Off The Map In Africa – Balancing Political Risk With Geological Risk

Going to take a break from discussions of supermajors and the New Seven Sisters for one post to highlight an interesting article from Canada’s Globe and Mail introducing a small Toronto Stock Exchange-listed company, Addax Petroleum — Canada’s fifth-largest offshore oil producer (it has no domestic Canadian production), the biggest independent producer in Nigeria and sixth largest in Western Africa, among the oil world’s last exploration frontiers.  This blog highlight is offered not as a strong endorsement of Addax (that is left up to the reader, as always), but rather as an interesting study of a small hydrocarbon exploration company making its way in a variety of frontier markets.  Enjoy!

“…Most oil companies, especially those listed in North America, avoid war zones and political hot spots, or, once in them, are forced out (Talisman Energy’s flight from Sudan comes to mind). Not Toronto-listed Addax. It moves with alacrity into messy areas like Iraq and Western Africa and was on the verge of jumping into Iran a couple of years ago. Mr. Gandur dropped the Iran project after receiving agitated reactions from the company’s politically correct Bay Street underwriters. Addax isn’t the only medium-sized, North American-listed company in West Africa and Iraq. But its fondness for exotic locations may be the start of a trend borne of necessity. Conventional oil reserves in politically stable countries are becoming exceedingly hard to find, one of the reasons prices have gone from $10 (U.S.) a barrel in 1998 to almost $100 today. To find reserves of any size, companies big and small are hunting in the offshore and onshore regions of West Africa. Mr. Gandur says Nigeria, Angola and the deep ocean in the Gulf of Guinea are probably the last oil discovery and development frontiers.

…Analysts compare Addax to the old Hurricane Hydrocarbons (later PetroKazakhstan), the TSX company with no Canadian production that found its fortune in Kazakhstan and happily lost its independence in a bidding war in 2005. China National Petroleum Corp. paid an astounding $4.2-billion for the former penny stock. Mr. Gandur describes Addax’s oil projects in Iraq and West Africa as potential “company makers.” The big caveat, of course, is political risk. Iraq prohibits oil exports from Kurdistan, where Addax’s reserves are located. Nigeria appears to be relatively stable. But anyone who remembers the uprising against Shell Oil and other companies led by Ken Saro-Wiwa, who was executed by the Nigerian government in 1995, knows that oil companies and the Nigerian people are not always allies.

…Addax Petroleum, and gave it a clear strategy: Exploit underdeveloped, but proven, oil plays in spots that wouldn’t rank high on your dream honeymoon list. In practice, that meant loading up on production and exploration blocks in the West African nations of Nigeria, Cameroon and Gabon and in Iraq, though Addax has tried to nab properties in Iran, Libya and other oil-rich but politically delicate countries. “Addax has taken on more political risk than other oil companies, but less geological risk,” said Al Stanton, an analyst at Royal Bank of Canada’s investment arm.…How did Addax leap out of the shadows to become one of West Africa’s most prolific producers?

Mr. Gandur says making nice with the locals helped. “In Africa,” he said, “people like to talk to company builders. The CEOs of [the multinationals] probably never go to Africa. If you want successes there, you must create friendships, they must like you.” Maintaining relationships means he spends about 200 days a year travelling, and doing so without the convenience of a company jet.

Indeed the relationship between Nigeria and the majors such as Exxon Mobil, Shell and Total seems to be souring, though they remain significant producers in that part of the world. In November. Tony Chukwueke, head of Nigeria’s Petroleum Resources Department, was quoted in a Bloomberg story as saying the government is “tired” of dealing with the multinationals and wants smaller players to bid for exploration and operating rights. Addax couldn’t be happier.

…Addax began business in 1995 by reviving a small abandoned field off Ivory Coast. Its first big break came in 1998 when an American oil company called Ashland decided to sell four offshore Nigerian oil properties. The Nigerian government threatened to repossess the assets. Addax convinced Mr. Etete that repossession would send a bad signal to the oil world. Mr. Etete agreed and allowed Addax to buy the Ashland properties, then producing 8,000 barrels a day. It nailed them for the equivalent of pocket change. Today, after a $1-billion investment program, they form the heart of the company, with production of more than 100,000 barrels a day.

Since then, Addax has been in constant motion, both onshore and offshore, in Nigeria, Cameroon and Gabon. In the spring of 2006, the company signed production-sharing contracts in an offshore region, known as the Joint Development Zone, shared by Nigeria and the tiny island republic of Sao Tome and Principe. One of Addax’s partners in the region is a company associated with wealthy Nigerian business tycoon Emeka Offor, who is said to be close to Olusegun Obasanjo, Nigeria’s president until last year. The Nigerian government is reportedly investigating the awarding of an offshore Nigerian block known as OPL 291, which was eventually landed by Mr. Offor’s company and Addax. Mr. Gandur and the analysts say they are unaware of any probe.

…Kurdistan is another story. There, the geological risk is small, the political risk enormous. Addax has a 45-per-cent stake in the potentially huge Taq Taq field about 320 km northeast of Baghdad. The problem is that no Iraqi national law exists to allow oil exports from Kurdistan. Any production has to be consumed locally. Unless the national law changes, and a pipeline is built, the field is little more than a dream.

Addax believes Taq Taq contains as much as 2.7 billion barrels, of which 20 to 40 per cent is recoverable. Addax and the analysts drool over the field’s money-making potential. UBS analyst Memet Kont estimates the field could produce 200,000 barrels a day, well in excess of Addax’s total current production. Costs might be $2 (U.S.) a barrel, the analysts say. Royalties are $3 and the local price for the oil is $30 a barrel, leaving a fat profit of $25 a barrel. Not bad, and the profit would soar if an export pipeline were built because the price and the volumes would rise substantially….”

This entry was posted on Friday, January 11th, 2008 at 9:27 pm and is filed under Iran, Iraq, Libya, Nigeria.  You can follow any responses to this entry through the RSS 2.0 feed.  Both comments and pings are currently closed. 

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Wildcats & Black Sheep is a personal interest blog dedicated to the identification and evaluation of maverick investment opportunities arising in frontier - and, what some may consider to be, “rogue” or “black sheep” - markets around the world.

Focusing primarily on The New Seven Sisters - the largely state owned petroleum companies from the emerging world that have become key players in the oil & gas industry as identified by Carola Hoyos, Chief Energy Correspondent for The Financial Times - but spanning other nascent opportunities around the globe that may hold potential in the years ahead, Wildcats & Black Sheep is a place for the adventurous to contemplate & evaluate the emerging markets of tomorrow.