industry, estimates that the well planned on its Tapir prospect will cost at least $65m. Given this backdrop perhaps it is little wonder that offshore Namibia has been overlooked. The sole exploration phase to date occurred in the early 1990s, restricted by technical capabilities of the time and subsequently located in the shallow waters on the shelf, with companies often using dated 2D seismic. Fast forward two decades however, and with the era of ‘easy oil’ now behind us, the appetite and ability now exists to pursue targets that up to now have remained out of reach.
For evidence of this, one only needs to look across the Atlantic Ocean to the Santos Basin offshore Brazil. Since 2005, Majors including BG and Petrobras have led a drilling campaign targeting the huge sub-salt oil deposits of the area. The discovery of the Tupi field in 2006 revolutionised oil exploration in a remarkable technological feat, given that the drill bit had to penetrate five thousand metres of source rock whilst submerged under another two thousand metres of sea water. The results so far appear to vindicate the enormous costs involved; Tupi alone is now estimated by Petrobras to hold over 8 billion barrels of recoverable oil. Rapid economic growth has propelled Brazil to becoming one of the largest energy consumers in the world, yet according to the EIA the country became a net exporter of oil in 2009, largely as a result of production from the Santos Basin.
Indeed, for investors in Namibian oil, current excitement and optimism stems to a certain extent from discoveries in the Santos Basin. Some 200 million years ago there existed a super-continent, Gondwanaland, that incorporated present-day South America and Africa. Despite now being separated by the Atlantic Ocean, the Namibia Offshore area is analogous to that of Brazil, with the Walvis and Orange basins mirroring the Santos and Campos basins. The same sub-salt source rocks are in existence, and oil seepage and slicks offshore indicate a working petroleum system. As with offshore Brazil, potential targets are similarly huge. A recent investor presentation by Chariot Oil and Gas reveals prospective resources of over 16 billion barrels across the company’s licenses. Included in this figure is the Nimrod ‘mega-structure.’ With a prospect area some 500km2 in size, and prospective resources of nearly 5 billion barrels, the comparisons with offshore Brazil are apparent.
Among those championing the cause for the potential of Namibian oil is Marcio Mello, current CEO of HRT Participações em Petróleo S.A, a Brazilian company with 6.9 billion prospective barrels of resources in the country. He was the founder, first and current president of the Brazilian Association of Petroleum Geologists (ABGP) and the former President of the American Association of Petroleum Geologists (AAPG), Section Latin America. Mr Mello spent 24 years of his working life with Petrobras, and his studies of the offshore Brazilian sedimentary basins are instrumental in our understanding of the area today. Having helped lay the groundwork for the discovery of some of the largest oil fields in the world, his attention now shifts to West Africa in order to prove his theory that the equivalent of Tupi lies undiscovered. HRT Africa has already raised more than $400m in order to fund drilling activities in Namibia; an expression of Mello’s confidence that significant oil deposits exist.
Slowly but surely, the Majors appear to be taking notice of the potential riches Namibia has to offer. Petrobras moved first, farming in to Chariot’s block 2714A, electing to retain the acreage and operatorship in June of this year. Given Petrobras’ reputation as a global deepwater expert, this is a ringing endorsement of the country’s potential. Following hot on its heels was BP, in a farm-in announced in August, which saw it join Petrobras in the same block containing the Nimrod structure, for which the partners intend to drill in the first half of 2012. Despite the reputational damage suffered following the Deepwater Horizon incident in the Gulf of Mexico last year, BP remains one of the most respected operators in this kind of environment. Aside from the N.Uist well, which the company intends to drill with Faroe Petroleum early next year, Namibia would represent BP’s first foray back into deepwater plays. For his part, Marcio Mello oversaw the acquisition of Canadian junior Universal Power Corp. in a $730m deal back in February, enabling him to gain a foothold in Namibian acreage and attempt to replicate his success with Petrobras on the other side of the Atlantic. In less than a year from now the world will know if his unwavering belief in the Namibian oil dream pays off.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.