In 2019, Australia-listed energy explorer Invictus Energy announced major oil and gas potential at the Muzarabani prospect, a first step on the long road to development.
Independent analyses of seismic data confirmed significant potential at the site.
Invictus hired UK company ENVOI to run the farm out process; this is the stage at which an explorer like Invictus seeks partners for drilling and development.
The Zimbabwe Environmental Management Agency also approved the company’s Environmental Impact Assessment (EIA) prospectus. To secure customers for the gas that could be produced in future, Invictus signed offtake agreements with companies such as Sable Chemicals and Tatanga Energy.
In oil and gas, the road from prospect to development typically takes years. Now, in the shadow of the COVID19 crisis, oil prices have tanked. WTI futures, one of the benchmark indices for crude oil, fell below zero. Across the region, large energy projects are now being delayed.
Will all this affect Invictus? Have the project’s prospects changed? newZWire speaks to Invictus MD Scott Macmillan to find out.
How will the tanking of oil prices impact on your capital raising?
At the moment we have sufficient capital to fund our operations in country for the foreseeable future and the completion of a farm out deal will bring additional partners and capital to the project.
We’ve noticed that ExxonMobil is delaying final decision on the Rovuma LNG project in Mozambique due to uncertainty around oil prices and the impact of COVID19. Could this drop in oil demand also impact on Invictus’ farm-out plans?
Whilst there are delays in the Rovuma LNG Development (ExxonMobil project), this project is at a very different phase in the lifecycle to SG 4571 and also targeting different markets. Projects like Rovuma LNG are being delayed at the moment as they require billions of dollars in immediate capital to begin construction and development.
It requires huge offshore facilities in deepwater as well as the LNG facilities onshore in a relatively remote location in northern Mozambique far away from any markets.
There are also issues around securing binding offtake agreements in a low price environment that at present do not meet the investor hurdle rates, so projects of this size are more difficult to secure finance for and are typically delayed until the price or market outlook improves.
LNG is ultimately destined for international markets, mainly in Asia and Europe, and is competing against other suppliers worldwide and hence the pricing of LNG nowadays is far more competitive and susceptible to industry downturns than it used to be.
Our SG 4571 licence is at a very different stage in the oil and gas project lifecycle, being right at the front end of exploration. Fortunately being onshore with good infrastructure already in place such as tarred roads it is much more cost effective to explore than offshore. Geo Associates, the SG 4571 licence holder owned by Invictus and One-Gas Resources, is also targeting to be a local and regional gas market champion rather than the overseas export market.
Is there enough energy demand in the region to sustain development of SG 4571?
We see a huge opportunity in the energy market in the region which is chronically undersupplied and likely to become even more challenging. Fortunately gas sales agreements are generally fixed price, long life contracts over 10-20 years which means you have stable pricing and remain unaffected by the sort of volatility that we are seeing in the oil market at present.
We’ve seen great local demand as evidenced from our gas sale MOUs with Sable Chemicals and Tatanga Energy which are fantastic anchor customers that will underpin any commercial discovery that we make.
A great example is the onshore gas developments in southern Tanzania that supply gas to power facilities in Dar es Salaam via pipeline. Tanzania had been very reliant on hydroelectric power which is susceptible to drought; and heavy fuel oil generators which are expensive to run. This resulted in both intermittent supply and high electricity charges in Tanzania.
The Songo Songo and Mnazi Bay gas fields were developed in 2004 & 2006 respectively, initially for a single gas to power project but has now grown to multiple power projects as well as industrial and even residential use. Gas consumption has increased eight-fold from 2005 to 2019 (25 – 200 million cubic feet per day) as it is a low cost fuel and once the pipeline infrastructure is in place it becomes very easy to adopt.
The gas to power projects alone have saved Tanzania US$4 billion in energy costs between 2015-2017 as a result of the switch to natural gas; and the Tanzania energy market is 50% the size of Zimbabwe’s.
So we see huge potential to become a regional gas champion. Our farmout opportunity is very different to most that are typically seen in industry because of the scale and the target market. This has put us in a good position despite the current market and we don’t see it having a major impact.
So how far have you advanced on the farm-out process?
The farm out has progressed really well and we hope to conclude our negotiations and finalise a deal in the near future. I can’t comment further at this stage due as it is confidential and still a live process, but we hope to update the market with some positive news soon.
Any change to the 2021 target for the start of drilling?
Not at this stage, but we will have to assess the impact of COVID-19 later in the year and how long the travel restrictions, border closures and limits on gatherings etc are in place.
Mobilising a drill rig, equipment and skilled personnel is a massive endeavour involving hundreds of truckloads of equipment, and the rotation of hundreds of people through the operation over several months, the majority of which will be imported.
Looking beyond Zim, what’s your forecast on LNG in the region given what’s happened now with demand?
I think the LNG sector will be challenging this year due to demand destruction caused by the shutdown of the global economy and manufacturing. We are seeing very low pricing for LNG at the moment, particularly for oil price linked contracts caused by an oversupply.
The oil and gas industry is a very cyclical business with investment horizons of 25-30 years which do have ups and downs. However, there is a saying in the oil industry that “the cure for low prices is low prices”. In other words, low prices result in increased use and adoption which ultimately feeds greater demand and results in the increase in prices.
The delay to investments in projects will ultimately result in a supply shortfall at some stage due to the eventual decline from existing fields.