Shell writes off R7.6bn in Orange Basin exploration - but Namibia's oil story isn't over

Namibia’s promising oil story was dealt a hapless blow last week when Shell wrote off some R7.6 billion it invested in exploration off the coast of the neighbouring African country.



After pouring the small $400 million fortune into drilling nine exploration and appraisal wells, the oil major – and being the first company to discover oil off the coast of Namibia at its Graff-1X well in 2022 – Shell has decided against developing the prospects which it has deemed commercially unviable in the face of technical and geological difficulties.



There is no question that there is oil. Experts point out it is a sweet light crude, a high-quality product which naturally tends to occur alongside a great deal of natural gas. Previously, this would have been of little concern, as gas would simply be flared off. But this is no longer desirable industry practice amid a World Bank and UN-driven initiative to end routine flaring by 2030.



Instead, gas would be captured and utilised in some way – necessitating additional investment.



Another issue is the permeability of the rock in Shell's offshore block, known as the Petroleum Exploration Licence (PEL) 39.



"Not all fields are the same, and you get differences in the permeability of the rock, meaning it's how the oil and gas can flow through the rock. And certainly the Shell fields have, from a permeability perspective, been deemed to be very tight... meaning it [the oil and gas] is constricted, it doesn't flow so easily," said Brendon Hubbard, a portfolio manager at ClucasGray Investment Management.



Those issues, like the gas, can be overcome, but comes with a cost, he said.



The ultra-deepwater conditions are also said to be challenging in the block, which is situated 250km in deep-offshore acreage, comprising an area of more than 12 000 square kilometres.





The $400 million write-off refers just to Shell's portion in the exploration block where it holds a 45% stake as the operator. Another 45% working interest is held by QatarEnergy, while the National Petroleum Corporation of Namibia (Namcor) holds the remaining 10%.



"Shell have impaired the asset, but they haven't walked away from it," said Hubbard. "It would mean that potentially at some stage in the future, they may come back. Or they may choose to walk away from it at some stage in the future... they'll probably book it to their reserves, and then they'll wait.



While Shell’s write-off is disappointing, it is by no means the end of the story for Shell in Namibia, said David Thomson, Welligence Energy Analytics’ Vice President for Sub-Saharan Africa.



"Out of the discoveries made by Shell, TotalEnergies and Galp so far in the Orange Basin, we always felt Shell's were the most challenging to commercialise," he said.



"And it is important to remember there is no indication Shell is walking away from its acreage. It has said it will continue to conduct E+P [exploration and production] operations and look at ways to commercialise. It is entirely possible down the line it will find more resource and/or find a way to develop what it has found."



Thomson said it would be a big mistake to draw too many conclusions for the Orange Basin as a whole, the largest portion of which extends into South African waters.



"It is still early days for the basin and there continues to be a real buzz about the area. TotalEnergies, Galp, Rhino and Chevron all have big wells [that] they are drilling at the moment, with more planned, and our expectation is that there will be more positive news appearing in the coming months," he said. "Frontier exploration is by definition high risk, and not everything that is discovered is going to be easy to develop. But we remain positive about the basin and I think the industry feels the same."



Hubbard said the different fields within the basin all have different attributes and the permeability of the rocks will vary throughout the vast basin.



In response to Shell's write-down, Namibia's Ministry of Mines and Energy said it viewed the discoveries at PEL39 as commercially viable and remained committed to "progressing these opportunities with the right partner and right investment commitment."



While initial assessments of some of the subsurface parameters indicated challenges related to subsurface complexities and reservoir quality, the ministry said there is significant potential for improvement as exploration and technical analysis continue. "Advances in technology, coupled with further geological and geophysical studies, are expected to provide deeper insights and unlock the full potential of these resources," it said.



The African Energy Chamber, an oil and gas advocacy group, said the write-downs were "merely a speed bump in Namibia's oil development rather than a roadblock" as the country still offers significant potential in the offshore Orange Basin and beyond, underscored by the positive exploration campaigns currently underway.



"The Orange Basin, particularly the northern areas, still holds significant exploration prospects with potential for commercially viable discoveries. Leading international oil companies and independents continue to position the basin as one of the most sought-after exploration hotspots, with various exploration campaigns expected to yield strong results," the chamber said.



Industry experts said it was correct accounting for Shell to write off that investment which it cannot commercially recover today. But there may very well be opportunities for Shell's discoveries still, depending on what exploration efforts by other majors find, said one source. This is because there will likely be opportunities for companies to club together on costly gas and other infrastructure.



The wait may not be too long either.



TotalEnergies – which is the operator in a licence area to the west of Shell's – began drilling at its Tamboti well in October, and will likely provide some insights in early February when the company will publish its latest financial results.



Already, the fact that the company has extended the rig contract is a highly positive indicator.



Its Final Investment Decision (FID) on its Venus discovery – its largest find in two decades – is also anticipated to be taken before the end of this year.



Galp Energia, which is the operator in a licence area to the north of Shell's, spudded a new well in its Mopane complex on 1 January. This is thought unlikely to be a "duster" (a dry well), since five discoveries have been made already there, but will provide more critical information ahead of farming in other partners and taking FID.



In December, Rhino Resources spudded the Sagittarius well, with information expected to flow by the end of January.



Chevron, which is operating a block north-west of Shell's, is thought to have spudded its Kapana well (although nothing has been publicised) and would then likely announce the outcome in February.



But whether Namibia's oil story will have a happy ending simply won't be known until these companies pull the trigger and develop some of these finds, said Hubbard. "All we know for now is that they are still spending an enormous amount of money and energy up there."

-NEWS24