• Tullow Oil cuts exploration and appraisal budget of $1 billion by more than two-thirds.

 

 By TZ Business News Staff.

 

Tullow Oil Plc (TLW), the British oil company that’s among the most active explorers in East Africa, said during the second week of January, 2015 that  it won’t drill a single offshore exploration well in the continent this year as it reduces investment in response to lower prices.

Bloomberg News has reported that For Africa to revive the momentum of its oil and gas industry, governments  will need to look at the terms they offer explorers and adapt them to reflect lower prices, Tullow Chief Executive Officer Aidan Heavey said.

“As more and more companies are pulling back, you’ll see that countries will have to change their terms,” Heavey said in an interview with Bloomberg news. “We will be renegotiating our exploration license terms.”

Bloomberg  News reporter Paul Burkhardt says in an article published Thursday, January 22, 2015, that  Tullow has cut its exploration and appraisal budget of $1 billion by more than two-thirds and will focus on onshore drilling in East Africa, where it’s been able to reduce well costs to $7 million each.

“It’s going to be the operators who are going to have to control costs,”  said Claude Illy, head of oil and gas advisory for sub-Saharan Africa at Deloitte & Touche.”  Exploration will be cut quite drastically, he said.

The dash for resources that saw explorers invest billions of dollars to tap promising oil fields from Ghana on the west coast to Tanzania on the east, is stalling as the global drop in crude prices pushes drillers to reconsider the high costs of exploration on the African continent.

For many drillers, 2014 was already failing to reach the promise seen in 2013 when half of the world’s 10 largest oil and gas finds were made in Africa. With oil prices dropping below $50 a barrel, analysts say they expect a more concentrated pullout in 2015.

“Now that we’re at another weak oil price, every company will be reviewing discretionary spending,” said Brendan Warn, an analyst at BMO Capital Markets in London.

Tullow has been active exploring oil and gas on Tanzania’s off-shore blocks inside the Indian Ocean, where the company operates in collaboration with  Aminex, another British oil and gas prospecting company. The company has also been active  searching for oil and  gas on the country’s onshore blocks  on the Ruvuma basin—the blocks which are located in the Lindi and Mtwara regions. The joint venter later allowed a third player, the prospecting company Solo Oil.

Tullow had in earlier years told shareholders in London evidence available proved their deep sea license area in Tanzania to be a strictly natural gas area with oil indications present only on the mainland.  In that briefing to shareholders, company officials said data currently available showed oil was present somewhere “onshore” while evidence indicated the offshore Tanzania license was “a gas play.”

Consequently, the company’s main higher impact exploration is focused on their onshore Tanzanian assets in Lindi and Mtwara regions.

Tullow Oil, fresh from  a huge success story across  the DRC border in Uganda,  drilled the first well at Likonde-1 which did not prove commercial, but provided a range of useful data, in particular the confirmation of oil onshore in Tanzania. Michael Rego, the group exploration director remarked that “Likonde-1 is the first well in the area to indicate oil and opens up the possibility of a new oil region”.

After the Likonde-1 ‘miss’ in 2010  at the Lindi Block which forms the northern part of the Ruvuma PSA, the joint venture team resolved to move on to  a neighbouring area, the oil prospecting well Ntorya-1.

Likonde-1 reached a total depth of 3,647 metres and intersected two sandstone intervals with a combined thickness of over 250 metres (820 feet), containing evidence of residual oil and gas. Likonde-1 was terminated due to high gas influx.

The said Ntorya-1 well would be drilled about 14 kms to the south of Likonde-1, to a planned total depth of 2020 metres, targeting the same high quality Lower Tertiary reservoir sands encountered in the Likonde-1 well. Seismic interpretation placed the sands at Ntorya-1 structurally up-dip relative to Likonde-1. Aminex estimated that the well has a probability of success for the discovery of hydrocarbons of approx. 20%, with a mean recoverable resource potential of 100 million barrels oil equivalent.  Tanzanian authorities formally approved the drilling of Nyorya-1.

Aminex chairman Brian Hall commented: ‘The Ruvuma basin is a significant frontier exploration area which has witnessed important discoveries offshore in the last two years, in neighbouring Mozambique and most recently with BG’s discovery in a deep water licence directly adjoining the Ruvuma PSA. The Ruvuma PSA covers a large, mainly onshore area which has only been lightly explored to date and we welcome the approval of the Tanzanian authorities to the Ntorya-1 location which will enable an exciting drilling programme to continue.’

The East African Margin had been previously limited to commercial gas discoveries predominantly offshore, but according to the company the Ruvuma onshore is regarded as a separate sub-basin.

In Africa’s frontier environment, drilling may bring a higher reward, but since most exploration takes place offshore, single wells can cost hundreds of millions of dollars, increasing the industry’s susceptibility to lower oil prices, Bloomberg News reported.

Duncan Clarke, chairman of Global Pacific & Partners, a firm that advises African governments, said cuts have already begun. They include “budget cutbacks, asset sales, some corporate consolidations, more farm-outs, slower acreage pick-up, tougher operating conditions, and weaker overall margins for producers,” according to Clarke.

Following major discoveries in 2013 in countries including Tanzania and Kenya, the Baker Hughes Rig Count reported 154 rigs in Africa in February of last year, the most since 1983. By December, that had declined to 138.

Ophir Energy Plc (OPHR), a U.K. explorer that’s made several large finds in Tanzania, ended its 2014 drilling campaign in Gabon in June, after a series of dry holes. Repsol SA (REP), Spain’s biggest oil producer, spent almost $100 million on a well that missed in offshore Namibia.

THE SILVER LINING

The silver lining for companies obligated by lease terms to drill could be lower service costs.

“Exploration in general will receive less funding due to the fall in oil prices,” Larry Bottomley, CEO of Chariot Oil & Gas Ltd., said in a Jan. 9 response to questions. “What we have seen, though, is a significant decrease in exploration costs, specifically seismic and drilling, so although there are fewer dollars, those dollars will go further.”

The cost of conducting a 3D seismic survey had dropped to $3,500 a square kilometer from $10,000 a year earlier, Ophir CEO Nick Cooper said last year in an interview at an oil convention in Cape Town in November. The company wasn’t immediately available to respond to a request for updated costs.

Drilling service companies such as Milan-based Saipem SpA (SPM) may see orders drop 30 percent with oil at less than $80 a barrel, Sanford C. Bernstein analysts said in a Jan. 19 research note, and the cost of hiring offshore rigs may fall 40 percent.

Not all companies have put off plans.

“The majority of our current development and near-term exploration drilling is offshore Nigeria, where typically the production costs are a little lower than other exploration areas,” Lionel McBee, a spokesman for U.S. explorer CAMAC Energy Inc. (CAK), said in a phone interview. “In this price environment, we’re not going to be expanding exploration drilling. We’re sticking to our development program.”

Some projects, such as completing of South Africa’s first deepwater well, which Total SA (FP)suspended due to technical issues last year, may not be realized for as long as the under-$50 environment lasts. The company didn’t reply to an e-mail inquiry about drilling plans in the country.

“You’ll see more timing delay on the exploration,” Simon Ashby-Rudd, head of oil and gas at Standard Bank Group Ltd., said in a Jan. 9 phone interview. “The major oil companies are now accepting that their long-term oil price assumption has changed.”