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As Venezuela and its oil…
With only days to go…
As the asymmetric war between Iran and the U.S. continues to escalate, threatening oil supply across the Middle East, oil markets appear to be entirely ignoring the conflict. As oil prices tank while geopolitical tensions soar, there has never been a better time to get an insider's view on the market.
In an exclusive interview with James Stafford of Oilprice.com, Jay Park, CEO of Reconnaissance Energy Africa, discusses:
- Why oil prices aren’t responding positively to the specter of war
- What will influence prices in 2020
- Where the next shale boom might be
- How Recon Energy is positioning itself in a new oil hotspot
- And why regimes the world over are failing to attract investors
JAMES STAFFORD: The oil markets have had a volatile couple of weeks—even by 2019 standards. How worried should the oil markets really be about the recent escalation in Middle East tensions?
JAY PARK: Well when you look at oil markets in general, there are five things that influence the price of oil:
- Oil supply and how it’s changing
- Market demand and how it’s moving
- OPEC, its quotas, and its compliance with those quotas
- And finally, sentiment about those four things.
When we talk about the recent events in the Middle East we are talking about geopolitics. But despite all this tension, there hasn’t been any real change to supply or demand as a result of the recent tensions in the region. Sentiment is and sentiment alone is what moved prices higher. The tensions were particularly bullish for oil because for most of 2019 there was this underlying worry in the market that an agreement could be reached that would lift the sanctions on Iranian oil and flood the market. That prospect seems very unlikely now. More recently, Iran’s retaliation has convinced markets that this conflict is likely to remain a proxy war within Iraq as opposed to one that causes major global disruptions.
JS: Do you see another September 2019-style retaliation from Iran in the future?
JP: Iran is suffering from U.S. sanctions on its oil, and it would love to share that pain with Washington’s Gulf allies, particularly Saudi Arabia and the UAE.
It is reasonable to anticipate that Iran might take steps to impact oil production in those areas, whether via attacks on shipping or facilities. It’s reasonable because Iran has already done this type of thing in the past year.
JS: If Iran did retaliate in that way, what would the impact be?
JP: When a couple of oil tankers were hijacked and the Aramco refinery at Abqaiq was attacked, the incidents had less of an impact on oil prices and for a shorter period of time than most anticipated. We seem to be seeing a similar trend today after Iran’s retaliation underwhelmed. Further hostile actions may not necessarily have the same muted effect, but it was certainly underwhelming in 2019. It would have to be a sustained military operation with an impact on supply that could last for several months at least.
At that point we’d be looking at a hot war, which could easily increase the price of oil by 20%-30%, moving it to $90-$100 per barrel.
JS: Looking beyond geopolitics, what do you see as the biggest investment opportunities in today’s oil markets? I mean, we’ve got Exxon’s massive finds in Guyana, Apache’s recent discovery in Suriname, your own Recon Africa project in Namibia. If investors are moving away from U.S. shale, where should they be looking and why?
JP: Well, to begin with, I think it’s been clear for a long time that growth in U.S. shale is slowing and that has made finding the next big oil frontier the holy grail for oil companies like Reconnaisance Energy Africa.
As you said, both Guyana and Suriname look interesting after their recent successes - but those are capital intensive offshore plays that only really the oil majors are capable of exploiting. When you are looking at real value, I firmly believe there is nowhere on earth with as much potential as Africa.
To give you an idea of just how undervalued that continent is, the value of subsoil resources in OECD countries is about $300,000 per square mile, compared to the value of subsoil resources in Africa of $60,000 per square mile. Now, this is either because Africa doesn’t have its fair share of the world’s resources, or because it hasn’t found those resources yet. I’d put money on the latter because Africa is vastly underexplored compared to the rest of the world.
JS: Ok, but just because the resources may be there doesn’t mean that these are investor-friendly opportunities...
JP: That’s very true, and precisely why it remains so underexplored as a continent. But, before becoming CEO of Recon Energy Africa I was a lawyer specializing in upstream oil and gas and petroleum regimes. Now, what that means is that I have spent years of identifying and creating investor friendly petroleum regimes around the world. And it is with that experience that I was able to identify these opportunities in Namibia that we are currently working on.
Let me explain. A country’s petroleum regime can make or break its oil industry. I have worked with 17 governments holding 44% of the world’s oil reserves and 33% of the world’s gas reserves. I know how to make these structures work, and what works is doing things in a sustainable way so explorers will come, invest, have success, and then reinvest. That’s the ultimate goal—to find the right kind of petroleum regime that works for both investors and states. Now, once you are able to identify a state with the correct regime – and find an oil project with high potential within that state you have a winning formula.
JS: But the problem is that most African states have poorly constructed petroleum regimes?
JP: Yes. Many states in Africa have struggled with their petroleum regimes. These states tend to create regimes that are complex and heavily taxed. They also fail to give investors the assurances they need. Investors want to be confident that when they make a discovery, it will turn into money. That’s part of the reason that I am disappointed that Africa has fallen behind. While it is the place to go for resources, their regimes don’t meet the objectives I described. They either aren’t attractive to investors or they poorly address the state’s need, for example through inadequate environmental policies.
JS: Ok, so how do you go about finding a country and project that is suitable?
JP: Well I rate petroleum regimes across the world, including in Africa. I have a report card with 10 items on it, and I grade each one, and then give an overall grade to each country.
Assessing these regimes is precisely how I came to Namibia with Reconnaissance Energy Africa. The founders of the company wanted to know where the next great opportunity was. They brought together geologists from various backgrounds, petroleum taxation experts, and then I participated from the point of view of petroleum regimes. The idea was to find the next oil and gas hot spot.
Now, each of these experts were vital in narrowing down exactly that. A geologist might point out that Saudi Arabia has the best rock formations on earth, but you can’t get a grant from the state there. Libya is likely to have a great shale resource, but our taxation experts would point out that the state taxes oil and gas at over 90%, so shale would become an impossible proposition. We needed to identify places with great resource potential, plus good fiscal terms, plus a good legal regime.
That’s exactly how we got to Namibia. We filtered through various countries and Namibia came out very high for all of these targets.
JS: Namibia hasn’t really been on anyone’s radar. When we talk about the next ‘shale revolution’ it’s usually Argentina, or perhaps Russia. Where does Namibia suddenly fit in?
JP: It’s not on anyone’s radar because there are no commercial discoveries yet, but there is activity offshore. Those who have seen success in Angola, for instance, think the same opportunities might exist in Namibia. You probably hadn’t heard of Suriname on the oil map, either, until a couple of months ago. By the time it’s on everyone’s radar, it’s much less of an opportunity. And Namibia is a virgin opportunity.
We were looking at the onshore because we had an interest in shale, but instead, we discovered a giant deep basin, the Kavango Basin. It’s never seen a drill bit, yet it’s an analogue to one of the world’s largest shale discoveries in South Africa. This is all part of the Permian Karoo shales of South Africa, Botswana and Namibia. And we found a particular part that is a very deep basin that simulates in many ways the kind of environment you see in Eagle Ford. So, we licensed the entire basin. That’s 6.3 million acres, with test wells to be drilling this year to confirm there’s a working hydrocarbon system.
We already know we have interesting rock, so we don’t need seismic.
JS: Let’s shift back to the macro picture now. How has oil exploration changed over the last 5-7 years, and what can we expect going forward?
JP: The obvious answer is that technology has revolutionized exploration.
Despite appearances, we are really only in the very early stages of shale exploration and production. We’ve only been doing it for 10-15 years. There have been huge developments from data to drilling tech--massive advances in seismic, further-reaching horizontal drilling capabilities, refracking jobs, you name it. And there is a lot more to be learned.
We can drill deeper, too. Forty years ago when I started, a well in 800 meters of water was considered deep. Now, 3,000 meters of water is considered deep. If you look at the land area that is exploitable today that was not exploitable 15-20 years ago, it would add up to about the size of a continent.
JS: Do you see this as the end of the cheap oil era? Do you think all the cheap, easy-to-reach stuff has already been tapped?
JP: It is interesting to look back seven or so years when the talk of peak oil was very real. Then, too, everyone said all the easy resources had been found and produced, and called for $200 oil. But technology has proven that sentiment to be false. I suspect the same will be true in the future as tech advances march on.
Yes, today’s resources are more expensive, but we are still managing to make it work at $60 oil.
Still, in the last five years, we have seen far less exploration and discovery of oil than what we are consuming. That disparity can’t continue forever - we need new oil. And with existing fields declining at 3-4% per year you need to find a lot of new oil. The new oil that may be coming online in Guyana, Brazil, and Norway this year will close that gap to some extent, even with less growth from US shale than we have seen in recent years.
JS: Aside from Iran, do you see any other geopolitical time bombs that people are overlooking?
JP: Venezuela, but it’s difficult to see Maduro leaving soon. He’s survived US sanctions and local opposition. Even if the Maduro government is replaced, it would take a number of years for Venezuela’s oil industry to come back.
Perhaps a more urgent venue is Mexico. Its oil industry is facing significant challenges in the coming years.
In 2016, I helped Pemex do its first ever joint venture and we developed the first-ever farm out structure for Mexico. Farmout is a very common oil and gas transaction in which someone with a lot of land but not enough money to explore it enters into a transaction with an oil company, swapping capital for land. This was the first time in 70 years that Pemex had done one of these.
The concept of hydrocarbon reforms in Mexico was based on this idea: let’s let private capital take some petroleum grants and let Pemex use its massive acreage opportunities and allow it to do joint ventures. I thought those reforms were good and produced fast results, with farmouts being made and new discoveries and production happening. Within a few years, things were already moving.
The fruits of that were just starting to be seen when the new government came in and stopped it. There are great shale opportunities within Mexico, but they are undeveloped and the shale boom has bypassed the country. The regime that makes unconventional oil work has clearly been demonstrated in other countries, but Mexico has failed to capitalize on this. To make this work, the petroleum regime would need to be a concessions regime and a regime with a relatively low government take – 50% or less. That’s not Mexico today.
JS: So what’s the solution?
JP: The key to success for any government is focusing on exploiting as many types of resources as efficiently as possible.
Different kinds of resources require different recipes - different terms. In Alberta, where I’m from, we have five different regimes for five different resources. And all five get exploited. Nothing is wasted.
Take that back to Namibia. It’s got a 5% royalty and 35% corporate income tax on its oil reserves – it’s an attractive environment because they haven’t found anything yet as the country is vastly underexplored. They aren’t taxing the resource high because they want people to find it. It needs to be handled on a case by case basis but when looking for new opportunities in oil exploration the petroleum regime should always be one of the key things you look at. Good geology, good fiscal terms, and a good petroleum regime—that’s the formula, and at Recon Energy Africa, we think we have found that in Namibia’s Kavango Basin.
JS: Thanks for your time Jay.
As the race to tap Africa’s true potential as a major oil and gas producing region heats up, other companies are also vying for their own piece of the pie, including…
Exxon (NYSE:XOM) recently acquired an additional 7 million net acres from the government for a block extending from the shoreline to about 135 miles offshore in water depths up to 13,000 feet, with exploration activities to begin by the end of this year.
What Exxon’s banking on is that Namibia, which according to theory once fit together with Brazil, shares the same geology as Brazil’s pre-salt basins, Santos and Campos, which have already proved resource-rich, according to Deloitte.
Chevron (NYSE:CVX) ranks among the top oil producers in Nigeria and Angola. Other areas on the continent where the company holds interests include Benin, Ghana, the Republic of Congo and Togo. Chevron also holds a 36.7 percent interest in the West African Gas Pipeline Company Limited, which supplies Nigerian natural gas to customers in the region.
British Petroleum (NYSE:BP) has significant interest in Africa, but not necessarily the same stake as its peers. While BP has some oil assets in the region, it is focusing heavily on renewable power generation and natural gas production. Recently, it began work on a project in Mauritania and Senegal. The company noted, “We see this as the start of a new chapter for Africa’s energy story.”
Royal Dutch Shell (NYSE:RDS.A) is a veteran in the African oil and gas game. The company began drilling in the region in the 1950s, and now has assets in over 20 countries across the continent. Though it has sold off a number of assets in the region in recent years, it continues to maintain a strong presence in South Africa.
Total (NYSE:TOT) is another major betting big on Africa’s potential. It has been present in the region for over 90 years, and it is showing no sign of reducing its footprint anytime soon. In fact, just recently, the company announced a major oil discovery offshore Suriname. John J. Christmann, Apache CEO and President noted, “The well proves a working hydrocarbon system in the first two play types within Block 58 and confirms our geologic model with oil and condensate in shallower zones and oil in deeper zones. Preliminary formation evaluation data indicates the potential for prolific oil wells.”
By. James Stafford of Oilprice.com
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