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Wildcatters flee African deep water to weather oil rout

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LONDON (Bloomberg) — Drillers burned by a two-year slump in crude prices are slowing exploration of deepwater prospects off the coast of Africa, undermining a key driver of growth on the continent.

In the 25 years since 1982, African oil output doubled to more than 10 MMbpd. Now, with prices sitting below $50/bbl, international drillers have cut their plans for capital expenditure in the next five years by $100 billion, according to a Nov. 2 report by Wood Mackenzie. The change could drop the region’s oil production 46% by 2030, the report said.

Hardest hit: Nigeria and Angola, countries that are already struggling economically and depend on oil for almost all their foreign income. To revive deepwater exploration on the continent, crude prices would have to rise to $60 to $70, according to Keith Myers, managing director of the consulting firm Richmond Energy Partners.

“Africa suffered the most of any region in terms of the decline in frontier exploration,” Myers said in an email. Deepwater exploration was “the driver for production growth in the region.”

In September, the number of offshore oil and gas rigs in Africa fell to just nine, down from a high of 48 in November 2014, according to Baker Hughes Inc. data. That’s the lowest level in more than a decade. Overall, the number of rigs on the continent dropped to a five-year low of 77.

“We’re being more disciplined,” said Oliver Quinn, director of Africa and global new ventures at Ophir Energy, speaking at the Africa Oil Week conference in Cape Town this month. The London-based explorer has plans to drill three to five frontier wells over the next two years, split between Africa and Asia, according to Quinn.

“We don’t want to go out and spend capital that we can’t replenish to do exploration,” he said.

Nigeria, the continent’s biggest oil producer and most populous nation, is dependent on the fuel for more than 90% of its foreign income. The country, facing ongoing violence in its crude-producing Niger Delta region, saw inflation accelerate to an 11-year high in October as revenues from oil tumbled and import costs for consumer goods and machinery rose.
Angola, which depends on oil for almost all its exports, said in July it was generating “barely enough” revenue to pay off its debt.

Exxon Mobil, Royal Dutch Shell and Total are among the biggest players in Nigeria, where deepwater fields have so far escaped the militant attacks that curbed output in the Niger Delta. The biggest deepwater producers in Angola include BP, Exxon and Chevron, which canceled an ultra-deepwater semisubmersible rig with Maersk Drilling Services at the end of March.

Shallower Water

Tullow Oil has turned away from deep water, even as the Africa-focused explorer prepares to renew its hunt for new discoveries on the continent. The company is more focused on “shallower water” prospects, said Tullow CEO Aidan Heavey.

In relation to exploration, “a dollar spent today is probably the same as $3 spent a couple of years ago,” Heavey said in an interview in Cape Town.

Over the past decade, sub-Saharan Africa accounted for 42% of global deepwater frontier drilling, according to Richmond Energy Partners. That kind of exploration is key to sustaining output in the longer term, Myers said. With the lower price of crude, however, global companies are increasingly looking for easier access to their product.

Brent, the global benchmark, is down 41% in the past two years. The contract for January settlement was little changed at $46.55/bbl on the London-based ICE Futures Europe exchange at 11:02 a.m. on Friday.

As an example, Houston-based Noble Energy, which has assets off the coast of Equatorial Guinea, this year will focus two-thirds of its $1.5 billion in spending on U.S. shale. Companies have to “justify investment in new deepwater projects,” said Susan Cunningham, executive V.P. of exploration and new ventures at Noble, in an interview in Cape Town this month.

“We’re not going to be doing much in deep water” for the next two years, she said.

Battered by falling oil prices, some African governments have been slow to trim the share of profits they take from deepwater projects, deterring investment.

“Deep water can still work but you need to make sure that the fiscal terms in the country you are operating will generate a return in the current commodity price environment,” said Geoff Callow, investor relations manager at Ophir Energy. “Some governments are adjusting terms and they are seeing investment and others are being slower to adjust and are consequently finding it harder to attract investment.”

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