IPFS
Is Tunisia the New Hot Spot for Energy Investors?
Written by Staffoilpricedotcom Erik Subject: EnergyUntil recently Tunisia was considered to be a minor
league and relatively underexplored venue in Africa’s rapidly expanding oil
& gas scene. This situation has quickly changed with new
bid rounds and forced relinquishments creating an opportunity for new companies
to come in.
Major E & P companies like Shell have jumped at the opportunity to acquire
ground that had been dominated for decades with little to no work conducted, mostly
by European State oil & gas companies in this former French
protectorate. For the first time major spending
has been committed to test Tunisian basins which are arguably equally prolific as
those in neighbouring environments with more work performed, such as Libya.
Tunisia is now in focus for investors because
exploration is increasing within the producing Pelagian Basin, which leads us
to ask the following questions:
Should Tunisia now be on energy investors watch list?
Is Shell just the start of “big oil” making inroads into the country? And
which are the plays that people should be watching?
To help us look at the developing situation in the region we managed to
speak with oil industry veteran John Nelson.
John Nelson is CEO of Canadian-listed Africa
Hydrocarbons Inc. (NFK). A veteran geologist, Nelson spent much of his career in East and
Central Africa—much of it for Mobil Oil--studying regional and mapping rift
basins at a time when no one else was shopping around in Africa’s interior.
Over his 27 years in the industry, Nelson has also had junior E & P
experience, recently serving as CEO for Lion Energy Corp., which was bought out
by Africa Oil Corp AOI' in 2011 as a way for AOI to gain access to their
impressive Kenyan land package that John had put together.
Africa Hydrocarbons Inc has a 47.5%
interest in the Bouhajla Block, located onshore Tunisia and surrounded by major
Shell Oil.
In an exclusive interview with Oilprice.com, Nelson
discusses:
Interview by James
Stafford of Oilprice.com
James Stafford: Is Tunisia
right now a venue for the juniors or majors, and what makes Tunisia a good
venue for small companies?
John Nelson: There is a
good cross-section of different sized oil companies exploring and operating in
Tunisia. Some of the majors are present such as ENI, Total, CNOOC and Shell;
however, most of the activity is with the smaller companies.
Junior companies can be very successful on projects that may not meet the economic threshold of the majors, but can propel juniors quickly to mid-tier producers. This makes Tunisia a good place for smaller companies to explore.
The basins in Tunisia are well established and understood.
Services for seismic and drilling are available. There is a capable work force
and French rule of law. Infrastructure in the way of roads and pipelines can be
found across the country. Fiscal terms are good and the government is stable
and reasonable to deal with. There are a number of smaller Canadian companies
already there.
James Stafford: Can you tell us
a bit about Tunisia’s potential. What is the biggest field and what are the
best exploration prospects?
John Nelson: There is a lot
of geological diversity in Tunisia which creates a number of different play
types to explore for. The biggest onshore oil field is the Sidi el Kilani field
in north central Tunisia. This field has produced over 50 Million barrels of
light sweet crude from a small number of wells. In fact it is the similarities
in Africa Hydrocarbon's targets to Sidi el Kilani that got me interested enough
in the "home run" size of the first drillable target, to decide to
come and run this company.
James Stafford: How does the
geology compare to the East Africa and the East Africa Rift System?
John Nelson: The geology of
Tunisia is not exactly like that of the great Tertiary rift system of east
Africa. There are of course some geological similarities on a smaller scale
where extension has caused the formation of horst and graben structures in some
areas of Tunisia. In general what we are looking for is actually arguably more
straight forward.
James Stafford: What’s the
business atmosphere right now in Tunisia?
John Nelson: Business as
usual. We have not seen any significant risks or changes in business practices
since we have been involved there. In terms of North Africa, Tunisia is
probably at the top as a jurisdiction in which to do business, and stability of
the politics, etc. The economy seems to be doing well. There is construction
going on in many of the cities. The country has not suffered at the same level
from debt and poor fiscal mgmt like some of the Eurozone countries on the
northern Mediterranean side. The country, like many countries these days, has
unemployment issues especially with the younger generation.
James Stafford: So if Big Oil
is not looking in Tunisia, how does that help NFK?
John Nelson: It is hard to
compete against majors when it comes to acquiring sizeable acreage and making
commitments. It allows smaller companies to cost effectively get positioned and
undertake exploration initiatives. However, if a significant discovery is made
then Big Oil may appear back on the scene to partner with or acquire small
companies like NFK. Shell Oil surrounds our Block now but we were there first
and were able to position ourselves with over 130,000 acres.
James Stafford: Africa
Hydrocarbons has a nice piece of contiguous acreage in Tunisia. Can you tell
us a bit about the two blocks in question and where you are right now in the
exploration process?
John Nelson: We have a
47.5% interest in two adjoining concessions, the Bouhajla and Ktititir blocks,
located in north central Tunisia and only 25 kms west of the Sidi el Kilani oil
field. The blocks were acquired approximately 3 years ago when the govt made
them available for bidding after being off the market for over 25 years. Our
local partners were there first, and that is the opportunity.
James Stafford: What are you
chasing here? Conventional or unconventional plays? What do you think you’ll
hit with drilling?
John Nelson: We have
several conventional type prospects and leads on our blocks and that is what we
will be targeting initially. Our first well will be testing a fractured
carbonate chalk reservoir, which is very similar to what is found producing at
Sidi el Kilani. Last year, Shell acquired a large land position around us and
have committed to spending over $150MM on their blocks. We have heard that
Shell and others have an interest in testing shale (also called
“unconventional”) plays within the region. The possibility for an
unconventional play type also exists on our acreage but we have chosen what we
believe is the "low hanging fruit" to target first.
James Stafford: You’ve
mentioned before the ability to “de-risk” exploration and development in
Tunisia. Can you take us through the math here and demonstrate the economic
feasibility of operating in Tunisia?
John Nelson: Our situation
is somewhat unique compared to many others in Tunisia or exploring in other
remote parts of Africa. Only 25 kms from our block is the facility and pipeline
for the Sidi el Kilani oil field. The facility was built to handle up to 25,000
bbls/d but now is only handling 1000 bbls/d. So there is much excess capacity
in this nearby facility. There is also a pipeline in place from the field all
the way to the port facility on the coast that is also under-utilized.
That means it won’t take much time or money to get
any future production on stream. As a result, we can still be profitable in the
event of a smaller discovery size due to the infrastructure already being in
place. It also allows the option to truck oil to the facility to obtain some
cash flow while onsite facilities and a short pipeline are built to Sidi el
Kilani if we make a discovery.
In other words if we are successful on our first
well next month, we should be able to start cash flowing very very quickly.
James Stafford: Do you need a
major operator in there like Tullow with Africa Oil in Kenya? What happens if
you make a discovery? Can you develop it cost-effectively?
John Nelson: In our
situation we do not need the expertise or deep pockets of a large partner. In
the event of a discovery we would be able to adequately finance a development
project. We anticipate that fewer than five wells would be needed to optimize drainage
of our first target area, which is substantially larger than the area of
production of 50 million barrels at Sidi el Kilani
James Stafford: How does the
cost of drilling wells compare in Tunisia, Kenya, Somalia …?
John Nelson: Our costs to
drill a 2500m well is in the area of $7 million. The cost seems excessive
compared to drilling costs in North America, but on an international scale it
is reasonable. This actually isn't very deep, and given the size of the target,
not very expensive. We also have easy terrain and a network of roads in our
area of Tunisia. Access is pretty easy and services are relatively close if
needed.
In more remote projects such as in Puntland, Kenya,
Ethiopia or other areas far from infrastructure, the drilling cost of a similar
well may be well over $50MM.
James Stafford: Outside of
Tunisia, where should smaller companies be looking? Can you rank the prospects
for us here in terms of junior capabilities and potential?
John Nelson: Juniors
provide a valuable service to the industry by often being the first entrants
into a new area or applying new technology to older areas. There are niches in
most parts of the world. Myanmar is opening up. New opportunities may now come
up in Venezuela. The rift basins of Niger, Chad and Sudan are attracting new
investment. The new discoveries off of Israel are opening up a lot of new
exploration initiatives there that look quite attractive. There is not so much
a shortage of ideas and opportunities as there is a shortage of capital to
pursue them.
James Stafford: We understand
that you have experience in Somalia—specifically in Puntland. Can you debunk
any myths about working in Somalia and take us through the challenges?
John Nelson: There were a
lot of concerns about security issues both onshore Puntland as well as piracy
in the offshore. It took a lot of careful planning to mitigate much of the
risk. Local communities were engaged, informed and employed. Our security
people worked with the govt and contractors to remove any possible threats
along transportation routes. The airstrip and drilling camp were well
protected. In the end, all the people and equipment were mobilized and the
drilling took place without incident.
James Stafford: What about
Ethiopia and Eritrea? Eritrea seems open for business now after preferring to
focus on its mineral resources for so long--and thanks to the new technology on
the scene--and it’s got Red Sea territory that is virtually unexplored.
John Nelson: Eritrea has
been slow to open up to oil and gas exploration despite a fairly high level of
interest. New laws and policy changes move slowly in many parts of Africa.
Eritrea has been explored in the past and there are known oil seeps there. No
major discoveries have been made yet.
James Stafford: How do you view
prospects in Ethiopia, as a possible extension of finds in Kenya?
John Nelson: Ethiopia has a
variety of play types throughout the country that are soon to be drilled.
Africa Oil is currently drilling in SW Ethiopia along the Tertiary rift trend
that extends north of Kenya. They may make the first significant oil discovery
for Ethiopia in that area.
James Stafford: How close are
we to commercial viability in Kenya, and what do you think the next year to
year and a half will show?
John Nelson: Tullow and
Africa Oil are close to determining commerciality. The recent testing suggests
the rates and accumulations may be sufficient. Some additional drilling success
in some of the other sub-basins on their acreage in blocks 10BA and 10BB as
well as in Ethiopia will help initiate further development decisions. There is
a lot of drilling and testing to be done over the next couple years. I am
pretty sure the results will lead to major infrastructure plans for the area.
It will take time--years--due to the remoteness and current lack of
infrastructure in the area as well as political involvement of neighbouring
countries.
James Stafford: So what can we
expect by the end of the year from Africa Hydrocarbons? What do potential
investors need to know?
John Nelson: We anticipate
drilling our first well in April and should know the results in May. In over 27
years, I haven’t seen many wells with this kind of risk-reward—a $7 million
well that is geologically so similar to a proven field only 25 km away where
one well produced more than 20 million barrels.
We have worked up the target with 2-D and 3-D
seismic that are remarkably clear, and that give us what we call in the
business a "play chance" that is much much higher than your typical
International exploration well. Usually with a target this size you are looking
at a 10%-15% chance of success - we have heard our chances rated by third
parties between 28% and into the low 30% chance of success. This is actually a
geometric difference in probabilities - really an order of magnitude.
With success on our first well, we would look to
start production from Bouhajla North, and follow in that area by preparing to
penetrate the reservoir again with new wells. We would also establish a reserve
and resource calculation to highlight the size of the produceable reservoir in
that area.
Concurrently we would develop an inventory of
prospects all over our acreage which we would develop with additional seismic
programs.
Real success just on our first well would turn us
from an explorer into an intermediate producer immediately.
James Stafford: What happens if
you hit—what kind of NPV do we get compared to current market cap.
John Nelson: Well James, if
we don't hit we are backstopped by cash in the treasury as well as our land
position and additional targets which we would then set our sights on.
But with a discovery similar to a Sidi el Kilani
well, our NPV10 based on our 47.5% working interest would be close to $100MM,
which is about 10 times the current market capitalization of the company of $9
million - we will know within 8 weeks. .
James Stafford: Thanks for
taking the time to speak with us John.