Last Stops on the East Africa Oil & Gas Frontier: Eritrea, Ethiopia

Eritrea is most likely sitting on massive oil and gas reserves, but the government doesn't seem to be too interested in exploiting them-for now. At the same time, neighboring Ethiopia is about to be put to the test in what explorers are hoping will be a first massive find in its first well in the Kenya-Ethiopia Frontier Basin. Eritrea remains enigmatic despite its potential, but in Ethiopia, there's no mystery-it's open for business.

ERITREA: An Enigmatic Exploration Venue

Eritrea's natural resources-especially oil and gas-remain virtually untapped largely as a result of the 30-year war for independence with Ethiopia. While there is plenty of evidence that Eritrea holds massive oil and gas reserves, the country's leader has kept quiet about it until recently. 

Eritrea is at the southern end of the Red Sea and this is one of the few unexplored places left in the world. It has the geological features of a major hydrocarbon bonanza. While most of the potential is offshore, onshore also has potential, though minerals like gold, copper and zinc are bigger prizes than oil and gas. 

The Eritrean Red Sea Basin is about 125,000 square kilometers and offers attractive potential in the pre-rift (Mesozoic), syn-rift (Miocene), and post-rift (Late Miocene to early Quaternary) sedimentary units.

Exploration has been going on-piecemeal-since 1921, but only 11 wells have ever been drilled offshore. Eight of those offshore wells have had good oil or gas shows. In the 1940s, 12 shallow holes were drilled in the offshore islands. What's got everyone's attention are the plentiful oil seeps on the islands of the Dahlak archipelago as well as in areas along the coast. In 1969, Mobil was drilling a gas well that caused a blow-out. The gas flowed by itself for almost two months afterwards.

So far, there have been no commercial deposits discovered offshore, but ENI (Italy), Anadarko Petroleum (US), Perenco (France), and CMS Oil and Gas (US) have all explored in the past-and then abandoned efforts. In October 2008, the government signed two agreements with the Defba Oil Share Company (a Chinese-Eritrean JV) to explore a large area near the border with Sudan. Exxon Mobil, Shell and Total are involved in the marketing and distribution of petroleum products in the country. Today, exploration of the Eritrean Red Sea is pretty much up for grabs and remains largely unexplored. 

So why has there been no real surge into Eritrea? The 30-year war was a bit off-putting, and security concerns have lingered, though the situation can now be considered very stable. The earlier gas finds in Eritrea weren't very attractive because there was no market for it at the time, but that, too, has changed.  

But this is pretty much a similar story everywhere. Now, with the flurry of exploration activity in Africa-from major discoveries in Uganda and Kenya, high-level production activities in Sudan and even exploration in war-torn Somalia-Eritrea should be on everyone's radar.

What remains problematic is the lack of infrastructure for oil and gas, but beyond this exploration has been slow because the government has until very recently chosen to more or less save its hydrocarbons for the future and instead rely on mining activities to bankroll other sectors. Post-war Eritrea has only now really begun to court foreign oil and gas companies in earnest. New technology to unlock unconventional offshore reserves, however, reignites interest in previous exploration activities.  

It was only in 2010 that the government even admitted that Eritrea was a potentially oil-rich country. Now it's actively pursuing foreign investment. In collaboration with Robertson Red Sea International Ltd., Eritrea's Ministry of Energy and Mines has compiled all technical information of the Red Sea prospective areas in two volumes to help investors determine hydrocarbon potential.

The Ministry is also offering downstream opportunities, such as the rehabilitation of its Assad refinery, the construction of a new refinery, oil and gas distribution licenses and more. Eritrea will end up being the last stop on the East African frontier-once everything else is explored, the Red Sea will spark renewed interest.

ETHIOPIA: A Potentially Golden Block on East Africa's Tertiary Rift

Get ready for the first-ever exploration in Ethiopia's Omo region-and it could be VERY BIG. After all, it's an extension of the massive finds in Kenya.

Ethiopia has the misfortune of being entirely landlocked as a result of the 30-year war with neighboring Eritrea. Still, oil and gas exploration here is advancing must faster. It has less potential-and no offshore prospects-which should make it less attractive than Eritrea, but foreign oil and gas companies favor it nonetheless.

In late February, UK-based Tullow Oil Plc (TLW)-the same company behind the massive discovery in Kenya in early 2012-announced it would finish drilling its first well in western Ethiopia's South Omo Block by the end of this quarter. The foray into Ethiopia was based on geography. This block is considered an extension of Tullow's Kenya concessions and it all is part of East Africa's Tertiary Rift (which includes Uganda). If they find oil in this well it would be the first discovery in Ethiopia. The well (Sabisa) belongs to Tullow, Africa Oil Corp. (AOI) and Marathon Oil Corp. (MRO).

There have already been some gas discoveries in eastern Ethiopia, but the target here is potential oil in the country's west-as part of the same oil system found in Kenya. What are the chances of striking oil at Sabisa? Well, the explorers say the structure is virtually identical to the structure of the Ngamia well, the site of Tullow's massive find in Kenya. According to Tullow, Sabisa is targeting some 140 million barrels of oil resources.

The terms would be fairly attractive, with the Ethiopian state taking 10% of any discovery. Tullow and partners plan to build a total of 11 wells in what is labeled the Kenya-Ethiopia Frontier Basin. Three of those wells will be in Ethiopia.

Ethiopia also has an estimated 3.89 billion tons of oil shale (enough to produce about one trillion barrels of oil, roughly) in Tigray State, on the border with Eritrea. It is also believed to have around 100-120 million tons of oil shale in the Delbi.

Ethiopia has also recently build its first drone, which could be used for surveying oil and gas prospects (not to mention the military applications for monitoring the insecure borders with Eritrea, Somalia, Kenya and South Sudan). 

Another reason Ethiopia has been favored by foreign investors-aside from its geological connection to Kenyan oil and gas prospects-is its security partnership with the US, both in regards to Somalia and Yemen. And this is something that Eritrea eyes warily.