When it comes to finding the final frontier for big oil discoveries, you need to look beyond the Guyana-Suriname basin where everyone’s already staked their claims. And beyond the American shale patch, where growth is already slowing.
Africa is the next great oil frontier, where small-cap companies are staking large-cap claims of the kind that generously reward investors with a bigger risk appetite.
This could be the final, underexplored frontier for oil; is there anywhere else to go?
“There is nowhere on earth with as much potential as Africa,” Jay Park, CEO of Reconnaissance Energy Africa told Oilprice.com in an interview.
While many would have disagreed two decades ago, times have changed, and the fact that the African continent already holds 7.5% of the world’s known oil reserves, and as much of its gas reserves, yet still remains woefully underexplored, is exactly what might make this the last big land based venue on Earth for oil.
We’ve got the “legacy” players, such as Nigeria, Angola, Congo-Brazzaville and Equatorial New Guinea, but the real final frontier is only just emerging in places such as Ghana, Uganda, Mozambique, Tanzania and - even further off the radar, Namibia.
Park, who previously worked as a lawyer specializing in upstream oil and gas and petroleum regimes, says the African continent is wildly undervalued. “The value of subsoil resources in OECD countries is at about $300,000 per square mile. In Africa, they’re valued at only about $60,000 per square mile,” he said. “This is either because Africa doesn’t have its fair share of the world’s resources, or because it hasn’t found those resources yet. I’d put money on the latter because Africa is vastly underexplored compared to the rest of the world.”
Ghana, according to Deloitte, boasts the highest oil production among its peers, launching its first offshore licensing round in late 2018 and attracting majors from all over the place. They’re all hoping to top the massive Jubilee field - a massive discovery made in 2007 and operated by Tullow Oil.
Mozambique, another newcomer on the final frontier scene, enjoys the largest gas resources in the region and the biggest untapped gas potential, according to Deloitte. And now it’s planning a massive LNG development in the Rovuma Basin, with production expected somewhere around 2022.
Tanzania - the fastest-growing economy among these oil players - is second only to Mozambique in terms of natural gas resources, while major oil discoveries in Uganda in 2006 have catapulted the country into fifth place in terms of resources, with first production scheduled for next year.
Namibia is the newest venue of the lot, but it’s also the one that has the potential to be bigger in territory than Eagle Ford--the shale basin that put the U.S. on the oil exporter map to rival the best of OPEC.
The prize here is about as pure as it gets: The country has never produced a barrel of oil, but its potential is pinging the radar of even giant Exxon (NYSE:XOM), which recently acquired an additional 7 million net acres from the government for a block extending from the shoreline to about 135 miles offshore in water depths up to 13,000 feet, with exploration activities to begin by the end of this year.
Onshore, the potential is also striking. And nothing is more striking than the 6.3-million-acre Kavango Basin, which rivals the Eagle Ford in size. It’s also believed to be an extension of South Africa’s 600,000-square-kilometer Karoo sedimentary basin, home to Shell’s massive Whitehill Permian shale play.
ReconAfrica bought up the entire basin, with a 90% interest (the government owns the other 10%) and a four-year exploration license and a 25-year production license once a commercial discovery is made.
That’s a major feat for a small company with a market cap of ~$50-million. Still, they’ve done what is usually reserved for the majors: They’ve secured the oil and gas rights to an entire sedimentary basin in Namibia and Botswana--both very friendly to oil exploration, with very low royalty fees (5%) and an estimated 18.2 billion barrels of oil in place.
It is the quintessential setup for the rare savvy junior. It has plans to go big on exploration, and even has the potential to be scooped up by a supermajor that’s already operating in the region.
And just as exciting - one of the world’s leading Geochemists, Dan Jarvie of Worldwide Geochemistry has just put out a report on Recon Africa’s oil potential and he is saying there is potential for 120 billion barrels of petroleum potential on just 12% of Recon Africa’s holdings.
It certainly seems that promising things are going down in Namibia.
How Risky Is Oil’s Next Frontier?
Whether it’s legacies like Nigeria and Angola, or newcomers with massive potential such as Ghana, Uganda, Mozambique or Namibia, what’s always kept investors away is the regulatory risk associated with these venues.
That’s exactly why Africa is, today, the next frontier for oil.
Park, who has spent years identifying and creating investor-friendly petroleum regimes around the world - from Africa to South America - says this is exactly what makes or breaks a country’s oil industry.
Overall, Park says he’s disappointed that Africa has fallen so far behind.
That’s a result of states creating regimes that are “complex and heavily taxed”, he says. “They also fail to give investors the assurances they need. Investors want to be confident that when they make a discovery, it will turn into money.”
So, while Africa is definitely the place to go for resources, it’s not always attractive to investors.
According to Deloitte, the risks are high, and companies need to plan for everything from regulatory and policy hurdles, to problems with third-party partners and suppliers, environmental and labor issues, and overriding questions of infrastructure.
In addition to that, “macro risks, such as political, security, governance, economic structural, country liquidity and currency risks also loom large”.
For Park, Namibia ticked all the right boxes: good geology, good fiscal terms and a good regime. That includes a 5% royalty and a 35% corporate income tax on oil reserve profits--and, of course, the country is offering up good deals because it hasn’t made any discoveries yet.
For companies who can properly navigate the risk, that risk gets smaller every day, particularly thanks to technological advancements.
Major developments over the past decade and a half open up enormous possibilities in this underexplored region.
And if parts of Africa weren’t on investor radar yet, they will be soon.
“You probably hadn’t heard of Suriname on the oil map until a couple of months ago,” says Park. “By the time it’s on everyone’s radar, it’s much less of an opportunity. Namibia, for instance, is just emerging as one of the world’s exploration hot-spots with some big wells going down this year. But for now, it’s a virgin opportunity.”
“Success with ReconAfrica's three-well programme could radically alter the value of the Company because it has all rights to the entire sedimentary basin. In all, the basin is optimally conducive to a functioning petroleum system that must be drilled,” Park said.
Other companies set to win big as oil prices bounce back:
Total is a diversified French energy company which holds to a ‘big picture’ outlook across all of its endeavors. Not only has the company taken a progressive approach towards loomin climate risks, it’s taking into account how its operations are set to impact the world’s growing population. That’s why its receive great praise for its commitment to contributing to each of the United Nations’ Sustainable Development Goals. From diversity and societal progression and workplace safety to its commitment to reducing its own carbon footprint, the near-100 year old energy giant is checking all the right boxes for investors.
While Total’s share price slipped in March along with the wider market, Total’s pivot towards sustainability has helped it outperform some of its peers. Though it still maintains a major presence in the global oil and gas industry, it has made significant strides in the renewable realm, as well.
British Petroleum is another European energy giant slowly pivoting towards greener energy alternatives. BP, which has been criticized in the past as being slow and late to the environmental cause, could now leapfrog its peers. We are still a long way from Beyond Petroleum. But chief executive Bernard Looney believes that we are only 30 years from a net zero BP. He has promised that in September the company will lay out a more detailed plan that shows the path to that destination. But he has shown already that there is more to his commitment to net-zero than there was to Beyond Petroleum 20 years ago.
“Renewables and natural gas together account for the great majority of the growth in primary energy. In our evolving transition scenario, 85% of new energy is lower carbon,” Spencer Dale, BP group chief economist, said, commenting on the outlook to 2040.
Exxon is an outlier in the recent downturn in oil prices. Unlike its peers, Exxon hasn’t booked major writedowns since oil prices crashed earlier this year. It also has deviated from its European peers in its lack of committing to a solid carbon target, though it is making headwinds in the fight to reduce its own emissions, especially in the race for carbon capture tech.
ExxonMobil claims to have about one-fifth of the world’s total carbon capture capacity. The company captures about 7 million tons per year of carbon. This has been in place since 1970, and the company claims to have captured more CO2 than any other company — more than 40 percent of cumulative CO2 captured.
Suncor Energy (NYSE:SU; TSX:SU)
Suncor Energy has adopted a number of high-tech solutions for finding, pumping, storing, and delivering its resources. Not only is it big in the oil sector, however, it is a leader in renewable energy. Recently, the company invested $300 million in a wind farm located in Alberta.
When the rebound in crude prices finally materializes, giants like Suncor are sure to do well out of it. While many of the oil majors have given up on oil sands production – those who focus on technological advancements in the area have a great long-term outlook. And that upside is further amplified by the fact that it is currently looking particularly under-valued compared to its peers.
Canadian Natural Resources (NYSE:CNQ; TSX:CNQ)
Though Canadian oil has had a particularly rough go at it this year, Canadian Natural Resources, kept its dividend intact after swinging to a loss for the first half of the year, while Canada's producers are scaling back production by around 1 million bpd amid low oil prices and demand. Though Canadian Natural Resources kept its dividend, it withdrew its production guidance for 2020, however. It also said it would curtail some production at high-cost conventional projects in North America and oil sands operations and carry out planned turnaround activities at oil sands projects in the second half of 2020.
While the Canadian energy giant has seen its stock price slump this year, it could provide a potentially opportunity for investors as oil prices rebound. It is already up over 170% from its March lows, and it could still have some more room to run.
By. Sam Kennedy
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