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March 19, 2015

For Some Drillers, Oil Crash Could Be a Blessing in Disguise

By Tim Maverick, Commodities Correspondent, Wall Street Daily 
Not too long ago, if you asked any energy insider where in the world the most exciting energy hot spot was, you would have gotten a surprising answer: Africa.
It’s true; Africa was a hotbed of oil activity just a few years ago.
In 2013 alone, six of the world’s 10-largest global oil discoveries were made in Africa. Not to mention the huge natural gas fields found offshore of Eastern Africa. The waters off Mozambique, for example, are estimated to hold over 180 trillion cubic feet of gas!
And the oil industry was anxious to develop the resource. In February 2014, there were 154 rigs drilling in Africa, the highest level since 1983.
But oil’s 50% plunge over recent months is threatening the bright promise these discoveries once held.
The World Bank, in its 2015 Global Economic Prospects report, labeled East Africa as a “new frontier” for economic growth, thanks to its rich energy resources. Still, the World Bank pushed back the date for growth from 2017 to sometime after 2020, thanks to oil’s decline.
Tap on Low
As elsewhere, projects in both West and East Africa are being delayed because of cutbacks made by oil companies in response to lower profits. Africa is especially susceptible to the leaner environment because most of the projects are offshore, where a single well can cost hundreds of millions of dollars.
British oil company Tullow Oil PLC (TUWOY) is among the most active oil explorers on the continent. Yet, even Tullow said in January that it wouldn’t drill a single offshore exploration well in Africa this year.
The company also said it would reduce its rig count in Kenya, Uganda, and Ethiopia. And it cut its overall capital budget from $1 billion to about $200 million.
Africa’s oil boom is facing other problems besides low oil prices, too.
You see, many of the companies exploring and drilling in Africa are juniors. And like their counterparts in the mining industry, juniors are cash-strapped and quick to slash budgets.
Another hindrance is the lack of infrastructure in the region where most of the exploration takes place. Roads, ports, refineries, and pipelines need to be built in most locations.
That kind of development usually requires deep pockets. But neither the countries nor many of the companies involved have deep pockets.
Still, that doesn’t mean all projects have stopped… Some very promising developments are still moving ahead and are profitable even with oil below $60 per barrel.
Pushing Through
Offshore Western Africa, Ghana’s giant Jubilee field contains an estimated 2 billion barrels of recoverable light oil. Operating costs there are only $10 per barrel, said Jacques Verreynne of NKC Independent Economists in a Reuters article.
Jubilee is controlled by Tullow and its partners – Anadarko Petroleum (APC), Kosmos Energy (KOS), and the Ghana National Petroleum Corporation. And those companies plan to keep the operation pumping out all of the oil it can (as long as it’s profitable).
Another major project that may get the final investment decision this year is the one involving Mozambique’s natural gas resources.
Anadarko and Italy’s Eni SpA (E) are looking to build the world’s second-biggest liquid natural gas facility in the country, and are close to locking in buyers from Asia.
So, even with low oil prices, some projects will move ahead.  
Silver Lining
In fact, the oil price may prove to be a blessing in disguise for the companies involved in Africa.
You see, African governments are hyperaware of the companies walking away from projects and the lost revenue that results from the exodus. These administrations are now willing to revise the terms of their deals with oil companies in order to encourage them to stay.
Previously, most of these deals were strongly skewed to benefit the national governments presiding over the reserve. But now that these countries are trying to convince companies to stay, that will soon change. These nations are now giving companies both more time to develop resources and a bigger piece of the revenue pie. This will especially be true in countries with hard-to-reach reserves.
The CEO of Tullow Oil, Aidan Heavey, put it this way to Reuters: “If you want to get companies looking at licenses again, then they have to be made more attractive. It’s very simple supply and demand.”
Courtesy Tim Maverick for Wall Street Daily (EconMatters article archive Here)   

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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