Chevron Corp. (CVX:US) and Genel Energy Plc (GENL) are hunting for elephants in Morocco. Not the animal, rather the giant oil fields that send explorers’ market values soaring when they’re discovered in the frontier.
Oil companies are planning as many as 10 wells in Moroccan waters through 2014, according to Citigroup Inc. That’s twice what was drilled in the past decade and represents the fastest pace opening wells since at least 2000. U.K.-based Cairn Energy Plc (CNE) is scheduled to start drilling the Foum Draa prospect in the fourth quarter. Chevron, the second-biggest publicly traded U.S. oil producer, picked up three offshore licenses last month.
Africa has seen a string of big discoveries in recent years, including Tullow Oil Plc’s Jubilee field in Ghana in 2007, a find that exceeds 5 percent of Chevron’s global reserves. As more prospectors study Africa, Morocco’s stability through the Arab Spring revolts and 10-year tax holiday to drillers is making the country more attractive.
“Morocco has seen a huge explosion of interest in the last six months,” said Laura Loppacher, a Jefferies Group Inc. analyst in London who rates Cairn a buy. “It’s an area with several plays for people to target, but it’s still frontier and risky.”
Genel, run by former BP Plc Chief Executive Officer Tony Hayward, said today it may drill its first well in Morocco in the fourth quarter and three more next year. The prospects it’s exploring in the country may hold as much as 2.4 billion barrels of crude, Chief Financial Officer Julian Metherell said in a telephone interview.
Energy investments in Morocco may bring more volatility to the dirham, which is relatively steady against the dollar, having depreciated 2.8 percent in 2011 and gained 1.6 percent in 2012 against the U.S. currency. With a bigger economy per capita than Egypt, Morocco escaped turmoil suffered in North Africa since 2011, as regimes were upended in Libya and Egypt.
Morocco isn’t devoid of political troubles. It controls most of the Western Sahara region in the south of the country, though sovereignty is disputed with the Polisario Front seeking independence. While the issue is unresolved, there has been a cease-fire since 1991, and only a minority of oil licenses are off Western Sahara, including some owned by Kosmos Energy Ltd. (KOS:US) and Total SA of France.
Morocco has only 1.6 wells per 10,000 square kilometers (3,900 square miles) of licensed offshore acreage, compared with the world average of 51, or 100 in Nigeria, by the same measure, according to research by Sanford C. Bernstein & Co.
Chevron, Spain’s Repsol SA (REP) and Kosmos Energy of Bermuda are vying with relative minnows such as Fastnet Oil & Gas Plc (FAST) and Chariot Oil & Gas Ltd. (CHAR) in the hunt for fields to rival recent discoveries in Ghana and Mozambique that promise energy wealth to countries on the poorest continent.
After decades of production in Angola and Nigeria on Africa’s central west coast, drillers are pushing into the frontiers of Morocco and Mauritania in the north and Namibia in the south.
Morocco’s government has encouraged drilling to reduce energy imports. The nation gets more than 90 percent of its gas and 99 percent of its oil from abroad. The tax structure nets the government less than 30 percent of petroleum income, making it one of the most favorable to companies, Citigroup’s Michael Alsford wrote in a Feb. 8 note.
“The fiscal terms are close to the most attractive in the world,” said Chariot CEO Larry Bottomley. “They will probably get tougher after discoveries.”
Morocco’s economy is currently dependent on tourism, agriculture and textiles, and is more secure than some of its North African neighbors. BP Plc is reviewing plans to drill in Libya after an attack on an Algerian gas plant killed dozens in January.
“Morocco is the sexy place to be in Africa because it’s safe,” said Oisin Fanning, chief executive officer of San Leon Energy Plc (SLE), which sold offshore blocks to Cairn last year. “Other places have been so politically dangerous.”
San Leon rose 5.8 percent to 8.46 pence in London today. Chariot added 2.4 percent and Fastnet 4.3 percent -- all beating the 0.7 percent gain in the Standard & Poor’s Europe SmallCap index.
Explorers have drilled 730 wells onshore in Morocco since the first in 1919 and only 40 offshore, according to Oswald Clint, an analyst at Bernstein in London. The country is still underexplored, as only five have been drilled in Moroccan waters in the past 10 years.
Half of the biggest conventional oil discoveries in the past three years have come from frontier regions similar to Morocco, with the average size of the finds climbing as high as 700 million barrels of oil equivalent, according to Clint.
The Jubilee field in Ghana, where Chevron isn’t involved, holds 600 million barrels of oil. That’s equivalent to 5 percent of Chevron’s global reserves if it can repeat that success in Morocco.
Anadarko Corp. and Eni SpA have uncovered gas fields off Mozambique large enough to justify freezing the fuel for shipment to Asia.
The Mozambique find was a boon for Cove Energy Plc, which held an 8.5 percent stake in the Rovuma-1 block. The company sold for $1.9 billion after a bidding war between Thailand’s state explorer and Royal Dutch Shell Plc, completing a 20-fold increase in its share price since it went public in June 2009.
Fastnet is trying to replicate Cove’s success in Morocco and even has former Cove CEO John Craven as an adviser to the company. The strategy for smaller companies is to acquire licenses for untested acreage and research them enough to attract partners for drilling. If they strike oil or gas, the world’s biggest oil companies will buy out the company or fund the field’s development.
While Cove and Tullow show the potential for success, Chariot’s Namibia campaign shows how things can go wrong for small drillers. The company drilled two wells last year the country that both failed to find oil. The share price plummeted to about 20 pence from more than 200 pence. About 70 percent of Chariot’s investors are individuals rather than institutions.
In Morocco, Chariot has already been approached by potential partners, Bottomley said in an interview. The company’s not ready to sell yet, he said.
Chevron, which holds a 75 percent stake in the three exploration blocks, is waiting for the Moroccan government to finalize the awards before acquiring seismic studies. The formations are known as Cap Rhir Deep, Cap Cantin Deep and Cap Walidia Deep.
“It’s a new frontier basin for us and an opportunity to expand” on nearby holdings off the West African coast, Kurt Glaubitz, a spokesman for San Ramon, California-based Chevron, said in a phone interview yesterday.
Chevron increased exploration and development spending on new African oil and natural gas projects last year by 17 percent from 2011 to $3.45 billion, according to a Feb. 22 filing with the U.S. Securities and Exchange Commission. The company spent an average of $12.14 to harvest each barrel of crude on the continent last year, the cheapest production region in Chevron’s global portfolio.
While the biggest potential finds may be offshore, Longreach Oil & Gas Ltd. (LOI), Circle Oil Plc (COP) and Gulfsands Petroleum Plc (GPX) are stepping up gas production efforts onshore. Longreach, a Canadian company with a C$64 million market capitalization, is drilling two wells this year, with the first starting in the second quarter.
“There’s potential onshore, in shallow water and in the deeper Atlantic margin,” said Stephane Foucaud, an analyst at First Energy Capital in London. “It could be billions of barrels, possibly in places where people have been in the past and it hasn’t worked. Finding another Jubilee is the dream.”
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