Emerging new twist in Namibia’s black gold dream hunt

The excitement surrounding Namibia’s oil industry has been palpable since major discoveries were made off its coast in recent years. The government envisions these resources as a means to stimulate economic growth, create jobs, and elevate the country’s status on the global energy map. However, a new challenge has emerged that could complicate their plans: an unexpectedly high percentage of gas found in the fields.

This new challenge coincides with a time when Namibia has entered a pivotal stage in its ambitious oil exploration and production efforts, as the state-owned National Petroleum Corporation of Namibia (Namcor) has commenced to drill three exploratory wells in partnership with international oil companies. This phase, set to continue through the first quarter of 2025, aims to assess the continuity of hydrocarbon flows from recent discoveries that have sparked optimism about the country’s potential as a significant oil producer.

“The wells are aimed at understanding the continuity of hydrocarbon flow from recent discoveries as well as finding new ones. The drilling campaigns will be conducted with global oil and gas firms Galp in PEL 83, Chevron in PEL 90 and Rhino Resources.

“Namcor is investing in seismic data acquisition and appraisals in the Orange, Walvis, Namibe and Luderitz Basins. We are doing a detailed study on the geology within the Walvis Basin and we are finalizing a transaction with Chevron for them to enter the Basin. We continue to do more work in our least explored Basin, the Luderitz, where we are seeing many hydrocarbons prospective and flows from our seismic data,” Victoria Sibeya, Executive: Exploration Upstream told attendees of a technical workshop during African Energy Week (AEW) 2024: Invest in African Energies last week.

Namcor is also planning to drill more wells with ExxonMobil in block 1711 of the Namibe Basin to de-risk reservoir quality of a gas discovery made in the area.

Initial assessments indicated a promising yield of oil; however, recent geological surveys have revealed that the gas-to-oil ratio is higher than anticipated. This shift poses a significant challenge for Namcor and its partners, who must now consider the implications of this gas presence on their operational strategy and infrastructure requirements. The need to install additional facilities to manage and process the gas could potentially escalate costs, raising concerns about the profitability of the projects.

Industry analysts warn that while natural gas can be a valuable resource, the high gas content may necessitate extensive investments in infrastructure, such as gas processing plants and transportation systems. These additional requirements could deter investment or delay the timeline for production, further complicating Namibia’s aspirations to become a key player in the oil market.

“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, Total, Galp and Norway’s BW Energy, and wants Namibia’s national oil company Namcor to 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 have been quoted saying.

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 US$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.

“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.

Additional reporting by Reuters

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