Obtain the data you need to make the most informed decisions by accessing our extensive portfolio of information, analytics, and expertise. Sign in to the product or service center of your choice.
The world is in an energy transition, we are told, moving
inevitably to a low- or net-zero carbon future. After a century of
dominance, fossil fuels are now being phased out, a process which
will take only several decades. Consequently, investor preferences
are changing. Many no longer support hydrocarbon projects, or at
least they don't support projects that are not "agile"—in terms
of time-to-develop—or "advantaged"-in terms of cost of
development and carbon emissions. This means that frontier
exploration--the riskiest of all exploration activities-is also
losing steam. These days, only around a dozen companies are
actively pursuing frontier exploration worldwide.
But while frontier exploration activity is decreasing globally,
sub-Saharan Africa seems to be an exception, with several high
impact frontier wells being drilled today in frontier areas. And
companies have plans to do more in frontier basins across the
region. In fact, sub-Saharan Africa's rig market—which is an
important indicator of upstream activity—is improving. At the
time of writing, three of the deepwater drillships under contract
in west Africa were contracted for frontier exploration. One of
these will even soon set the global deepwater record.
So why is Africa different, and what is driving frontier
exploration across Africa? Will this level of frontier exploration
be sustained? This blog will explore these questions.
Frontier Exploration: The Final Frontier?
Frontier exploration is struggling. But so is, more broadly, the
exploration business. In part, this is because exploration just
hasn't been delivering the kind of returns that shareholders
demand. But it also reflects an important shift taking place in the
upstream sector, both in terms of company strategy as well industry
structure. Last year, upstream explorers discovered the smallest
amount of barrels worldwide since the 1950s while drilling the
fewest number of wells in the last 15 years. On average, the
upstream sector is drilling around 400 exploration wells annually.
For this reason alone, that frontier exploration—a subset of
exploration activity in general—has not produced stellar
results is not a surprise.
Setting the stage for the shift in corporate behavior is the
overall disappointing performance in the E&P sector and
investor reaction to the energy transition. Back in 2009, upstream
companies achieved a double-digit rate of return. Since then,
however, returns dropped and until recently they produced on
average single digit returns. So investors are voting with their
pocketbooks, searching for upstream activities that will generate
higher returns. The lower returns from exploration lead them to shy
away from frontier exploration as well. While exploration activity
does continue, investors tend to focus more on barrels that are
"advantaged"—those that are lowest cost both in terms of their
carbon footprint as well as proximity to markets.
In addition, a number of upstream companies are reinventing
themselves in the face of the energy transition, turning from "oil"
companies to "energy" companies. With this broader focus, these
companies maintain a portfolio with upstream oil and gas assets,
but they are also adding renewables—a sector with a
utility-type business model and utility rates of return. Committed
to staying in traditional E&P, these companies need to achieve
higher rates of return than a utility might generate. To do this,
they focus their exploration activities in basins that are proven,
—where they are more likely to meet exploration success. Proven
basins contain both "emerging" and "mature" basins, but may also
contain frontier plays or new plays. The bulk of upstream dollars
go to fund these activities, and consequently frontier basin
activity only comprises about 10% of overall activity with respect
to spend and success. These results represent a major shift from
the past.
Going forward, however, we may yet see a shift back. There is a
sentiment that we are in an energy crisis and the world is resource
rich, a sense that we have a glut of resources. But it should be
noted that this sentiment is not necessarily reflected in actual
reserves, and in some parts of the world, we are "production poor."
That is part of the reason for this energy crisis, which these days
dominates news headlines. Should the industry then reconsider its
approach? This question deserves more analysis.
Why does Africa have so much frontier
exploration?
Africa is indeed seeing a flurry of exploration drilling some of
the upcoming high-impact exploration is in frontier basins like the
Zambezi Delta and other wells are in frontier plays within proven
basins, like the Congo Fan. A good example for a well testing a
frontier play within a more mature basin is the Ondjaba - 1 well,
recently drilled by TotalEnergies offshore Angola at a world record
water depth of 3,628 m. This well targeted a play that to-date was
untested and is therefore considered a frontier play, though its
basin is not frontier.
So why does Africa see so much frontier activity? A key reason
is because the region still has the potential for major
discoveries. Unlike most of the world, Africa hosts many frontier
basins with a significant number of large untested prospects. And
large discoveries tend to result in the production of barrels with
lower costs per barrel and lower carbon intensity per barrel. Also,
since frontier basins are often found in countries with limited or
no upstream industry, they tend to have fiscal terms that are more
attractive to investors—as government aim to build an upstream
sector—than in countries with a mature upstream industry. Such
terms ultimately lower the economic threshold investors must
deliver to their shareholders for a discovery, a benefit which a
large discovery only amplifies.
To be sure, some companies are pulling back from frontier
exploration—BP and Kosmos are well known examples—and the
overall size of the pool of explorers has decreased. But other
companies are moving into the sector. Though these companies may
not be operators, they do share in the risk and ultimately in the
potential returns.
What kind of frontier exploration activity are we seeing
in Sub-Saharan Africa?
The oil price crash of 2014-15—the first crash of two in
less than a decade—was followed by a delayed recovery in
exploration drilling in the region (exploration subsequently picked
up until 2020 and a second crash hit). In the region, the recovery
of exploration activity following a crash tends to be delayed
primarily due to the fact that exploration in Sub-Saharan Africa
generally occurs in the offshore and deepwater, and deepwater wells
are more expensive than onshore wells. After the 2014-15 price
crash, companies need time to redeploy capital to exploration in
the deepwater. In addition, exploration drilling roughly tracks the
oil price. So if oil prices remain around current levels, it is
expected that drilling will continue apace.
Below is a list of eight high-impact wells that are being and
expected to be drilled in the next few months:
Eni's Baleine 1 discovery in Cote d'Ivoire, in the Cote
d'Ivoire Basin
TotalEnergies' Ondjaba-1 well in Angola, in the Congo Fan
Petronas's Jove Marine-1 well in Gabon (geologically, an
extension of the Lower Congo Basin deep-water pre-salt play last
tested by Petronas with the Boudji 1 well)
Shell's Graff-1 well in Namibia, in the frontier Orange
sub-basin
TotalEnergies's Venus-1 well in South Africa, in the frontier
Orange sub-basin
AziNam's Gazania-1 in South Africa, in the frontier Orange
sub-basin
Galp/Shell's Jaca 1 in Sao Tome Principe, in the Gabon-Douala
Deep Sea Basin
Eni and Exxon testing in Mozambique, in the deepwater Zambezi
Delta
Which basins do explorers seem to be pursuing in
Sub-Saharan Africa?
Context is important. The world has about 2,700 basins, of which
only around 127 are considered favorable under IHSMarkit's criteria
for choosing the top basins. Many of these basins are located in
Africa and in particular sub Saharan Africa, both on- and
off-shore. Africa still contains many untested Cretaceous turbidite
plays which have led to large successes in offshore Ghana, Brazil ,
Guyana and MSGBC. However, the areas farther south, in Namibia,
then around the Horn and going north through East Africa, have
different geological characteristics. As such, they have not
attracted the same attention as the plays in the West. There are a
number of reasons for this, for example, corporate priorities,
existing knowledge, and even the number of explorers willing to
challenge conventional wisdom and develop new concepts to pursue.
It remains to be seen, however, whether frontier basins like the
Orange sub-basin, Natal Trough, Somalia, and Zambezi Delta will
result in the mega-plays that were discovered in the Atlantic, such
as in Guyana or MSGBC. In addition, in southern Africa, explorers
have hunted for oil rather than gas, which is seen to be in
over-supply. Sub Saharan Africa is sitting on over 130 TCF of gas
which has yet to be developed after more than 10 years. So why
explore for gas?
How is gas perceived by explorers?
Gas is seen as a major risk in Sub-Saharan Africa. The reason is
the gas market, or lack thereof. Neither gas markets nor
infrastructure are readily available in Sub-Saharan Africa. So even
if a large gas discovery is made, it almost surely will take years
to commercialize. As for local consumption, it is a chicken and egg
situation: explorers would look for gas if there was a robust local
gas market but not until that market exists. So generally, in
Sub-Saharan Africa, explorers prefer oil.
Reflecting this, nearly all of the upcoming high-impact wells
are targeting oil. But the big gas discoveries in Mozambique and
Tanzania initially thought to be oil plays. Though one well to be
drilled in Zimbabwe early next year onshore targets gas, all other
high-impact wells mentioned above target oil. Will the oil
predicted to be in East Africa's offshore finally be found?
Is the current round of drilling the beginning or end of
frontier basin plays?
The results from the current drilling activity will constitute
an important signpost as to whether the trend of drilling frontier
wells will continue. Simply put, success attracts activity. If
plays expected to deliver oil instead produce gas, or if the oil
that is discovered is not commercial, most likely explorers will
begin to look for new plays to pursue. That said, the large majors
tend to have deeper pockets and greater resources with which to
explore. So as long as a basin shows characteristics that are
promising, these companies often have the ability to be more
patient and continue exploring. Eni's success in the Cote d'Ivoire
Basin is a good example
Where do you expect explorers will go next in
SSA?
Here is a short list:
Expansion of Cote d'Ivoire (a proven basin)
Ultra-deep water Congo Fan, and deepwater Equatorial
Guinea
Somalia offshore (this may be where the elusive east African
liquids will be found)
Zambezi Delta
Natal Trough
South West African Coastal Basin (including the Orange
sub-basin)
Posted 16 November 2021 by Bob Fryklund, Vice President – Upstream Energy and
Daniel Berkove, Senior Advisor, Strategic Energy Initiatives, IHS Markit and