Into Africa
With gross domestic product (GDP) of just $1,500 per capita, Ghana is among the poorest countries in the world. For most of its history, the West African nation’s most important industries and sources of foreign reserves have been cocoa production and gold mining.
Although Nigeria, Angola and Libya have garnered significant attention and economic growth as a result of their oil wealth, Ghana’s proved oil reserves stood at just 15 million barrels at the end of 2008–less oil than the US consumes in a single day, and a far cry from Nigeria’s 36 billion barrels in reserves and Libya’s 44 billion barrels.
But that’s changing. Ghana has become the unlikely setting for a high-stakes oil bidding war that’s pitted global energy giant ExxonMobil (NYSE: XOM) against CNOOC Limited (NYSE: CEO) and a group of powerful private equity firms, including Blackstone Group (NYSE: BX). The object of all this attention: a massive offshore deepwater oil discovery known as Jubilee.
The Jubilee field is located in waters roughly 4,000 feet (1,220 meters) deep, spanning two offshore blocks, the West Cape Three Points and Tano. Each block is owned by a consortium of foreign companies along with the state-owned Ghana National Petroleum Corporation (GNPC). The table below shows the ownership structure of both deepwater blocks.
Source: Company Reports, Oil & Gas Journal
The Jubilee field is still being appraised, but early indications suggest the field could contain as much as 1.8 billion barrels of recoverable oil, along with another 800 billion cubic feet of associated natural gas; there is considerable upside to these estimates, as companies continue to drill appraisal wells to delineate the exact size and shape of the field. In addition, producers have announced the discovery of additional smaller fields in these two offshore blocks, including the Mahogany Deep and Odum fields on the West Cape Three Points block and the Twenboa find in the Tano block. Twenboa, in particular, looks promising, and Tullow Oil (London: TLW, OTC: TUWOY ) believes the field could be as large as 200 square kilometers and contain total reserve upside of as much as 1.4 billion barrels.
The Ghanian government gave the go-ahead for first phase of producing Jubilee last summer. Tullow oil will conduct these operations, which call for output to begin in the fourth quarter of this year. Oil will flow onto a floating production platform capable of handling 120,000 barrels per day of oil and 160 million cubic feet per day of gas production. The importance of the Jubilee discovery becomes apparent when you consider that the nation’s current oil output stands at just 7,400 barrels per day.
The massive oil find has become the subject of considerable international controversy and instigated some backroom maneuvering reminiscent of the early days of the Texas oil boom. For more than a year, rumors have swirled that Kosmos Energy was keen to sell its stake in Jubilee. The rationale for such a move has nothing to do with the quality of the reserves; Kosmos Energy will be required to pay significant sums as part of Jubilee’s development plan, and in early 2009 there were real concerns that an entity backed by private-equity firms wouldn’t be able to raise the necessary capital.
As it turns out, Kosmos Energy was able to obtain a $750 million loan via the International Finance Corporation, part of the World Bank. Nonetheless, it’s been an open secret that Kosmos Energy is willing to sell its significant stakes in both offshore oil blocks for a reasonable price. Several buyers were rumored to be interested, including India’s Oil and Natural Gas Corporation (ONGC), ExxonMobil and, of course, CNOOC Limited.
ExxonMobil offered to buy Kosmos Energy’s stake for $4 billion last October. Let’s put that amount into perspective for Ghana: The country’s total GDP in 2009 was about $14.8 billion; the offer equals nearly one-third of the country’s total economy.
Given the strategic importance of Jubilee to Ghana, it’s no surprise that the country’s state-owned oil company, GNPC, blocked the sale and indicated that it might pursue the acquisition of Kosmos Energy’s stake on its own. It’s clear that the Ghanaian government never expected West Cape and Tano to bear such fruit and is now dissatisfied with just a 10 percent stake in each field, plus any royalties and taxes earned. It appears that if Kosmos Energy sells, GNPC will buy the stake and look to partner with another firm–possibly ExxonMobil or another integrated oil company such as ONGC or CNOOC–to develop the field.
The level of interest from so many top integrated oil companies and national oil companies, coupled with the sheer size of ExxonMobil’s bid, offers a good indication of the play’s potential long-term. And whatever the outcome of the Jubilee sale, two companies stand out as big winners: US-based Anadarko Petroleum Corp (NYSE: APC) and Britain’s Tullow Oil (London: TLW, OTC: TULWF). Even if another publicly traded company such as ExxonMobil or CNOOC Limited were to secure a stake in the field, neither represents much of a pure play on West Africa’s oil boom or the African oil sector as a whole given–both firms boast far-flung operations.
As the operator of the Jubilee field, Tullow Oil offers the best direct exposure to growth in Ghana’s oil production. With a market capitalization of around GBP10 billion (USD15 billion), Tullow Oil is less than half the size of Anadarko, and its future growth potential is more closely tied to success with the Jubilee and Twenboa finds.
But the bullish case for Tullow Oil isn’t confined to its offshore finds in Ghana. Tullow Oil is an aggressive exploration-oriented firm that’s had considerable success drilling in other parts of Africa. Topping the list is the Lake Albert Rift Basin, an area where the company has already drilled 27 wells, 26 of which were prospective for oil or gas. The company has announced 700 million barrels worth of discoveries across several plays and believes there’s upside to more than 2 billion barrels in potential recoverable reserves. Ugandan fields are slated for development in three phases, the first of which will supply 20,000 to 30,000 barrels per day, primarily to the domestic market. The program will culminate in production of 100,000 barrels or more per day, much of which will be exported via pipeline. Buy Tullow Oil at current prices.
The market has traditionally regarded Anadarko Petroleum Corp as a US-focused gas producer with heavy exposure to fields in the Rocky Mountains. Although the firm has considerable US natural gas assets, the stock’s valuation is increasingly driven by announcements concerning its deepwater finds in West Africa and the US Gulf of Mexico.
Anadarko Petroleum owns significant stakes in the major Ghana offshore blocks. In addition, Anadarko continues to work on the theory that Ghana’s Jubilee find is just one bookend of a much larger deepwater oil and gas producing region that extends west into neighboring countries.
Source: Anadarko Petroleum Corp
In September 2009, Anadarko announced the discovery of Venus off the coast of Sierra Leone, about 700 miles (1,100 kilometers) to the west of the major Ghana discoveries. Exploratory wells in Venus encountered about a 45-foot thick layer of oil and natural gas. Further appraisal will be necessary to estimate the size of the find.
The discovery of Venus lends credence to the idea that there’s more oil and gas to be found between the Ghana and Sierra Leone discoveries. This huge area represents a deepwater region off the coast of Liberia and the Ivory Coast that shares similar geological characteristics with the Ghana and Venus finds.
Although Tullow Oil also owns interests in some of these blocks, Anadarko has the largest position in this potentially massive offshore oil region. The company has already identified thirty drilling targets that have characteristics similar to Jubilee. If even a few of these targets pan out as major finds, it spells huge potential upside for Anadarko Petroleum. Buy Anadarko Petroleum Corp at current prices.
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