Tuesday, March 28, 2006

Deutsche Bank Report Says ERHC May Benefit From Block 1 Find

In a report whose wider circulation is sparking a modest rally during today's sharp decline in the share price of ERHC Energy (OTC BB symbol: ERHE), Deutsche Bank analysts said yesterday that ERHC, Anadarko and other companies in surrounding blocks may benefit from the rumored discovery of a billion-barrel oil reservoir by Chevron in Block 1 of the Nigeria-Sao Tome and Principe Joint Development Zone.

The report comes as well-known energy consultants Wood Mackenzie confirms to Deutsche Bank the size of the find at Chevron's Obo-1 well in prospect A-1, which is close to the midline between ERHC/Sinopec's Block 2 and is believed to overlap it.

Here is the Deutche Bank report:

27 March 2006

Sao Tome Deepwater
Obo-1 - Worth the wait

Paul Sankey
Research Analyst
(+1) 212 250-6137

Ryan Todd
Research Associate
(+1) 212 250-8529

A long delay - but worth the wait

After two years of wrangling over concession terms and the withdrawals of Devon, Noble Energy and Pioneer from block participation, the first well has been drilled in the Nigeria Sao Tome JDZ. While Chevron and ExxonMobil remain silent, news reports and Wood Mackenzie confirm a discovery, with initial estimates similar to Nigeria's Akpo containing 1 billion barrels of oil and condensate and 1 tcf gas reserves.

Expanding the deepwater play

Potential farm in negotiations in the neighboring Block OPL 257 may be keeping ExxonMobil and Chevron silent, but Obo-1 appears to be a success, with preliminary reserve estimates near 1 billion barrels. This is the first well drilled in the Nigeria Sao Tome JDZ and the furthest offshore, extending the deepwater Gulf of Guinea play and possibly opening the door for future success at Blocks 2, 3 and 4, which should spud wells by 2007.

Month of good news

The news comes in a positive month for ExxonMobil’s upstream. The company came to terms with Pertamina after years of delay for the development of Cepu in Indonesia, and today announced that final terms were reached with Abu Dhabi National Oil Company for the expansion of the massive Upper Zakum field. Each of these projects was absent from this month’s analyst presentation and should contribute to the projected medium and long term volumes growth.

It’s good to be small

Based on a development the size of Nigeria’s Akpo to the north of Obo-1, the present value of the development is $3.2 billion when discounted at 8% and $2.2 billion when discounted at 10%, based on a 2013 start up. While the discovery is good news for Chevron and ExxonMobil, smaller players such as Afren on Block 1 and participants on nearby blocks such as Anadarko, ERHC Energy Inc, and Centurion Energy may benefit significantly from future success. Risks include poor results in future appraisal wells, dry holes in nearby blocks, and the ever-present geopolitical risk associated with both Sao Tome and Principe and Nigeria.

First well in Nigeria Sao Tome JDZ potentially 1 billion barrels

While as yet unconfirmed by the companies, new reports confirm positive results from the drilling of Obo-1, the first well drilled in the newly opened Nigeria Sao Tome and Principe Joint Development Zone. Initial estimates put reserves at nearly 1 billion barrels of oil, with Wood Mackenzie comparing the resource to that of Akpo, located in the block just to the north of Obo-1. Akpo has estimated reserves of nearly 1 billion barrels of oil and condensate and 1 tcf of gas. Obo-1 is located on Block 1, operated by Chevron (51% interest), with partners ExxonMobil (40%) and Dangote Energy Equity Resources (9%, with Afren Plc owning 49% of Dangote).

Wood Mackenzie reports that the companies’ delay in reporting the well results may be due to ongoing farm-in negotiations at the neighboring block OPL 257. The blocks were originally awarded in early 2004, but have since been plagued by delays over contract terms and struggles with the Nigerian government over lease holdings by inexperienced Nigerian companies. Resulting disputes and delays prompted the withdrawal by US companies Devon, Noble Energy and Pioneer from their respective blocks.

Initial estimates of the resource size are comparable to the Akpo development in the block just north of Obo-1, with an estimated 1 billion barrels of oil and condensate and 1 tcf of gas. A resource of this size with an estimated start-up of 2013 and long term oil price of $40/bbl results in a valuation of $3.2 billion when discounted at 8%, or $2.2 billion when discounted at 10%. The discovery is a significant find for Chevron and ExxonMobil, but especially dramatic for minority players Dangote Energy Equity Resources and Afren (Afren owns 49% of Dangote).

As the first well drilled in the Nigeria Sao Tome JDZ blocks south of the existing Nigerian offshore blocks, the success is important. Success continues to expand in the prolific West Africa basins and extends the deepwater Nigerian play, which is an increasingly important part of the majors’ portfolios. A significant commercial find bodes well for future drilling on Block 1, as well as for Blocks 2, 3 and 4, which should spud wells by 2007. Participation in these blocks is dominated by smaller players, with names to watch including Anadarko, Addax (Swiss), Centurion Energy and ERHC Energy Inc., which has a solid stake in Blocks 2, 3, and 4.


1/Chevron, ExxonMobil, Dangote Energy Equity Resources, Afren
2/Sinopec, Addax/ERHC, ONGC, Equator, Foby Engineering, Momo Oil & Gas
3/Anadarko, Addax/ERHC, DNO-EER, Equinox, Ophir, Broadlink
4/Addax/ERHC, Conoil, Overt Energy, Godsonic, Centurion Energy, Hercules Energy

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