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Challenges, Capital and Building Independents in Africa
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The Role of Independents in African E&P
- Actually what is the role of Independents?

There will always be a role for Independents in the upstream Oil & Gas industry

Independents are Nimble and Entrepreneurial – act like R&D departments for Big Oil as with
other sectors such as Technology and Pharmaceuticals whereby larger players will make an
acquisition once an asset is technically and commercially derisked

Independents have a much higher risk tolerance than the Industry Majors – prepared to
invest time and resources in areas that are underexplored and carry high geological risk

Majority of large frontier discoveries in Africa in last decade were made by Independents

Majors cannot and should not be entrepreneurial or risk takers – business model is process
driven i.e. buy assets or farm in to acreage that has been technically de-risked by
Independents
-
Entrepreneurs would rip major organisations apart
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Successful Independent E&P companies in Africa in the past decade
Major discoveries in Sub-Saharan Africa over the last ten years
Gas discoveries
Oil discoveries
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“A rising tide lifts all boats” – a decade of ‘Eazy’ living for the industry
Major events and real world oil prices (inflation adjusted for USA CPI)
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During the ‘Eazy’ Decade the Oil & Gas Majors had access to almost
unlimited funds - and this in turn trickled down to Independents

For this Decade the Majors have been paying 3% - 5% dividend annually
•
Big draw for worldwide institutional investors – must have for most pension funds
•
For example the BP dividend comprises 10% of all dividends paid on the London stock
market

Majors paid for dividends by increasing borrowings tied to increasing oil prices

Increasing oil prices also generated substantial free cash flow for the Majors which was used
to fund expensive CAPEX programmes

Lower oil prices make borrowing difficult so dividends now being funded by asset sales and
from free cash flow, resulting in significant CAPEX reductions

Existing independents now vulnerable:
•
Independents traditionally farmed out assets or were taken over by majors
•
For the next 5 years this model will be increasingly difficult due to a lack of majors’
currency for such transactions
•
Excess funding has dried up and this ‘trickle down’ from majors has ceased
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Challenges being faced by Independents in Africa

Decline in exploration success

Development difficulties

Lack of infrastructure

Political risks increasing

Shale oil “revolution” in North America
− Hoovering up capital away from African developments

Africa now out of favour
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High oil prices attracted significant capital to Africa E&P
leading to sharp decline in Exploration success rate
•
World class discoveries in Ghana,
Angola, Mozambique, Kenya attracted
significant capital to Independents
operating in the region
Early exploration success has not
been sustained and from 2009 to 2013
the commercial discovery success rate
fell from 24% to 5%
Commercial Discoveries Success Rate SubSaharan Africa
100
25%
90
80
20%
70
60
15%
50
40
10%
30
20
5%
10
0
0%
2008
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2009
2010
2011
2012
2013
2014
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Commercial Discoveries (%)
•
High oil prices during the ‘Eazy’
Decade has been catalyst for
expensive
deepwater
drilling
campaigns in sub-Saharan Africa in
the last decade
Number of Exploration Wells
•
Sub-Saharan Africa development difficulties
Volumes produced from same discoveries
Volumes discovered, 2004-2014
18,000
Rest of Sub Sahara Africa
16000
Ghana
14,000
Ghana
Tanzania
14000
Angola
Mozambique
10,000
8,000
12000
Production, mmboe
Volumes discovered (mmboe)
Nigeria
12,000
Rest of Sub Sahara Africa
Tanzania
Nigeria
Angola
10000
8000
6,000
6000
4,000
4000
2,000
2000
Production, mmboe
16,000
18000
250
200
150
100
50
2010 2011 2012 2013 2014
0
-
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
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2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
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North American Shale Revolution hoovering up capital
from Africa
Shale Oil “Revolution” North America
• Driven by advances in technology and higher oil prices
• US Oil Production in 2015 forecast to reach 10 million bopd (77% increase since 2011)
• Capital is becoming scarce for African exploration as available resources are reallocated to
onshore America
Onshore American Shale
African Exploration
U.S. Crude Oil Production
million barrels per day (MMbbl/d)

No Exploration Risk
Exploration Risk
12
10.001
10
 No Logistics Risk
Logistics Risk
8
6
 No Political Risk
Political Instability
 Abundance of Quality
Infrastructure already in
place
Lack of Quality
Infrastructure
5.65
4
2
0
2011
2012
2013
Production
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2014
2015
Forecast
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OIl Production (Barrels per Day)
Well 5
Well 4
Well 3
Well 2
500
Well 1
Long tail of US Shale Oil could be a paradigm shift
Typical Decline Curve for Shale Wells
400
300
Potential paradigm shift
200
100
Long tails coming from shale oil?? Are these wells recharging??‎
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0
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3
4
5
6
7
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9
10
11
12
13
14
15
16
17
18
19
20
Years
•
High rate of initial production allows investors to recoup the cost of well drilling in initial 1-2 years of production
•
This is followed by a potential 20 year long tail of production supported by enhanced recovery offering investors an attractive annuity
•
Could US shale wells be re-charging in the long tail of production? We only have 8 years’ performance history for new high tech shale wells but
observers are amazed at how tail productivity is so far exceeding all expectations
Current generation of thousands of shale wells in North America have potential to deliver long tail
production and income streams above expectations in next 10 – 20 years
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Opportunities for Independents in Africa
 There will always be opportunities for entrepreneurial and nimble Independents who can adjust to the
new industry landscape
 If funding can be secured it is a great time to buy assets as the Asians and Majors are no longer
chasing assets
Opportunities for Independents in Africa:
-
Production orientated and / or low cost onshore projects
New private equity backed Independents with capacity to buy onshore and offshore production
attractive prices (e.g. Nigeria)
Opportunities for Independents outside Africa:
-
P/E backed acquisitions of North Sea production assets being sold by Majors
South American production assets (e.g. Columbia)
RTO- Reverse Takeover Transactions
-
-
Huge opportunities in today’s market for those successful management teams in the 1990’s who
developed E&P’s in a tough environment to now reverse their Newco vehicles into many sleeping
and underperforming Independents in the $500m - $3bn market cap range
e.g. T5 Oil & Gas Limited - led by 5 former Tullow Oil directors now actively looking at RTO’s
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Future for Independents in Africa – Tied to Oil Price

Fundraising capabilities of Independents in the coming years will be tied to direction of oil price

Difficult to predict oil price movements in next couple of years but one should keep in mind the oil
price collapsed by 60% in 1986 after Saudi Arabia held production and chased prices down
•
Could history be repeating itself?

In 2014 Saudi’s are holding production and competing on price in response to declining demand –
we believe Saudi agenda is to influence Iran

USA has become second global swing producer to rival Saudi with daily output on target to surpass
10m bopd – we believe USA agenda is to influence Russia

USA economy benefits from lower oil prices and Saudi’s can withstand lower prices due to massive
reserve account

We believe that until political tensions in Russia and Iran are resolved it will be difficult for oil prices
to recover

There will always be exciting opportunities for Independent Oil and Gas companies who remain
nimble and entrepreneurial
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