In February, the Ugandan Ministry of Energy signed a deal with three oil companies to develop its petroleum reserves.
The third is a lesser-known company, Tullow Oil (TLW.L). We’ve actually featured the UK-based explorer and driller early last year. The firm has been aggressive in its African exploration efforts, especially in the East African region.
Now, the oil being discovered is substantial – with reserves estimated at over 3.5 billion barrels in Uganda, based on limited drilling and testing.
This is on the back of Tullow’s estimated discovery of more than 600 million barrels in Northern Kenya last year.
These discoveries, while significant, also come with their own set of issues.
Put to the Test
To date, the three companies above have invested more than $3.5 billion in exploration, and have hired thousands of locals. But it’s going to take billions more in spending before the first drop of oil makes it to market.
Plus, the oil is located onshore, deep in the countryside – with no real infrastructure to bring the oil to market. Pipelines are nonexistent in countries where paved roads are considered luxuries.
Add to this the corrupt nature of government entities, red tape, unwritten regulations – and you start to see why this part of the world is truly pre-emerging when it comes to the energy sector.
But, that’s also where the opportunity lies.
Built for Challenges
Companies like Tullow are able to operate on the edge of chaos – and under less-than-favorable conditions – because they’ve made the effort to deal with unsavory and self-serving parties, in order to get to the prize.
In fact, the company’s push to publicly disclose where their payments have been directed is causing a lot of consternation among the locals involved.
There’s also the fact that these companies have a lot of incentive to make this African venture work.
The countries involved – Kenya, Uganda, and probably Tanzania and Somalia, as well – are cash strapped and heavily reliant on tourism for their foreign exchange. Jobs are scarce, and subsistence farming is still the dominant form of employment.
Add to this the lack of local energy sources (until now), low labor costs and the latest technology – and you have a perfect scenario for profits.
Another bonus is the location of the oil…
Yes, the fact that it’s onshore might be a challenge until pipelines are built. But the discoveries have come at relatively shallow depths.
Tullow’s Ngamia-2 well in Kenya encountered high-quality net oil pay at 39 meters, and net gas pay at 11 meters. (That is, where there’s enough oil to make it economically viable to drill for it.)
Deeper test wells have also been drilled to depths exceeding 3,000 meters. These have also shown economically viable resources at levels beginning at 50 meters.
Ultimately, just the drilling and exploring alone should make Total, CNOOC and Tullow a lot of money going forward.
Yet there’s an added bonus, too.
The deal that the companies signed didn’t just cover oil and gas discoveries. They’re also being asked to develop energy plants and infrastructure – from power generation to pipelines and transportation for future sales.
Based on current activity – and the timeline for building infrastructure in the form of pipelines from the interior to the coastal regions – I expect oil to really begin flowing in late 2015 and into 2016.
Companies like Tullow are relatively small and trade under the radar. They’re firmly entrenched in Africa, and offer a nearly pure billion-dollar play on the future of African oil, something that few investors are focusing on today.
And “the chase” continues,