5 Interesting Facts About The World's Hottest Oil Play

With evidence of an active petroleum system now confirmed after two test wells in Namibia's 6.3-million-acre Kavango Basin, the game is afoot with 2D seismic and a 6-well exploration drilling campaign that hopes to put this final frontier nation definitively on the commercial oil map.  Mentioned in today's commentary includes:  Chevron Corporation (NYSE: CVX), Royal Dutch Shell plc (NYSE: RDS-A), BP p.l.c. (NYSE: BP), TotalEnergies SE (NYSE: TTE), Baker Hughes Company (NYSE: BKR).

Recon Africa (RECO, RECAF), the junior explorer behind the new play, and its JV partner NAMCOR, Namibia's state oil company, think they might have drilled into a reservoir in their first test well, and they are very excited about what comes next. So, let's drill down here to better understand exactly where we stand with exploration in the Kavango Basin, and why many of us are so excited about it. 

Namibia Is Set To Boom

The purpose of the first two stratigraphic wells was to determine evidence of whether Recon Africa is sitting on an active petroleum system. These wells were not drilled with the intention of completion for production, which comes at a later stage if all goes well, though the first well has been left in a state that will enable re-entry for flow testing. 

ReconAfrica's first test well (6-2) now has a complete set of data. Complete data from the second test well (6-1) is being assembled for submission to and must be accepted by the Government of Namibia before the company can release it in the public realm. We expect that shortly. 

What we know so far from the first test well is that data shows three main intervals with a variety of oil shows and associated gas shows. Drilled to a total depth of 2,294 meters, this well had over 250 meters of hydrocarbon shows. 

Mud-Logging Results Are Positive

Mud-logging is said to be one of the most critical elements of exploration—and we believe it's crucial for investors in terms of determining the potential value of a company's exploration results. 

It used to be that mud-logging was a less comprehensive affair involving the recording of depth and the describing of the lithology of formations encountered in drilling. Those results would then determine whether the formations contained hydrocarbons. 

But, as Schlumberger notes, mud-logging has expanded significantly in recent times. Today, it involves an impressive collection of high-tech sensors, including gas chromatographs, weight-on-bit and mud-pit level indicators. Advanced tech mud-logging now combines a basket of surface indicators that give us an incredibly concise record of subsurface geology and hydrocarbons. 

ReconAfrica's (RECO, RECAF) mud-logging results are quite impressive. 

Conducted by U.S.-based Horizon Well Logging Inc, mud-logging for the 6-2 well returned 52 intervals with shows. All of that was documented by U.S.-based Horizon Well Logging Inc, and the description is available on the ReconAfrica website. 

Samples are described every 3 meters, and any samples that have evidence of oil are described, and then the oil itself is extracted and rigorously evaluated for quality. Likewise, gas is sampled directly from the flowline and sent to a chromatograph, which measures the amount of gas and some basic properties.  

Horizon CEO Doug Milham noted: "Horizon is proud to be part of the team at ReconAfrica and the potential resource that has been discovered with their first two wells. The presence and quality of oil and gas shows encountered while drilling the 6-2 and 6-1 wells was remarkable, with many positive indicators of hydrocarbons encountered throughout both wells. Our sample logging data and analysis has identified significant intervals of oil and natural gas in each of the two wells drilled, with varying characteristics from multiple zones. This is an exciting oil and gas exploration project with world-class potential." 

What this mud-logging data shows most clearly is evidence of the presence of a conventional petroleum system with many light oil shows. That, in turn, means the company has significant support for a comprehensive 2D seismic program that will more definitively evaluate the Kavango Basin. 

3 Zones of Thickness Could Potentially Be Reservoirs

First of all, this is a conventional petroleum system. We know this now because the comprehensive data shows signs that—as in a conventional system—the petroleum is migrating along faults, fractures, or porous rock from a source into a reservoir or trap. In Recon Africa's 6-2 well, the three intervals, we don't know yet if they hit an actual reservoir in its first well.

More Results On The Horizon

Core labs are expected to give us critical data about the rocks specifically, which in turn should feed into the analysis of the wireline logs.  These are said to be taking about 4-5 weeks longer than anticipated due to COVID restrictions that made it more time-consuming to ship from Namibia to Core Labs in Houston, Texas. 

The company reports that 2D seismic has already started and remains on schedule, and Recon Africa is already receiving information to interpret. Test lines have been finished as of the first week of August, and Recon Africa reports it is now shooting its first line in production mode. 

So, in addition to the wider 450km seismic acquisition across the Kavango Basin, Recon Africa is also shooting vertical seismic profiles in the 6-2 and 6-1 wells in an effort to tie them to the wider seismic line. We think this is significant because it should allow the company to accurately correlate the zones they've already found through the first two test wells. 

Target completion of seismic data acquisition is said to be by the end of September. 

As of the time of writing, Recon Africa (RECO, RECAF) reports it has CAD$60 million in cash to cover the seismic program, additional wells from now until June 2022, and its ESG commitments to Namibia and the people of the Kavango Basin. As soon as the seismic acquisition is complete, which again is expected by the end of next month, Recon Africa says it will start drilling more wells. The company intends to drill one to two wells by the end of this year, and an additional two to four wells in the first half of next year. 

Supermajors Are Eyeing Higher Oil Prices

Chevron (CVX) comes in just above Shell as the world's second-largest oil and gas company by market cap. Chevron is also betting big on Africa, particularly Nigeria and Angola. The supermajor ranks among the top oil producers in the two African nations. Other areas on the continent where the company holds interests include Benin, Ghana, the Republic of Congo and Togo. Chevron also holds a 36.7 percent interest in the West African Gas Pipeline Company Limited, which supplies Nigerian natural gas to customers in the region.

With bets on both oil and natural gas, the company is looking to take advantage of both fossil fuels. Though prices are fairly volatile at the moment, as fuel demand returns to normal, Chevron could be a big winner as prices climb higher.

Netherlands-based, Royal Dutch Shell Plc. (RDS.A) operates as an integrated oil, gas and chemicals company. Shell remains one of Big Oil's least optimistic companies when it comes to the long-term oil and gas outlook Shell says we might already be past peak oil demand and is bracing itself for a worst-case scenario: Demand to never fully recover.

"I think a crisis like this has the potential to capitalize society into a different way of thinking, much as the Paris Agreement has had,"  company CEO Ben van Beurden has told investors. 

Shell has also revealed that it expects ~75% of its proved oil and gas reserves to be exhausted by 2030 and nearly all by 2050.

BP Plc. (BP) engages in the energy business worldwide, including oil and gas production and refinery, trade in natural gas; offers biofuels and operates onshore/ offshore wind power, and solar power generating facilities. Also known as British Petroleum, BP is a multinational energy company that has been around for over 100 years. BP was formed in 1909 by the merger of two rival companies- Anglo-Persian Oil Company and Royal Dutch Shell. With operations in more than 80 countries and regions, BP is one of the world's largest oil and natural gas producers.  

It's also betting big on the energy transition. "Renewables and natural gas together account for the great majority of the growth in primary energy. In our evolving transition scenario, 85% of new energy is lower carbon," Spencer Dale, BP group chief economist, said, commenting on the outlook to 2040.

TotalEnergies (TTE) is one of the most diversified and forward thinking oil majors in the business.  And it's no stranger to the African oil game, either. Total betting big on the region's potential. The company has been in the region for over 90 years, and it is showing no sign of reducing its footprint anytime soon.

Recently, Total said that it would accelerate its dividend growth "in the coming years" as it looks to return more cash to shareholders. The group will increase its "dividend by 5 to 6 percent per year instead of the 3 percent per year as previously announced," Total said.

Baker Hughes (BKR) recently announced what it calls the largest deployment of its remote operations digital technology, and this deployment involved all of Aramco's drilling operations. This is how the company describes what the project entails: "a single solution that covers data aggregation from the edge; real-time, unified data streaming and visualization; data management; software development services; rig-site digital engineers; and monitoring personnel."

In other words, what we may call remote drilling in a conversation actually involves a comprehensive push to unify and centralize operations in the upstream industry. Baker Hughes has been doing it for 20 years already, and its peers are doing it, too.