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Morocco: Investor Haven in Chaotic North Africa

Before we get into the oil and gas scene that is suddenly attracting the supermajors to this unexplored venue that has all the promise of the greatest African discoveries of this decade, let’s look at the Moroccan economy as a crucial piece of the investment puzzle.

The Moroccan economy has been growing at a stable—and by most accounts, unprecedented—rate, with growth on average 4%-5% higher than the previous decade. The reasons for this are multiple, but most poignant have been economic modernization and gradual diversification away from dependence on the agriculture sector.

Economic IndicatorsWhile the Justice and Development Party (PJD)-led government at first attempted to avoid an unpopular reduction in spending on subsidies and public wages—as in Tunisia—by 2012 it was in urgent need of an IMF credit line, and this came along with painful austerity measures. The IMF credit line of $6.2 billion was opened in August 2012 and then extended in July 2013, with a warning that Morocco would have to address subsidies and other financial reforms. By August 2013, this was made clear with an increase in the fiscal deficit for the first half of the year. Summer subsidy reforms came with political implications that included the resignation of five ministers from Istiqlal. Oil subsidy reforms were then delayed until September this year, leading to public protests and giving the opposition Istiqlal an opportunity to score some political points from the sidelines.

Despite opposition, the subsidy reforms are necessary, especially given forecasts for 2014 of slower economic growth, which may require additional austerity measures. But overall, Morocco is on the right path, and while next year may see slowed growth, the longer term indicators are positive.

In December 2012, Morocco successfully issued 10-year bonds for the first time in two years, while in May 2013 it re-opened these bonds with a slightly lower yield over the US Treasury

•    Morocco has also issued its first sharia-compliant bond (sukuk)
•    Private banks in Morocco are returning to the market amid improving financial conditions
•    A new export stimulus package seeks to diversity Morocco’s export markets, which rely too heavily on the European Union. (For 2012, exports to the EU dropped, while exports to Africa and the US rose and we expect this trend to gain momentum, particularly beginning in 2014 with two key projects: the Renault factory and a new oil facility)
•    The worsening security situation elsewhere in North Africa and the Sahel is diverting foreign investment, trade and tourism from these venues into Morocco, and we foresee this trend increasing over the next year
•    In North Africa, for 2012, Morocco was the leader in foreign direct investment, replacing Egypt in the top spot)
•    Across the Middle East and North Africa, for the first half of 2013, Morocco registered the largest growth in hotel demand
•    As oil and gas companies seek safer places to explore and produce and safer ports from which to export, Morocco and its estimated 20 trillion cubic feet in recoverable shale oil and natural gas is becoming increasingly attractive.

The New North African Venue

Land Grab in Africa

Advances in technology coupled with growing security concerns elsewhere in the region have contributed to an uptick in oil and gas exploration activity in Morocco, which is now even quaintly being referred to as “the Norway of North Africa”.

Between 1990 and 2013, only 9 exploration wells were drilled in Morocco, a country largely ignored in the face of the prospects in Libya and Algeria, for instance. Now we are seeing more wells about to be drilled in 12 months than have been drilled in the span of more than two decades. We are looking at about 10 new exploration wells to be completed in the next 12-18 months.

Offshore, the past year and a half has seen smaller independent players buy up offshore exploration blocks—but now it’s time for the supermajors to land and reward the juniors for their development efforts to date.   

So what we have now is a country that is virtually unexplored and highly prospective. Now the supermajors have descended on this frontier venue and let the drilling begin.

The juniors on the scene include the likes of Britain’s Cairn Energy, Kosmos Energy of Bermuda, Fast Oil and Gas Plc., San Leon, ONHYM, and … our favorite, Genel Energy, which has been storming the frontier venues in Iraqi Kurdistan and across Africa.

Genel has gross acreage of 16,489 square kilometers through interests in three offshore blocks here, including in the Juby Maritime block, in which it has a 37.5% interesting along with partners Cairn Energy (37.5%) and ONHYM (25%). The Juby Maritime block, Cap Juby has the potential to deliver 250 mmbls, according to Genel and the first well should be drilled here in the fourth quarter of 2013.

In the Sidi Moussa block, where General has a 60% interest, they are targeting over 850 mmboe of gross resources, with the first exploration well expected in the first half of 2014. In the Mir Left block, in which Genel holds a 75% interest, drilling is also expected to begin in 2014.

As for the supermajors, BP plans to start drilling next year. In mid-October, BP joined the ranks of supermajors here in a deal with Kosmos Energy for three offshore blocks. Before that, in January, Chevron bought a stake in three offshore blocks.  

What are they looking at? The analog geology that suggests the massive pre-salt finds offshore Brazil could be similar off the African coast. A theory already proven in emerging powerhouses like Angola and Ghana.

The Essaouira Basin offshore Morocco (but extending onshore) is relatively under-explored, but the exploration activity and a number of discoveries nearby make it highly prospective.

One offshore sweet spot might turn out to be Mazagan, off the coast of Morocco in the Atlantic Ocean, where independent surveys suggest mean prospective resources of 5.3 billion barrels of oil (net). Within Mazagan, Pura Vida Energy is singling out the Toubkal prospect, which alone has a prospective resource range of 436-3,074 mmbo barrels, with a mean estimate of 1,507 mmbo. What they like about this prospect is that it is an analogue of the billion-barrel Jubilee field in Ghana—the largest oil discovery this decade in West Africa. Pura Vida Energy has a 75% interest in the Mazagan permit. Drilling is expected to begin next year on the Toubkal field and Pura Vida think it could Pura Vida this year found a partner for its Mazagan block. Drilling is to begin next year in Toubkel.

Chevron, for its part, is acquiring seismic data and conducting studies in the deep-water areas of Cap Rhir Deep, Cap Cantin Deep and Cap Walidia Deep located between 100 to 200 kilometers west and northwest of Agadir, Morocco. The areas encompass approximately 29,200 square kilometers with average water depths ranging between 100 meters to 4500 meters.

But that’s offshore. Onshore, activity is picking up as well, but this will be more problematic because some of this exploration is slated for territory that reaches into the disputed Western Sahara—an issue that is heating up now thanks to saber-rattling by Algeria, which is lining up the rest of the region against Morocco and its occupation of this territory claimed by the Sahrawi people.

Sweetening the prospects we have not only a much preferred security environment, but attractive fiscal terms and plenty of infrastructure. The fiscal terms in Morocco will be attractive enough, in fact, to make its oil worth more than anywhere else in Africa. The tax structure nets the government less than 30% of petroleum income.

For Morocco, which imports 95% of its energy needs, the sudden increase in exploration activity is a major blessing.

While we’re still probably a decade away from realizing Morocco’ oil and gas potential, and that one big find hasn’t been made, it’s’ only a matter of time—and both the juniors and supermajors agree: Morocco is North Africa’s next sweet spot, for a number of reasons.

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