Namibia is currently witnessing what could become one of the most spectacular explorational oil plays in recent memory, and one Canadian driller is at the center of this brand-new, potential blue-sky opportunity.
Reconnaissance Energy Africa (TSXV:RECO, OTC:RECAF) is in the process of attempting to de-risk the potentially huge Kavango basin. Following the encouraging results of their first two test wells, the company is now analyzing the data to determine the size and commercial potential of the basin.
With the exploration efforts in Namibia advancing quickly, Oilprice.com founder James Stafford sat down with one of RECO’s leading geologists Dr. Jim Granath to find out more about the producibility and commercial potential of the encountered hydrocarbon system in RECO’s Kavango basin.
In This interview with Jim we look at the following:
- Why the stratigraphic wells were a huge success
- How the hydrocarbons are stacked in columns from 15 to over 110 meters in height
- The oil and gas they are seeing are far more than normal shows
- The type of oil they are seeing in the wells
- How the geology is similar to the Zagros belt in the Middle East
- Why this is a conventional play
James Stafford: Well, I have to start off with the latest drilling update from ReconAfrica. I know these are only intermediate results and there is a lot more to come from these wells in the near future, but could you talk through for our readers what it all means and what you think you have here?
Jim Granath: We have almost completed the second well now. As you know there are multiple shows of multiple fluids, that is both oils and gases—and I use the plural intentionally. The two wells are comparable in that the distribution of the shows run up and down the stratigraphy, and they are more extensive than ‘normal shows.’ What is clearly evident is that this is decidedly a conventional play—the hydrocarbons are in rocks into which they have migrated. One gigantic issue is behind us now: our main reason for drilling stratigraphic wells as opposed to targeted wildcats has been spectacularly fulfilled—there is a petroleum system. We have eliminated this particular so-called geologic risk, which is to say the basin is worthy of exploration.
JS: You were one of the geoscientists responsible for the play concept that has led to this exploration program, one of the first people to review the aeromagnetic survey. How do you think such a potentially huge oil field went undiscovered for so long?
JG: We have yet to find out how huge this is in terms of potential—we will eventually see, but it’s encouraging that the two wells are so similar and yet 16 km apart. Back in 2014, the founder Craig Steinke asked some of us to review various information to recommend a play to pursue, and I suggested the Karoo system in southern Africa was an under-appreciated play: he went on to put Karoo and Namibia together and followed through with the licensing of Petroleum Exploration Licence 73 in the Kavango region. When Earthfield produced a model of the shape of the basin from aeromagnetic data that Craig purchased from NAMCOR, I realized we had something different from the conventional viewpoint on the Owambo Basin. For various technical reasons it became apparent that the depth of that model should not be where it is—the Owambo should start to die out west of PEL 73; it should pinch out where Earthfield’s model became deep. The depth of Earthfield’s model was striking—something never previously suspected under Kavango, and thus suggested a new basin that was separate and distinct from Owambo in terms of its geologic raison d’etre. Since this was all hidden under the famous Kalahari sands, the Kavango Basin as a petroleum target remained a sleeper until we put the geophysical model together with the regional geology.
JS: What is it that excites you about the Kavango? Why were you and the Recon team so confident that the ground held oil?
JG: The exciting part for me is the new insights into a neglected geological province. But beyond the ‘science’ of it, the work I just described set up a new, blue-sky play: in my opinion exploration is all about exploiting new insights rather than following the herd. And this is possible only in a very few places in the world these days. As Bill Cathey commented early on, in his experience, all basins of this depth hold commercial levels of hydrocarbons. We really had to find out more about what was under that Kalahari cover to make the next step. To join forces with the rest of what has become the Recon team to take that next step has been really exciting.
JS: The latest release says the following: Based on initial analysis of this first section, ReconAfrica is pleased to report 134m (440 feet) of light oil and gas shows from the 6-1 well. The shows are similar in character to those seen in the 6-2 well, 16 km to the south. This second well (6-1), like the first well (6-2), is in the same sub-basin, shows clear evidence of a working conventional petroleum system. What do you mean by light oil and gas shows? Can this oil be produced?
JG: Crude oil comes in a wide spectrum of forms depending on the source it’s derived from, the temperature of its creation, and its subsequent history, etc. Think of a turkey at Thanksgiving—the turkey is organic matter in sedimentary rocks, immature as we call it before burial and heating up. As it cooks it gives off aromas (gasses) and juice in the pan (oils, liquids)—together they are called fluids. As the turkey cooks it gives off more and more fluids—the good stuff that grandma makes delicious gravy out of. Then if you overcook it, the turkey burns and the liquid boils off to turn to the crusty undesirable crud that makes the pan hard to clean, and the turkey itself becomes dry and unsavory. Organic matter in source rocks goes through a similar progression, except that early in the ‘cooking’ history a tarry sludge comes off—this is heavy oil like the tar sands in Canada, Venezuelan oil, or even the California oils. These are called immature oils. As the system cooks further the oils get lighter and move more toward what gasoline or motor oil look like, lighter in color and less viscous---their index goes up in what’s called API—these are mature oils in the sweet spot of the spectrum. This is the kind of stuff we have in the wells.
But producibility of the oil also depends on the rocks they are in. Thinking of the reservoir rocks like a sponge to which the hydrocarbons have migrated, producibility depends on how much space is available to host the hydrocarbons (the porosity) and how connected that space is to get the oil and gas to move to the well bore (the permeability). Even the best reservoirs only give up a fraction of their oil in human time frames. In the North Sea, for example, recoverability as it’s called is about 40-50% of the fluid. That’s on the good end of the spectrum—more typical is 25%-- lower-end reservoirs might only be a few percent. We have to find these things out before we can say anything about the amount of hydrocarbon that can be recovered. So producibility is one of the questions we will be looking to answer when we can do what’s called a drill stem test in the wells precisely on the position of the better shows. This is an attempt to get the fluids to flow into the wellbore.
JS: Also from the press release you gave a quote, “In these first two wells, the many oil and gas shows, with such variety, is certainly remarkable. It is highly encouraging to see clastic and thick carbonate sections which appear to have similar reservoir characteristics as observed in many other petroleum provinces.” Could you please let us know what you find remarkable about the variety of oil and gas shows and you also expand upon what you mean by, and could you also let us know which other petroleum provinces have similar reservoir characteristics?
JG: They are remarkable from a couple of points of view. The logs show that the hydrocarbons are stacked in columns from 15 to over 110 meters in height, oil shows are matched in most cases with gas shows and there also are significant shows of complex gases. Shows in wells are typically just a brief puff of gas and a little staining on the cuttings as they come out of the well, and they are often interpreted to suggest the well has intersected the migration path of the hydrocarbons. The ones in 6-2 and 6-1 suggest we have a potential accumulation where the shows are—that’s one remarkable part and the fact that the two wells 16 km apart are so similar so far, and that we were lucky enough to find them in the first wells! But, I have to emphasize that we don’t know yet the size of that accumulation or how much will be recoverable, or will actually produce.
The immense productivity in Saudi Arabia, Iraq and Iran (especially the Zagros belt) is based on multiple stacked source rocks and several carbonate reservoirs which are involved in many types of traps. This is not to say we have discovered a new Middle East, but some of those are in structures --the Zagros in particular in Iran and Iraq—that are similar to what we suspect we have drilled into. So, the Kavango rocks may have similar reservoir properties to some of those.
JS: I know we are still waiting for results from the labs of the core samples of well 1. Can you share with us what you might find out from those studies? Could well 1 produce oil? What would need to be done to make it a producer? What next for the team?
JG: We expected to find out some important things that seismic data can’t tell us, which again is why a stratigraphic test was the first step: the age of the rocks if they have sourcing potential, was there any evidence of hydrocarbon passage, are there any reservoir rocks and what would their quality be, etc. Some of those are clear now, but some are going to take some time to pin down.
The producibility is a key question, of course: we know the shows are arranged over quite a few meters and even tens of meters vertically in the wells—stacked if you like. The open question is “will they move to a borehole to be able to be produced? Is there enough to make the well a production well?” The first step toward answering those questions is to test the shows in a simulation of production to see if they will flow. 6-2 has been left in a state that it is possible to go back and test. Then we need to map the structure to see if it’s sizable enough to trap enough hydrocarbon to be commercial. Then you have to drill appraisal wells to prove that the first well isn’t something anomalous. All of that is aimed at reducing the commercial risk. It took 30 wells in offshore Norway to get to the point where we are in 2 wells in Kavango—a remarkable start, but still only a start.
JS: Thanks for your time Jim. Hopefully you will be able to answer a few more questions once we get the lab results back.
Here are a number of other oil companies with exciting early stage projects around the world you might want to look at:
Chevron (NYSE:CVX) comes in just above Shell as the world’s second-largest oil and gas company by market cap. Chevron is also betting big on Africa, particularly Nigeria and Angola. The supermajor ranks among the top oil producers in the two African nations. Other areas on the continent where the company holds interests include Benin, Ghana, the Republic of Congo and Togo. Chevron also holds a 36.7 percent interest in the West African Gas Pipeline Company Limited, which supplies Nigerian natural gas to customers in the region.
With bets on both oil and natural gas, the company is looking to take advantage of both fossil fuels. Though prices are still depressed at the moment, as fuel demand returns to normal, Chevron could be a big winner as prices climb back up to pre-pandemic levels.
While it’s still an oil company at the core, Chevron has emerged as one of the fossil fuel industry’s biggest proponents of hydrogen, even playing a major role as a global advisory body to the Hydrogen Council in order to provide a long term vision for the role of hydrogen in the energy transition.
ConocoPhillips Company (NYSE:COP) as the largest pure upstream company, has performed relatively well in this depressed market, generating ample free cash flow and returning a good chunk of it to shareholders. Unlike many of its peers who continued to expand aggressively during the shale boom, COP has taken several steps to lower costs and fortify its balance sheet.
Like many of its peers, ConocoPhillips has been gradually offloading non-core assets, including the sale of its North Sea oil and gas assets for $2.7 billion and the planned sale of its Australian assets for $1.4B. Its asset portfolio, however, remains healthy.
Thanks to a global recovery in demand, Conoco has seen an increasingly bullish look on the industry, and it was one of the few companies which did not partake in the mass-layoffs seen in the industry last year. In addition, Conoco has also seen a fairly decent about of insiders buying into its stock, which is a good sign.
Petrobras (NYSE:PBR) is focused on developing its pre-salt operations. And it’s easy to see why. Those upstream projects being approved for development must have a breakeven price of $35 per Brent or less. Brazil’s national oil company has budgeted capital spending for exploration and production activities of $46.5 billion from 2021 to 2025.
Clearly, while the pandemic has hit Brazil’s oil industry causing production to fall because of savage budget cuts and well shut-ins, it appears to have done no material long-term damage. Demand for Petrobras’ low sulfur content fuel is firm and will grow because of the global push to significantly reduce emissions, which will ultimately make Petrobras even more valuable over time.
Petrobras remains one of the most underrated oil majors in the world. It’s got desirable crude oil, a massive footprint in its domestic industry, and a growing amount of interest from investors. It’s also bouncing off of low share prices like the rest of the industry, indicating there could be some upside left.
Exxon (NYSE:XOM) was hit with incredible losses sparked by the global COVID-19 pandemic and the resulting demand destruction. Earlier this year, the company even did something that it was holding off on doing long after all the rest of the Big Oil club did it: it revised down its oil reserves.
ExxonMobil isn’t ignoring the reality of the market, however. It has made major moves in its commitment to reduce its emissions. It claims to have about one-fifth of the world’s total carbon capture capacity. The company captures about 7 million tons per year of carbon.
ExxonMobil is also big in its commitment to reduce its emissions. It claims to have about one-fifth of the world’s total carbon capture capacity. The company captures about 7 million tons per year of carbon. This has been in place since 1970, and the company claims to have captured more CO2 than any other company — more than 40 percent of cumulative CO2 captured.
Schlumberger (NYSE:SLB) is transforming itself to survive and thrive in an oilfield a fraction of the size it was only a few years ago. The emphasis is shifting from throwing big chunks of iron and a schoolyard full people at a project to minimizing capital intensity of operations through the digital PSO transformation we have discussed here. The digitalization of the global oilfield will prove to be very sticky and begin to deliver subscription-type returns to both companies.
SLB is ahead of the rest of the oilfield pack with their New Energy Genvia venture, which aims to produce carbon free blue hydrogen through a hydrogen-production technology venture in partnership with the French Alternative Energies and Atomic Energy Commission (CEA), and with Vinci Construction. This new venture will accelerate the development and first industrial deployment of the CEA high-temperature reversible solid oxide electrolyzer (SOE) technology.
SOE can potentially be a game-changing technology in the medium term because it offers a unique and efficient method to produce clean hydrogen by water electrolysis using a renewable source of electricity. Genvia’s mission is to deliver differentiated system efficiency when producing hydrogen from water, compared to current commercial electrolyzer technology, and as such, enabling clean hydrogen production at highly competitive price.
Baker Hughes (NYSE:BKR) is the world's largest oil field services company. They provide drilling, completion, production, and reservoir management products and services to customers in more than 100 countries around the world. Founded in 1919 as Geophysical Services Inc., Baker Hughes has grown into a global corporation with operations in over 120 locations across 30 countries.
Like many of its peers, Baker Hughes has also faced mounting pressure to join the green revolution. And it’s risen to the call-to-arms. Surprisingly, however, it wasn’t investor pressure that got Baker Hughes into the hydrogen boon. In fact, it’s been in the game for well over half a century. It built its first hydrogen compressor in 1962, and hasn’t stopped since.
Because it’s still primarily an oil field service company, however, Baker Hughes has had its share of ups and downs over the past year, but the $27 billion industry giant still remains a smart buy for long-term investors. Not only has it shown that it can adapt to the times, but it also pays dividends!
Ecopetrol (NYSE:EC) is another company to keep an eye on as oil prices slowly return to pre-pandemic levels. The Colombian producer has a bright future in one of the world’s up and coming hydrocarbon regions. South America is often overlooked in the market, but as the world’s biggest consumers scramble to broaden their import sources, the region is set to grow rapidly in the coming years.
In a recent announcement, Ecopetrol approved an investment plan to help improve the company’s growth potential. In fact, it’s even betting on its own domestic fields, allocating as much as 80% of its planned $4 billion investments in Colombia, with the remaining 20% to be split between operations in Brazil and the United States.
Though Ecopetrol is still grappling with a pushback against its fracking plans, it has a lot of potential. And if hydraulic fracturing really takes off in Colombia, it could be a boon for not only the country’s petroleum-dependent economy, but for Ecopetrol’s shareholders, as well.
Enbridge (NYSE:ENB, TSX:ENB ) is in a unique position as oil and gas stages its 2021 comeback. As one of the more potentially undervalued companies in the sector, it could be set to win big this year. In fact, in early December, it issued optimistic updates, planning higher dividends and expecting more profits in 2021, after the challenges the oil industry has faced last year due to the COVID-19 pandemic and the wider market crash. Kinder Morgan also expects to raise its dividend for 2021 by 3 percent compared to this year.
Kinder Morgan Inc's chief executive officer Steve Kean noted, "With budgeted excess coverage of that dividend, we expect also to be able to engage in share repurchases on an opportunistic basis.”
Kinder Morgan is a must-watch in the industry. With dividends on the rise, oil prices increasing, and bullish sentiment returning to the oil industry, there could be some significant upside left for this pipeline operator, especially as oil begins flowing at pre-pandemic levels.
Crescent Point Energy Corp. (TSX:CPG) was another Canadian oil producer that struggled in the oil price crisis of last year. The mid-cap company saw its share price tumble from a January high of $4.56 to an all-time low of just $0.70 as oil demand dissipated and prices tumbled into the negatives in a historically bad first-quarter. The terrible year forced the company to lower output and capex forecasts for 2021.
Despite its struggles, however, Crescent has seen its share price climb significantly over the past month. The 28% gain may just be the beginning of a turnaround for the embroiled Canadian oil giant. In fact, it has even received a ‘strong buy’ signal from analysts at Zack’s thanks to its strong price performance and improving technical.
In addition to bullish news from OPEC and Asian demand recovery, Canada’s oil sands are looking a bit more positive as well. According to government data, the controversial oil sands hit record-production in November and will likely continue to grow throughout the year. This turnaround in Canadian oil will likely be a boon for Crescent, and a full recovery is looking evermore probable.
Canadian Natural Resources (TSX:CNQ) has been able to do what many of its Canadian counterparts haven’t been able to, keep its dividend intact after swinging to a loss for the first half of the COVID pandemic, while Canada's producers are scaling back production by around 1 million bpd amid low oil prices and demand. Though Canadian Natural Resources kept its dividend, it withdrew its production guidance for 2020, however. It also said it would curtail some production at high-cost conventional projects in North America and oil sands operations and carry out planned turnaround activities at oil sands projects in the second half of 2020.
Though there is a lot of negative press surrounding Canada’s oil sands, the industry is starting to clean up its act a bit. And Canadian Natural Resources is leading the charge. And if analysts are right about Canada’s comeback, Canadian Natural Resources could be in for a big year.
Though the Canadian energy giant has seen its stock price slump this year, it could provide a potential opportunity for investors as oil prices rebound. It is already up over 170% from its March 2020 lows, but it is just getting started. If oil prices continue to climb, it could be huge news for investors that held on.
Enbridge (TSX:ENB ) is a giant in Canada’s oil industry, and it is in a great position as oil and gas stages its 2021 comeback. As one of the more potentially undervalued companies in the sector, it could be set to win big this year. But that’s only if it can overcome some of the challenges in its path. Most specifically, its Line 3 project has faced scrutiny from environmentalists.
The massive multi-billion project project plans to replace Enbridge's existing 282 miles of 34-inch pipeline with 337 miles of 36-inch pipe. The new Line 3 would have the capacity to move 370,000 barrels of oil per day, alleviating the takeaway capacity constraints that Canadian oil producers have been struggling with for years now. Line 3 is one of two pipeline projects in the works that are—in their unfinished state—keeping Canada's oil industry from reaching its potential.
Though this challenge seem prove difficult for Enbridge to overcome, the overall health of the Canadian oil industry is improving, and with it, the outlook for Canadian producers such as Enbridge. Enbridge started the year off with a bang, and if oil prices continue the upward trajectory they’ve seen over the past few months, the Canadian giant could see some upside still.
TC Energy Corporation (TSX:TRP) is a Calgary-based energy giant. The company owns and operates energy infrastructure throughout North America. TC Energy is one of the continent’s largest providers of gas storage and owns and has interests in approximately 11,800 megawatts of power generation. It’s also one of the continent’s most important pipeline operators. With TC Energy’s massive influence throughout North America, it is no wonder that the company is among one of Canada’s strongest and well-known companies.
Like a number of its peers, one of TC Energy’s biggest challenges in recent years was grappling with the particularly difficult approval process for its Keystone Pipeline. But that’s all history now, and with the bounce back in oil and gas demand, TC Energy could stand to benefit. While TC Energy’s stock price has yet to recover from pre-pandemic levels, it is one of the few industry giants which has managed to keep high dividends rolling in. With quarterly payouts exceeding 6%, TC has remained appealing for investors in the industry.
Suncor Energy (TSX:SU) is another giant in Canada’s industry. It has set itself apart from some of its peers through a number of high-tech solutions for finding, pumping, storing, and delivering its resources. Not only is it big in the oil sector, but it is also a leader in renewable energy. Recently, the company invested $300 million in a wind farm located in Alberta, showing that it is committed to reducing its carbon footprint.
Now that oil prices are finally recovering, giants like Suncor looking to capitalize. While many of the oil majors have given up on oil sands production – those who focus on technological advancements in the area have a great long-term outlook. And that upside is further amplified by the fact that it is currently looking particularly under-valued compared to its peers, especially as lithium, which is present in Canada’s oil sands, becomes an even more desirable commodity.
CNOOC Limited (TSX:CNU) is one of the world’s most interesting oil and gas companies. It is China’s most significant producer of offshore crude oil and natural gas, and may well be one of the most controversial oil stocks for investors on the market. A label that has nothing to do with its operations, however.
The relationship between the United States and China has admittedly been better, and if things were to take a turn for the worst, it could have a major impact on global natural gas, given that CNOOC is China's largest importer of LNG. But the Biden administration has been working to improve relations and as such, Chinese companies, including CNOOC, are likely to breathe freely once again, and it be great news for investors in Chinese stocks.
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Forward-Looking Statements. Statements contained in this document that are not historical facts are forward-looking statements that involve various risks and uncertainty affecting the business of Recon. All estimates and statements with respect to Recon’s operations, its plans and projections, size of potential oil reserves, comparisons to other oil producing fields, oil prices, recoverable oil, production targets, production and other operating costs and likelihood of oil recoverability are forward-looking statements under applicable securities laws and necessarily involve risks and uncertainties including, without limitation: risks associated with oil and gas exploration, including drilling and other exploration activities, timing of reports, development, exploitation and production, geological risks, marketing and transportation, availability of adequate funding, volatility of commodity prices, imprecision of reserve and resource estimates, environmental risks, competition from other producers, government regulation, dates of commencement of production and changes in the regulatory and taxation environment. Actual results may vary materially from the information provided in this document, and there is no representation that the actual results realized in the future will be the same in whole or in part as those presented herein. Other factors that could cause actual results to differ from those contained in the forward-looking statements are also set forth in filings that Recon and its technical analysts have made. We undertake no obligation, except as otherwise required by law, to update these forward-looking statements except as required by law.
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