The Commodity Investor: Oil Firms Moving On The Next Frontier, Offshore North Africa

January 29, 2014

The U.S. isn't the only country seeing an oil boom.

 

In my previous column, I wrote about the quiet revolution in the energy industry that is seeing the traditional sphere of activities shift from emerging markets to North America—certainly when it comes to American oil companies. Many oil firms domiciled in America or with broad activities in America are selling off their international assets (namely in Africa and Southeast Asia) in order to focus on the shale revolution taking place back home.

However, a countertrend is also occurring. Many exploration and production companies (especially Europeans and Asians) are moving into this void left by the Americans in Africa. In particular, many offshore exploration and production companies are moving to what may be Africa’s next frontier: offshore North Africa.

A New Frontier

Offshore Africa has been extremely rewarding to oil companies and countries in recent years. Dec. 15, 2010 marked the first oil from the Jubilee field in offshore Ghana by Tullow Oil (LON:TLW). After several years of dry wells, the drilling activity finally yielded a commercially viable discovery. That has led to an oil bonanza within the country that is becoming transformational for Ghana as well as Tullow.

Encouraged by this success, many companies were gripped by “gold rush fever” and are proceeding to sign up as many agreements with countries whose shores are on the Atlantic Ocean.

In addition, countries such as Angola have been producing oil for several years, and that has certainly encouraged offshore drilling activities there. The way it usually works is you have a company that purchases offshore blocks through a legal agreement with the host government, and they agree to share the risks. Some of these formulas can range from 50 percent/50 percent to 75 percent/25 percent in favor of the operator.

In some cases, the company may have to “farm out” some of its blocks. They bring in a financial or operational partner in order to further mitigate risks. In these cases, the company that “farms out” its blocks will give up some equity upside in exchange for cash or expertise. This is a typical model that has been prevalent throughout Africa, and indeed, some other areas.

 

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