Reuniting Gondwana: Why Big Oil is returning to West Africa.

All right, you're listening to Energy Sense and S&P Global Energy Podcast, where we discuss everything on the intersection of energy and finance. I'm Sam Humphries, and I'm joined as ever by Hillvaden. How's it going, Hill? It's going well. You've got new neighbors. Here I am again. Yes, have you been making a back? And they've moved back to the console as well? Yeah. I think she's going to be in a TV show with garbagey, I don't know. Oh, yeah. Anyway, that's not what we're here to talk about today. We joined today by friends of the podcast, Justin Cochran, who is head of our African upstream research and Roderick Bruce, who is above-grad risk expert for Africa, and we were talking about the Atlantic margin and specifically the opportunities in West Africa and why it's attractive. But are there any key takeaways that you wanted to share with everyone before we jump in? A bunch of things just to listen for, and I think Justin does a good job explaining the geological conditions that have people interested in the Atlantic margin. Those are now you've got above-ground conditions, one in the sweetening of physical terms, from some of the host countries to encourage exploration after a lot of these explorationists have focused their attention elsewhere, and then geopolitically it comes up just kind of on the sidelines. But the opportunity to look for more for a diversity of supply, right, and the western side of Africa is perceived to be more oily than other frontier areas. So it's attracting some interest as people start to reconsider exploration, and it's a nice start to, I think, a conversation that will probably come back to as more activity happens. What do you think? No, I agree with everything you said. I particularly like the term oily, but like you said, I think it's a conversation that we will definitely be coming back to certainly next year. There's a lot going on, and certainly people watch on, but I think we will hand off now. All right. All right, Justin Roderick, thank you so much for joining Hill and I again on Energy Sense. It's been a while, but how are you both doing? I'm good, thanks. Are you? Yeah, very well. Thank you, Sam. Well, fabulous. Well, it is lovely to have you both back. And we are all together today because you both did a LinkedIn Live recently on West Africa and the Atlantic margin basin. And so it was a really good opportunity for us to talk a little bit more about that in a bit more detail from this upstream perspective, upstream oil and gas perspective. As I think a lot of the time when people are looking towards upstream and where those six big success stories have been, we see Yana as this major, you know, like I just said, success story for big discoveries, but there have been some very, very notable ones in West Africa, which I won't go into. But I thought maybe Justin, you could set the scene a little bit on why this region is so important and the significance of those big discoveries on either side of that margin. Yeah, thanks. Thanks, Sam. And so I would say when you tie it together, you talk about Yana, but also most recently we've seen the explosion of discoveries in Namibia. We've also seen several discoveries offshore, cut of war. And when you're looking at that Atlantic margin, what you see is IOC's positioning themselves. So maybe a good place to start is actually explaining what that Atlantic margin is. So maybe if you think about Gonduon in land, that was a super continent, long time ago, and you had Latin America and Africa connected. And in the early Cretaceous, those things, those two continents started to separate and split. Where they were splitting, in the middle there, there was a small, well, I say a long thing, you could probably say, ocean that started to open up. And sediment was pouring into that, that small ocean in between these two separating continents. And the point is there, the sediment that was coming in, you can kind of assume is on the same, the sediment was sort of like coming in. And what would be on the African side would also be on the Latin American side. And over time, these things separated further and further and further. And you know, prister, here we are today. And now you've got Latin America where it is, you got Africa where it is. And you have some of that same sediment sitting on both sides of the Atlantic margin. So the Atlantic margin is technically defined. It's the area where we meet that oceanic crust. So that's the place that's separating in the middle. And if you look at like Google Maps or something like that, you'll see this really nice mid oceanic ridge, which is all the volcanoes along the middle. And anyway, so a long story short. Now you've got this idea of similar rocks in Africa, similar rocks in Latin America. And the geologists think, well, once upon a time these things were both together. So let's look, if we make a discovery on this side, let's look on that side to see if we see the same thing. And so that's why the guys are positioning themselves along the Atlantic margin. They're looking just like we made discoveries in Brazil, in the Santos and the Campos. Well, let's go look in Angola in the Kwanza base and all. We made discoveries in Nimubia in the Amazonas base and Petrobras made this discovery, the more fur discovery. And well, what's a conjugate for that? Well, let's go and look at, you know, the Tano Basin, for instance, or for Cartivore. And exactly what you see is Petrobras has positioned itself in the Amazonas base. But they've also taken a whole big acreage position in the Cartivore, or the Tano Basin or Cartivore. So that's essentially the reason why they are positioning. They're chasing the same geology on both sides of the margin. All right, so that's a super helpful description for non-geologists. And now all the people will understand those bumper stickers of reunite Kandwanaland. Sit right down the highway, you know, wondering where Kandwanaland and why we should reunite it. So Roderick, as we're thinking kind of outside of the rocks, we've seen discoveries, you know, Justin mentioned, you know, Giata's come up, Angola's come up, and Nimubia's come up, there's production coming out of Brazil, there's production coming out of Nigeria. If we're looking above ground, if people are looking underground at the rocks and saying, all right, well, we should see similarly as, similarities on each side of the Atlantic. It's the same thing happening on physical terms from the kind of the government rep side of things. Yeah, I think there's so interesting trends that we can look at both in terms of the countries involved and the companies. And I think what we've seen over the past two years is there has been more broadly globally a sort of return to exploration theme from the big oil companies, you know, they've kind of left behind that brief spell of focusing on energy transition targets, particularly the European companies, and a lot of them are back. Now looking at exploration, particularly because of the sort of the geopolitical drivers we've seen, you know, there's uncertainty over big resource holders in the Middle East, and in Russia, so suddenly there's a big focus now on, you know, diversity of supply and sort of security of supply. So the big oil companies are looking for places they can go that are resilient host countries where they can make big liquidity discoveries. So in Africa, a lot of the countries, yes, they've been making strides to try and be more attractive above ground. So they're improving their fiscal terms, they're making it easier for foreign investors to come in. So they're making a licensing process easier and quicker. And the big oil companies like that because obviously deep water exploration is very risky, so if they can come in and scope out opportunities more efficiently, that's good news for them. So those deep water frontier areas, and those frontier, those do not know, which is completely new areas of exploration. You mentioned the sort of almost de-risking, it's not really de-risking, but how competitive is it in Africa and West Africa compared to Latin America? Is there a significant shift to Africa to try and bring in those big oil companies, the IOCs, the NFCs, or, you know, is it a focus on smaller domestic companies to try and bring them in? Maybe Justin or Roger, one of you can take. I'll give it a shot, I'll try and I'll just kick us off, Roger, and then you can jump there. So what I would say pivots on, well, that sounds like a great thing, a pivots on what you were saying, Roger. So basically, IOCs are in a situation at the moment where they need to replace reserves, but exploration budgets have been decimated. So, I mean, it's a slide, Roger can often present it, and we see, like, 2025 exploration budgets for the big seven. It was about 9.4 billion, but if you look at, like, 2013 that was 30 billion and and that's not even I always add this and that's not even inflation adjusted so you might say that you know what we're spending now is equivalent to about a fourth of what we were spending in 2013 but you still have to I mean oil and oil and gas company has a terminal value if you do not have the resources to produce and sell and and and make all of of the money and your investors want to make sure that they're getting some bang for their buck so one of the things that they did was they cut all these budgets they're slashed but now in a situation like okay great we've still got to find resources and and how do you do that and you know initially when a lot of that happened everyone thought it was like sort of the big ISC's would flood back to mature basins or places that are low geological risk environments but that's not really what we saw we saw ISC's moving into places where they could make these sort of needle moving discoveries big discoveries now where do you go to make a big discovery when I was just looked before so you basically have to go into the frontiers those are the places where they're called frontiers just because we haven't got we haven't got so much exploration that's taken place in those areas and and so that's what we're seeing an Africa what's cool about Africa I say Africa and Latin America is that Africa actually sits on a lot of frontier acreage stalls there's a lot of acreage that's under explored and I mean the same is true for for Latin America but if you look at the acreage capture sort of of the last couple of years well I mean 2025 is a good one so if you look at those big seven ISCs more than 50% of the global deep water acreage capture took place in West Africa essentially so 50% of all the acreage they captured throughout the entire world deep water was full West Africa so I don't know I think I might have taught myself out if I don't really quite remember what the original question was but I hope I'm there isn't interesting answer regardless okay good good Roderick you started to answer that question as well I don't know if you remember it but before I come in with another question do you have anything you want it to add to what just and just said I just know that Justin's answer was perfect thanks so Justin mentioned that the difference in 2013 and 2026 in terms of the exploration spent right and since then the US predict you know specifically the Permian Basin has grown gangbusters right so as we're thinking about exploration and this these inventory concerns that global IOCs have that there's a couple things that are different and Roderick I'll let you pick on which one you want to talk about one of the things that's different is the explorationists that were around in 2013 have all been acquired by the IOCs and so there's a dearth of true explorationists that are used to taking the types of risks that anodarko and others were when they existed right to we're at the stage of technology and innovation where AI is potentially going to improve exploration success rates at the same time that it particularly improves recovery rates from the Permian Basin right so you got to make your bet do I bet on getting recoveries up in unconventional oil or do I bet on a higher rate of success and exploration and one of them is going to be slower moving that being deep water right so as you're thinking about what's different this time Roderick which one of those things is more interesting to you the change in the competitive environment or the the advent of technology that the industry is starting to consume I think the I mean both both are a big factor so if you look at who it is that is you know taking up a lot these licenses on African Atlantic margin it is the big IOCs and that's interesting because you know we talked about return to exploration now we're we're also seeing a sort of return to Africa because a lot of those IOCs had sold off their more mature positions in countries like Gabon we'd seen Shell exit you know we'd seen a lot of them live-esting BP had reduced its interest in Africa and in frontier basins but now they're all coming back Shell's gone back into Gabon BP's gone back into Gabon so I think in terms of the companies involved it is the big IOCs because they are the ones that can really leverage things like you know the technological advantage that you mention Hill really comes into play obviously in the deep water and the ultra deep water so they are the the companies that can really show their competitive advantages to to make these discoveries you know they've got the technology to do it so maybe in the past it was the indies that had dominated in Africa say in the shallow water or the onshore it's the majors that are you know the the play openers now in the in the deep water and ultra deep water and that's where the the countries come in because countries are making it easier for the IOCs to scope out these opportunities so we've seen a lot of what are called pre-contract agreements like MOUs memorandum of understanding technical evaluation agreements or TEAs as well are being offered so these are not formal contracts but they're sort of scoping and reconnaissance agreements that allow the oil companies to look at data and therefore reduce their sort of exploration risks they can do it more cost-efficiently they can do it more quickly so it gives them the chance to scope out more acreage more quickly and that's a good way for them to try and reduce their exploration risks in these frontier areas I'm going to piggyback off that Roddrick and probably ask you a follow-up we've seen countries attract of interest before and then it's like a cycle there's interest and then it wanes back and forth same with exploration cycles we've seen peaks before anthroffs obviously things are a little bit different now but when you're talking about those those moves and those opportunities to get companies more data ahead of committing to like a trillion campaign or so on what are governments doing in particular I don't know if there's any specific government it kind of stands out to help facilitate those larger companies to actually invest in exploration in a specific country over another yeah so I think one of the one of the big new trends we've seen are these pre-exploration agreements that they help to reduce risk and then those in countries like Angola for example are combined with you know really competitive fiscal terms and incentives for specific types of resources like deep water or gas or marginal fields etc and then you combine that with more streamlined regulation licensing processes approvals etc and you get the sort of holistic approach that Angola's been very good at doing over the past few years that makes it a lot more attractive for IOCs to enter you countries all right Justin one of the other things that has changed since 2013 oh so sorry guys I just want to add one little bit to it and I'm I'm I'm out of mystic but there's one one other component is access to data so oftentimes what's what the guys are offering is allow an IFC to come in or you know you ever to come in get access to the data so that they can kind of like work up at least a bit of understanding of the acreage before committing to you know like a two or three well drilling campaign etc so I think it just is just low is also the the entry risk for some of the IOCs so that's something so with taking so with that comment I'm going to change my question if I give you access to a bunch of data I in a sense I lose some leverage right that because that data may discourage you from exploring what what what do I as the I explore what kind of skin do I have to have in the game in order to see those data like could the four of us call and go and ask to see those data where do we have to bring some money to the table I think I think that it definitely helps to have deep pockets and I think that's the IOCs have that so I think there's I mean I actually mentioned this before there's the brands the brands are important the shells the X ones the share ones that brand brings a lot of interest to a you know I want to say a country that's trying to attract other investments so if you've got no acreage licensed and then Chevron comes up and picks up a couple of blocks it makes everybody look but how do you get Chevron to come and pick up a couple of blocks you've got to make a pretty nice offer to to Chevron and so one of the things that you can do is you can improve the terms significantly and but you can also sweeten it a little bit more by actually give them access to the data and before they sign a formal exploration contract and yeah I don't want get into my whole thing about the race, that was not my whole thing, but this idea of the race to the bottom where we're in a situation now along, I mean, the Atlantic margin, but you can actually say globally with places with Frontier acreage, where in order to attract that limited exploration capital, you kind of want to make your country the best return on investment. So if you make a discovery in Namibia or you make a discovery in Angola, or you make a discovery, you know, or fraud, Argentina, whatever it might be, you want that discovery to be as valuable as it can be. And so if you take this idea of all things being equal, okay, this up Frontier Basin, Frontier Basin there, Frontier Basin there. So we say the geology is neutral, we don't really even consider that, but we go to go and spend a hundred million dollars or 150 million dollars drilling a ultra-deep water exploration while while we're going to go to one of these places over any other. Well, you would look into, okay, the terms are the best. So if we make a discovery there, we're going to get the biggest bang for our buck. So what's happening is host countries all over the place are competing with each other to improve terms. And essentially that's in a natural, that's what the race to the bottom is, you know, Gabon improves its terms and Congo improves its terms and Golan improves its terms. Namibia, you know, kind of get to a point where, you know, well, a host country could ultimately be sort of giving the baby away with, you know, throwing the baby out with the boss water. So they're not, they're not really left with all that much. But one of the things they can sweeten that thing with is access to data, you know. So there's another, another way you can kind of de-risk a little bit without maybe just giving everything away. Okay, so I have a slightly different question. Say, magically I have a hundred million dollars and I want to invest it in exploration. You won't be doing podcast sale anymore, Sam. But why? What would incentivize me to look in West Africa, as opposed to say East Africa, because there's been some pretty significant discoveries over on that side earlier. Before, would there be a different one? What is the driving factor? Why is West Africa so attracted at the moment compared to East Africa? Maybe a hundred, Justin. Well, as we say, there's a two-fold, a two-prone. I mean, I don't know. Look, I mean, it addresses very quickly the primary reason that guys are spending money in West Africa, over East Africa, is the perception that West Africa is liquid-prone, and East Africa is gas-prone. And the issues with frontiers and gas revolve around infrastructure. When you go into a frontier, you don't have infrastructure. So you don't have an LNG plant, or you don't have, you know, pipeline infrastructure. You don't have all kinds of things. And oftentimes, you know, if you make a big gas discovery, and you want to do something with it, there's all kinds of domestic obligations. And those domestic obligations can be difficult. And there's also, you know, like you have to push a bunch of that into, into the local market, and there can be a forex risk. You spend money in dollars to develop something. But, I mean, those are just some of the facts that I mean, they're primarily liquid gas. I think that's the main reason that guys are looking at West Africa, but they're not. There is more than more to that. Yeah. I think on the above ground side, a lot of the countries in West Africa, obviously, the mature oil producers in West Africa, you know, I go like a bon Congo, etc. They're all used to producing oil, and their economies are geared towards it. And East Africa is more frontiers, and as Justin said, is gas. And a lot of these projects, again, as just mentioned, are difficult to develop because they're gas. And in the decades, since the discoveries were made, there have been a lot of political issues of a reason in countries like Mozambique and Tanzania. So, you know, you've got a militancy in Mozambique that has constrained the development, the pace of development of these gas resources. And in Tanzania, you've had governments that have threatened to renegotiate contracts, has been resource nationalism, has been a struggle to agree on terms for ALNG. So, I think that the above ground elements are another factor why East Africa is perhaps, you know, less attractive in the current context for explorers. So, one of the consequences, the industry, you know, kind of got into its exploration capabilities over the past, you know, 10, 15 years, right? A lot of people retired. When those skills disappear, they're hard to build back, right? As we're thinking about this kind of this new stage of exploration, are there certain companies that have done a better job maintaining that capability and perhaps those that maybe let some of it a trick? Are we going to see new company formation that there's a lot of really smart explorationists who have gone off to do other things? Are they going to get back by new capital private equity to go into this and maybe take some of the risk off of the IOCs who are busy doing other things as well? I'll say Justin. Okay, okay. Well, now I'm going to be careful here because I don't want to say, hey, this company did well and this one hasn't done so great because all of them are customers. There you go. We can focus on the good and we won't have time to mention everybody there for if your name doesn't come off. It's not negative. Your boss has haven't done a terrible job over the last decade or so. What I would say is, like take a company like a total, they seem to have explored consistently throughout downturns. They didn't really ratchet back there. We didn't hear too much about them slashing exploration divisions, etc. There's another company that the logo is green and yellow. They were aggressive in cutting out their exploration division. I remember chatting to a lot of them. They had excellent, excellent, excellent geologists and geophysicists. They were brilliant, brilliant, brilliant. But once those guys are, let go of, they either get picked up by other companies, but during that period of time, not a lot of hiring taking place for exploration geologists. They might have moved into things like wind turbines and I don't know, completely out to coffee shops and stuff like that. That's from the big guys. In terms of the small Indies or smaller companies coming, there's one like, I've got one example, is a venture. If you look at the guys that are sort of in the back end of a venture, those are like X2 low guys. So they're an explorationist, but a venture itself is not really like that to the real frontiers to make discoveries, etc. But they picked up some producing assets in Angola and they've kind of grown that a bit. Now they're stepping up within Angola into more exploration type opportunities on shore and stuff like that. I think project would be all sorts. Yeah, I think you've captured it well, Justin. So yeah, so in terms of these, the pre-exploration agreements that we've discussed, I think one of the sort of pitfalls of them is that they are not from construction or they're not production sharing contracts, etc. etc. So obviously there's a risk that a company can express interest and then actually just not sign a contract. But I think we have actually seen a trend now of these pre-exploration agreements actually being converted. I haven't just in I think Angola, you've seen quite a few contracts there. And I think Gabon is quite a high level of confidence of signing firm contracts with big players like X on BP, etc. So I think the strategy of companies deploying these agreements, it does appear to be working. I think there's also a point to me made there. Anybody tells you that IAR, they just technical exploration agreements or MOUs, don't read too much into it. You could just say, look, they're actually outturning into real exploration contracts. Excellent. I mean, that is really interesting. Now, I want to just sort of round this conversation off and we always look at a short-term look into the future. So six to 12 months. And Roderick, maybe we'll start with you, but is there something that you want to highlight that is happening in the next six to 12 months? It could be in a specific country, it could be it could be anything, but you want people to pay attention to and then move to death. Yeah, I think probably it's a big theme that underpins everything we've discussed today and that is the sort of the relative attractiveness of Africa globally. is improving, I mean, not just an oil and gas, but we've always talked sort of economically as well about Africa carrying this perceived risk premium where, you know, it was risky for foreign investors to go in there. And that's often, you know, it's a sort of controversial view, so often viewed as being rather unfair. And I think the current, you know, geopolitical and rest in other regions has highlighted that there are some huge opportunities in Africa for foreign investors to, you know, not only, sort of develop more diverse supply sources for energy and resources, but also, you know, carry out projects that benefit the local population as well. So I think that's, you know, a really important trend that's going to underpin a lot of the investment decisions being made by these big energy companies. Justin? Yes, I think we're going to see more ways to disrupt the sort of race to the bottom. So one was, you know, giving, you know, companies access to data, maybe that's a sweetener. I think keep an eye on Angola and see what they're doing. There seem to be quite forward thinking in terms of how they are progressing in terms of, you know, fiscality and also just allowing other mechanisms in place. So one of the things, we probably don't have too much time to talk about it, but one of the things is they're, they're, they're allowing, like, for instance, unification of different development areas. And what that ultimately allows you to do is recover costs from wherever within that, that wider, that bigger development area. So I think the logical progression of that is to kind of allow the recovery of exploration costs outside of development areas. In fact, you know, from your producing base wherever it might be within that country, you allow them, you allow the IOCs to recover exploration costs, you know, in the frontiers, et cetera. And what that would do is, to degree, it removes the negotiating power from the IOC and puts it back in the hands of, of the host country. Because now you can't really go in and say, "Hey, man, for me to drill a well there, it's super high risk. You're going to have to give me really good terms." The host country is, "Well, you don't really have any risk because you're going to recover the costs from us." And so that's more Norwegian thinking, I think. I like that. Well, thank you to both of you for joining us again. It's an interesting area to watch. And I'm sure that we will hopefully have you back on sooner than we had before to talk about this. To thank you very much. Talk about success. Thanks. Talk about success. Talk about success. Yes. Thank you. Thanks, guys. Thank you guys.