Lack of growth in non-OPEC oil supplies, combined with growing demand even in a weak economic climate, has meant big opportunities for exploration and production companies willing to think outside the box, notes Elliott Gue of The Energy Strategist.
At the beginning of 2011, the supply-demand balance in the global oil market had tightened considerably, thanks to:
- growing consumption in emerging economies
- limited growth in non-OPEC supply.
- The onset of civil war in Libya, and subsequent disruptions to the country’s 1.5 million barrels per day of oil exports
All this sparked a huge rally in the prices of Brent and West Texas Intermediate crude oil.
OPEC’s response to this lost supply is equally revealing. Although some members balked at boosting their oil output, their reluctance was pure theater: Saudi Arabia’s oil fields account for more than 75% of OPEC’s roughly 4 million barrels per day of spare oil production.
Ironically, whenever Saudi Arabia ramps up its capacity to balance the global oil market, the price of crude oil tends to increase. Why? Because investors then worry about OPEC’s ability to respond to future supply shocks.
Plus, Saudi Arabia’s oil isn’t an exact replacement for Libya’s oil exports. Whereas Libya produces primarily light, sweet crude oil that’s easy to refine into gasoline or diesel, Saudi Arabia’s spare production yields heavy, sour crude that costs more to refine.
Although supply-side analysts have focused primarily on Libya’s lost oil output, long-term investors should focus on potential production growth from deepwater fields off the coast of West Africa. This region is home to some of the largest and most prolific oil and gas fields discovered over the past two decades.
In 2010, the West African nations of Nigeria (2.5 million barrels of oil per day) and Angola (1.85 million barrels per day) were the continent’s leading oil producers. Ghana, on the other hand, produced only 500 barrels of oil per day last year.
But the gap between Ghana and its peers should narrow in coming years. Two adjacent exploratory blocks offshore of Ghana—the Tano and West Cape Three Points—have yielded significant oil and gas discoveries in recent years.
NEXT: Thinking Small Pays Off
|pagebreak|Thinking Small Pays Off
These fields are located in 3,500- to 6,000-foot-deep waters located roughly 37 miles off Ghana’s coast. Three publicly traded foreign companies hold significant acreage in this region: US independent producer Anadarko Petroleum Corp (APC), UK-based Tullow Oil (London: TLW, OTC: TUWOY), and newly listed Kosmos Energy (KOS).
The first major deepwater field in Ghana to enter production, Jubilee, yielded its first commercial quantities of oil in December 2010—42 months after its initial discovery in 2007. Given the cost and complexity of deepwater fields, Jubilee’s development progressed at a rapid pace; often, seven years passes between discovery and first oil.
By the end of 2010, production from Jubilee had ramped up to about 55,000 barrels of oil per day, and was expected to reach 120,000 bpd by this summer.
Although none of the partners has offered concrete, long-term production plans for Jubilee, the field’s total proven reserves amount to more than 600 million barrels of oil. This estimate will almost certainly increase as the partners continue to drill; it’s not far-fetched to suggest that the field could ultimately produce in excess of 500,000 barrels of oil per day.
Jubilee isn’t the only discovery offshore of Ghana. The aforementioned partners also announced the discovery of the Tweneboa and Mahogany Deep oilfields in the same region.
Although appraisal drilling is still underway in these new finds, initial results are encouraging and the fields will likely produce first oil in the next few years. Better still, the majority of the discoveries near Ghana produce light, sweet crude of slightly higher quality than Brent crude oil…and fetches a premium price.
Similar geologic features extend around the coast of Africa to other nations, including the Ivory Coast, Liberia, and Sierra Leone.
Although West Africa is home to some of the world’s largest offshore oil discoveries, thinking small has paid off. Integrated oil and gas giants such as ExxonMobil Corp (XOM) often pass up these smaller discoveries, because they won’t make a meaningful contribution to the company’s production levels and earnings.
That’s not to suggest that these smaller fields are poorer quality or unprofitable to produce; by virtue of their scale, the Super Oils prefer to pursue game-changing plays.
One of our biggest recent winners is Afren (London: AFR), a UK-listed exploration and production name that bought a series of smaller plays off of Nigeria that were discovered by major international oil companies. By bringing these smaller projects online, this firm has built a growing base of profitable oil production.
In May 2011, management reaffirmed its 2011 net oil-production guidance of 40,000 barrels of oil equivalent per day. Much of this output will come from two plays offshore of southeast Nigeria, the oil-producing Okoro and Ebok fields.
And the company is now expanding outside Nigeria into a total of 11 African countries. High-potential plays include blocks offshore of Kenya, Madagascar, and Tanzania, some of which the company is operating and some of which it has farmed out to other producers to reduce the capital needed to fund drilling.
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