Sometimes a major's trash is a junior's treasure. That's the story in East Africa, where majors began outlining resources and then ditched them for onshore assets. In their wake, junior companies with technical expertise are ready to unlock more wealth than the large caps thought possible. In this interview with The Energy Report, Canaccord Genuity Director of Research Christopher Brown fills us in on hidden opportunities in the rift basins of east Africa. He also shares an interesting perspective on how to make money on oil and gas ventures in Ukraine.
Christopher Brown serves as director, research, international oil and gas at Canaccord Genuity and has provided international analytical coverage since 2006. Previously, Christopher worked as the international oil and gas analyst for BMO Capital Markets. Brown's industry experience includes reservoir engineering work at various large-cap oil and gas companies. Prior to that, he was employed at an international M&A firm with mandates out of London. Brown holds a Bachelor of Science in chemical engineering.
The Energy Report: Christopher, you cover oil and gas explorers operating in the rift basins of Africa and South America. How is the introduction of hydraulic fracturing technology affecting the oil and gas industry operating in these rift basins?
Christopher Brown: Fracking is in its infancy in the eastern African basins. Companies are mostly pursuing conventional targets. As these prospects mature, the companies will need to unlock the remaining resource. The idea is to identify the conventional targets first in order to understand the migration pathways from the source rock. Once those pathways have been identified, and the low-hanging fruit plucked, drillers will start fracking the source rock.
TER: What companies are you following in the African rift basins?
CB: Two companies are doing exceptionally well in the rift basins: Africa Oil Corp. (AOI:TSX.V) andCaracal Energy Inc. (CRCL:LSE). Both companies are run by Canadians who took their homegrown technology and expertise overseas, unlocking millions, if not billions, of dollars in resources that were overlooked by majors who had previously drilled in these regions.
TER: Why is the geology of rift basins propitious for fossil fuels?
CB: The rift basin complex is geologically interesting because the rifts form where the continent pulls apart. Ancient lakes coalesce inside the rifts into what we now consider to be source rock, and then sediments backfill the declivities. The East African rifts can be viewed from outer space; they are very dominant features in the modern landscape. As technologies improve, we can drill deeper, down into the ancient lake beds in the rifts to unlock the oil and gas. Since mid-2005, a flurry of exploration activity has identified billions of barrels of recoverable opportunity in these basins.
TER: What was the technological advance that allowed us to unlock the opportunities?
CB: Initially, it was drilling technology that allowed explorers to dig deeper while managing increasing pressure and temperature with improved mud systems. The next step is to enhance oil recovery with unconventional, complex fracking completions.
TER: What are the newest developments with Africa Oil Corp.?
CB: Africa Oil has successfully explored a number of plays on its Kenyan blocks. It is getting ready to submit development plans. Because Kenya does not have any oil production in place, the plan approval will likely be accelerated to enable Kenya to become a very significant contributor to the global oil markets.
TER: Will the approvals involve production sharing contracts?
CB: Yes; production sharing contracts are different from the concession contract, with which North American investors are familiar. Production sharing contracts are very lucrative and attractive to foreign investment because they allow for cost recovery. It enables an operator to recover its investment dollars upfront before the profit sharing component of the contract kicks in. After investors recoup their capital and operating costs, the state takes a certain percentage, and the investors keep the rest. It is a very good contract for emerging economies and encourages foreign investment.