General Thoughts, page-6938

Full version below...and worth the read as Shell has not given up on PEL 39 and sounds interested in other slices of the Orange Basin pie...

"Shell’s high-profile oil and gas discoveries in Namibia’s Orange basin are not commercial, spurring the supermajor to write-off the cost of exploration wells in its deepwater licence. This news has burst Namibia’s exploration bubble and will be a big blow to the government, which had been pressing Shell — and others — to fast-track production from their many discoveries in the frontier basin. Despite declaring its five discoveries in Petroleum Exploration Licence (PEL) 39 an uneconomic, Shell said it will continue to seek ways to monetise its these finds, while also keeping its eye open for other exploration opportunities in Namibia. Since early 2022, the UK-based giant has drilled nine exploration and appraisal wells in PEL 39, making landmark discoveries including Graff — the basin’s play opening find — Jonker, Enigma, La Rona and Lesedi.

Jonker was widely considered to be the best of the bunch and was being eyed for development, but it has subsequently emerged that reservoir properties posed a challenge. On Wednesday, in its fourth-quarter trading update, Shell said its upstream business expected to take exploration well write-offs of about $400 million. It did not reveal more details, but it is now understood that the bulk of this write-off relates to wells in Namibia, which prompted an analyst note from Redburn Atlantic to state: “It now seems unlikely that (Shell) will develop their discoveries in PEL-39.” A Shell spokesperson told Upstream that because the supermajor’s Orange basin discoveries “cannot currently be confirmed for commercial development… we are required to class the discovered resources as ‘commercial, non-viable’ and take a write-off of the capitalised well spend.” “This is an accounting process and does not represent ongoing efforts in PEL 39, where we see potential additional opportunities beyond the wells we have drilled and are writing off,” said the spokesperson, adding that “the extensive data collected shows that there remain opportunities.”

In an emailed statement, Shell said it has drilled six exploration and three appraisal wells across PEL 39, “more than in any other exploration block in Namibia,” stressing that it continues “to explore potential commercial pathways to development, while actively looking for further exploration opportunities in Namibia.” Expanding on the reasons for PEL 39’s exploitation issues, the spokesperson said: “The discoveries remain challenging due to resource mobility and permeability, and a high gas-to-oil ratio making extracting oil and gas harder.“ This, coupled with current market conditions, has not yet enabled clear commercial pathways that meet Shell’s investment criteria/requirements.” The spokesperson said the supermajor is “evaluating these pathways for further exploration and appraisal with our partners, in line with existing agreements,” adding that “our approach is aligned with accounting policy.”

Shell chief executive Wael Sawan had alluded to sub-surface issues with its Orange basin discoveries as far back as July 2023, hinting that while big volumes of oil had been discovered, the company needed to fully understand the geology. In early 2024, after Namibia’s government revealed smaller-than-expected resource numbers for the PEL 39 discoveries, he told analysts that Shell was looking for “sweet spots” to develop. In May, Sawan said its Namibian discoveries were “complex in terms of porosities and permeabilities,” and in August re-stated that the reservoirs are “complex,” with oil mobility issues. Finally, in October, he said told analysts that the block was "very challenging." A financial source familiar with Namibia said the write-off was to be “expected — no-one was surprised,” given Sawan’s earlier pronouncements on PEL 39’s sub-surface challenges. Redburn Atlantic added: “While disappointing, Shell had been more vocal than peers about the commercial challenges of their discoveries given high gas contents and lower permeabilities.”

All discoveries in Namibia’s Orange basin appear to have significant quantities of associated gas, which can be costly to handle in deep waters. TotalEnergies is known to also have permeability issues at Venus, but high reservoir pressure is understood to counter this effect. Market sources are now speculating what Shell’s next steps will be for its exploration licence, which is set to expire later this year. One source close to the supermajor said it will continue to evaluate PEL 39 and the wider Orange basin where Galp Energia, Rhino Resources, Chevron and TotalEnergies are all currently drilling exploration wells. In May, Sawan said Galp’s Mopane discovery, directly north of PEL 39, offers “excellent data points for the overall basin … and those will be taken into consideration as we think about where we go next in our (drilling) programme.” He said at the time that Shell would study drilling results from nearby blocks to be able “to better inform our own choices.” An exploration source with knowledge of Namibia previously told Upstream that Shell would take a close look at the exploration potential of PEL 39’s northern and eastern areas, bordering the blocks operated Galp and Rhino.

Commenting on the write-down news, NJ Ayuk executive chairman of the African Energy Chamber (AEC), a Johannesburg-based oil and gas advocacy group, said: “There is no need for alarm. Exploration in (the Orange basin) is ongoing, and discoveries may need to be tied in with other finds within the basin." Shell and other operators have only scratched the surface of the vast exploration opportunities available in Namibia." The AEC described Shell's write-down as "merely a speed bump in Namibia’s oil development rather than a road block."