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From Madagascar to the Faroes, oil companies seek out the last frontier

The Business: From Madagascar to the Faroes, oil companies seek out the last frontier

“…Royal Dutch Shell has appointed 80 staff to a new exploration division centred on exploring the waters around the Faroes. That is ten times what it should need to manage its one exploration licence, pointing at a push in the region.”

Sunday July 24, 2005

By: Richard Orange

ON THE face of it, there’s nothing much to link two places as far-flung and disparate as the Faroes and Madagascar. But these islands are two key locations that feature in what looks likely to be the last great land grabs by the international oil industry.

Exxon Mobil last week surprised its peers by buying up rights to explore 13,100 square miles of northern Madagascar from UK company Sterling Energy, which will keep a 30% stake.

The US oil firm is throwing all its weight at exploring the island, which until last year was largely dismissed by Africa’s oil men. Last year it bought into two blocks owned by Vanco Energy, and the island is expected to open a new licensing round later this month.

Meanwhile, Royal Dutch Shell has appointed 80 staff to a new exploration division centred on exploring the waters around the Faroes. That is ten times what it should need to manage its one exploration licence, pointing at a push in the region.

The major oil companies have been grindingly slow to react to the industry’s present paradox: they have huge cash flow, but, with most of the Middle East stubbornly closed and Russia rapidly closing, precious few places to spend it. Signs are they are now becoming more adventurous.

Derek Butter at oil industry consultants Wood Mackenzie says: “Exploration budgets are on the rise and there are several companies exploring in places where you haven’t seen much drilling in the past. They’ve got cash coming out of their ears and some of the money is leaking throughinto some more off-the-wall ideas.”

Harry Wilson, Stirling’s chief executive told The Business: “The big companies are waking up and pushing out their risk profile. Just a few years ago I wouldn’t have had anybody join us in Madagascar. It’s not moose pasture [acreage with no chance of oil]; it’s not prospective; it’s just pure frontier exploration.”

He sees the major oil companies piling into East Africa over the coming year, taking interest in oil licences being offered in countries as unlikely as Tanzania, where Shell already has licences, Kenya and Mozambique.

UK gas group BG Group, for example, says it is looking at taking its first positions in East Africa, targeting the shallow water, which is expected to hold gas, while the deeper waters appear more oil prone. An executive said: “There could be an oil kitchen that’s never been drilled in deep- water East Africa.”

East Africa was ignored in the past because it was both further to markets and less prospective than theWest, but it is one of the very few under-explored areas left. In West Africa, conflict has left the waters of Sierra Leone and Liberia relatively ignored, drawing interest from Spanish oil major Repsol and Australia’s Woodside.

Of the super majors Exxon Mobil is the most active in the chase for the next big province. The others have tended to leave frontier exploration to smaller, more entrepreneurial companies like Stirling.

Exxon is also drilling the untouched deep waters off Columbia’s Caribbean coast and a new basin off Canada’s Newfoundland alongside Chevron. BP cites its well in the Black Sea off Turkey as its key piece of frontier exploration. As well as looking at the Faroes, Shell is undertaking a study of the oil potential of Ukraine, which, because of Soviet oil riches elsewhere, was underexplored.

It seems like stretching the “frontier” definition, but Shell includes its work in Saudi Arabia – hardly an untested province – in its list of new plays. It is exploring the “empty quarter” – the first time one of the international oil companies has been given the rights to explore the desert kingdom since the Saudi oil industry was nationalised.

Iraq also has huge tracts of unexplored land in its western desert, and international oil companies are only just being given access to new territory in oil producers such as Algeria and Libya.

Even so today’s land grab seems a little like fighting over scraps. Since the mid 1990s, the most exciting new opportunity for the industry has been drilling wells in ever-deeper water.

But Jason Nunn at PFC Energy points out that because the world has produced 16bn barrels of oil a year more than it has found since 1993, even if today’s frontier drilling found another play that size – about 50bn barrels – it would plug the gap for only three years.

Nunn said: “The difference between now and 20 years ago is that then they had geologists sitting in a room at all the companies saying, ‘We haven’t been to Yemen; we haven’t been to Chad’.

“Now you’ve still got a lot of geologists sitting in rooms scratching their heads, but there aren’t many places like that left.”

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