INDEPENDENTS IN WEST AFRICA

West Africa is an ancient and tumultuous land, one buffeted by wars, jihads, famines and conquests during its entire history. The region sits along the Atlantic coast of the great continent, south of the Sahara and north of the Equator. Cameroon's highlands separate it from Central Africa. People have lived in West Africa since the early Stone Age, and more than 1,000 years ago complex societies developed in the savannah regions. Indeed, the empires of Ghana, Mali and Kanem-Borno rivaled those of Europe in the 11th century. Today, West Africa teems with more than 250 million people, occupying an area some two-thirds the size of the U.S. The Population Reference Bureau projects that West Africa will be home to nearly 620 million people by 2050. Deep and widespread problems bedevil this part of the world. Poverty, disease, poor health care and civil strife are everyday facts for millions of its inhabitants. Nonetheless, the area has riches. For centuries, gold, ivory, feathers and leather were traded to the Arabs of northern Africa across the Sahara; later, slaves, gold and palm oil were traded to Europeans along the coastal stretches. Today, crude oil is the new wealth of West Africa, and the world is eagerly seeking its export. Oil production in West Africa flows mainly from Nigeria, Gabon and Equatorial Guinea, thanks to their offshore holdings in the prolific Gulf of Guinea. (Heavyweight Angola, which sits south of the Equator, will be featured in an upcoming issue of Oil and Gas Investor.) Once the province of major oil companies, West Africa now attracts independent operators. These smaller firms see opportunities to use their flexible structures, quick response times, and close focus on cost control to deliver an edge in the cutthroat world of big-time exploration and development. Many governments in the region are rolling out the welcome mats for smaller operators. "We've found that the governments in West Africa have been receptive to us, and to our approach to doing business," says Earl Reynolds, vice president and general manager of Devon Energy Corp.'s international division. "Majors were in some cases successful here, in others unsuccessful. Independents have a different mindset and a different approach, and we have access to the same technologies as the majors." Foreign concessions supply nearly 15% of the Oklahoma City-based independent's total production of 700,000 barrels of oil equivalent per day. Unquestionably, foreign oil is a key component of the company's growth strategy, and West Africa is an area it likes very much. "The reserve potential can be significant, and that's what draws us here." Nigeria Nigeria leads all of Africa in oil production. The importance of oil to Nigeria is overwhelming: it accounts for 95% of foreign earnings, 80% of government revenues and 40% of the gross domestic product. An OPEC member, it currently has a production quota of 2 million barrels a day and has, according to its federal government, 34 billion barrels of oil reserves. It also holds tremendous gas reserves, totaling some 170 trillion cubic feet (Tcf). Nigeria is a key oil supplier to the U.S. In January 2004, it sent 923,000 barrels of oil per day to the U.S., nearly 10% of total imports. "We plan to raise our reserves to 40 billion barrels and our productive capacity to 4 million barrels per day by 2010," says Philip O. Chukwu, group general manager, National Petroleum Investment Management Services, the upstream arm of Nigerian National Petroleum Corp. "We hope to do that in deep water, in drilling deeper onshore, and in places we have produced in the past where newer technology will allow us to increase production. "Nigeria is the place to be at this time. We have a good legal framework, and we have been in the oil business for nearly 50 years." Political conditions for entry into the Nigerian oil and gas industry are prime at this time as well. The country is in its fifth year of being run by a democratically elected government, and President Olusegun Obasanjo has pledged both to bring greater transparency to the Nigerian oil sector and to root out corruption. While the task is monumental, progress is being made. Most of Nigeria's current production flows from the traditional producing area in the Niger Delta region in the southeastern corner of the country. Here, a plethora of simple geological structures contain oil and associated gas, and hundreds of fields are scattered across the vast delta in swamp and shallow-water environments. However, ethnic unrest and sabotage of facilities are continuing issues in this region. Partly because of the problems in the Delta region, and partly because of technological improvements that allow access to greater water depths, the world focus has turned to Nigeria's deep waters. Already, a handful of giant-size discoveries dot the deepwater trend: Bonga, Akpo, Agbami, Erha and Ukot/Usan. Simply put, this province is one of the most prospective areas on earth. "These are very huge finds, and we believe this is the future of the Nigerian oil industry," says Chukwu. Under Nigerian law, the federal government owns all of the country's mineral rights. The most prevalent business arrangement is a joint venture between an operator and the NNPC. The state participates in the projects through the joint venture and in addition recovers revenue from taxes and royalties. Problems arise when the government has to cut back its funding commitments and money is not available for all the proposed developments. It's a paradox of plenty-there are so many fields, and capital calls are so high that there isn't enough cash to move all the projects forward. Deepwater blocks, however, are licensed under production-sharing contracts, in which the concession holders pay 100% of all work and recover their investment from production. "The government does not have to contribute toward the development of these fields," says Chukwu. "For us, it is risk-free, and very important because of the competing interests in government finances. There are so many social needs our government must fund that the funds are not always available to the oil industry." Deepwater promise For multinational firms, deepwater blocks are definitely the game to play. Fields larger than a billion barrels of oil have already been discovered, and vast stretches of the offshore have yet to taste a drillbit. And, the odds are excellent: "The success rate for deepwater Africa is way ahead of the rest of the world," says Alex Vartan, PGS Geophysical country manager, Nigeria. Since 1991, worldwide exploration success in deep water has been around 30%, but Africa has posted an astounding 50% to 70% success rate. "It's due to both the quality of the data, which is easily interpretable and lends itself to AVO studies, and to the quality of the geophysicists working here." PGS has an agreement with the Nigerian government that gives it exclusive rights to acquire 3-D data over a number of deepwater blocks. (Veritas has a similar agreement for 3-D data acquisition, and a couple of companies have exclusive agreements for 2-D acquisition.) "The government made a conducive business environment for us to come and assist them in acquiring and marketing the data ahead of the license rounds," says Vartan. Working in an alliance with Integrated Data Services Ltd., a subsidiary of NNPC, PGS acquires seismic over specified blocks and then licenses that data to the oil industry. "It's a boon to the exploration program of the Nigerian government. The deepwater blocks are covered with data, and the oil companies get a chance to see those data and formulate a work program and business plan based on what they see. It fast-tracks the exploration cycle," he says. Deepwater blocks are awarded in bid rounds, and to participate in bidding a company must meet numerous criteria. "We have to determine that a company has the necessary skills, finances and experience to carry out a program of activities," says Chukwu. Certainly, a small club of majors dominates this entire sector, and new faces trying to break into the inner circle face an arduous challenge. Nonetheless, Devon Energy targeted this trend, and through its subsidiary Ocean Energy Nigeria Ltd., it has successfully acquired two operated deepwater blocks in the heart of the red-hot play. Rubbing shoulders with the likes of Shell, Total, Eni, ExxonMobil, ChevronTexaco and ConocoPhillips, Devon will drill its first Nigerian deepwater well this year, in 2,000 meters of water on oil prospecting license (OPL) 256. This March, it also signed a production-sharing contract on OPL 242, which is in up to 3,100 meters of water. Devon holds a 95% interest in 256 and 75% in 242. All of the experience Nigeria has accumulated in oil and gas exploration and production during the last 40-some years has led the government to develop a very thorough process for controlling operations in the industry. To be successful in Nigeria, a company has to carefully follow the process. "Since April 2003, we have been working with the government to understand its process," says Raymond Marchand, Devon's Lagos-based managing director of Nigerian operations. "We found that the government has been very responsive and helpful. All of the issues we have encountered have been settled in a very respectful and professional way. Following its process is definitely the way to succeed in Nigeria." A key strength that Devon believes differentiates it from a multinational competitor is its approach to partnership with the national oil company. "Big companies have dominated Nigeria. If we want to succeed, we have to be transparent and work with the agencies as partners. We can't forget that we are only the contractor; NNPC is the owner of the block," says Marchand. Devon is the first independent to operate in Nigeria's deep waters. Michael Griffin, manager of Devon's international operations, says, "Nigeria has a clearly defined path to get where you want to go. Our strategy is to do everything by the book, as efficiently and quickly as we can, and to be completely transparent with the government agencies." Smaller opportunities If Nigeria's highly sought deep water is too pricey for a company, other options are available in the traditional producing provinces. A Houston firm that aids independents interested in Nigeria is Sovereign Oil & Gas Co. Nigeria offers a winning combination, says Joe Bruso, president. (Bruso was previously with United Meridian Corp. and has been working in West Africa for many years. UMC merged with Ocean Energy Inc. in 1997, and Ocean Energy merged with Devon in 2003.) Throughout the Niger Delta, exploration success rates exceed 75% and the median field size is in the 100-million-barrel range, he says. Adding to that, Nigeria is lightly drilled by U.S. standards-at present the density of exploratory wells drilled in the Niger Delta is comparable to the U.S. Gulf Coast in the 1940s. "The geology is similar to the U.S. Gulf Coast, with growth faulting and deltaic deposition. For independents who have spent time in the Gulf Coast, Nigeria is strikingly similar." Although the Niger Delta doesn't have the salt tectonics seen in the Gulf Coast, it does have a thick, underlying mobile shale sequence that functions like salt to create structural traps. The petroleum system is world-class. "We like Nigeria because of its favorable geology, low entry cost, and the absence of competitors for small and independent companies," says Bruso. Too, Nigeria is home to all of the major oil-service firms, it has abundant skilled local labor, and its fiscal regime is workable, falling about in the middle of world spectrum. New entrants also benefit from the intense infrastructure already built by the major companies. "Small companies can definitely find opportunities." The stiffest challenge is getting access to acreage, as all of Nigeria's productive trends are tightly held. "We've found the best way for a company to get into Nigeria is to join with indigenous companies that have acreage, and there are quite a number of those." Canadian firm Nexen Inc. followed this path. Sovereign Oil recently helped the firm farm into oil mining license (OML) 115, a block that is held by Oriental Energy Resources Ltd., a Nigerian independent. OML 115 covers 61,000 acres in shallow water near the country's eastern border. Sovereign, the technical advisor to Oriental on the license, helped to arrange a deal under which Nexen will have a 40% participating interest and will assume duties as technical advisor (contract operator) to Oriental. Nexen will fund a 3-D seismic survey and up to three exploration wells; Oriental will remain operator of record and retain 60% working interest. Nigeria's marginal-field initiative is another area that holds promise for smaller firms. The government estimates that there are more than 200 marginal fields in the Niger Delta, spread between onshore, swamp and offshore environments, with reserves of up to 50 million barrels per field. For the most part, these are discoveries that were drilled years ago but not developed due to their problematic sizes. Nigeria is prying these fields loose from the major operating companies that hold the existing licenses, and bringing in indigenous operators to develop or rejuvenate them using new technologies. An initial marginal field farm in was concluded in 2000, and the first large-scale offering was held in February 2003, when the government awarded 24 marginal fields to 30 indigenous companies. The country plans similar offerings on a periodic basis. "These awards are exclusive to indigenous companies, but these companies are allowed to form partnerships with foreign companies to assist them with skills and funding requirements," says Chukwu. "Small independents are suited for this kind of arrangement." Another development that could free acreage is a recent push by the government to judicially review licenses and identify those on which contractual obligations have not been met. If Nigeria decides to reclaim these blocks, it could offer them in new license rounds in the future. The expectation is that these would be choice blocks. "Nigeria has a strong business community, and its people are world-class traders and entrepreneurs," says Bruso. At the same time, its social and political environment is very complicated. "The key to business in Nigeria is knowing the right people at the right level, and working with first-rate local partners." Equatorial Guinea Another Gulf of Guinea country that attracts U.S. companies is Equatorial Guinea. It's a small, Spanish-speaking nation about the size of Maryland that owns a sizeable swath of the prolific Gulf of Guinea, thanks to international boundaries around its five islands. In the last several years, the country has become a notable oil and gas producer, and U.S.-based firms are integral in its industry. (See "Equatorial Guinea," May 2001, Oil and Gas Investor.) In January 2003, the U.S. Energy Information Administration estimated Equatorial Guinea's total proven oil reserves at 1.1 billion barrels of oil, and today that number is higher. Current production is some 350,000 barrels of crude oil of per day. The majority of Equatorial Guinea's oil-280,000 barrels a day-is flowing from the giant Zafiro Field, which was discovered in 1995 in 425 meters of water by Mobil and United Meridian Corp. ExxonMobil operates Block B; Devon Energy subsidiary Ocean Equatorial Guinea Corp. and GEPetrol, the state oil company, are its partners. Zafiro Field is in the distal part of Niger Delta province, almost astride Equatorial Guinea's international offshore boundary with Nigeria. It produces from a series of Pliocene channel sands that were deposited in deep water and now occur at subsea depths of 1,500 to 1,800 meters. When the field was discovered, it was thought to contain some 180 million barrels of oil, but additional drilling has vastly expanded that number. The estimated ultimate recovery for Zafiro has been steadily climbing and is currently estimated at 1 billion barrels of oil. It's a tremendous success story. What was thought to be a structurally controlled accumulation turned out to have a substantial stratigraphic component. "We've mapped as many as 40 of these Pliocene channels in the field, in four or five completely different hydrodynamic systems," says Dave Lindsay, Devon's Malabo-based general manager for Equatorial Guinea. "It took 3-D seismic and a huge number of pressure measurements to define this very complex system." Very highly deviated wells are also key to the field's development: each sand is only 20 to 30 meters thick, so vertical wells cannot produce enough oil to be commercial. Last year, the partners completed the southern expansion project on Zafiro, adding 110,000 barrels of production capacity per day and installing the Serpentina floating, production, storage and offloading (FPSO) vessel. ExxonMobil and Devon continue to develop exploration opportunities, as the Zafiro area still holds significant potential. Alba Field, a 5-Tcf gas and condensate field, occupies Block D, immediately east of the Zafiro Block. Discovered in 1991, Alba initially produced only condensate and its accompanying gas was flared. Gas is now the emphasis of operator Marathon Oil and its partner, Houston-based Noble Energy. (Marathon acquired Alba from CMS Energy three years ago.) In 2001, Marathon, Noble and the government built a $450-million methanol plant on Bioko Island. It was designed to produce 20,000 barrels of methanol per day, fed by 120 million cubic feet of gas per day from Alba. The companies are currently expanding the facilities and production, and expect to be producing 46,000 barrels of condensate and 16,000 barrels of liquefied petroleum gas per day by October of this year. Marathon also plans to construct a liquefied natural gas (LNG) plant on Bioko Island. Last year, it signed an agreement with the government and GEPetrol outlining the fiscal terms, and also signed a letter of understanding with BG Group for long-term LNG offtake from the plant's production. Rio Muni Basin Because of Equatorial Guinea's unique geography, its islands are quite distant from the mainland, which is sandwiched between Cameroon and Gabon. The continental part of the country is Rio Muni, and its offshore is a separate petroleum province from the Niger Delta. The Rio Muni Basin, part of a system of rift-related basins that extend along West Africa's margin, features Cretaceous and Tertiary sediments and salt-related structures. The Rio Muni Basin's sole producing field is Ceiba, discovered in 1999 by Triton Energy in Block G. In a marvel of engineering and efficiency, Ceiba began production just 14 months after discovery. Amerada Hess acquired Triton in 2001 and now operates the field. According to South Africa-based independent Energy Africa, an interest-owner in Ceiba, the field produced an average of 50,750 barrels of oil per day in 2003. That level was lower than expected due to mechanical problems in one well, reservoir issues in another, and problems with reservoir continuity in certain parts of the field. However, the partners are now drilling additional wells, ramping up the pressure-maintenance program, and installing subsea pumps. Energy Africa says Ceiba should average more than 40,000 barrels per day this year. More oil will soon be brought online in the area, however. Amerada Hess and Energy Africa hit three discoveries last year on Block G, adding the Elon extension, Abang and G-13 discoveries to their earlier Okume, Oveng and Akom finds. Another four successful appraisal wells were drilled, two on Elon Field. The partners have submitted a development plan to the government for Okume, Oveng and Elon fields, and expect first production in early 2005. The fields, which are estimated to contain 500 million barrels of oil in place, will be produced into an FPSO, says Energy Africa. The remaining finds will be produced in subsequent developments. Although the country has endured some high-profile dry holes, interest remains strong in Equatorial Guinea's offshore. This year, several closely watched wells are slated for the Rio Muni Basin. Devon plans two shallow exploratory tests in its operated Block P, in which it is partnered with Malaysian firm Petronas, Norwegian independent DNO ASA, Nigerian firm Atlas Petroleum, and GEPetrol. "In the Rio Muni area, we're looking for late Cretaceous sands that are deposited on top of the Cenonian unconformity. It's completely different geology than around Zafiro," says Lindsay. On neighboring Block H, Atlas Petroleum is shopping for a rig to drill its first deepwater well. Roc Oil, an Australian explorer, and Sasol Petroleum of South Africa are its partners. And, in the southern part of the basin, where Equatorial Guinea's offshore boundary with Gabon is under dispute, drilling is expected later this year on Block K, the Corisco Deep license. Its operator, Houston-based Vanco says Block K has many similarities to the Ceiba area, and that it has identified dozens of prospects on the huge concession. Repsol-YPF and Nexen Inc. have both picked up 25% interests in Block K. On adjacent Block N, the Corisco Bay block, operator Petronas and partners Devon and GEPetrol have acquired 1,500 square kilometers of 3-D seismic, but have not yet announced drilling plans. Cote d'Ivoire Thanks to the recent spate of high-profile deepwater discoveries off Nigeria's coast and elsewhere, countries all along West Africa are reassessing their offshore potential. Many are putting together new offers of exploration acreage. But because their potential discoveries are not likely to rival the size of the fields in Nigeria's sediment-rich offshore, these nations are improving their fiscal terms to pump up interest. Cote d'Ivoire sits in the middle of the West African coastline. It is not a large producer, averaging daily production of some 35,000 barrels of oil and 150 million cubic feet of gas. Nonetheless, it is an important refining center in West Africa, and it actively promotes the production of natural gas. The country is recovering from a civil war that broke out in September 2002. The economy has suffered as the upheaval scared off foreign investors. The government of President Laurent Gbagbo is now working under a power-sharing arrangement that includes the opposition. Antoine Bouabre Bohoun, economy and finance minister, says Cote d'Ivoire's energy sector has had positive growth, and this has offset the negative trends in the economy's other sectors. The country wants to augment its domestic production, and hopes to use additional natural gas for power generation. "Cote d'Ivoire is the gateway to West Africa, and we want to be an exporter of electric power to the neighboring countries." It is already a net exporter of electricity, and is a key player in the development of the West African Power Pool, a project to interconnect power networks of the mainland nations. Established production The largest oil producer in Cote d'Ivoire is Calgary-based Canadian Natural Resources. Mark Cadman, exploitation manager, CNR International (UK) Ltd., noted in a Houston conference that CNR likes Cote d'Ivoire because it has significant exploration potential and extremely attractive terms, and it offers CNR the opportunity to operate projects with high working interests. "We think the political risk is manageable and no obstruction to exploration and production." Much of the current interest in Cote d'Ivoire's offshore was sparked by CNR's March 2001 deepwater Baobab discovery, the country's first such find. Drilled on Block CI-40 in 1,600 meters of water, the discovery well encountered a 300-meter oil column in turbidite reservoirs, and tested at a constrained rate of 6,700 barrels of oil per day. The field is estimated to contain some 200 million barrels of oil, and is expected to produce at a peak rate of 60,000 barrels per day. CNR is charging ahead with a very aggressive development schedule, drilling eight production and three injection wells. First production is slated for early 2005; the oil will be produced into an FPSO vessel and the gas will be piped ashore. CNR is also redeveloping Espoir Field on Block CI-26, adding a waterflood to stabilize production. In the 1970s, Phillips Petroleum discovered the Lower Cretaceous field, which consists of two accumulations separated by a saddle. The major produced 30 million barrels of oil, but in 1988, it abandoned the field because additional capital was needed for secondary recovery, oil prices were low and operating costs were high. To date, CNR and its partners-Tullow Oil, Addax Petroleum and Petroci-have drilled five production wells and four injection wells on East Espoir and brought daily production up to 20,500 barrels of oil and 19 million cubic feet of gas. The three-well West Espoir development is expected to begin producing next year, adding another 11,000 barrels per day. And, the partners discovered another pool on the block, at their Acajou prospect. The initial well, drilled in 950 meters of water, tested at the rate of 3,500 barrels of light oil per day. Natural gas is the other component of Cote d'Ivoire's production. Devon produces 54 million cubic feet of gas and nearly 5,000 barrels of oil and gas liquids per day from Lion and Panthere fields on Block CI-11. The gas is piped ashore, where it fuels a power-generation plant and an liquefied petroleum gas (LPG) plant. The government subsidizes the sale of butane to its citizens, as part of its conservation effort to reduce the widespread use of wood and charcoal for cooking. Devon's partners in the project are Petroci, SK Corp. of South Korea, and International Finance Corp. Gas from the 650-billion-cubic-foot (Bcf) Foxtrot Field, owned by Mondoil Corp. and French firm Saur Energie, is also used in power generation. A hearty welcome Fortunately, most of Cote d'Ivoire's oil and gas potential lies offshore, removed from the politically unstable areas, and the country is offering attractive terms to interested firms. Of the 28 offshore blocks, 12 are licensed and 16 are available. The country's deepwater province, which covers 60% of the sedimentary basin, is very lightly explored. Petroci, the state oil company, is working to promote its upstream sector and to bring internationally known oil companies to offshore Cote d'Ivoire, says Levi Zadi S. Gourenne, managing director. "Our potential is not yet appraised. We're looking for companies to come and bid." Petroci develops and maintains a database on the country's oil assets, interprets seismic data and performs reservoir simulation studies. Presently 85% to 90% of Cote d'Ivoire's offshore is covered by 3-D seismic, and interested bidders are encouraged to review all relevant data. The state firm has held road shows in London and Houston in 2002 and 2003, promoting its available acreage. It does not have a set deadline for bids, but rather negotiates terms based on a block's potential. Currently, interested parties are talking to Petroci about six of its unleased blocks. Petroci does not operate, but it generally takes a small interest, up to 15%, in the offshore contracts. "We have one of the most flexible production-sharing contracts," says Gourenne. "We adapt everything to the evolution of the situation, and we negotiate in the mutual interest of all parties." Independents should look hard at Cote d'Ivoire, he notes: it is an open country, with excellent access to business, and an excellent petroleum law. "Petroci will be happy to talk to potential partners in both upstream and downstream activities. We welcome every company." So, for the independent with patience, cash, flexibility and a desire for consequential reserves, West Africa awaits. SOCIAL INVESTMENT Any oil company working in foreign lands is expected to contribute to the local communities. These initiatives are sometimes required as part of concession agreements, and sometimes are voluntary. For an independent, a strong commitment to social projects can be a business advantage, separating it from a pack of competitors. In Cote d'Ivoire, Devon Energy Corp. charged its country manager, G. Koffi Adje, with assessing the needs of the government and the community in which it is involved. Koffi Adje selected an orphanage at Bingerville, outside of Abidjan, that needed massive renovations, as one of Devon's projects. The company completely rebuilt four dormitories-including toilets, showers and kitchens-at the orphanage, home to some 200 boys between the ages of six and 14. "Part of our corporate culture is community involvement, from the top down," says Earl Reynolds, vice president and general manager of Devon's international division. "We like to focus on improving education and health care in the communities we work with." This approach is particularly apropos in West Africa, which has a burgeoning population of young people who are overwhelming the established school systems. Nigeria accounts for Devon's largest international social commitment. There, the company is engaged in a wide range of activities, including financing professional and post-graduate training of state oil-industry employees. "We're providing training to develop 'smart power' to ensure the future of these organizations," says Adeyinka Adeyemi, manager of government and public affairs, Nigeria. Devon also offers hundreds of scholarships for indigenous, high-merit students. To support the communities that are most affected by oil development, many of these scholarships are earmarked for students from Lagos and the Niger Delta areas, and 20% are awarded to female students. Furthermore, the Oklahoma City-based independent assists several schools in Lagos. At the Archbishop Taylor Memorial Primary School on Victoria Island, the company is building two blocks of five classrooms and two toilet facilities, rebuilding the fence and school gate, and providing clean water. At the Methodist Boys High School, Devon is buying furniture and equipment for a biology laboratory, rehabilitating and painting school buildings, and purchasing textbooks.