oil in east africa: is this the last frontier

Oil in East Africa: Is this the Last Frontier for Energy?

by Callum Newman
on 4 August 2012

The new global hotspot in the oil and gas business isn’t US shale gas, or Queensland’s coal seam gas industry. It’s the vast untapped resources of offshore oil and gas in East Africa.

It’s been tagged ‘elephant country’ and not because of the local mammals with ivory tusks and big ears. It’s all to do with the discovery of huge energy reserves off the coasts of Tanzania, Mozambique and, potentially, Kenya. Opportunities are hot for small exploration companies to identify more assets that can be tapped and developed.

What’s remarkable is how little action this part of the world has seen until now. For a long time a combo of low commodity prices and high risk shut out the East Africa region from any exploration or investment at all.

Kris Sayce pointed out in Australian Small Cap Investigator that until recently, for every seventy wells drilled over the rest of Africa, only one was drilled in the east. That makes it one of the last regions of relatively unexplored territory left in the world.

But that’s changing faster than the time Michael Phelps takes to swim to the other end of the pool. The race is on to find new energy reserves to replace current production and increase output to meet the huge rising demand in Asia.

Remember, all the cheap and easy oil fields have been in production for a long, long time. Oil companies have to find new supplies, often in more remote, riskier and more expensive places.

The risks are high — but fortunately, so are the rewards…

Low-Cost African Oil and Gas
Threatens Aussie Energy Dominance

The reason for the excitement in East Africa is down to the success of early drilling.

Diggers and Drillers editor, Dr. Alex Cowie told his subscribers this week:

‘The success rate in this region is outstanding. To provide some context, oil and gas exploration typically has a success rate just 10-20%. That’s terrible when you think about. It can cost $50 million to sink an offshore well, and the chance of making a financial return could be as low as one in ten.

‘But East Coast African energy exploration stands out from the crowd because in all but a few cases they hit oil or gas. To be exact — the success rate has been 87%. A strike rate of close to 9 out of 10 is almost unheard of.’

This is attracting the interest of the big energy majors. And shareholders in the London-listed Cove Energy (LON: COV) don’t need to be told about the success in the region. The Cove share price has gained over 1000% in three years mainly thanks to its assets in Mozambique.

Global energy giant Royal Dutch Shell this year made a bid for the explorer, only to be trumped by Thai firm PTT Exploration & Production. After withdrawing its offer for Cove, Shell is now rumoured to be in talks with American company Anadarko Petroleum (NYSE:APC), which has an even larger stake in the same gas reserve and plans to develop an export facility to supply Asia.

This has got Australia’s natural gas industry worried, despite East Africa’s current lack of production and infrastructure. On Thursday, the Australian Financial Review ran the headline: ‘Woodside warns of East Africa rivalry’. The story notes:

‘Woodside Petroleum chief executive Peter Coleman has sounded another warning about the competitive threat from rapidly emerging gas hubs overseas that is increasing pressure to rein in costs in Australia’s liquefied natural gas sector.

‘He pointed in particular to East Africa, where discoveries in Tanzania and Mozambique by companies including BG Group, ENI and Anadarko Petroleum have spawned proposals for LNG export ventures that will target customers in Asia.’

Asian countries could source their energy from Africa and cut out the volatile Middle East and higher cost producers like Australia.

Huge Opportunity for Oil Explorers

The subdued oil price in recent times has seen major oil companies rein in their frontier exploration and consolidate their existing projects and revenue. This has created opportunities for smaller, aggressive companies to find new reserves. Cath Norman, managing director of small oil and gas explorer, FAR Ltd (ASX: FAR), said in a recent interview:

‘The larger companies are doing very little frontier exploration at the moment; they’re relying on the smaller companies, with a view to buying back in later. The larger companies will always have a need to replace their reserves and increase their inventories, and they’re really dependent on companies like us to do that for them.’

It’s a huge opportunity for exploration companies to get in early and capitalise on the growth. One benefit is they’re not especially sensitive to short term movements in the oil price because they don’t have any revenue. An oil producer does — and any downward shift in the oil price effects their profit. But shares don’t come much riskier than oil explorers.

The good news for investors is that the energy business can rise without depending on a rising economy. That might sound strange because oil often falls on slack demand. But the other question is always supply.

During the 1970's, a troubled decade frequently cited as similar to today, the oil price rose over fifteen times in price per barrel despite ‘stagflation’ and a bear market in bonds and stocks.

The long-term trends for the energy business are bullish, as Asian demand continues to rise and existing producers struggle to maintain supply. That’s good news for some oil and gas stocks, especially for frontier energy explorers.

Callum Newman
Editor, Money Weekend

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