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A Land Of Promise For Offshore Drillers

Not all regions of the world with proven oil are receiving attention from struggling oil companies. But as the lesser prospects get put on the shelf, companies are focusing on some of their core areas.

West Africa is one area that is not losing a ton of interest even though oil prices are low. In fact, there is one country that has the potential for some very positive news in the coming months.

Senegal

West Africa is a promising place for offshore oil drilling. Ghana has generated the most headlines in recent years, after several major discoveries kicked off that nation’s offshore rush. However, Senegal is another West African nation that holds huge potential.

Cairn Energy (LON: CNE), a British oil and gas exploration company, opened up an entire new basin for oil exploration in 2014 when it drilled two wells off the coast of Senegal and discovered oil in both. The finds were significant. Together, the two discoveries could hold more than 1 billion barrels of oil.

Cairn is exploring three blocks off Senegal’s coast – the Rufisque offshore, Sangomar Deep Offshore, and Sangomar Offshore, which stretch over 7,000 square kilometers. Cairn is the operator with a 40 percent interest in the blocks, and it has three partners as well, including ConocoPhillips (NYSE: COP) (35 percent stake), FAR Limited (ASX: FAR) (15 percent stake, Senegal’s state-owned firm Petrosen (10 percent stake).

Its first discovery was drilled in the FAN-1 well in 1,400 meters of water depth, located 100 kilometers from the coast in the Sangomar Deep block. The well was drilled to a total depth of nearly 5,000 meters, and encountered a promising oil zone.

Cairn’s second discovery, the SNE-1 well, was even better. The SNE discovery has the most potential, and depending on the extent of its reserves, it could turn out to be the largest oil discovery in the entire world for 2014.

Cairn already has some 3D seismic data on the western part of its blocks, and it is conducting 3D seismic surveying on the northern and eastern sections of its acreage this quarter. The seismic surveying will go on for the rest of 2015 and the results will be processed and released sometime in mid-2016.

Cairn and its partners plan on drilling three wells to help them learn more about what they are sitting on. The three wells will consist of two appraisal wells near the potentially massive SNE discovery, plus one exploration well.

The first appraisal well, SNE-2, will be drilled 3 kilometers north of SNE-1, and drilling will begin in the fourth quarter of 2015. To outline the southern extent of the field, SNE-3 will be drilled either in Q4 2015 or Q1 2016.

Finally, Cairn and its partners will drill an exploration well in Q1 2016, targeting the Bellatrix prospect, which will also help define the northern extent of the SNE field. “The Bellatrix prospect is one of a number of high-quality targets the joint venture has identified in both the Rufisque and Sangomar license areas offshore Senegal,” Cath Norman, managing director at FAR, said in August. “The great attraction in drilling Bellatrix is that it will allow us to gain additional information on the extent of the SNE field while also testing a high-quality exploration target of 168 MMbbl in its own right.”

The companies will present a work plan to the Senegalese government later this year.

(Click to enlarge)

Cairn’s initial estimate of production from the SNE field is somewhere between 50,000 and 100,000 barrels per day. The company expects to use a floating production storage and offtake (FPSO) vessel, along with a subsea production system. If all goes according to plan, first oil is expected in 2021-2023.

Cairn has had a rough time in recent years, having spent a significant sum looking for oil in Greenland, but ultimately pulling out after disappointing results. It is getting hit hard by low oil prices. As a result, the company is refocusing largely on West Africa. Of the company’s $170 million budget, it is using three quarters of that on West Africa, mostly in Senegal.

The rest of Cairn’s budget will be spent on its North Sea assets, where it expects free cash flow from 2017 onwards when the Kraken project in the North Sea comes online.

As such, Cairn offers investors a large degree of exposure to Senegal. With several catalysts in sight with the company’s exploration and appraisal wells coming in the next few quarters, Cairn’s share price could rise or fall depending on the results.

To the north of Cairn’s holdings is a block held by Kosmos Energy (NYSE: KOS). Kosmos acquired two blocks in August 2014 – the Cayar Offshore Profond and the St. Louis Offshore Profond, both of which it holds operatorship and a 60 percent stake. For now, the company is focused on drilling out its acreage in neighboring Mauritania, where it hopes to develop significant natural gas resources that could be exported as LNG. Kosmos acquired the Senegalese prospects after working in Mauritania, and then extending its holdings to take advantage of its existing operations there. Kosmos hopes to integrate the holdings to build a strong West African presence.

One other intriguing company to keep an eye on is T5 Oil & Gas, a startup venture run by several former executives from Tullow Oil Plc (LON: TLW), an oil company with a rather successful track record in West Africa. T5 aims to become a “publicly listed billion dollar Africa and Middle East E&P company,” and it has acquired over 27,000 square kilometers of acreage by buying Blackstairs Energy Senegal. Its onshore Louga Block has given the company a foothold into Senegal. The company wants to replicate Tullow’s success, but in “a much shorter timeframe.” It is looking to acquire acreage, knowing that Cairn’s and Kosmos’ interest derisks the play and signals rising interest.

(Click to enlarge)

Investment Climate

Just a word on doing business. Senegal has a largely stable and business-friendly government, with good infrastructure and telecommunication links compared to its neighbors. T5 Oil & Gas also argues that the Senegalese government offers excellent contract terms, and is one of West Africa’s best places to do business. Such a positive investment climate is not always a given, so Senegal has that working in its favor.

Conclusion

The usual caveats apply. Oil prices are low, so the willingness for companies to throw money around right now is limited. However, Cairn’s decision to focus almost exclusively on Senegal, following its huge SNE discovery, shows that there is significant interest in Senegal, even during this period of low prices.

Plus, the decision by Kosmos to begin wading into Senegalese waters also bodes well. Kosmos had originally been focused on Mauritania, but saw what Cairn was doing, and figured shifting its resources to the South would make good strategic sense since it was operating not far from there.

Cairn offers investors the most exposure to Senegal right now. With exploration and appraisal wells being drilled in the Q4 2015 and Q1 2016, there is an upside for investors to take advantage of. The low oil price environment is weighing on Cairn’s share price, but there is a chance of a rebound as we move into 2016. If Cairn reports good results from its wells, that will provide a nice spark to its share price.




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