Invictus Cocktail Bar Lounge, page-23

Below are my thoughts on the Lokichar Basin as an investor in Africa Oil. Note that most of this occurred well before I started following Africa Oil in mid-2022 so it's my best effort to piece things together after the fact.

I agree with you that the Lokichar Basin isn't the best analogue for Invictus. Both Africa Oil and TotalEnergies walked away from the project last year with $0 so it's a little awkward to use that as our reference point. However, there were some complications that were somewhat unique to the Lokichar project that are worth noting:

• The oil turned out to be waxy. This was going to greatly increase the ongoing maintenance costs of the wells as it tends to clog wells up over time requiring more frequent workovers. More importantly, it required the installation of a heated pipeline for the full length to the Kenyan coast, greatly increasing the capital and operating costs of the project. If I recall correctly, the all-in costs per barrel were around $55, which is on the high end and comparable to US shale. Furthermore, I believe waxy oil sells at a discount because it's harder to refine.
• Early on there was a plan to build the pipeline in conjunction with Uganda (who also has a long stranded oil development). However, Uganda and Kenya had a falling out and Uganda opted to run their own pipeline through Tanzania rather than work with Kenya. This caused the Lokichar's initial field development plan to be scrapped and a new one designed and written up.
• The operator of the project (Tullow Oil) almost went broke due to poor results elsewhere in the portfolio. Africa Oil being nearly broke at the time too, necessitated a significant farm in partner before the project could move forward. Invictus is also broke but we're a small exploration company so that's normal imo.
• The nail in the coffin appears to have been the election of the new president in Kenya. This is a risk that Invictus shares (and all oil companies to a degree). It isn't clear what he said but there was some worrying language around forcing the companies to build a local refinery and not allowing them to proceed with the project at all. It was shortly after these statements were made that the potential Indian farm-in partners walked away and Africa Oil and TotalEnergies relinquished their stake.

The end result is that the Lokichar basin was going to be a very capital intensive and high cost project in an unfavorable jurisdiction. Regarding the timeline and its relation to the shale revolution, the big farm-out to Maersk Oil for $907m occurred in 2015, which is well into the shale revolution. The farmout was announced in November 2015 when oil was trading around $50 to $60 USD (although it had recently collapsed from $135 about 18 months prior). So although the shale revolution likely played a big part in killing the project (and many others around the world), Africa Oil was still able to fetch a very good farm-in offer. Personally, I think the deep-water revolution played a bigger part in killing the project. For example, TotalEnergies has said that they're looking at $20 per barrel costs (CAPEX and OPEX) for their Venus project offshore Namibia which is way more attractive than shale developments.

Before investing in Invictus, I asked myself whether it would turn into another stranded asset like the Lokichar basin. I concluded it probably will not for several reasons:

• Gas to power allows for an incremental build-out of the field. Lokichar was looking at an upfront capital investment of $3.5b USD to make the barrels economic before any revenue was realized. Beyond the pilot project, Invictus can likely get a significant gas to power project up and running for a fraction of that cost.
• Due to local demand and the SAPP, we have ready monetization options. Natural gas prices in southern Africa are very favorable atm. The Lokichar's only real option was building an 800 km heated oil pipeline to the coast.
• Unlike Kenya, the Zimbabwean government has been very supportive of the project publicly (although the delays on PPSA are becoming more concerning)

It would be interesting to look at more recent natural gas transactions that might serve as a better analogue. One I'm going to look into this weekend is Galp's sale of their 10% interest in a Mozambique offshore gas field to ADNOC. The farmout occurred this last week and appears to have fetched a substantial sum ($1.15b for 10%? Still need to look further into it and confirm; some is contingent on FID and I have no idea how much Galp has already put into the project).