This regime of low oil prices has seen a lot of wild cat explorers like you in deep crisis. May we know what is keeping you driving? We have always been driving efficient business processes and that has seen us afloat when our peers are sinking. Having said that, I won’t also underplay the challenges we face as well. Every company which is concentrating on exploration in these times has serious problems and challenges.
So we have faced our challenges; and what we are trying to do, of course, is to ride them because we believe that in every adversity, especially a business adversity, opportunity presents itself. It is the opportunity side of it that we are trying to exploit at this time. So, we are still here. We are still kicking, and, like I told you before, oil prices are cyclical. We have experienced a downturn where the oil prices has gone down from over $140 per barrel for Brent to a stage where we are fearing that it might fall below $40 per barrel. We have come back up where we are beginning to see a bit of stability between $50 and $60. So, we see deals still starting to be remade. If we have an increased period of stability for the rest of the year, I think most the companies would be alive.
How has the situation affected your commitment and delivery to your shareholders? Oh, it hit our share price badly, and what we have done is to chart our sharp drop in valuation against what we call our peer companies and they are virtually all the same. It hit us in the same proportions. We all come from different places but there is the same proportional downward movement is what we all have suffered. So, at least we can console ourselves that the market didn’t punish us worse than it punished our peers. It is just that same group range that all of us have. The challenge now in this difficult environment is to look for sufficient market catalysts to start bringing us back up; because this is a time we just announced that we have agreed on the location of our first well in Kenya, the Tarak 1. Not just that, we also have a possible second target, the Igoli 1.
This means that depending on what Tarak 1 brings, we may drill the Igoli 1 immediately. When you make this kind of announcement in a time of good oil market your share price spikes. But right now exploration as a whole is not an interesting area. So we made it and the share price spiked for a day and it settled where is started from. But before when we were preparing to drill in the JDZ, with every step towards drilling that you announced the share price goes up further. It doesn’t come down. It keeps going up till it gets to its peak. And just as you start drilling everybody will start watching and once you now make a spectacular discovery it shoots up again.
But this time, there is no general investor appetite for exploration. So, we have had this situation which should be a major landmark, and it still hasn’t had the effect that we expected. But the thing is to continue, and we are continuing. Your key exploration enclaves in the JDZ and EEZ appear to have surprised a lot of explorers in terms of protracted activities with little outcome. Do those concessions still hold attraction for you? We have stayed.
We have always reiterated our commitment to our shareholders in the JDZ. We are still there. Certain parties have been wearier of staying back in the JDZ, but we have kept faith, and we have stayed. At early stage of exploration, we realize that sometimes it takes long time and many trials to make a big hit. The geological and geophysical studies in the JDZ remain very promising. Indeed they have been enhanced by the drilling campaigns that went on. Three wells so far have been drilled in Block 1 in which I must say that ERHC has no interest whatsoever. However it is one of the most promising geologies in the region. Discovery was made there even though the question of commerciality still remains up in the air.
We drilled five wells with our partners in JDZ Blocks 2, 3 and 4. As we have announced, we made no commercial discoveries of oil. We have a bit of gas discovered, so there is no commerciality to speak of, not to talk about development and production, which is where all the disappointment comes from. However, having done that drilling work, it enabled a greater understanding of the subsurface in the region. And the question now is mobilizing funds, seeking the parties with investor appetite for further drilling in the region with better understanding that we have now. Of course, there are certain questions that arise in this case which will be discussed with the authorities.
One of them is revising the fiscal terms on which exploration goes on. That discussion has been ongoing for some time because we have gone from a very attractive and very prospective province to a province where it is now recognized that the discovery might not be as easy as it was thought before. And there should be reappraisal in terms of re-evaluating the data and probably coming up with a different interpretation on how to go on if we are going to make a commercial discovery which we still think is possible in the region. That is one of the discussions we held. The other one, of course, is that at a time of relatively low oil prices (I used the word relatively, that is, relative to where prices reached in the last upward cycle), in that time, deep offshore exploration is one of the activities that have been pushed back in the list of priorities.
So you have the additional challenge of interesting investors who have the pocket and appetite for this in a constricted market. That is why I said the first discussion would be to make fiscal terms that govern exploration attractive, so attractive that even in these times people would find it attractive enough to defy the risk of low price regime and other challenges in the industry and invest in exploration. So, all that would have to go on but we haven’t given up. It is going to be a gradual process. We don’t expect a resolution in weeks or even in months. It is something we have to be patient with.
That is as far as the JDZ is concerned. In the EEZ, we signed a production sharing contract last year just as prices started to tumble. You talk about timing but it was a negotiation that had gone on for two years. So it had come to an end and there were arrangements to bring in a big offshore operating partner but unfortunately it coincided with when prices were going down. So the partners we had lined up were no longer in a position to farm in after we signed the PSC. Yes, that PSC is valid. We are currently discussing with the National Petroleum Agency of Sao Tome our budget for the year particularly in the light of low oil prices. We have the first exploration period of four years. So we are discussing with them on what work could be done in this first year and what budget to put up for it.
May we have a little highlight of your expectations from the JDA on the revision of fiscal terms for the JDZ? Basically, you know these so called discussions have been led by the JDA and I can’t say I am speaking for them. If you look at the PSCs which are already published you will see that they all modelled after Nigerian PSCs. You see the nature of signature bonuses that are almost running into $100 million. With that kind of signature bonuses, you understand that you are looking for the kind of prospectivity that you have in Nigeria.
However, things have changed. There are no billion barrels oil discoveries to justify any of these expectations. Before the wells were drilled the expectation was that there was going to be big discoveries. And all the G & G studies pointed to that. So, companies were willing to pay those high signature bonuses at the time. But now, we have drilled and no commercial discoveries have been made. You have eight deep offshore wells to speak of. There was a discovery in Block 1 but again the question of commerciality is up in the air with Chevron and Total having pulled out even with the discovery they have made. It is not our block so we don’t have the exact figures, but that should be an indication whether is commercial for the majors.
Then we have our three blocks where we drilled five wells and no commercial discoveries at all were made: just a little non associated gas. So, from that point of view the commerciality has changed. Can we still command the kind of signature bonuses that are contained in the current PSCs if we are going to attract new partners? Well, I don’t think so, particularly with the current price of oil. Like I said, it is not our decision. It is a decision ultimately the JDA has to make and the JDA is a very reasonable organization.
It is staffed with very efficient and experienced oil and gas people. So it is something that is definitely going to be looked at very seriously if you are going to attract new people in the current environment and given the subjective history of the JDZ. Then you look at all the other fiscal things like social projects and all the commitments you have to make from upfront money some of which are not cost recoverable, then you begin to ask questions again about the commitments in the current PSCs. Are these sustainable with what we know now and where we are today? These questions are definitely going to be asked because you are now seeking to attract people in a very constricted market. The external environment is bad and the subjective environment has been found to be not near as attractive as it was before drilling. So are you going to continue with these same terms or are you going to do something else, something much more attractive to companies?
So what is actually responsible for the misleading pointers about the hyped prospectivity of the JDZ? What was wrong with the data? What we blame is the state of technology so far. The science hasn’t yet been discovered where you can predict with any form of accuracy before you drill that there is oil. There is no science for that. People have experimented with what they call direct hydrocarbon indicators. These aero-magnetics and gravity studies we all do now, as a matter of fact before we do seismics, were initially announced as they were going to change the state of play; that they could determine there is oil in place before you drill. But it turned out that that never happened.
The science was not that. In fact it has moved back to a position before seismic. All it does now is to focus your seismic. So, seismic remains the main thing now. In layman’s terms what does seismic tell you? It simply tells you that there are structures in the ground that could be oil bearing structures. That is all it does. It doesn’t tell you these structures have water in them, or they have oil, or whether the oil is still there or whether it has migrated. It just gives you indication of existence of structures that could contain oil. So the most important role of seismic is that it can rule out completely that there is oil here. It can tell you that there are no oil bearing structures here. But it doesn’t rule it all.
All it tells you is that there could be oil. That is all it does for you. Now you are given indications that enable you draw all forms of analogues. So the geologists can tell you that if these structures contain oil that is how much oil it should contain. That is the big case. So the only way you could prove what we call scientific gestimate is by putting a rig on the ground, and until you put that rig you don’t have oil. The ratio of success to failure is still very high in favour of failure of course. Apart from those doing shale, in conventional resources the rate is about 61 percent failure. That explains why oil is very expensive when you bring it up the ground, and people make money because all we don’t see are the failures. And all the reserves we have recorded so far are the spectacular successes because everyday people are drilling failures. But why do people continue? It is because one commercial discovery can pay for the past failures.
So it is like a big gambling operation. It is gambling and when you strike it, it wipes away all the tears. The Gulf of Mexico has the same thing. They have some of the best geologists and scientists in the world; and for many years, they kept recording failures until eventually they got it. It was the same thing in Ghana until the Jubilee Field discovery. Ghana was completely written off. For many years Kenya was written off. Kenya is now where Tullow has made one of its biggest discoveries, and it is holding on to it even as it is exiting other blocks. So it just takes one exploration. And from what we understand, and again I don’t speak for them, Tullow worked on wells that Shell had drilled long time ago. And using new technology they took another look at these wells, looked at the geology and then went back in. So, like I said at the beginning, when you have wells actually drilled it is an advantage even if they fail; because it is not going to be theory anymore.
You will understand what is going on in the subsurface. You are not just talking theory based on seismic anymore. You now understand how that place is. And of course when you make a mistake you then know what to correct for in the next move. Now what is your next move given that your shareholders want you to continue with the JDZ assets? Like I said, it will take a few months if not years to get a resolution because all the wells have failed. That is the reality. We have contractual partners that we are going to review. You are working with two governments, not just one.
Government has changed in Nigeria now; and there have been some movements. When the government changes in Sao Tome there will also be some movements. JDA is a very dynamic organization, I must say, and there has been some continuity even if people have changed. So, I give them kudos for that. However, all this means that it is a patient process. In a best case scenario, this is what will happen. Certain partners will leave.
Certain partners have already indicated their intention not to continue not because they don’t believe in ultimate discovery but these things are sometimes commercial decisions. For instance, if discovery here is gonna take some 20 years, then let me focus my resources in something I can discover in two years. So, they are commercial decisions. Some of the big players there like Total have just done two wells and pulled out very quickly and said, ‘ok we are not going to continue.’ So, what you are going to try to do is attract new partners to repopulate the PSCs, or even sign new PSCs depending on what the parties agree.
So, the first thing: how do you attract new partners? Your new partners in deep offshore will want to see data. So, the data we collected in all these operations we have to put into a data room, and you set up a process where people would come and look at them. You may probably put up a time frame when people can come and look at the data. And then the people may say, ‘ok we are interested.’ So, while this is going on or even before that you may have agreed in principle the terms that you are going to offer. And like I have said, you have to look at the terms you already had and say, ‘are these practical given the current realities?’
-In this interview, Chief Executive Officer of America based oil firm with strong Nigerian ownership content, ERHC Energy, Mr. Peter Ntephe, explains to Deputy Business Editor SOPURUCHI ONWUKA the impact of the downturn in oil prices on wild cat explorers. He declares that the company is on track to a major breakthrough, and gives details of ongoing renegotiation of production agreements in the joint development zone (JDZ) between Nigeria and Sao Tome and Principe