What’s new in exploration (1)

	Vol. 230 No. 3
ARTHUR BERMAN, CONTRIBUTING EDITOR, bermanae@gmail.com

Independents Discover Oil in Uganda

A year ago, I wrote that ExxonMobil had decided not to compete for new international opportunities because the global environment had become overly competitive and over-valued (“Winner’s Curse”, World Oil April 2008).  A review of recent investor presentations by Chevron, Shell, BP and ConocoPhillips suggests that the other international oil companies have adopted similar positions.   The upstream portfolios of the majors are dominated by exploitation of existing assets, new field start-ups, LNG and oil sand projects, and onshore North American tight gas and shale gas plays.  While the major oil companies slowly liquidate, smaller independents are making substantial discoveries in areas that the majors evaluated in the past and apparently dismissed.

Heritage Oil Ltd. and Tullow Oil PLC have discovered about 2 billion barrels of recoverable reserves in Uganda during the past two years.   In late 2006, Heritage's Kingfisher-1 well in Block 3A (Figure 1) produced oil from four zones at an overall cumulative maximum flow rate of 13,900 bopd.  In 2008, their Kingfisher-2 well tested 14,364 bopd from three zones.  The Kingfisher-3 well drilled in December 2008 most-likely recoverable reserves of about 200 million barrels of oil from Miocene and Pliocene reservoirs above 8,500 ft TVD. Untested adjacent prospects on Block 3A have the potential to hold several hundred million barrels of additional resources.

In late December 2008, Heritage announced its Buffalo-1 discovery, also on Block 1.  This well had a gross oil-bearing interval of approximately 404 ft with 141 ft of net pay.  The subsequent Giraffe-1 discovery announced in January 2009 confirmed that the Buffalo-Giraffe complex contains recoverable reserves of more than 400 million barrels of oil, on a structure with approximately 35 square mi under closure, and a 459 ft oil column. 

In October 2008, Heritage announced that its Warthog-1 exploration well was a discovery on a separate fault block farther downdip than Buffalo-Giraffe. The well found 151 ft of net oil pay at depths shallower than the 3,000 ft.  Reserve estimates have not yet been announced.     Adjacent prospects on Block 1 may hold several hundred million barrels of additional resources.  Heritage operates Blocks 3A and 1 with a 50% interest in partnership with Tullow that holds the remaining 50% interest.

Tullow Oil PLC drilled five successful wells in 2008 on Block 2 which lies between Blocks 3A and 1 in the Lake Albert Basin.  Its Kigogole 1 well found oil pay at 1,312 ft in high quality Tertiary sandstone reservoirs at a location nearly 1 mi downdip from the crest of the mapped structure.  Along with the Taitai 1, Ngege 1, Karuka 1 and Kasamene 1 wells drilled in the Butiaba area of Block 2, Tullow estimates that overall reserve potential on the block may exceed 1 billion barrels of oil.

The Albert Basin is part of the East Africa Rift System that extends across Somalia, Uganda and parts of the Democratic Republic of Congo.  It covers 3,500 square miles and may contain as much as 20,000 ft of sedimentary fill.  The principal reservoir intervals are fluvial sandstones of Late Miocene to early Pliocene age deposited by ancestral rivers that flowed into the Albert Basin.

Petroleum traps consist of large, 3-way structural closures against normal faults.  Source rocks have not yet been penetrated but are probably Late Miocene lacustrine shales deposited during lake highstands.  The oils discovered in the Albert Basin are moderately mature with some associated wax.  They are believed to derive from freshwater, clay-rich, algal source rocks that had little terrigenous input.  Oil seeps on outcrops have a similar composition to oil discovered in the basin.

The Albert Basin is a strike-slip, pull-apart basin.  Local structures may have formed by clockwise rotation of microplates caught in the shear couple of the East Africa Rift System.

Lake Albert has a maximum water depth of approximately 180 ft.  While drilling depths are shallow and have been accomplished by directional drilling from land, the remoteness of the Lake Albert region produces cost and logistical challenges.  In addition, the area contains national parks, tourist destinations, and an indigenous fishing industry which must be protected.  Eventually, a pipeline will be necessary to bring petroleum to the coast in Kenya near Mombasa, and this will involve considerable cost and time.

It must be challenging for relatively small companies like Heritage and Tullow’s to fund long-term exploratory programs without current cash flow in Uganda.  At the same time, I doubt that the major oil companies will find sufficient revenues in exploitation-oriented projects and resource plays to maintain their vast overhead, especially in the lower price environment that most analysts predict will continue for some time.  Most of the majors have a lot of cash.   They may use some of it to acquire companies like Heritage and Tullow.  While this would help them with reserve replacement, it would not address the chronic lack of new exploration ideas in the big companies. 

Perhaps the majors should fund companies that are good at exploration.  They should admit that they have lost the knack for exploration, and rely on smaller, more flexible surrogate companies to do their exploration for them. 

The major oil companies somehow missed the E&P opportunities in places like Uganda.  The smaller companies that recognized the potential may not have sufficient capital to realize the longer-term profits from their discoveries.  Surely, there is a win-win solution to this situation. 

Heritage Oil Ltd. and IHS provided information about the Albert Basin petroleum system as well as current drilling, testing and key scouting information. Their support of this column is greatly appreciated.