Low-Risk Exploration The Key To Success In The Congo

The Tilapia well will be drilled to an intended total depth of 2,700 meters with completion expected in 64 days. The Well targets multiple horizons including the shallow R1/R2 sands that are already producing at Tilapia; an undeveloped discovery in the lower Mengo sands; and a deeper exploration prospect in the Djeno interval from which the adjacent Minsala field produces at a rate of 5,000 bopd. Depending on results from these three horizons, the Well may also be extended down to test the Vanji Horizon.

"The commencement of drilling operations ahead of schedule expected represents the culmination of a considerable amount of hard work by the team,” David Sefton, Executive Chairman, commented. “In the space of six months, we have effectively built a new operations team from scratch, commenced the well planning process, raised additional funds, negotiated all relevant contracts, completed a new Environmental Impact Assessment, successfully executed the workover of the two existing wells and have now mobilised an entire drill team and equipment. This is a real achievement for a junior oil and gas company.”

The Republic of Congo is the oldest producing country in West Africa and is currently dominated by the French Oil companies, with Total the biggest. It has significant prospects both on and offshore in the same formation that runs all the way up to the Ivory Coast. “It is an oil town, and it has been for a long time,” Sefton adds.

Single play

For AAOG it is a straightforward story. AAOG has one subsidiary that it wholly owns, Petro Kouilou, which at present has just one access, a 56% share in a field called Tilapia. The state oil company, SMPC hold the other 44%. The current play has been in production for about 10 years. That is very important for us because we used to have pure exploration.

The reason people buy small E&P companies is for exploration upside, not for the cash flows of production. If you want to buy the cash flows of production, you buy BP. If you buy small E&P companies, when the exploration comes off, you make 10 or 20 times your money; it is a huge capital gain. The risk of that is typically that if the exploration design does not come off, then you are at risk of total loss.

However, in this instance, two things are very different. “The first is that it is from existing producing layers and the proven layers,” Sefton explains. “You have got a very profitable oil operator that is worth more than the point of entry. If the exploration side, which is very exciting, does not come off or takes longer, you are not leaving everything, just some of the upside.

“The second one is that if some E&P companies make a discovery, it is worth a little bit of money on paper, but you have got to find somebody to farm it and operate it. All that means that you are years away from realizing the real value of the site.

“Whereas here we can turn oil production into dollars, so it is very quick for monetization.”

Multi-target well

Even though this play straddles off-shore and on-shore all the work is carried out at a five-acres pad on-shore. The key, according to Sefton, is keeping costs down very low. “It is what we gain with this new well,” he explains. “It is a multi-target well.”

First, the well will go through the R1 and R2 Sands, which are already producing about 150 barrels a day of light, sweet crude. That element of the well is understood and carries minimal risk in terms of bringing R1 into production.

Next up is the Mengo sands. There was a test well drilled into it about eight years ago that found hydrocarbons. They are very tight sand, so historically it has not been brought into production until five years ago when they started using the one-off frac techniques. “Since then there have been some mass developments in the Mengo, largely on-shore,” Sefton adds. “Those wells tend to come on at 800 barrels a day then decline to about 500 or 400 barrels and then stabilize at that for quite an extended period. For us, it is purely a question of the operational risk in bringing it into production, but that's a pretty low risk.

“Those top two layers plus the existing two wells will be very, very profitable to the extent of millions of dollars a year, net free cash flow just based on that alone without any exploration. Where we take on exploration risk is the Djeno sands. We know the structures from seismic work, but we have yet to drill into it. Surrounding produces like the ENI are drilling about 47 kilometers away from where we are.

“It is an enormous gas field, but surrounding it is a very thick oil rim, and ENI have hit the oil rim part. Because there is a big gas field at the heart of it, there is enormous pressure they are getting flow rates, on average of about 5000 barrels per day per well coming off from Djeno sands. 5000 barrels a day per well is transformative as to the value.”

That said it is pure exploration. “While we got seismic there is statistically a one in four chance per well of hitting the right spot,” Sefton concludes.