Zambia: Sitting on the Next Lake Albert?

Zambia has no proven oil reserves as of yet, but we're looking here because there is massive exploration interest with the potential tie-in to hot Angola and geological similarities with Lake Albert--and we believe the next major find in Africa could be in Zambia. So we're looking at who is buying up the acreage here, where we are with drilling and who is best positioned to capitalize on this once that big find puts Zambia on the emerging oil map with its neighbors.

In late 2006, Zambia detected its first oil deposits in the mineral-rich North-Western province, close to Angola. In 2008, it also confirmed the presence of oil in two other areas; in the west-again close to Angola-and in the east.

The Zambian government is growing impatient with its explorers, in February threatening them to use it or lose, as the country eyes significant finds for its neighbors in the region. Minister of Mines Yamfwa Mukanga said licenses would be revoked if companies failed to report exploration results soon. His take on the potential is that "God cannot be unfair": The Democratic Republic of Congo (DRC) and Angola have struck oil; Tanzania and Mozambique have massive natural gas reserves; Zambia-Africa's top copper producer--is right in the middle of this hydrocarbon bonanza.

The Geological Snapshot of the Zambian Rift

The Zambian Rift encompasses includes Lake Tanganyika, which covers 8 separate rift basins within the East African Rift system and is also an emerging oil play in Kenya and Uganda as well as an exploration target for DRC and Tanzania--so we like the potential Zambia tie-in.

The buzz is that Lake Tanganyika could be the next Lake Albert, which is sitting on 3.5 billion barrels of reserves. The geology is almost identical-from rock age to lake size. There are multiple oil slicks here and among the natural oil seeps is one that geologists think is the largest in the world. (Check out this study the geology of the East African Rift system that includes Lake Tangyanika).

Right now, there are three significant seismic programs (that we know of) going on in Lake Tangyanika. Australia's Beach Energy has just completed one, on Tanzanian territory, and the projection is that we could see the first hole here drilled next year. If they strike oil, there will be a rush on Zambia.

Infrastructure in Place

With no proven oil reserves, the focus in Zambia has been downstream, but while there is a lot of infrastructure in place, it's aging and in need of some major upgrades. Zambia's got one refinery, the Indeni Petroleum Refinery, which is not configured to process pure crude. (There is also a 25% punitive surcharge on imports of finished fuel products to discourage imports.)

In July, the government announced plans to build a new $410 million oil refinery, saying that Indeni was "finished". Financing this, though, remains an uncertainty.

It's also got the Ndola Fuel Terminal, which is having a hard time coping now with increased domestic demand.

Finally, there is the TAZAMA Pipelines network, which is owned jointly by the governments of Zambia and Tanzania.

Who to Watch

This prospective discovery play nestled between other major finds (including a recent find in Namibia-its first), has naturally brought us around to who owns the most prospective acreage here. The answer to that is a bit shocking, actually. Calgary-based Alberta Oil Sands (AOS) has recently bought into 18 million acres in the Zambian Rift!

Our first question was: Who buys 18 million acres in in a country with no proven oil reserves? Usually only a supermajor capable of absorbing the risk. But this time it's a small-cap Canadian junior. Canadian juniors are all over the risky new frontier exploration scene these days, but still…18 million acres?

AOS seems to be as confident in God as is Zambia's mining minister. But the company is also keen on what it says are the best production-sharing contracts to be found in the East African Rift.

AOS' acreage covers three key basins: Tanganyika, Luangwa and Cabora Bassa.

We spoke with AOS CEO Binh Vu about Zambia, and he had this to say:  "We believe that Zambia is a fabulous jurisdiction because it shares the geology and rock age in certain large areas that have hosted the Lake Albert Discovery and the Block 10BB Kenya discovery.

However, it is totally underexplored for hydrocarbons and thus provides much cheaper access to very prospective areas. Our company has successfully tied up ~18 million acres or what we believe covers about 33% of the attractive rift areas in Zambia - which equates to oil and gas rights over about 8% of the country."

This is a massive risk, but we're interested in how the company is attempting to de-risk. AOS is cutting costs by securing a concession agreement that doesn't tie it to expensive immediate seismic commitments. It also favors high-grading with satellites and other remote sensing techniques, including 'ground-truthing', over expensive seismic. But what it's really doing is piggybacking on the exploration of others before it puts out a lot of cash. So it's eyeing Beach Energy's efforts on the Tanzanian side of Lake Tanganyika, letting others foot the exploration bill. And Beach's acreage is adjacent to AOS' acreage.

Bottom Line: We're convinced that Lake Tanganyika is next Lake Albert, so we're eyeing not only Zambia, but potential finds anywhere in the 8 basins covered by the lake. Based on exploration progress, the first Lake Tanganyika find is most likely to come in Tanzania-so keep a close eye on Beach Energy-but further ahead, we're looking at where this will lead and we expect this to be Zambia's first find. (Next month, we'll take you through Namibia's prospects).