Measured expectations

Angola

TOGY talks to Carlo Sanders, Repsol’s country manager in Angola, about the company’s ownership of Block 22 in the Kwanza Basin, investment strategies and marginal fields. Repsol is a Spanish energy company with a global reach and interests across the energy spectrum.

Repsol is a Spanish exploration and production company present in 28 countries around the world. It employs some 40,000 people in its international operations and has operating capital of USD 7.6 billion. In Q2 2016, 11% of the international company’s exploration spending was in Angola.

• On the Kwanza Basin: “When the 2011 bid round opened, everybody was incredibly optimistic and now everyone is incredibly negative, but the reality is somewhere in between. We think that there is still potential in the Kwanza Basin.”

• On investment: “When the oil price is high, you can take more risks because people are more open to investing money in exploration. Now, with the low oil prices, everyone is re-evaluating their portfolios and their exploration strategies.”

• On marginal fields: “In the last bid round, the original contracts were based on expectations that reserves would be equal to Brazil Santos Basin, which had huge discoveries of several billion barrels. We now know that the Kwanza Basin does not have these large traps. This is why the new decree of marginal fields – and associated adapted economic conditions – and by which I mean smaller, is attractive in Angola.”

• On oil prices: “Production in the world is now almost at full capacity due to the price war. With the exception of shale oil, there are not many countries that can increase production.”

Carlo Sanders also addresses plans for exploration in Kwanzaa and the use of natural gas as an intermediary between oil and renewables. Most TOGY interviews are published exclusively on our business intelligence platform TOGYiN, but you can find the full interview with Carlos Sanders below.

What are the updates about Repsol’s operations in Angola?
Repsol is relatively new to Angola. We came five years ago in 2012 and acquired three blocks in the Kwanza Basin bid round. We operate Block 22, and we were partners on Block 37 with ConocoPhillips and Block 35 with Eni. In total, we drilled six wells and made a number of interesting discoveries, but there was nothing sufficient enough to be economical. We had mixed results.
Blocks 37 and 35 were relinquished in 2017, but we still operate Block 22. We have an extension for another two years, and we think there is still exploration potential. We still have prospects for drilling, but under the current circumstances we are re-evaluating our situation. We have bought some time to study the basin. At the moment, it is purely exploration. Sonangol has extended our exploration activities for two more years.

What are the prospects for the Kwanza Basin?
All of the companies in this basin together and spent USD 6 billion-USD 8 billion to acquire a lot of data, which is available to be studied. So it is unfortunate that many are leaving. These wells are complex and often have unconventional reservoirs. We decided to study them to re-evaluate how we see the Kwanza Basin.
When the 2011 bid round opened, everybody was overly optimistic and now everyone is overly pessimistic, but the reality is somewhere in between. We think that there is still potential in the Kwanza Basin, especially in our Block 22. We still have a drillable prospect, and we have to figure out how to continue.
At the moment, we are doing a large regional joint study on all the available wells and seismic information in close co-operation with the concessionaire. Based on those results we will evaluate the basin and see how we will move from there. That will take around two years.

When you came in 2011, oil prices were high and continued to rise until 2014. In this new reality, how difficult will it be to monetise a discovery?
When the oil price is high, you can take more risks because people are more open to investing money in exploration. Now, with the low oil prices, everyone is re-evaluating their portfolios and their exploration strategies.
We do not have the same expectations as last time, but we know a lot more about how this basin works. We think we know where to look for oil and where for gas and what to expect. At this moment, we can make a more educated decision to drill or not. Monetisation will depend on the contracts.
In the last bid round, the original contracts were based on expectations that reserves would be equal to Brazil Santos Basin, which had huge discoveries of several billion barrels. We now know that the Kwanza Basin does not have these large traps.
This is why the new decree of marginal fields – and associated adapted economic conditions – and by which I mean smaller, is attractive in Angola.
It also depends on the long-term oil price trend, which nobody knows. If you make an interesting discovery, you will produce the first oil in about eight to 10 years. You have to try to imagine what the oil price is going to be at that point in time and also in the following 20 years when you are producing. Historically this has proven to be an enormous challenge.
When oil prices go down, the costs of rigs, services and materials also go down. Everybody is looking for a new balance between the oil prices and [development] costs. It also depends the type of discovery. Unconventional reservoirs are difficult because you do not know how they are going to behave in the long term, how many wells you will need to develop and what facilities you will need.
When you have these kinds of prospects, you have to discover first and study the reservoir before you can make a sensible prediction about the economics. Being pre-salt makes it even harder. Fortunately we have a lot of experience in Brazil, and we brought that knowledge to Angola.
As such, what we found was not surprising. We knew what to expect and where we had the best chances to find oil. We were more or less correct. However in the Kwanza Basin, we drilled further offshore, geologically, than we ever did in Brazil and found things that they have not studied yet. So now, Brazil is learning from Angola again.
Some young people do not realise the boom and bust concept of this industry. They entered the oil industry in the middle of the boom and they think it will last forever. If you know oil’s history there has been a boom and a bust about every decade.

Does Repsol need a high oil price or a consistent oil price?
A consistent oil price is always better for the industry than wild fluctuations. It is interesting to try look at the long term. Due to global GDP [increases] and development, the demand in the world is gradually rising at 1 million to 1.5 million bpd every year. Production in the world is now almost at full capacity due to the price war. With the exception of shale oil, there are not many countries that can increase production. At some point, supply and demand are going to cross again in the future.
The trouble is finding where the industry can increase production capacity in the future when supply is short. The big question then will be if shale oil is enough. Worldwide, conventional oil has been declining for years, and shale oil was required to keep up with the demand. We do not know what is going to happen in the next 10 years and what effect the current cut in investments will have.
At the moment, if the industry continues to cut investments the problems will grow larger and the price of oil will swing more extreme in the future. These are the market fundamentals. World oil price, however, has more than not been dominated by world politics, which are unpredictable. I expect that there will be a cap on future oil prices, somewhere between USD 60 and USD 80, which is the variance of prices at which shale oil and other unconventionals are profitable. That could be the next ceiling, and it will be difficult to break through for a while.
But then again, every prediction about future oil prices have almost always been wrong. It is something inherent to this industry, and we have to live with that uncertainty.

Sonangol believes that there could be significant gas reserves in the Kwanza Basin. Do you believe this as well?
Yes, we do. The further offshore you go, the larger gas reserves become. There are, potentially, very large gas discoveries out there. The problem is that they need to be very large in order to be economical.
Additionally, some of them are complicated by carbon dioxide content. There are structures out there with huge amounts. We had a structure in Block 22 where we had the equivalent of 1.3 billion barrels of oil, but with a lot of carbon dioxide. We know big structures exist, but the trick is finding them when they are filled with oil or gas and not carbon dioxide.
In the Cobalt discoveries in block 20 and 21, they found a reported 5 tcf [142 bcm] of associated gas discoveries. There are a lot of gas discoveries in the Kwanza Basin, but it is a matter of making them commercially viable for the country. According to the PSC contract, the JVs do not have any rights to the gas, so this is an issue that belongs to Sonangol.

What is the role of gas in the transition from coal and oil to renewables?
Gas is a lot cleaner than coal or oil. You could move from oil to gas without having to change the society, current infrastructure or cost too much. As such it is often proposed as transitional phase to reach environmental benchmarks in the short term while in the meantime developing cleaner policies.
There is a lot of gas in the world, and it is relatively cheap and easy to transport. Policies are not made by the E&P companies. This transition will be driven by government regulations and international agreements on environmental issues, but logically, it is something that we can see happening. The strange observation is that environment is a luxury issue. In the modern world, environmental issues became important once people had job and income security, housing, healthcare and education. People start to worry about the environment once the basics are taken care of. As we have observed over the past decades, the more economical development you have, the cleaner you eventually become. In the beginning, you go through a dirty basic industrialisation period where cost and price dominate everything, but once a country starts to develop further, it starts to become cleaner again.
In Angola, we do not use a great deal of gas for energy generation or factories, but it is something that could be put into place for the future. An interesting product, aside from power generation, is in fertilisers. The agricultural potential of this country is enormous, and it has been [a major sector] in the past. We did studies with farmers in rural areas and realised the problem limiting production was the difficulty and expense of getting fertilisers.

Is Angola moving towards a market that is characterised by its maturity like the North Sea or the Gulf of Mexico?
A lot of effort is being put in around the world to try and maximise enhanced recovery. If you can improve your efficiency by 1% or 2% of your production, it is a huge margin. Companies here are trying to maintain their plateau, but they are not growing.
Angola is not yet a mature market, as a lot of the newer fields will take time to put into production. If you do not continuously keep adding reserves to your production line, sooner than later it will decline and then it takes many years to explore, discover something and put it on line again.
Five years of reduced investments can have an enormous impact. If you stop exploration for a few years there will be a gap in production that you cannot fill in the future. This is why the Kwanza Basin remains so important for Angola. It was supposed to add the reserves for the future, but that has not worked out as expected.

How does Repsol perform geological studies independently?
We do all our studies in-house, and we try to work closely with our partners and the concessionaire.
We also flew in a big seismic computer, which weighs 10 tonnes and is the size of a small room, from London. It is a copy of one of our super computers from Houston and is now in the PK Sonangol building. It is called Kaleidoscope and is used to run very sophisticated calculations in seismic imaging.
The studies are not only for Repsol to gain more insight in the basin, but also to transfer those technologies and workflows to Sonangol, the concessionaire, so that it can do this work independently. With most of the operators now gone in the Kwanza Basin, we are few left to do the regional studies anymore. We have the expertise, based in Brazil, and we thought we would do this together with Sonangol. The imaging of the seismic is difficult and complex, and it can sometimes take three to four years to keep polishing and reprocessing until the image comes out, and you actually know where to drill.
Every time you go to another country as an oil company, especially here, you are requested to train local staff and to share your know-how. They learn from us but we also learn from them how they do business, how their company operates and how the business culture differs.

What is the future of Repsol in Angola?
At the moment, we are trying not to look too far into the future. We are taking it step by step. Our next step is to drill the next well and see what we find. Once you make a discovery, you can start thinking about the future and plan for production. In that case, we can grow our presence here and think about expansion. If we have a dry well, it is probably the end of the exploration efforts.
There is no real time limit because we have a two-year extension to decide if we want to go into another three-year exploration phase. But you have to start preparing now if you want to drill within two years.
Within two years, everything can look different. Rig prices are a good example of that. Two years ago, some wells were USD 200 million-USD 250 million to drill, mostly due to rig prices. Nowadays, you can can drill that same well for USD 50 million-70 million. You have to be very flexible and open minded to adapt the moment you see opportunities.

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