JDZ News: Nigeria, Sao Tome See Little Action In JDZ
PIW, No. 20, May 19, 2008
When Nigeria and its tiny island neighbor, Sao Tome
and Principe, launched their Joint
Development Zone (JDZ) to great fanfare in 2003,
officials were so confident of its appeal
that they contemplated minimum signature bonuses of
$100 million for the most prospective
blocks. The zone has seen little action in the past
year or so, however — the first and last
well was drilled by Chevron in 2006, and little new
seismic has been shot since. Investors
have been quick to cite rig availability issues when
pressed on when they’ll drill, but the lull
could also reflect a more general reassessment of JDZ
risk due to rising thresholds for commerciality
in the region’s deepwater. Partners in the
Anadarko-operated Block 3 initially talked
of drilling in 2007, then in 2008, and one now admits
they could wait until 2009. Yet this group
has better rig access than most. Anadarko, which has
51% equity, signed several rig contracts
in 2005 to underpin its deepwater strategy for
2006-11, while Africa-focused Ophir Energy,
which has 4%, has rig-share agreements with Exxon
Mobil and others for two deepwater vessels.
China’s state Sinopec and Switzerland’s Addax, which
operate Blocks 2 and 4, respectively,
have fewer options; in early 2007 they contracted the
Aban Abraham drillship to start drilling
in mid-2008, but delays upgrading the rig have upset
this schedule. The duo have outlined plans
to drill up to 10 prospects in the Gulf of Guinea,
including three wells on JDZ Block 4 and one
on Block 2, to meet minimum commitments required by
2010.
A number of factors have conspired to make the JDZ
look riskier. Rig rates and other costs
have risen, taking the bill for some deepwater
exploration wells close to $100 million. This means
massive discoveries are needed to justify such high
finding and development costs, industry
sources say. At the same time, the Gulf of Guinea’s
deeper waters — the JDZ’s range from 1,750-
2,200 meters — are yielding fewer rewards, with
discoveries in the region’s ultra-deep over the
past few years smaller, more widely dispersed and less
economically viable than the elephant finds
of the 1990s. Block 1 operator Chevron said that its
discovery, which was rumored at around 100 million
barrels, could not support a standalone development
project. Chevron has no plans to drill another
well and is set to scale down its representation in
Sao Tome, local sources tell PIW. The discovery also
appears to have deterred Exxon, which sold its 40%
stake in Block 1 to Addax last year (PIW Oct.1,p7).
Addax would appear to have lower commerciality
thresholds than Exxon. But some suspect that the
company may have bitten off more than it can chew in
the JDZ, with equity in four blocks.
Complicating matters, many key investors are exposed
to risks from little-known players
within their groups, due partly to agreements
predating the JDZ and partly to Abuja’s insistence
on awarding equity to insiders long on Nigerian
political connections but short on cash and
upstream expertise. Addax, for example, is carrying
Nigerian-owned and US-listed ERHC Energy’s
stakes of 7.3%, 10% and 17.7% in Blocks 2, 3 and 4,
respectively. ERHC is being investigated by
the US Securities and Exchange Commission and a US
Senate subcommittee for alleged corruption.
Financial difficulties at Equator Exploration have
increased the exposure of investors in Sinopecoperated
Block 2, which also has some players lacking upstream
experience (PIW May23’05,p7).
