Angola's Cabinda Province Reopens for Onshore Oil

Dow Jones Newswires

CABINDA Oct 10, 2006 (Dow Jones Newswires)

Coming hard on the heels of a peace accord this summer between the Angolan government and some separatist guerilla groups, Australia's Roc Oil Co. Ltd. (ROC.AU) expects to start onshore drilling for oil in the Angolan enclave of Cabinda in the coming months, marking the first onshore exploration work in the province during more than 30 years.

Foreign oil companies are looking to extend their reserves and increase production and Roc's move highlights the increasing readiness of oil companies to venture into disputed, and potentially risky, parts of the planet as historically high crude-oil prices, the need for supply diversity and advances in exploration technology spur investment.

Sandwiched between the Republic of Congo and Democratic Republic of Congo and barely twice the size of the U.S. state of Rhode Island, Cabinda's offshore production of 530,000 barrels of oil a day accounts for 38% of Angola's output, making the country sub-Saharan Africa's second-largest oil producer after Nigeria.

Roc, founded in 1996, started seismic evaluation work late last year in Cabinda after 30 years of unrest, which included kidnappings of Western oil workers. The troubles reduced in intensity following the end of Angola's civil war in 2002 and Roc's recent move could herald new onshore investment in Cabinda by block operators U.S.-based Occidental Petroleum Corp. (OXY) and Devon Energy Corp. (DVN), as well as state-owned oil company Sociedade Nacional de Combustiveis de Angola, or Sonangol.

"The high price environment and hunger for exposure to commodities, particularly oil, is driving a mini boom in exploration companies who are prepared to take risks with very significant technical, political and security [challenges]," says Kevin Rosser, oil and gas practice leader for consultancy Control Risks in London.

All of Cabinda's current output is produced offshore by Chevron Corp. (CVX), but despite the potential pitfalls, onshore reserves could be vast, experts say.

"The cumulative results [of onshore discoveries] could amount to the equivalent of one very large offshore field," said William Prast, a London-based oil-and-gas consultant who has studied the basin. Angola has about 5.4 billion barrels in proven reserves and large offshore fields typically hold one billion barrels of recoverable reserves.

Exploration in Cabinda yielded significant discoveries in the 1960s, both onshore and offshore, according to industry experts and company officials. But the technology available and civil unrest allowed for only limited onshore exploration, says Roc Oil Chief Executive Officer John Doran.

Today, new techniques allowing exploration deep under Cabinda's salt-covered reservoir improve the case for investing in the area, Doran said.

Showing a grainy, 8-millimeter movie of hundreds of barrels a day of oil spouting from drilling rigs in 1964 in what is now Cabinda Southern, a block 60%-owned by Roc, 20% by local company Force Petroleum Ltd. and 20% by Sonangol, Doran says oil resources are expected to be significant since the onshore reservoir is part of the same geological trend as Chevron's large offshore fields. Riding high on investor appetite for small, independent oil companies, Roc's stock has risen 44% during the past year. It closed Tuesday on Australia's ASX at A$3.66.

Still, Roc's exploration work will take place against the backdrop of a tense political stand-off. In 1975, as civil war broke out in Angola after gaining independence from Portugal, separatists in Cabinda refused to be integrated with the rest of the country. Since then, rebels have pursued a low-level military campaign against the government and stifled onshore exploration and production.

In August, the Angolan government signed a comprehensive peace treaty with some leaders of the separatist guerillas, the Front for the Liberation of the Enclave of Cabinda, or FLEC. But the agreement was immediately denounced as invalid by both the FLEC president, N'Zita Tiago, and the main civil society and human-rights organization, Mpalabanda, which was banned by an Angolan court ruling in July. The FLEC president and Mpalabanda criticized the accord because they hadn't been included in the talks. Still, the conflict's intensity has been greatly reduced.

Oil majors have refrained from entering Cabinda's hinterland, partly because they tend to focus on much larger offshore projects, Doran says. And while onshore fields in Cabinda may hold total recoverable reserves of one billion barrels, they are in diverse, smaller fields, consultant Prast says. Security also remains a concern.

The situation remains tense in the enclave. Roc Oil workers conducting seismic tests work within earshot of the thud of mortars, apparently launched during exercises by the local army. A government tank nearby offers some reassurance of stability, but the military presence also raises questions about the safety of operating in Cabinda.

Carlos Saturnino, director in charge of licensing at Sonangol, thinks security is assured. The fact that Roc Oil is already operating there means that "stability is something real" in Cabinda, he says.

Despite the uncertainty, a number of smaller oil companies have expressed interest in following Roc into the territory. U.K. independent oil company Soco International PLC is in talks with Sonangol to get a 17% stake in Cabinda Northern block, of which Occidental has nominal operatorship. Sonangol is also in talks with Occidental to replace the U.S. company as an operator. Sonangol says it is keen to see exploration in the area but Occidental, which owns 35% of the block, has been reluctant to start, people familiar with the situation say. An Occidental spokeswoman declined to comment on the company's operations in the area.

People close to Devon Energy say the independent oil company is considering starting seismic tests in the next six months on a block it controls in the enclave. Devon owns 30% of the Cabinda Central block, Spanish-Argentine Repsol YPF SA (REP) has 25%, with the rest split between Sonangol, 20%; Portugal's Petrogal, 20%; and Gulf Energy Resources of the U.S, 5%. Devon didn't immediately comment on its plans for Cabinda and Repsol didn't return calls.

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