West African Frontier Heats Up

BMI View: The West African frontier begins to hot up as Cairn Energy outlines its latest drilling programme to target the offshore of Morocco and Senegal. We s ee strong upside to th e West African offshore area and expect intere st to mount, particularly if commercial discoveries are made.

In its half year report announcement, Edinburgh headquarter ed Cairn Energy shared its plans for its latest 12 month frontier exploration drive . The company has previously invested significant resources in Greenland as they pushed to be first mover in this unproven oil and gas province. In 2010 and 2011 Cairn drilled eight wells, and while some showed the presence of hydrocarbons, none were of commercial value. The company spent US$1.2bn on these drilling operations with no reward , significantly impacting its ability to take on new high risk endeavours .

After rebuilding its portfolio with the purchase of producing North Sea assets, the new focus of Cairn will be the frontier areas of West Africa, including offshore Senegal, Mauritania and Morocco. The company's latest drilling campaign will begin in September using two rigs and targeting five wells before H214. Two wells are planned for Morocco in Q313 and H114 respectively, two are planned for Senegal in the beginning of 2014, while a further well is planned for offshore Ireland. Furthermore, Cairn is in the process of farming into an offshore block in Mauritania and is currently awaiting government approval. The total investment on frontier exploration will be US$510mn, which totals 70% of the company's budget exploration and appraisal expenditure despite only targeting 5 of their 15 wells in 2013/2014. The company may also return to Greenland in H214, but is awaiting a decision form joint venture partners.

We believe Cairn's move is well founded considering the high prospects for the West African coast. Initial investigations suggest Moroccan geology resembles that of the Scotian margin in North East Canada, which has seen successful gas finds in the Sable and Deep Panuke fields. Further up the Canadian coast oil has also been discovered at the Hebron, Hibernia and Terra Nova fields. Wells drilled off the coast of Morocco in the late 1960s and early 1970s also provide evidence of petroleum systems with the MO-2 and MO-8 wells finding oil. We expect the Moroccan wells to have a high probability of successfully finding hydrocarbons, and believe this is why they will be the first targeted in Cairn's drilling programme. Strong upside it therefore anticipated for Morocco's oil and gas sector, however potential discoveries will unlikely be of considerable size (estimated at between 50-200mn barrels of oil equivalent).

Senegal appears to hold more exploration risk as the conjugal margin of the country, east coast Florida and Georgia, also remains an unproven hydrocarbon province. The country also found oil in the 1960s. The Dome Flore field on the border with Guinea-Bissau is thought to hold as much as 1bn barrels of oil equivalent providing evidence of petroleum systems in the country. However, the oil discovered is very heavy, 10° API, making it challenging and costly to extract. Cairn is targeting 1.1bn barrels of unrisked oil from the two planned exploration wells.

Riskier Working Environments But Higher Potential
Long Term Political And Economic Ratings *

Despite the considerable below ground upside, the West African operating environment could prove more challenging than elsewhere. Our long term political and economic ratings of the three countries targeted remain weak, and the discovery of a major oil or gas field, especially in Mauritania or Senegal could prove disruptive.

In spite of the riskier West African economic and political environment Cairn will be moving into, the company expects a higher probability of success in this region. According to Cairn's calculations, the wells drilled in Greenland in 2010 and 2011 had a probability of success of around 10%, whereas the wells in the new drilling plan are expected to be around 25%. Thus, with a four well West Africa programme, Cairn is anticipating on making a discovery in this frontier area.

USGS estimates for mean recoverable oil and gas resources are very encouraging for Morocco and Senegal, driving growing interest from exploration and production companies. While currently the sector is dominated by smaller exploration & production companies, ConocoPhillips recently farmed in to one of Cairn's licences offshore Senegal adding to confidence in the regions prospects. Exploratory success here will likely encourage further interest from larger oil and gas companies. We will closely monitor Cairn's drilling programme over the coming 10 months with strong expectations for exploratory success.

Considerable Undiscovered Resources
OIL (bn barrels) GAS (bcm)
Source: United States Geological Survey (USGS) * mean recoverable offshore resources
Morocco (Essaouria Basin & Sub-Salt) 7.68 345
Senegal (Coastal Plain and Offshore) 2.35 398
This article is tagged to:
Sector: Oil & Gas
Geography: Senegal, Morocco, Mauritania

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