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São Tomé and Príncipe industry: JDZ drilling promising

January 15th 2010 Printer version



FROM THE ECONOMIST INTELLIGENCE UNIT

Exploration activity in the Nigeria-São Tomé and Príncipe Joint Development Zone (JDZ) appears to have borne fruit following the discovery of substantial hydrocarbons reserves in mid-December. Luís Prazeres, director of the national regulatory body for the sector, Agência Nacional de Petróleo, announced that oil had been found in "expected quantities", along with substantial amounts of gas, in Blocks 2, 3 and 4 in the JDZ. A total of four wells were drilled in 2009, and at least two more are under development. The drilling campaign has been driven by the Chinese oil company, Sinopec, which has acquired a dominant position in the JDZ through its acquisition of a Swiss-based oil company, Addax Petroleum, making it the operator of Blocks 2, 3 and 4 in addition to holding Addax's 40% stake in Block 1, which is operated by another US firm, Chevron.

In August Sinopec drilled the Bomu-1 well on Block 2, which has unproven reserves of 274m barrels of oil, and reportedly discovered some oil along with substantial gas reserves. This was followed by the drilling of the Kina-1 well in Block 4 and the Lemba-1 well in Block 3, which have combined unproven reserves of 642m barrels of oil. According to press reports two large gas reservoirs were discovered on Kina-1, leading to estimates of 1trn cu ft on the block, while large reserves were also discovered on Lemba-1. Two more wells are currently being drilled in Block 4, Malanza-1 and Oki East, amid speculation that a further well will be drilled south of Kina-1 to determine the extent of the gas find.

The success of the drilling programme has boosted the prospects of the JDZ, which had been clouded since Chevron's disappointing results from drilling in Block 1. At the time it was assumed that Chevron's find was not commercially viable, but the discovery of substantial gas reserves in the adjacent JDZ blocks has fuelled speculation that Block 1 could contain gas reserves of at least 1trn cu ft-a sufficient quantity to justify the expense of extracting it. This could pave the way for the development of a liquefied natural gas industry in the country, with the construction of a liquefaction plant and export terminal in Príncipe. However, the oil companies involved in the drilling have sought to keep optimism in check, insisting that the current campaign is merely to confirm the size and commercial viability of the blocks' reserves before any decision on developing the finds is taken. A second phase of drilling is expected to start in May 2010, probably coinciding with the planned licensing round for oil blocks in the 160,000-sq-km Exclusive Economic Zone (EEZ), which lies south of the JDZ.

National oil company

With development of the JDZ advancing rapidly, the government has brought forward plans to establish a national oil company. During a visit to the Angolan capital, Luanda, the Saotoméan prime minister, Joaquim Rafael Branco, revealed that Angola's national oil company, Sonangol, would assist in setting up the new company. After negotiating a poor deal from the JDZ, São Tomé is determined to do a better job of securing local ownership of offshore oil production in the EEZ. The assistance of Sonangol could prove crucial, as the company has gained a reputation for efficiency and driving a hard bargain with foreign partners. The new oil company will initially focus solely on the EEZ, where it plans to form a consortium with Sonangol to explore for oil and gas; however, in the long term the government hopes to extend its activities to the JDZ. The new company is expected to be established during the first quarter of 2010, prior to the EEZ licensing round.



The Economist Intelligence Unit
Source: Country Report