Investing in smaller companies setting their sights on frontier prospects comes with an immense amount of risk given the high cost of drilling just one well in unfamiliar waters. That risk, however, may be well worth the reward when it comes to offshore Ghana.
Some of the biggest oil companies in the world, like Royal Dutch Shell [NYSE: RDS.A], are finding themselves struggling to reap the rewards from the U.S. shale boom because of the high cost of drilling and the legal complexities of operating onshore. Finding new oil reserves is taking longer and the costs associated with their exploitation are ballooning.
Offshore, however, the story is different. And forget about the Gulf of Mexico because it's Ghana that's on pace to be the next new powerhouse in the emerging oil narrative.
The discovery of the Jubilee field offshore Ghana in 2007 – the largest offshore oil discovery in West Africa in the last decade – put the country's energy sector in the spotlight before U.S. shale stole its thunder. Tullow Oil [LSE: TLW.L], one of the prime movers in Ghana, said it now expects Jubilee to churn out at least 100,000 barrels of oil per day this year. When it announced its full-year results for 2013, Tullow, which has headquarters in London, said Jubilee was principally responsible for "solid revenue, gross profit and cash flow growth."
That's why developments from smaller companies examining the prospects off the Western African coast are worth a closer look. According to Gondwana Oil Corp., a minnow with headquarters in Canada, Jubilee has "created a staking rush up and down the coast of West Africa."
The company [CSE: GO] said Wednesday it was "very pleased" to announce the Ghanaian Ministry of Energy and Petroleum has invited the company's national subsidiary, Miura Petroleum Ltd., to negotiate exclusively on the Offshore Cape Three Points South Block, located in the Tano basin. Gondwana said that prospect, which is surrounded by 20 different discoveries, including Jubilee, may be one of the most important prospects off the West African coast.
Moving now on Gondwana makes sense because, frankly, it's a steal and it's in good company.
-- Italian oil giant Eni (BIT: ENI) successfully drilled an exploratory well in its Sankofa block, in the Tano basin, only a few miles from Jubilee. Eni believes that the field holds an estimated 150 million barrels of recoverable oil.
-- Hess Corp. (NYSE: HES) has drilled seven successful wells and is gearing up for production in the area. It holds a major stake in the Tano basin and plans on investing a fresh $550 million in exploration this year, of which Ghana is the top priority.
Success for Gondwana depends on its ability to avoid drilling dusters, a huge setback for minnows trying to swim with the big fish in deep Ghanaian waters. In its 2013 summary, Tullow said it plugged its Sapele-1 exploration well in the deepwater Tano license as a dry hole. The area offshore, however, has what Gondwana says is an "unprecedented and incredible" rate of discovery during the last five years and so it believes Ghana is worth the risk.
Since 2010 Ghana has seen a 72 percent discovery rate alongside a 63 percent commercial discovery rate, hence this truly is elephant country.
From the corporate standpoint, it's looked locally for technical expertise. When it wanted advice, it called on Douglas Manner. He's the former chief operating officer at Kosmos Energy [NYSE: KOS], a company worth an estimated $4 billion. Kosmos was the co-discoverer of Jubilee, alongside Tullow. If he's placing a bet on Gondwana, it's time to get in on the Ghanaian bonanza now while the rest of the sector keeps losing its assets on shale.
By. James Burgess of Oilprice.com