Afroil - Write-up - Afren sets out step-change

Afren sets out step-change

The AIM-listed company made its start in the marginal fields of Nigeria but is nowlooking at larger projects, as it aims to become a mid-sized playerBy Ed Reed

Hopes are high on Ebok’s prospects, with reserve figures expected in March
Financing could pose problems but Afren has done it before
The drilling on Keta was disappointing but gives an indication of Afren’s likely next moves

Afren has built up a substantial business in a short period of time, focusing on a broad portfolio of interests around West Africa. The Alternative Investment Market (AIM) listed company has, though, suffered alongside many others as a result of the current downturn. The company has strong Nigerian links and it is here that it has focused. Rilwanu Lukman established the company, but has subsequently left in order to pursue his role as Nigerian minister for petroleum.

Ebok
The Okoru Setu project, in shallow water offshore Nigeria, provides the majority of Afren’s production but the company is continuing its development work in the country, with its Ebok field. Afren’s CEO, Osman Shahenshah, told Afroil that the company’s Ebok work would play an important role. Results from drilling on the field are “still being evaluated but it is significant – it could increase the size of the company by a factor of two, so it’s very interesting,” Shahenshah said. The company announced the completion of drilling on the field in early February but revealed little in the way of results, leading to some concern. “We tested two zones and it went very
well,” Shahenshah said. “At a minimum, we met our expectations [of 25-35 million barrels] but it could be substantially larger and we should know [by mid-March].” The development plan for the Ebok field, in which Afren has a 40% stake, would involve “somewhere between 14 and 17 wells over the next couple of years,” Shahenshah said. In order to develop the Ebok field, Afren intends to secure a new banking facility – in addition to its outstanding debts. Shahenshah said the company was in negotiations on a loan for Ebok, “which will be much larger than anything we’ve done.” Richmond Energy Partners’ partner, Keith Myers, told Afroil: “Ebok is clearlythe next big project, though Afren has released few details, and debt financing a development of this size in Nigeria will be a challenge.” Despite the current banking woes, the Afren CEO was upbeat, saying that banks that lend to African oil and gas projects “tend to be somewhat insulated from the global financial crisis.” While talks on the financing and the appraisal programme are still underway on Ebok, the expected size of a loan could be around US$200-300 million, he said. Afren has debt of around US$400 million already, but the company’s CEO appeared confident with these loans for properties in Cote d’Ivoire and Nigeria amortising. “We’ve already started paying them down. [This will continue] over the next two years.”Further drilling on Okoru Setu is unlikely, he said, as it is “producing above expectations.” Afren financed the project and claims the majority of costs – which will go primarily to the banks. When costs have been recovered, the production split will change, leaving the company with 50%. This is dependent on oil prices so the timing is unclear, but is expected to occur in late 2010, at current levels.

Operations
The company intends to drill “one or two wells” in Cote d’Ivoire over the next year or two, to develop the assets it acquired from Devon Energy. Production from this asset – oil, gas and natural gas liquids (NGLs) is around 5,500 barrels of oil equivalent per day. Operational costs are unclear on the asset, although Shahenshah pegged revenue as likely to reach US$30-40 million this year. A well is to be drilled on the La Noumbi block, in the Republic of Congo (Brazzaville), “around the middle of the year” at an expected gross cost of around US$10 million. Afren only has a 14% stake in this area, which is operated by Maurel et Prom. A well is also to be drilled in Gabon, “towards the end of the year.” Afren has stakes in two blocks here, both operated by other companies. Cost-cutting clearly plays an important role in every company’s plans in these tough times. Consequently, Afren is working to reduce costs by about 25% in Nigeria, which is driven by both internal measures – using less equipment, for instance – as well as capitalising on falling service costs. Shahenshah also highlighted the importance of hedging production, saying the company had two such instruments in place, one at US$55 per barrel and the other at US$89 per barrel.

New model
One of the most high-profile plays of the last year has been the discovery of the Jubilee field, offshore Ghana. Afren has also had a shot at tapping Ghanaian acreage but encountered a disappointing result. Results from drilling on its Keta block were announced in late December 2008. The company said the well had encountered high pressure and was forced to stop short of the reservoir. Shahenshah acknowledged this was a blow but said that the prospectivity was still there. The well cost around US$50 million, down from the US$65 million originally budgeted because it stopped short, but still an expensive effort. Mitsui farmed in to the Keta block, taking a 20% stake, in exchange for half the costs associated with the Cuda well. The Afren CEO said the company would drill another commitment well in this area, with an obligation to execute this before the end of 2010. Work is likely to take place next year, rather than in 2009. The cost is likely to be around US$50 million. The Keta model, though, is still appealing to Afren. “We would like more things like Keta – large working interests in high-impact areas” indicating the company’s interest in future projects. This new angle is in contrast to the company’s roots – in Nigeria’s marginal fields. Shahenshah described the marginal fields as a “great starter kit” but said that Afren’s size now made such deals less attractive. “A marginal field that offers the possibility of 3,000-4,000 bpd is not that appealing when there are other opportunities like Ebok … we are going for more mature opportunities rather than marginal fields.” Such opportunities could well occur in Nigeria, but not necessarily. Shahenshah ran through a number of possibilities for expansion beyond West Africa, noting that East Africa was of interest or, in North Africa, Tunisia. He ran through the prospects of Algeria, Libya and Egypt, noting that each of these presented their own difficulties.

Strategic alliance
One of the most interesting facets of Afren is its ability to sign deals with large companies. In October, Afren signed a deal with Sojitz to co-operate on joint acquisitions in Africa. “Sojitz has very particular requirements, so we’ve shown them a few things that they haven’t liked but now we’re actively working on something – two deals actually. I’m pretty confident that we will announce a [West Africa oil and gas] deal with them by the middle of the year,” Shahenshah said. One way in which such a deal might play out could involve Gasol, a minnow with liquefied natural gas (LNG) aims and with which Afren has links. (See: Afroil Issue 276) Afren began its story with an interest in the Nigeria-Sao Tome & Principe Joint Development Zone’s Block 1. Progress here is likely to be slow and Afren is unlikely to follow this work through. “Drilling in the JDZ has gone slowly because it’s a high-cost operation. I do think Addax and the other partners in the other blocks will be drilling this year, which will then give some definition as to what happens with us in the JDZ. Our plan has always been: get us to the point where it’s commercial and then look to swap it with something else,” Shahenshah said. Afren has come this far by capitalizing on its Nigerian roots – building its exploration and production portfolio up through good political ties and local partners. As the company looks to expand beyond that country, though, progress will become harder and the deals will need to be bigger.As has been seen with the Cuda well, disappointment at these larger projects does not come cheap. In the near term, much is resting on the Ebok development, while in the longer term Ghana’s Keta area is still of interest and provides an interesting analogue of how
Afren sees its future.

Afren’s vital statistics
Total production: 27-28,000 bpd
Okoru Setu: 22,000 bpd
Cote d’Ivoire (gas and oil): 5,500 boepd
Nigeria: seven projects, including Okoru-Setu (Afren 50%) and Ebok (Afren 40%)
Ghana: Keta block (Afren 68%, Mitsui 20%, GNPC 10%, Gulf Atlantic Energy 2%)
Cote d’Ivoire: Block CI-11 (Afren 47.959%), Block CI-01 (Afren 80%), Lion gas plant (Afren 100%)
Congo (Brazzaville): La Noumbi (Afren 14%)
Gabon: Ibekelia (Afren 20%) and Iris Marin (16.67%)
Nigeria-Sao Tome & Principe JDZ: Block 1 (Afren 4.41% via Dangote Equity Energy Resources (DEER))
Gasol: Afren has a 21.3% stake
Financials (for the first half of 2008): Afren posted a post-tax loss of US$26.79 million. Administrative
expenses reached US$