The Global Race for East African Oil: An Investors Market ...Dec 12, 2012 · resources of oil and...

The Global Race for East African Oil:

An Investors Market Report

The next trillion-dollar deal: Why East African oil may soon beat Middle Eastern oil in the global markets, and what you need to know about this up-and-coming energy giant.

A Global Resource Intelligence Report by the Casey Research Energy Team

The Global Race for East African Oil: An Investors Market Report

Africa: The World’s Most Important Energy Producer in 2040?

“ In the space of a few years, East Africa has become a feeding ground for most of the world’s oil majors, which have sniffed our resources of oil and gas on a truly gargantuan scale.”

–Malcolm Graham-Wood, oil analyst, VSA Capital

The race is on for African oil: recently, the East African Rift has been drawing oil companies from around the world. Find out who’s backing the companies, how their strategies for suc-cess affect investment potential, and where the best opportunities lie.

It’s no secret that world-class oil deposits lie under and off the coast of East Africa. Major oil companies and wildcatters alike have been vying for position here in recent years.

What isn’t as well known is how much money countries such as China are sinking into the region, and the planned and approved infrastructure they’ll finance in a swath of some of the poorest nations in the world. During the next few decades, trillions of dollars will flood into East Africa in exchange for its resource riches – and right now, most of that is set to come from China.

What difference can that possibly make to us as investors? A big difference, considering the two main issues here:

1. Energy security is critical.2. East Africa can help other countries get it.

The raw materials to make goods, the power to run the factories and corporations that pro-duce them, and the fuel to transport them can be summed up in the single word “energy.” The world’s #1 and #2 largest economies drive their engines figuratively as well as literally with a steady influx of energy.

In this report, the Casey Research Energy Team examines East Africa’s future role in the race for energy security. We’ll also take a closer look at China’s all-out race to load up on supply.


The US is the other main contender in this mad scramble for oil – the stakes are simply too high for it to sit by and watch.

Though late to the game, the world’s second-largest energy consumer is going to try and catch up to China’s investment in East Africa by plying even more money there. Investors will profit from the inevitable bidding war between two of the largest economies in the world.

The Shifting Epicenter of OilStability in the Middle East – what little there’s been of it – has deteriorated even more in the two years since a fruit vendor in Tunisia set himself on fire to protest his hu-miliation by corrupt police.

But however much the “Arab Spring” sped oil-consuming countries to consider their op-tions elsewhere, the Middle East was already losing its pole position as an oil producer. For example, geologists have long been ques-tioning how long Saudi Arabia could maintain production with its aging oil fields and aver-sion to foreign expertise.

In contrast, African countries have been steadily defining more reserves from their oil resources and have exhibited a willingness to work with foreigners to develop the conti-nent’s massive untapped potential.

It’s not far-fetched to imagine that Africa – not the Middle East – will be the most important energy producer for the world in 2040 or even 2030.

Africa is certainly the hot spot for oil and gas exploration as well as foreign investment. But one region stands out on the continent: East Africa.

As recently as 2006, East Africa didn’t even make the list of oil producers. That began to change in 2007, when Heritage Oil (LSE.HOIL) and Tullow Oil (LSE.TLW) announced a 1-billion-barrel discovery in Lake Albert, Uganda. Oil and gas explorers have reported major discoveries each year in the region since then, most recently out of a Kenyan project of

The Beijing Consensus

The race to secure supplies becomes even more imperative for China when you consider the country’s market potential. As a simple example, just look at vehicles per capita: despite the tales of Beijing traffic jams, just 37 people per 1,000 owned some kind of four-wheeled vehicle in 2009, accord-ing to the latest data from the World Bank. In contrast, in the United States the figure is a whopping 809 vehicles per 1,000 people.

Add to that the International Energy Agency’s prediction that operating cars in China will grow 10% annually for at least the next several years, and you have a demand curve that points skyward. Where is China going to satisfy it to regain the dominance it wants on the world stage?

The answer for China lies in what’s termed “the Beijing Consensus,” which calls for investment in strategic regions like East Africa with a no-strings-attached approach. More on that later in this report, but this prag-matic attitude is in direct contrast with the current US mantra of exporting Western-style governance.


Africa Oil (V.AOI) spudded in January 2012.We expect activity in East Africa to increase significantly as world powers and international integrated oil players jockey for positions via both acquisitions and exploration.

The fuel for this fire is that East Africa’s potential is humungous. In terms of significance, think of the gold rush in South Africa, whose gold pro-duction went from zero in 1886 to 23% of the global supply just ten years later. That’s how big this could be.

Bigger than the North SeaGeologically, East Africa is a much more complex system than West Africa; thus the lack of explo-ration until the last few years. West Africa rests almost squarely in the center of the vast African Plate. In contrast, on the left you see the conti-nent’s opposite side.

Africa is ripping itself apart along its eastern edge, starting at the Red Sea about 25 million years ago and slowly zigzagging southeast. The rate of this rift is only millimeters per year, but far enough along that many geologists now call Central and Western Africa “the Nubian Plate” instead of the more inclusive “African Plate.”

The key point to remember is that geologically dynamic areas can form the organic-rich basins of sediments that, given the right mix of time and conditions, become oil and gas deposits. Later on, geological action can also expose them.

Today, the East African Rift system is the largest continental rift system on Earth. From the Red Sea, it extends some 3,500 kilometers though Somalia, Kenya, Uganda, Rwanda, Burundi, Tanzania, and Mozambique. The island of Madagascar lies just to the other side of the rift.

Combined, the potential areas for oil production are several magnitudes larger than the entire North Sea – which produces one-third of Europe’s oil and gas needs. The map on the next page shows, at scale, just how big the rift system is:

In this close-up of a UN map, the heavy gray lines de-lineate the leading edges of three tectonic plates: the Arabian Plate, the Somali Plate, and the African Plate.


Currently only a few East African countries have actual resources or better yet, reserves. As exploration ramps up and development begins in earnest, however, resource, reserve, and production numbers are likely to run up much higher than what you currently see here:

And here’s where we get to the investment side. You don’t need us to tell you that the real money isn’t made by following the herd – it’s made by the leaders.

The “herd” of mainstream investors has yet to take the plunge in East Africa. Once they do, though, the chain reaction will be unstoppable.

Demand will push companies with operations in the region skyward… larger market capital-izations will fuel more exploration… drilling programs will uncover more deposits… stocks will shoot to the moon… and the early investor will be along for the ride.

Of course, the savvy investor’s secret of success is due diligence. So let’s take a look at tax structures, country profiles, and China’s knee-deep involvement in the region.

Source: Africa Oil

CountryProduction Consumption Reserves (2012)

Oil (2011)(000 bopd)

Nat Gas (2010)(bcf)

Oil (2011)(000 bopd)

Nat Gas (2010)(bcf)

Oil(billion)

Nat Gas(Tcf)

Uganda – – 16.93 – 3.5 0.50

Ethiopia – – 49.08 – 0.00 0.88

Mozambique – 110.18 19.58 2.83 – 4.50

Rwanda – – 5.25 – – 2.00

Somalia – – 5.66 – – 0.20

Tanzania – 27.55 43.31 27.55 – 0.23

Kenya – – 79.41 – – –

Madagascar – – 17.48 – – –


The Open Hands of Governments: Oil and Gas Taxation in East AfricaEven a company pulling thousands of barrels a day out of the ground would go under if the government made a grab for the cash. In many jurisdictions around the world (Iraq, Venezuela, and Libya, for example), that’s unfor-tunately the case. In those countries, the “government take” exceeds 90%, so companies have only 10% of the distributable income to pay their interest payments, administrative costs, and dividends.

In East Africa, the main form of taxation is the pro-duction-sharing contract (PSC), sometimes known as production-sharing agreement (PSA). Under a PSC, the revenue is split into two components: “cost oil,” which is used to help pay back the operator for exploration, de-velopment, and operating costs; and “profit oil,” which is anything that remains. The profit oil is then split be-tween the government and the contractor.

To put a picture to it:

In order to quickly assess how friendly a government is to oil and gas producers, the Casey Research Energy Team developed the following rating system of five (exceptional) down to zero stars (unfriendly).

TotalProduction

Government Portion

Company Portion

Profit Oil

Cost Oil

Extortion Schemes – Why

You Should Pay Attention

Governments have a vari-ety of methods to extract money from the contrac-tors looking for oil in their countries: bonuses, royal-ties, taxes, carried-interest clauses, and production-sharing contracts are some examples.

Even analysts can forget to investigate and to factor in the impacts of these “government costs,” sub-tractions from a company’s bottom line that can be higher than the operational cost of a project – the most-often reported but superficial evaluation.

This is why the Casey Research Energy Team always evaluates the taxation structures and the amount of government take with every project.


For example, the North Sea has a government take of approximately 62%, or a three-star fiscal system. This is the most common rating; the world average is 67%.

As a rule of thumb, countries with higher levels of geological potential typically have higher govern-ment takes – but not in East Africa. Given the level of opportunity that lies within the East African Rift, the taxation levels are very reasonable. This means a bigger slice of profits for investors.

The sole exception is Uganda, whose fiscal system garnered only one star. Luckily, this disadvantage is offset by the country’s vast resource potential – so even with a much higher government take, Uganda will still draw in large companies. It’s also made a point of only courting major companies, issuing only a few PSCs. That helps boost demand for access.

Next, we’ll survey each major East African country in turn.

Dirt-Poor But Resource-Rich? The Countries of East Africa1. Ethiopia – Stunted Growth, Promising Future

Category Government Take

HHHHH Less than 50%

HHHH 50 - 60%

HHH 60 - 70%

HH 70 - 80%

H 80 - 90%

No Stars More than 90%

Country Rank

Madagascar HHH

Kenya HHH

Ethiopia HHH

Mozambique HHH

Somalia HHH

Tanzania HHH

Uganda H

Ethiopia

Population (2012) 91,195,67

Pop Growth (2012) (%) 3.18

GDP (2011) ($b) 96.09

Real GDP Growth (2011) (%) 7.50

Oil Production (000 bopd) –

Oil Consumption (000 bopd) 49.08

Oil Export/(Import) (000 bopd) 47.01

Nat Gas Production (bcf) –

Nat Gas Consumption (bcf) –

Nat Gas Export/(Import) (bcf) –

Oil Reserve (b bbls) 0.00

Nat Gas Reserve (tcf) 0.88


Ethiopia’s population of 92 million makes it the second-largest country in Africa by num-ber of residents. The country has been landlocked since 1993, when Eritrea declared independence and separated from Ethiopia. This, combined with the Eritrea-Ethiopia war in 1998 and a severe drought in 2011, severely hampered Ethiopia’s growth over the past 20 years. Today, it’s one of the poorest countries in the world.

A positive offshoot of the situation is Ethiopia’s determination to investigate its oil and gas resources as a potential way to jump-start its economy. So far exploration and hydrocarbon production have not been significant, but the proximity of neighbors Kenya and Uganda has sparked a renewed interest. Wells will likely be drilled sometime next year in order to evaluate the full potential of the considerable hydrocarbons the country is thought to possess.

Politically, Ethiopia has stabilized significantly since the war with Eritrea in 1998. Ethiopian troops are frequently called on to man peacekeeping missions throughout Africa, includ-ing Somalia and the Democratic Republic of Congo. The lack of any uprising following the recent death of Prime Minister Meles Zenawi bolsters its trend of stability. Deputy Prime Minister Hailemariam Desalegn will fill Zenawi’s position until elections in 2015.

1940Oil and gas explo-ration begins

1972-1973Clash with Tanzania

1973-1974 Famine kills 200,000

1974Haile Selassie overthrown by coup

2010Africa Oil signs agreement with Ethiopia to jointly study Rift Valley Block

2011Tensions arise with Eritrea

2012Troops attack posi-tions in SE

1977-1979Colonel Mengistu comes to power and kills thousands of government opponents

1977-1978Somali forces invade and are defeated with help from Soviet Union and Cuba

1980sSoviet Petroleum Exploration con-firms gas at Calub and Hilala

1991-1993Ethiopian People’s Revolutionary Democratic Front comes to power

1999Ethiopia-Eritrea War

2000Peace treaty signed

2006Ethiopia sends troops to Somalia to support transi-tional government


Hydrocarbons Galore

Ethiopia is separated into five dif-ferent sedimentary basins: The Ogaden; Gambella; Abbay; Omo Valley; and Mekele.

The Ogaden Basin covers over 350,000 square kilometers and is the most explored of the lot. Most of the 50 wells drilled in Ethiopia to date are here. It also contains two of the country’s largest hydrocar-bon discoveries, Calub and Hilala. Initial gas in place for Calub is ap-proximately 2.7 trillion cubic feet (tcf), while Hilala contains around 1.3 tcf.

Listed Companies Operating in Ethiopia

Source: International Development Partnerships


2. Somalia – A Tale of Two Regions

Somalia is a country located in the Horn of Africa and has a population of around 10 mil-lion. Unfortunately, it’s now best known for the gangs of pirates who hijack oil tankers and other ships as they travel the sea lanes leading to and from the Suez Canal. Before that, it was the scene of the United States’ 1993 fiasco in military peacekeeping depict-ed in the book and movie Black Hawk Down.

Somalia was created in 1960 as a merger of a former British protectorate and an Ital-ian colony. The country has been without a central government since 1991, when the government of Mohamed Siad Barre was overthrown by opposing clans. The departure led to a power struggle and made Somalia a lawless warzone.

Two regions subsequently split off to form governments of their own:

• Stand-alone Somaliland to the north, unrecognized internationally despite peaceful elections, a functioning judiciary, its own monetary system, and other hallmarks of an independent country;

• Puntland in Central Somalia, an autonomous region that says it will rejoin Somalia when the acknowledged Somali government demonstrates that it’s firmly in control.

Marked progress was made in 2000 when clan elders and other senior figures appoint-ed Abdulkassim Salat Hassan as president. A new parliament was formed in 2004.

After the militia removed warlords from the south in 2006, however, Islamist insurgents were able to move into the vacuum. Three years later, the insurgents launched an at-tack on capital Mogadishu, prompting Transitional President Ahmad to plead for help from the international community. By 2011, African peacekeepers and a Kenyan army incursion were able to retake most of Mogadishu.

Somalia

Population (2012) 10,085,638

Pop Growth (2012) (%) 1.60

GDP (2011) ($b) 5.90




Oil Export/(Import) (000 bopd) (5.66)




Oil Reserve (b bbls) –



The focus of current hydrocarbon exploration is in the northern part of the country, or the state of Puntland. Somaliland has also negotiated concessions on several blocks abandoned by Chevron (CVX), Conoco (COP), and other majors when Somalia fell apart in the early 1990s. Its oil minister says he expects Genel Energy (LSE.GENL), Ophir Energy (LSE.OPHR), and Jacka Resources (ASE.JKA) to commence drilling in 2014.

Exploration Since the ‘80s

The focal points of current activity are located within the Nugaal and Dharoor Basins. Geologists currently interpret both basins to be extensions of the Marib-Shabwa and Sayun-Masila Basins of Yemen, which contain approximately 6 billion barrels of oil.

The Nugaal Basin has been identified as having res-ervoir, source rock, and trap potential. Companies have explored this region in the late 1980s, with a grid of 2D seismic shot perpendicular to the axis of the rift system. A partnership of Africa Oil and Horn Petroleum (V.HRN) acquired over 4,000 kilometers of existing 2D data and now has an inventory of drilling prospects. Two wells, Nugaal-1 and Kalis-1, were drilled by Conoco and did encounter several oil shows; however, neither well reached its total depth (TD) before Conoco pulled out in the wake of Siad Barre’s ouster in 1991.

1977Somalia invades Somali-inhabited region of Ethiopia

1988Peace with Ethiopia

2012Horn Petroleum drills two dry wells between May and August

2011Piracy boom

October 2012Kenya enters Somalia to attack rebels

1991Somaliland declares indepen-dence. Siad Barre ousted and power struggle ensues

1980sOil and gas ex-ploration begins in the Nugaal and Dharoor Basins

1993“Black Hawk down”: US Rang-ers killed when mi-litias shoot down two helicopters

1991Conoco drills two wells but aban-dons blocks and leaves Somalia

2006Ethiopian and Somali govern-ment captures Mogadishu

1998Puntland declares autonomy

1969Muhammad Siad Barre assumes power in coup

Source: Horn Petroleum


Horn Petroleum drilled two wells in 2012 in the Dharoor Basin. The Shabeel-1 well reached a TD of 3,470 meters in May and at this writing is suspended for future testing. The Shabeel North-1 well reached TD of 3,945 meters in August and was plugged after finding neither oil nor gas.

Horn and its partners plan on entering the next exploration period in both the Nugaal and Dharoor Valley. Both blocks are owned by Horn Petroleum (60%), Range Resourc-es (ASE.RRC) (20%), and Red Emperor Resources (ASE.REMPF).

Listed Companies Operating in Somalia

3. Kenya – Unlocking Vast Potential

Kenya

Population (2012) 43,013,341

Pop Growth (2012) (%) 2.44

GDP (2011) ($b) 72.34









Nat Gas Reserve (tcf) –


The discovery of oil in the Ngamia-1 well by Africa Oil Corp and Tullow Oil was one of the most exciting stories in the oil and gas sector in 2012. When the partnership dis-covered over 100 meters of net light-oil play in the Upper Lokhone sand section and an additional 43 meters of potential oil play in the Lower Lokhone sandstone section, shares of Africa Oil leapt from C$2 to over C$11 on the announcement.

The story also caught the attention of many major and supermajor companies. The drill result at Block 10BB was the first major commercial oil deposit for the country and put Kenya on the map for oil and gas exploration.

The Africa Oil/Tullow partnership broke the streak of dry wells in Kenya by applying new technology: full tensor gradiometry (FTG). FTG measures the density of subsurface rock layers – a characterization tool that allows geologists to gain a clearer understanding of the underlying geology. By combining the partners’ FTG images with one of the most experienced oil and gas management teams in the world, they found oil on their first hole. In fact, Tullow Oil used the same technology to unlock the Lake Albert project in Uganda, with an unheard-of success rate of 90%.

If Tullow Oil and Africa Oil successfully apply the technology to the other areas they control, they have the potential to unlock multibillion-barrel fields and create an entirely new oil-producing region in the world.

The bottleneck now is Kenya’s lack of pipelines, which makes it difficult to transport the oil to the world market. However, it’s highly likely that one or more of the companies vying for dominance will build the infrastructure to gain access to the oil.

Tullow, Total SA (PA.FP), and China National Offshore Oil Corp. (CNOOC, SEK:883) al-ready have a working relationship to develop an Africa Oil “hub” in the East African Rift, and other companies are going to knock on the door to develop Kenya. China in particular is already awaiting the day that it can produce, refine, and deliver Kenyan oil to its shores.


Land of Four Basins

Kenya has four sedimentary basins: the Lamu Basin; Anza Basin; Mandera Basin; and the Tertiary Rift Basin.

The Tertiary Rift Basin contains Block 10BB, the discovery we mentioned previously. Prior to Ngamia, the Loperot-1 well was drilled by Shell in 1992, where it recovered 29 degrees API of waxy crude oil. Though this finding demonstrated a working petroleum system, Shell gave up on the project when it discovered that the sandstones were water-bearing.

The Lamu Basin has had 10 wells drilled in it since the 1950s, and an additional 820 square kilome-ters of 3D seismic data acquired offshore. Though several wells had indications of hydrocarbon pres-ence, none was fully assessed or completed for production.

The Anza Basin had 10 wells drilled in it between 1985 and 1990 by Amoco and Total, but none of them showed indication of hydrocarbons. The same group drilled two wells in the Mandera Basin during the same period, but the wells were also dry. The Bogal-1 exploration well, drilled in 2009 by CNOOC, also came up dry and was subsequently plugged and abandoned.

1950sOil and gas ex-ploration begins. First well drilled by British Petroleum and Shell

2012Africa Oil and Tullow Oil dis-cover over 100 meters of net light oil through the Ngamia-1 well

1978Kenyatta dies and is succeeded by VP Daniel arap Moi

1963-1964Kenya gains independence; the Republic of Kenya is formed

1998Al-Qaeda bombs US embassy, kill-ing 224 people

1992Loperot-1 well drilled by Shell encounters 13 m net pay – reservoir water-bearing

2009CNOOC’s Bho-gal-1 well drilled and multiple gas shows encoun-tered. Plugged after testing

2002Mwai Kibaki ends Moi 24-year rule

1944 -1947KAU formed and campaign for independence. Kenyatta becomes leader


Listed Companies Operating in Kenya

4. Uganda – The Lord’s Resistance Army

The Republic of Uganda is a landlocked country with a population of 33.6 million. Uganda made headlines in the 1970s and 1980s for its blatant human rights abuse under dictators Idi Amin and Milton Obote. During their reigns, over 500,000 people were slaughtered in state-sponsored killings.

Uganda

Population (2012) 33,640,833

Pop Growth (2012) (%) 3.58

GDP (2011) ($b) 49.96








Oil Reserve (b bbls) 3.50



Beginning in 1986, President Yoweri Museveni has gradually brought a measure of stabil-ity and growth to Uganda. Through Western-backed economic reforms, the country has seen an increase in growth and inflation control.

The Lord’s Resistance Army (LRA) has been operating in northern Uganda and neigh-boring countries for the last 20 years. Its leader, Joseph Kony – recently risen to infamy through a viral YouTube video – claims that the LRA aims to establish a theocratic state based on the Christian Ten Commandments, but the LRA is responsible for mutilating and killing tens of thousands and for using child soldiers. It’s listed as a terrorist organiza-tion by the US State Department.

Uganda is home to Lake Albert, Africa’s seventh-largest lake, which divides its shoreline between Uganda and the Democratic Republic of the Congo (DRC). A few years ago, Heritage Oil and Tullow Oil made elephant-sized discoveries here, reigniting the explora-tion interest in East Africa. Water issues and other contention have made Lake Albert a longstanding hotspot between Uganda and the DRC, and the large discoveries have provided another reason for hostility.

In 2009, Heritage sold its 50% interest in Block 1 and 3A to Tullow, which then partnered with CNOOC and Total to split ownership of acquired blocks into thirds, plus Tullow’s Block 2. Tullow has resolved a surprise 30% capital gains tax imposed by the Ugandan government, and the partners expect small-scale production in 2013 and ramp-up to ma-jor commercial production in the basin by 2016.

1978-1979Uganda invades Tanzania, defeated Amin flees

2012Uganda increases oil reserves to 3.5 billion barrels

1997Heritage Oil enters Uganda; first com-pany in 60 years

1993Museveni restores the traditional kings

1998Ugandan troops intervene in DRC

2002Uganda signs agreement to contain rebel group, LRA

2006Government and LRA sign truce, talks stalled by regular walk-outs – violence continues

2009Heritage announc-es Buffalo-Giraffe discoveries and intention to sell its interest

1971Milton Obote over-thrown in coup led by Idi Amin


Proven Reserves: 1 Billion

According to aeromagnetic surveys conducted between 1983 and 1992, there are five sedimentary basins within Uganda: the Albertine Graben; Lake Kyoga Basin; Hoima Basin; Lake Wamala Basin; and Moroto-Kadam Basin.

Most of the exploration in Uganda has occurred in the Al-bertine Graben Basin on the western border of Uganda. Heritage Oil was the first company to explore the country in 60 years when it entered Uganda in 1997. In 2001, Tullow farmed into Heritage’s Block 1 and Block 3 (later relicensed as Block 3A), acquiring 50% of its interests.

In 2004-2005, the two companies teamed up to acquire 2D seismic data, which resulted in Tullow spudding its first well in 2006 – the first well in Uganda since 1938. Heritage and Tullow enjoyed enormous suc-cess, and in early 2009, Heritage announced the Buffalo-Giraffe discoveries in its Block 1, the largest discoveries to date.

The Albertine Graben Basin has proven reserves of 1.0 billion barrels, which is all of Uganda’s reserves. Plus, the basin has prospective resources of 1.5 billion barrels.

Listed Companies Operating in Uganda

A map of Uganda’s Great Rift Valley (licensed under Creative Commons).


5. Tanzania – The Natural-Gas Hub

A population of 47 million people lives in the United Republic of Tanzania. It officially became a country in 1964 after Tanganyika merged with the island of Zanzibar.

In 1967, President Julius Nyerere issued the Arusha Declaration, which aimed to make Tanzania self-reliant through the creation of cooperatives and the nationalization of industries. After 10 years, the program was declared a failure due to a high level of cor-ruption and resistance from the poorer classes.

Julius Nyerere resigned in 1985 and was succeeded by Ali Hassan Mwinyi, who success-fully revived the economy through the privatization of industry and the attraction of for-eign capital. Benjamin Mkapa, who became president in 1995, followed the same policy.

The country has natural-gas reserves of 0.23 tcf and currently produces approximately 27.55 bcf per year. Tanzania has been in the news of late, most recently in August 2012, when the joint venture (JV) of Ophir Energy and BG (LSE.BG) announced that after reaching a TD of 5,544 meters offshore, their Papa-1 discovered a gas-bearing column of 89 meters. This was Ophir-BG JV’s sixth consecutive discovery.

In June 2012, Statoil (OSLO.STL) and its partner ExxonMobil (XOM) announced a dis-covery at the offshore Lavani well, the seventh such revelation in seven months. As a result, Tanzania has nearly tripled its estimated recoverable natural-gas resources to about 29 tcf.

Tanzania

Population (2012) 46,912,768

Pop Growth (2012) (%) 1.96

GDP (2011) ($b) 64.71





Nat Gas Production (bcf) 27.55

Nat Gas Consumption (bcf) 27.55





Offshore Riches

Tanzania encompasses several basins; however, the majority of recent discoveries and activity has occurred offshore in Mafia and Ruvuma. Other basins in Tanzania include the Selous Basin; Rufiji Trough; Dar Es Salaam; Ruvu Basin; Pemba Zanzi-bar Basin; and the Madawa Basin.

So far, companies have drilled some 35 exploration and development wells in Tanzania. The Mafia and Ruvuma Basins hold two of the largest, currently producing gas discoveries in Tanzania: the Songo Songo field, which started production in 2004; and the Mnazi Bay Field, which commenced in 2006.

These basins are also the site of the latest impact discoveries in Tanzania. In August 2012, the Ophir-BG JV announced results from a well drilled 53 kilometers southeast of their earlier Pweza-1 dis-covery. Statoil and Exxon Mobil (XOM), working in a 65-35 split, announced a discovery between the Ophir-BG wells in June.

Unfortunately, this success has led to Tanzania delaying its fourth offshore licensing round until its parliament presents and probably ratifies a new

1979Tanzania invades Uganda and helps oust Idi Amin

2010-2011Large gas dis-coveries made offshore by Ophir-BG JV and Statoil-ExxonMobil JV

200131 people killed and over 100 arrested in pro-tests against the government

1995Benjamin Mkapa chosen as presi-dent

2001Gold mine Buly-anhulu opens and makes Tanzania third-largest pro-ducer in world

2004Production from the Songo Songo and Mnazi Bay gas fields begins

2005Jakaya Kikwete wins presidential election

2012Tanzania orders a review of all current oil and gas exploration contracts

1964Sultanate of Zan-zibar overthrown and Tanzania is formed with Nyer-ere as president

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natural-gas policy. No doubt the new licenses will favor Tanzania at the expense of the oil companies – not even current licenses are immune, as the government is re-viewing them all.

Listed Companies in Tanzania


6. Mozambique – Gas Giant in the Making?

The Republic of Mozambique is located in southeast Africa and has a population of 23.5 million. It became a nation in 1975, when it won independence from Portugal through the Frelimo movement. However, in 1977, Mozambique backed armed groups against white-minority rule in Rhodesia (now Zimbabwe) and South Africa.

Both countries countered by sponsoring the opposing Renamo movement, which fought Frelimo in a civil war that lasted from 1977 to 1992. More than a million people died, and another million more were forced to flee the fighting. The civil war ended when Renamo and Frelimo signed the Rome Peace Accords in 1992. Frelimo has won all subsequent elections, but still continues to work with Renamo within the constitutional system.

Mozambique is known for its natural gas; the country currently has 4.5 tcf in reserves and produces 110.18 bcf per year. Like its neighbor Tanzania, Mozambique has been in the news lately due to major offshore natural-gas discoveries.

If the recent discoveries of natural gas are confirmed, Mozambique will rank fourth in the world for natural-gas reserves – behind Russia, Iran, and Qatar.

In August 2012, Eni (BIT.ENI) announced that its Mamba North East 2 exploration well encountered 200 meters of gas pay. This was Eni’s fifth successful discovery in the area and adds about10 tcf to its Area 4.

Mozambique

Population (2012) 23,515,934

Pop Growth (2012) (%) 2.44

GDP (2011) ($b) 24.19





Nat Gas Production (bcf) 110.18

Nat Gas Consumption (bcf) 2.83

Nat Gas Export/(Import) (bcf) 107.36




Majors Waiting in the Wings

In October 2012, Mozambique’s government an-nounced its fifth round of bidding for natural-gas concessions. Each round was separated by offering blocks within one of its two main sedimentary ba-sins, the Mozambique Basin and the Rovuma Basin.

Most of the majors, among them Exxon Mobil, Royal Dutch Shell (NYSE.RDS), BP, and Chevron have ex-pressed interest, according to Mozambique’s National Oil Institute. By law, the country’s own National Hy-drocarbon Co. (ENH) must own a stake in any field.

The Mozambique Basin holds four gas fields: Pande; Temane; Buzi; and Inhassoro. The Pande gas field – the first discovery in Mozambique – was found by Gulf Oil in 1961, followed by Buzi in 1962 and Temane in 1967. Inhassoro was later discovered by Sasol (JSE:SOL) after further work had been con-ducted on Pande and Temane.

As in Tanzania, the majority of high-impact discoveries are offshore, in this case within the Rovuma Basin. The Eni discovery we mentioned above came out of this basin. Eni also has partners in the area – GalpEnergia (ENXTLS.GALP) (10%), KOGAS (KOSE.A036460) (10%), and ENH (private) (10%, carried through the exploration phase).

1961-1967Gas fields: Pande, Temane and Buzi are discovered

2012Anadarko an-nounces major gas accumulation discovered

1976Renamo is created by white Rhode-sian officers to counter Frelimo.Civil war ensues

1975Mozambique becomes inde-pendent from Portugal; Frelimo rules

1992President Chissano and Renamo leader Afonso Dhlakama sign peace deal in Rome

2011Eni announces the discovery of a natural-gas field in the Mamba South exploration prospect

2010Anadarko announces first deepwater discovery offshore

Source: National Hydrocarbon Co., Mozambique


In June 2012, Anadarko Petroleum (NYSE.APC) announced its own discovery. The Atum exploration well within the offshore Area 1 encountered more than 92 net meters of natural-gas pay and was drilled in water depths of 1,000 meters to a TD of 3,860 meters.

With this discovery, the company increased its total estimated recoverable natural-gas resource in this area by more than 30 tcf. Co-interest holders in this area are an interna-tional cross section: Mitsui E&P (TSE.8031) (20%), BPRL Ventures (10%, a subsidiary of India’s Bharat Petroleum Corp.), Videocon (BSE.511389) (10%), Cove Energy (pri-vate) (8.5%), and ENH (private) (15% interest is carried through the exploration phase).

Listed Companies in Mozambique


7. Madagascar – The Oil-Sands Island

Madagascar is an island country with a population of approximately 22 million. A former French colony, Madagascar historically focused on the development of its agricultural sec-tor, including fishing and forestry. However, transport prices spiked during the 1973 oil crisis, and the nation saw an economic downturn that ultimately led to bankruptcy in 1979.

Since then, the country’s political arena has been marked by civil unrest, assassina-tions, and uprisings. The most recent coup d’état occurred in 2009, when President Marc Ravalomanana was pushed from power. Observers are looking hard at Madagas-car’s next elections, scheduled for 2013, as a sign of whether the country has become more stable.

Its location off the coast of Mozambique has meant that it shares in the wealth brought by the East African Rift. Madagascar has a sizeable oil reserve within the Tsimiroro heavy oil field and the Bemolanga oil sands and bitumen deposit. In September 2011, Madagascar Oil (AIM.MOIL) announced a contingent best-estimate resource of 1.7 billion barrels, and a prospective best-estimate resource of 2.2 billion barrels for the Tsimiroro field, located within Block 3104.

The government has so far been relatively cooperative with foreign oil and gas companies, implementing a fiscal system that is straightforward and fairly generous to oil and gas producers.

Madagascar

Population (2012) 22,005,222

Pop Growth (2012) (%) 2.95

GDP (2011) ($b) 20.66









Nat Gas Reserve (tcf) –

Source: Madagascar Oil


All Eyes on Heavy Oil

The three main basins in Madagascar are along the west coast and are comprised of Morondava, Majunga, and Ambilobe. The Morondava Basin contains the Tsimiroro heavy oil field and the Bemolanga oil sands and bitumen deposit – with potential depos-its exceeding 20 billion barrels. Geologists predict the offshore portion of the basin will contain lighter oil.

The Majunga Basin has only had eight wildcat wells drilled to date, with no discoveries. The Ambilobe Basin also has no discoveries, with even less exploration. Only two wells have been drilled in the Ambilobe Basin – the last one was over 50 years ago.

Source: Office des Mines Nationales et des Industries

Stratégiques (OMNIS)

2002Ravalomanana president after elections.Ratsiraka exiled

2009Andry Rajoelina assumes power with military back-ing – internation-ally condemned

1975Lieutenant-Com-mander Didier Ratsiraka named head of state after coup

2008Produces first bar-rel of crude in 60 years during six-month cyclic steam stimulation test

2011Madagascar Oil contingent 1.7 billion bbl, plus prospective 2.2 billion bbl

2012Madagascar Oil re-solves outstanding issues with gov-ernment regarding exploration blocks


Listed Companies Operating in Madagascar


East Africa – The RisksOf course, no investments are without their risks, especially when the region in ques-tion is thousands of miles away on a continent that is still finding its feet after its co-lonial period. Wells could come up dry and governments could fiddle with resource policy virtually anywhere, but in East Africa we also need to consider that politics could change in a heartbeat, and sectarian violence could always flare up.

For every success story, there are dozens of companies that spend millions of dollars for nothing but dry wells and heartbreak. So how do investors de-risk their investments?

To analyze investment opportunities in East Africa or elsewhere, Casey Research has created a time-proven, successful approach named the “The 8 Ps,” outlined in a de-tailed PDF document. The 8 Ps stand for People, Projects, Paper, Phinancing, Politics, Price, Promotion, and Push, but undoubtedly the most important is the first: People. In an unforgiving labyrinth of politics and power such as East Africa, the difference be-tween the companies which have experience and contacts and those which do not is often the difference between success and failure.

Pareto’s Law of SuccessSo in East Africa, you’d do well to follow those who have undertaken similar projects in oil and gas in the past – people who have gone into difficult locations and managed to build a successful oil and gas com-pany. The Casey Research Energy Team tracks these veterans in the Casey Explorers’ League, as well as the up-and-comers in the Casey NexTen. To earn an invitation into these honorable ranks requires at least three significant commercial discoveries. The lists include industry leaders such as Lukas Lundin, his late father Adolf Lundin, and Ross Beaty.

After people, you should look for companies that have gotten in early enough to snap up the best available land. It’s not just investors who are rewarded for rec-ognizing an opportunity early in the game.

Companies with prime holdings are often able to find partnerships in which they can “farm out” their land holdings. In a farm-out agreement, a company will give a percentage of a project to its partner in return for a partial funding of the exploration and development costs. For example, a company might farm out 30% of the project in exchange for 50% of the project costs.

Pareto’s Law Explained

Vilfredo Pareto was an Italian economist born in 1843. His research found that typically 80% of a po-tential benefit comes from just 20% of the effort that goes into achieving it.

Doug Casey has applied Pareto’s Law of Success to investments, finding that 4% (20% of 20%) of the people – company CEOs and presidents who lead their industries – gen-erate 64% (80% of 80%) of the wins in the market. As he says, “You want to follow that 4%.”

http://www.caseyresearch.com/xl

http://www.caseyresearch.com/pdfs/1267112781-0908208Ps.pdf

http://www.caseyresearch.com/pdfs/1267112781-0908208Ps.pdf

http://www.caseyresearch.com/xl

http://www.caseyresearch.com/nexten/home


Drill programs in East Africa can be tens or even hundreds of millions of dollars, so the farm-out approach reduces risk and stacks the deck in favor of the company holding the strongest hand. Theoretically, a company could even reduce its risk exposure on a project to zero by farming out all the costs to other companies but still maintain partial ownership. This set of agreements allows the company – and those who invest in it – to participate in the upside while avoiding all the work and the downside risks.

In contrast, companies that are “farming in” – those paying a higher cost to get a foot in the door – will have higher risk, since they are paying more costs compared with their potential returns.

So look for management teams that know the ropes and base their strategies on the farm-out model.

China and its state-owned companies like CNOOC are catching up quickly in this game – at the same time as they’re paying heed to two more of the Casey 8Ps: Paper and Phinance.

China’s Scramble for AfricaThe Chinese economy has been growing at a rapid pace over the past decade, even through the heart of the financial crisis of 2008. Looking toward the future, however, Beijing realizes that in order to continue this growth, China must have a stable supply of oil that can fuel its cars, grease its machines, and run its factories.

From the chart below, we can see that China’s domestic production has no chance of catching up to its voracious appetite for oil – which means Chinese oil must be imported:


In the past, most of China’s imports have come from the Middle East, but as we mentioned early on, this solution is turn-ing less viable with each year. Even in supposedly stable countries, there lurks the specter of upheaval: for example, King Abdullah in Saudi Arabia is nearing 90, and a power struggle upon his death would surprise few Middle East experts. (You can read more about it in this Casey Daily Dispatch.)

Sectarian conflicts and continued ten-sions between Israel, Iran, and the rest of the Middle East constantly worry China and could restrict its ability to con-tinue sourcing crude oil from the region.

Quantitative Easing for Africa – The Beijing ConsensusThe Chinese Investment Model, also known as the “Beijing Consensus,” approaches political and international relationships through the concepts of multiculturalism and cooperation. This is a sharp contrast to the “Washington Con-sensus” that impels countries to consider political changes such as democracy, Western governance, and reduction of poverty. China’s “no-strings attached” investments in Africa are made to bring growth and foreign policy together.

It is obvious that the main motive of China’s presence in Africa is the grab for energy; however, there are three other critically important factors in its strategy:

1. New market and investment opportunities2. Symbolic diplomacy3. Forging of strategic partnerships

US Piety vs. Chinese Pragmatism

Those who follow America’s record of blind-eye support for friendly dictators and government coups may be star-tled to learn that on record, at least, the United States has an aversion to doing business with any country that doesn’t embrace its values, including democracy, social change, and free-market capitalism.

Hillary Clinton summed up this attitude when she declared that the United States “will stand up for democracy and universal human rights, even when it might be easier or more profitable to look the other way.”

When it comes to Africa, it’s largely true. America has consistently dem-onstrated a reluctance to deal with a region stigmatized by weak social spending and corrupt government of-ficials. In turn, of course, such leaders are unwilling to accept America’s terms, as it would mean a loss of power and personal profit.

Meanwhile, China has pursued a more pragmatic, economy-only focus that has won it a lot more investments, a lot more contracts, and a lot more wealth.

http://www.caseyresearch.com/cdd/islamic-revolution-saudi-arabia

http://www.caseyresearch.com/cdd/islamic-revolution-saudi-arabia


Investments are made via financial and technical assistance, which China uses to bid competitively for resource and construction projects. A typical example was the offer of US$2 billion to develop infrastructure in exchange for a former Shell Oil block in Angola, across from Mozambique. Since 2010, China has committed US$41 billion in East Af-rica and US$107 billion around the continent in general.

For perspective, the first figure is roughly equivalent to the annual GDPs of Mozam-bique and Madagascar combined, according to the International Monetary Fund. Clear-ly, China is moving into Africa in a big way. Over the next decade, China will pump an amount of money into Africa that will rival the Quantitative Easing (QE) programs in the United States.

Is There Upside Left?In a word, yes. Despite the numerous discoveries and the land rush in the East African Rift, the number of active rigs still lags considerably behind the rest of the continent.

Furthermore, refining capacity is far behind in East Africa, as the area historically hasn’t produced its own crude oil. That’s about to change, of course, thanks to Chinese invest-ment combined with the large discoveries that have been made to date.

Source: Oilfield services company Baker Hughes (BHI)


This infrastructure gap represents a remarkable opportunity for investors, as it means that development is going to happen soon.

What’s Coming in East AfricaAll in all, East Africa is home to a potential…

• 28 billion barrels of recoverable oil• 440 trillion cubic feet of natural gas• 14 billion barrels of natural-gas liquids

Though it comes with a high risk factor, well-positioned companies – Chinese ones among them – have managed to mitigate a fair amount of geological risk, with strate-gies from developing joint ventures to funding local trade schools. For example, in October BG Group announced that it was pursuing cooperation with Statoil to build one larger LNG plant rather than several company-specific ones in Tanzania.

The next phase to expect is consolidation. Western oil behemoths will have to compete with Chinese state-owned oil companies to buy the smaller firms that had the vision, technology, and adaptability to lock in the best land positions and business relationships before East Africa’s prospects started to snowball. Elephant oil deposits in the region will carry a premium.

With the spate of discoveries in the East African Rift, the area is quickly becoming the most important region for oil exploration today.

Drilling rigs are being assembled, and every large-cap oil and gas company is looking for a piece of the action. If the next round of drilling produces the results to confirm that it

Sources: Energy Information Administration; Mbendi


is, in fact, home to world-class deposits, the ExxonMobils and Shells of the industry will go on a buying spree. They’ll be competing against the deep pockets of the Chinese, but they can’t afford to lose.

Companies in the East African Rift that own the right land, are cashed up, and actively managing their risks will be rewarded with a lucrative buyout from these supermajors. For the well-positioned investor, it will be interesting to watch – and to cash in.

US$29

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The Global Race for East African Oil: An Investors Market ...Dec 12, 2012 · resources of oil and...

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