The oil industry hasn’t started off 2014 with a bang. The oil majors – ExxonMobil, Royal Dutch Shell, Chevron, BP – all posted disappointing fourth quarter numbers. Shell in particular is undergoing a massive sell off to fix its balance sheet. ExxonMobil is also paring back capital expenditures.
Why are these companies struggling, and why all the gloom in the oil sector? Higher costs are the major reason. Projects are becoming more and more expensive to produce. Costs have ballooned for the entire industry, forcing record level expenditures in the past 2-3 years. But why? The reason is that finding and booking new oil reserves is becoming more difficult, and even when new fields are found, they take longer and cost more to get out of the ground. The oil majors are not looking all that great in terms of an investment opportunity.
But, small companies are riddled with risk. Drilling wells can cost millions of dollars, a tall task for a company whose entire market capitalization may not amount to much more than the cost of drilling one well. Coming up dry can bankrupt a small company if they are not careful.
For investors this poses quite a challenge. How can you trust that a small company is going to in fact strike gold when there is every reason to believe that they are exaggerating their positions to woo investment. Many companies that are actually siting on some incredible acreage won’t be a secret for very long. Are there any good oil stories out there that still aren’t widely known?
One strategy for investors is to find fields that have flown below the radar but have a high drilling success rate – the ratio of drilled wells to actual discoveries. In frontier areas where super-majors have to go seek out world-class discoveries that haven't already been picked over, success rates are typically in the 12%-15% range. That means every sixth well drilled will be a winner - pretty poor odds, especially if you can't afford to miss!
But, what if you could find a frontier with massive reserves, still extremely underexplored, and that promised a drilling success rate remarkably above the average?
There is such an area - the West African Transform Margin, and there is such a field: the 2 billion barrel Jubilee light oilfield off the coast of Ghana. The area in the last 5 years has clocked an incredible 65% success rate in discovery drilling into completely virgin territory!
The discovery of the Jubilee field in 2007 – the largest offshore oil discovery in West Africa over the last decade – kicked off a new era for Ghana’s energy sector. It broke a record for a major offshore oil development, achieving oil extraction within only three and a half years.
British operator, Tullow Oil (LSE: TLW.L) succeeded in ramping up production on such an impressive timeline, producing 120,000 bpd pretty much right away.
The Jubilee discovery also sparked a massive staking rush and tons of industry spending in the area from the biggest names in the business. Between Ghana, Cote D'Ivoire, Senegal, Sierra Leone and Liberia, a veritable who's who list of mid-sized, major, and super majors has appeared:
Of all of the above noted players and nations, Ghana remains home to the biggest and the best of which is Jubilee.
Tullow Oil mentioned above, is a British multinational with operations in two dozen countries, but whose production largely comes from a few African nations. It is the main player in the Jubilee field and has successfully lifted production in short order. Its partners include Kosmos Energy (NYSE: KOS), Anadarko Petroleum (NYSE: APC), along with GNPC. Tullow plans to invest a staggering $4.5 billion to develop a second block adjacent to Jubilee, the Tweneboa/Enyera/Ntomme (TEN), with production coming online in 2016.
Italian oil giant Eni (BIT: ENI) has also recently had success nearby. It 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 Corporation (NYSE: HES) has drilled seven successful wells and is gearing up for production. It has a 90% interest in its holdings in the Tano basin, and plans on investing a fresh $550 million in exploration this year, of which Ghana is the top priority.
These rather big oil players are positioning themselves to take advantage of Ghana’s coming oil boom. Their holdings in Ghana’s offshore blocks, which have already proven to be productive, offer some good options for investors. With a high drilling success rate, these companies have room to grow. But, as an investor, these large players are so diversified that it is hard to make huge returns from Ghana’s burgeoning oil sector by putting your money into them.
Smaller companies offer more of a pure play for the bolder investor. The newest entrant into the Tano Basin, offshore Ghana, has a large block but a low market cap-- Gondwana Oil (CSE: GO).
Despite its $15 million market cap, it has managed to secure 1,600 square kilometers of prime real estate. Its holdings are just 30 kilometers from established Jubilee production, and its block shares similar geologic features to Jubilee including water depth and rock age. Its territory sits adjacent to much bigger oil firms – Eni, Hess, Vanco, and Kosmos – four companies that have all discovered recoverable resources.
Kojo Annan, son of former U.N. Secretary-General Kofi Annan, is on board as an adviser. He has been very active in the Ghanaian resource industry for years, and Gondwana believes his local expertise will be critical. Gondwana has also brought on Douglas Manner as an adviser, who was the former COO of $4.2 billion Kosmos Energy, the discoverer of the Jubilee field.
How did such a tiny company get a hold of such lucrative acreage? In a weird quirk of the Ghanaian leasing program, Gondwana’s holdings were originally part of lease owned by Hess and Eni, but the two oil giants were forced to give it up as part of a deal with the Ghanaian government. And personal connections count--having Mr. Annan is big deal for Gondwana..
Now the next step for Gondwana will be to turn that valuable real estate into actual production. That leaves the company with several options. A classic strategy would be to farm-out the drilling operation to a larger player in exchange for a percentage ownership. This would allow Gondwana to drill its block while putting drilling costs on another company. Gondwana has said it plans to drill an initial well in calendar 2015.
The West African Transform Margin boats an unbelievable 65% discovery rate - something that has scarcely been seen in history in a frontier area. Within this offshore area over 5 billion barrels have been discovered in the last 5 years alone.
The Jubilee field offshore Ghana so far is the gem, and acreage immediately adjacent has to give the best odds by far. That should play very well for Annan and Gondwana.
By. James Burgess of Oilprice.com