Analysis: Gas may dash Big Oil's Namibian dreams

BW Energy

07/11/2024 05:30

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      More gas than expected in fields
    

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      Geology means oil will cost more to produce 
    

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      First production may be next decade
    

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      Government wants joint gas plan
    

  
    By Ron Bousso, America Hernandez and Wendell Roelf
       PARIS/CAPE TOWN, Nov 7 - International companies and the
government of Namibia had high hopes only months ago they could
quickly cash in on offshore discoveries and turn the country
they saw as the world's last frontier of untapped oil into a
prolific producer.
    They have since hit a major complication: an unexpectedly
high percentage of gas in the fields, meaning they need to
install additional infrastructure. That will slow development
and may make projects unprofitable, according to executives,
politicians and industry sources.
    "What we are seeing is that all our discoveries have a very
high gas-to-oil ratio," Namibia's Petroleum Commissioner Maggy
Shino told an industry conference last month.
    Namibian law bans flaring - or burning gas off, releasing
CO2 into the atmosphere - meaning companies will have to inject
the gas back into the reservoir or process it for consumption,
which Shino said was in any case the right thing to do.
    "We really want to utilise the gas and generate as much
value as possible ... and start then the industry of
gas-to-power and petrochemicals, established in Namibia," she
said.
    After initially hoping for first oil by 2026, Namibia's
government is working with operators to agree on a single plan
with common infrastructure for the 8.7 trillion cubic feet (tcf)
of unexpected gas. 
    The idea is to revamp a long-stalled project to pipe gas to
an onshore gas-fired power plant to supply Namibia, then
neighbouring South Africa and the wider region.
    Initially designed to handle 1.3 tcf from Namibia's smaller
Kudu field, the power plant project and related gas
infrastructure would need significant upscaling.
    Namibia's government has started talks with Shell  SHEL.L ,
Total  TTEF.PA , Galp  GALP.LS  and Norway's BW Energy  BWE.OL ,
and wants Namibia's national oil company Namcor lead the gas
development plan. 
    For the companies, the problem is the additional work could
delay oil production into the 2030s, making it harder to
monetise.
    Although the industry says oil will be needed for decades to
come, the International Energy Agency (IEA) estimates global use
will peak before 2030 as the world weans itself off
carbon-emitting fossil fuels and as electric vehicle use
increases, led by the world's biggest commodities consumer
China.
    For the major companies that have acquired or are seeking to
invest in stakes in development blocks, that is a setback,
industry sources told Reuters.
     
    GUYANA DREAM FADES
    The oil industry leapt to attention in February 2022 when
France's TotalEnergies and London-listed Shell announced major
discoveries in Namibia's Orange basin holding a cumulative 5.1
billion barrels of oil. 
    Investors piled in this April when Portugal's Galp said it
found as much as 10 billion barrels in the same area.
    Many drew comparisons to Guyana, where discoveries in 2015
led to an oil bonanza that has given the country GDP growth
above 20% for the last five years.
    But the high gas content, which became apparent over the
last year as operators carried out more extensive drilling of
reservoirs in Namibia, has since made oil majors cautious.
    "We are working on it ... It's a matter of being able to
re-inject all this gas in the reservoir at a cost that is
acceptable," TotalEnergies CEO Patrick Pouyanne told investors
in New York last month. 
    Injecting gas back into rock under 3,000 metres (9842.52 ft)
is already expensive, Pouyanne said. "If we have to have a big
gas machine handling 500 million standard cubic feet per day
instead of 200 or 300, of course, it changes the dimensions."
    Total is struggling to get production costs in Namibia under
$20 per barrel - an internal requirement for a final investment
decision (FID) on new projects. The company is considering
re-negotiating terms with authorities to try to lower costs.
    It still hopes to take a FID next year and produce first oil
in 2029 based on a plan to reinject all the gas rather than wait
for a common solution, said one person familiar with the
company's thinking, speaking on condition of anonymity. 
    The final decision would depend on whether the project would
still be profitable enough, another source said.
    "Namibia underwhelms," Jefferies analyst Giacomo Romeo
summed up in an investor note. Total proposed a
smaller-than-expected development of 160,000 barrels per day and
did not restate previous hopes for a FID in 2025, Romeo said.
    Shell has considered building a floating gas liquefaction
unit at the oilfield to produce LNG for export at the block
where it made the Graff discovery, according to one source. That
would significantly increase development costs and delay oil
output start-up. 
    Shell declined to comment.
    Shell CEO Wael Sawan told analysts on Oct. 31 that Namibia's
acreage was "very challenging," and that the lower permeability
of the rock made extracting oil and gas harder.
    "A lot of our focus is on figuring out whether we can find
ways to be able to develop commercially investable
projects," Sawan added.
    Galp, which has put half its Namibian stake up for auction,
has postponed the sale pending results of additional exploratory
drillings later this year. U.S. major Chevron, as well as Rhino
Resources, which is backed by BP and Eni’s  ENI.MI  joint
venture Azule Energy, are also expected to drill in Namibia this
year.

 (Reporting by America Hernandez in Paris, Ron Bousso in London;
Editing by Simon Webb and Barbara Lewis)
 ((america.hernandez@thomsonreuters.com; +33623014155))