Some of the world’s most savvy energy investors have converged in a strange place the last few months. A place I call “the secret coast”, because little is known about the geology here, or the potential for discovery.
The place is Morocco—the far northern end of Africa.
Now, it’s no secret there’s a lot of petroleum exploration going on in other parts of the African west coast. There’s been frenetic activity lately in Ghana, Gabon and Namibia (not to mention ongoing work in stalwart producing nations like Nigeria).
But the northern end of this coast, off Morocco—where the Atlantic meets the Mediterranean at the Straits of Gibraltar—is a mysterious place. Little is known about the rocks or the oil pools.
But some high-profile players are betting that a lack of historic work could mean big discoveries are still lurking here. In January, Chevron (NYSE: CVX) bought up three offshore blocks in Moroccan waters. And just last week, BP (NYSE: BP) said it will farm into three offshore licenses here held by Kosmos Energy (NYSE: KOS).
The stats back up their enthusiasm: estimates are that up to 10 exploration wells could be drilled off the secret coast over the next 12 to 18 months… more than all of the wells drilled here since 1990 combined.
An Investment Opportunity in the Making?
Should investors be jumping into companies here for ground-floor profits and a shot at massive finds?
There are two things we need to look at.
I say two because there are only two ways to make money in oil and gas exploration. And as investors evaluating a new play like the secret coast, it’s critical to make sure that a target company or concept falls into one of these dual categories.
Number 1: bring new ideas to old areas. That’s exactly what spurred the massive U.S. shale boom. Gas-bearing formations that had been known for centuries suddenly became headline news as new drilling technology allowed formerly unwinnable gas to be economically produced and sold.
Number 2: the converse—apply old ideas in new areas. This is what petroleum majors globally are hoping to do in Mexico—bring now-proven directional drilling and fracking technology to bear on formations that have gone under-explored for decades due to restrictive government policies.
A Little Bit of Brazil in Africa
So which money-making strategy applies to the emerging secret coast play?
The most obvious potential is in number 1—bringing new ideas. In this case, pre-salt.
Pre-salt plays (oil and gas found below geologic layers of salt) have been driving massive discoveries making headlines in Brazil over the last few years. Deep drilling into these formations has found billions of barrels of oil.
Exploration companies today are taking the new Brazilian pre-salt concept and applying it to old petroleum provinces on the west African coast. After all, Brazil and southern Africa were once joined geologically—so there’s a good chance the salty rocks will be the same.
Pre-salt oil had in fact been recorded in Angola from the 1980s. But recent drilling has provided the first modern confirmation of this play’s potential in Africa.
In June 2011, Harvest Natural Resources (NYSE: HNR) hit oil at its Dussafu project in Gabon (although the pool ultimately turned out to be small). Then Cobalt Energy International (NYSE: CIE) made what appears to be a bigger find at its Cameia prospect in Angola in February 2012.
Since then, explorers have been chasing Africa’s pre-salt potential along the coast.
HRT (TSX-V: HRT) has been drilling for pre-salt discoveries in Namibia. And oil majors Marathon and Total have pushed the pre-salt play north into Gabon—in August 2013, the companies hit up to 55 meters of hydrocarbon pay in the pre-salt at their deepwater Diaba license.
Discoveries have also been made further north in Ghana. Companies like Anadarko (NYSE: APC), Tullow Oil (LON: TLW) and Kosmos Energy are now pushing the pre-salt play even further northward into Sierra Leone and Liberia. Getting close to the waters of Morocco.
Of course, any proven pre-salt tests are still thousands of kilometers south of Morocco. But the nation may be attracting investment because it represents a low-cost way for intrepid explorers to chase Africa’s mounting pre-salt riches. The country has some of the most attractive fiscal terms for petroleum exploration on the planet. It may thus be worth a step-out for companies like BP and Chevron, who have been shut out of more-active African plays to the south.
There has been little historic drilling in Moroccan waters to pre-salt levels. Making the play concept very much a new idea here—one with potential for surprise discoveries that could prove much larger than the under-whelming finds made by older, shallower drilling.
Massive Oil Discoveries, Eh!
There’s also another approach majors could take to Morocco. One that’s based on old ideas in a completely different part of the world: Canada.
For decades, researchers have noted similarities between rocks in Morocco and those in the eastern Canadian province of Nova Scotia. A decade ago, companies like Kerr-McGee (now Anadarko) even acquired complimentary acreage across the Atlantic from each other in both locales, based on similar play concepts.
Nova Scotia has been a good spot for discoveries: in-place finds here total about 2.1 billion barrels over the past 50 years. All of this has come from conventional sandstone and carbonate reservoirs, more shallow than any salt layers.
Over the last decade however, exploration in Nova Scotian waters has trailed off. Sentiment being that most of the low-hanging fruit here has been picked.
But if the same proven-play rocks are indeed present in Morocco (where tens of wells have been drilled, as compared to the hundreds on the Canadian side), it could offer an opportunity to transfer existing geological knowledge across the Atlantic to a more-virgin fairway. A recipe for discovery.
Which One are You Investing In?
Both of these exploration concepts—the fresh new pre-salt concept and the old-school Nova Scotian playbook—have potential in Morocco. It’s simply important to ensure that you’re investing in the right company for the right opportunity.
A firm like BP, with its deepwater drilling experience, is more suited to profiting from the deep, pre-salt plays. Junior companies in Morocco like Cairn Energy (LON: CNE) and Pura Vida Energy (ASX: PVD) may do better with the easier-to-manage conventionality of the Nova Scotian ideas.
The best bet might be a junior like Kosmos—one that’s poised to benefit from higher-impact deep drilling without excessive risk, via its cost-carried joint venture with BP. We’ll see if other early-moving juniors look to follow this model and go big on the secret coast.