South Africa Explorer Flags Risks and Rewards

Southern Africa is still pulling in Western oil majors even as exploration budgets are slashed industrywide and companies become increasingly selective over frontier deepwater exploration. The catalyst is Total's Brulpadda gas-condensate discovery in South Africa’s Outeniqua Basin in Block 11B/12B which the French major found last year. Total is currently halfway through drilling a second well, Luiperd-1X, to test the oil-prone eastern fairway (IOD Aug.28'20). Before year's end, the French major may drill a third well in Block 11B/12B to test the Blassop prospect but plans to drill on Namibia’s 2 billion barrel ultra-deep Venus prospect in Block 2913B in the Orange Basin have been deferred until the first half of 2021. If proved to be commercial, Brulpadda, with estimated resources of up to 1 billion barrels of oil equivalent, could provide South Africa’s struggling power sector with a new source of energy. It should be possible to commercialize Brulpadda given its proximity to existing infrastructure and South Africa's need for gas, junior partner Africa Energy told Energy Intelligence. "South Africa is dependent on coal for 70%-80% of its power generation and there's a sense of urgency to replace that with natural gas over time," CEO Garrett Soden said in an interview. A gas development could also tick boxes from an environmental, social and governance perspective, as climate-related pressures force companies to focus on prospects that meet lower-carbon and low-cost criteria. Total and partners Qatar Petroleum, Canadian Natural Resources, and South African consortium Main Street have identified five prospects across the block. Results from Luiperd, now drilling in around 1,800 meters of water, are expected by end-October. “We think the [11B/12B] block has multibillion-barrel potential and that it’s going to be some mix of gas condensate and light oil,” Soden said, also flagging the attractive commercial terms. The government take is less than 30% in the royalty tax system for hydrocarbons. Nonetheless, the surface conditions offshore South Africa are challenging given the water depths, strong current, high winds and waves. And the most likely development scenario would be relatively costly, involving subsea tie-backs to a platform on the shallower shelf. However, the liquids could go into floating storage for potential sale either in South Africa or on international markets. The gas could be monetized given the proximity to the PetroSA-operated Mossel Bay gas-to-liquids refinery, which is rapidly running out of feedstock. “Block 11B/12B will be the natural feedstock for that refinery. And there are other power plants nearby that could potentially be switched to cleaner natural gas, Soden said. Backed by the Lundin Group of companies, Toronto- and Stockholm-listed Africa Energy was originally spun off in 2015 from Africa Oil, its major shareholder, as a new ventures vehicle. The aim was to give the former Tullow exploration team a new platform and the financial support to pursue play types they had been successful with in the past across Africa. The company also holds interests in Block 2B on South Africa’s side of the Orange Basin and Block PEL37 in Namibia’s Walvis Basin. Exploration activity offshore South Africa was limited until recently by what technology was available. Now, “the challenges for investment are of course the oil price, political stability and the commercial terms, so those things have to come together to encourage offshore exploration,” Soden said. South Africa is a very attractive location from an oil and gas investment perspective. It’s one of the more developed countries in Africa with a large population, very good infrastructure and a natural resources culture from the mining sector, he said. “The key component of encouraging more foreign investment is finalizing the Petroleum Bill so companies are confident that the commercial terms are not going to change.” Last month, Royal Dutch Shell exploited current market conditions to seize assets being offloaded by smaller indebted partner Kosmos Energy (IOD Sep.9'20). The acquisition raised Shell’s operated interest in South Africa's Northern Cape Ultra-Deep Block in the Orange Basin from 45% to 90% and boosted its ownership in Namibia's offshore Block 39 to 90% from 45%. Various industry heavyweights have taken a position in recent years in southwest Africa where exploration activity had previously stalled. Total itself farmed into Block 11B/12B in 2013, taking a 50% stake from Canada's CNR International (CCI) in a deal said to be worth $799 million. Yet the recent decision by Exxon Mobil and Equinor to exit South Africa after disappointing seismic results -- and a coronavirus-driven shift in priorities -- makes it clear that the region's prospectivity is no guarantee. Deb Kelly, London