Ocelot's diligence key to success of small Calgary independent's African projects

OGJ SPOTLIGHT - Ocelot Energy Inc.

First barge loading of crude from Ocelot Energy Inc.'s Panthere Nze permit in Gabon is shown under way in March 1998. Photo courtesy of Ocelot.

Ocelot Energy Chairman and CEO David Lyons - "There are lots of projects out there, but not that many great ones. You have to be pretty careful about which ones you select. There is a fascinating historical window right now when companies our size can go out and find these sorts of projects, finance them, and operate them." [15,522 bytes]
A pipe rack is shown in the early production facility at Ocelot Energy Inc.'s Panthere Nze permit in Gabon, where Ocelot hopes to boost reserves to as much as 100 million bbl. Photo courtesy of Ocelot. [14,881 bytes]
Tanzania Project [225,033 bytes]
Gabon project infrastructure [111,706 bytes]
Gabon block seismic coverage [198,877 bytes]

Calgary-based Ocelot Energy Inc. is proving smaller North American independents can operate successfully abroad, with its projects in Gabon and Tanzania.

Successful project development in Gabon and Tanzania is the payoff on careful international prospecting and slowly accumulated expertise, says Ocelot Chairman and CEO David Lyons.

Oil production started up on Ocelot's Panthere Nze permit in Gabon in first quarter 1998, and work is proceeding apace with the company's Songo Songo gas field development, pipeline, and power project, en route to start-up in 2000.

Ocelot strategy

Ocelot decided 10 years ago that the international arena is the best place to assemble projects of enough critical mass to produce substantial after-tax returns for shareholders. It was involved at that time primarily in methanol and Western Canada natural gas projects.

The company made a decision in 1989 to develop the skills to build a strong international portfolio meeting stringent criteria. A prospecting unit in London, close to financial markets and headed by Lyons, was set up to find good potential projects. A technical and operating team in Calgary then analyzes data on likely prospects in detail.

Lyons acknowledges that many independents can take on large-scale international projects, but selecting the right ones doesn't happen overnight. He says there was a 3-year prospecting process before Ocelot chose the Tanzanian project and 2 years of hard prospecting before it went into Gabon.

"There are lots of projects out there, but not that many great ones. You have to be pretty careful about which ones you select," he said.

"There is a fascinating historical window right now when companies our size can go out and find these sorts of projects, finance them, and operate them."

Project criteria

Ocelot has developed a tough set of criteria to identify the best prospects. A prospective project must feature:

Existing reserves.
Outstanding fiscal terms and a sharing of rent with the local government.
Direct access to high-margin markets.
Political stability.
Big exploratory upsides.

Both the Gabon and Tanzanian projects meet Ocelot's parameters for a "high-impact" project with strong potential returns.

Lyons says the development process is quite different than it is with operations in North America.

"The fundamentals are the same. You look for low finding and operating costs, big margins, and long reserve lives. But I think it takes a whole different point of view," he said. "The process of prospecting for these projects is a macro exercise. This type of macro prospecting is new, and it takes a big chunk of the risk out of it.

"It's different than exploring exclusively with the drill bit as you might do in Western Canada. You have to be able to negotiate the fiscal terms. You don't do that in North America, where they basically give the terms to you. And then you have to be able to put together the operation, and it's not as simple as drilling for shallow gas in Alberta or Saskatchewan. You're often in the jungle or offshore, and there's a different process there.

"And when you get through to the financing, you have to be able to put in place these big financial groups, like we did in Tanzania, which is a $350 million (U.S.) project. You have to start these things with your own money, but hopefully you can put together the right financial group so that you don't have an unlimited amount of your own capital at play."

Rewards evident

Lyons says developing good international prospects is a painstaking process, but he contends that the rewards are there.

In Gabon, Lyons notes, there are "great" reservoirs, with 28-30% porosity, permeability of 5 darcys, active water drive, and long reserve lives. Ocelot will now be using Canadian horizontal drilling technology to drill wells with horizontal displacements of as much as 1,500 m.

In Tanzania, he contends, the Songo Songo gas-to-power project, expected on stream in 2000, will "light up East Africa." He notes "a crying need" for more power in Tanzania, Kenya, and Uganda.

While majors such as Enron Corp., Unocal Corp., and Royal Dutch/Shell dominate the arena of international gas projects, Lyons says, Ocelot is a rare independent that has worked to make this one of its areas of expertise.

"Ventures such as Songo Songo aren't big enough for the majors internationally, but if you compare it with Canada, well over 1 tcf is a lot of gas reserves. We have made the effort to learn how to put these things together. The well deliverability is outstanding, the wellhead netbacks are better than the U.S. Gulf Coast, and the reserve lives just go for ever and ever."

Lyons says the message of Ocelot's experience in sub-Saharan Africa is that big projects take a lot of time, but the rewards are there for companies prepared to make the effort.

Gabon update

The company's Ocelot Nze Gabon Inc. unit began crude oil production in March in the Obangue pool, one of four previously discovered pools on Ocelot's Panthere-Nze development permit.

In addition to Panthere Nze, the company has interests in two contiguous exploration permit areas totaling 1.3 million acres. Panthere Nze is 33 miles inland and 140 miles south of the capital, Libreville.

Ocelot has invested more than $50 million (Canadian) to date in its Gabon venture. The company says its finding costs for light sweet crude in Gabon are low at $3/bbl for proven reserves and less than $2/bbl for proven and probable. It expects Gabon reserves to increase from 30 million bbl proven and probable now to as much as 100 million bbl as it develops its properties. An independent engineering evaluation as of Dec. 31, 1997, assigned proven reserves of 12.8 million bbl and more than 19 million bbl of probable reserves to the company's interests in the Panthere Nze permit.

Construction of crude oil production facilities, including treaters, 16,000 bbl of storage, and a 4-mile pipeline, was completed in February. Oil is now being shipped by barge down the Rembo N'Komi River to a terminal at tidewater. The company is now considering options for a $5-16 million crude oil pipeline to link with the country's main oil trunk pipeline (see map, p. 22).

Production is offloaded and processed at the Batanga tidewater facility to meet sales specifications and transported by existing subsea pipeline to an offshore storage tanker. Oil is then shipped to the U.S. Virgin Islands and from there to the U.S. Gulf Coast. Ocelot is paid for its oil at the Batanga point of delivery, less a processing and storage fee. The price is based on the Brent crude price, less a discount of about $1.25 (U.S.)/bbl to Brent.

Ocelot began drilling in September 1997 at Obangue. It completed three wells and recompleted one well. Two vertical wells were tested at a combined rate of 3,000 b/d and are expected to produce at a combined stabilized rate of 800-1,000 b/d. A third well was drilled at the edge of the pool but did not encounter commercial hydrocarbons. The company plans to reenter this well at a later date and drill it horizontally.

The fourth well drilled was the first horizontal test of the Obangue reservoir. It was completed with a horizontal leg of 1,673 ft and flowed at staged rates of 500-1,500 b/d. Stabilized production rates of 1,000 b/d are expected.

The company plans to increase horizontal drilling legs up to 4,900 ft and use a number of other technologies to support its drilling program. These include multilateral horizontal drilling, underbalanced drilling, measurement-while-drilling and geosteering, seismic inversion, seismic direct hydrocarbon indicators, and the latest seismic processing technologies.

Ocelot has completed initial interpretation of a 9.6-square-mile 3D seismic program completed in 1997 over the Obangue pool and is reprocessing and interpreting over 930 miles of 2D seismic recorded by previous operators on two of its permit areas. It is also reprocessing this year another 621 miles of previously recorded 2D seismic. Ocelot says it has already identified a number of highly prospective drilling targets on its exploration permits.

The company says a continuation of low crude prices through 1998 would result in reduced levels of cash flow and higher bank debt. Prior to the decline, Ocelot had forecast average liquids production of 7,800 b/d this year, with 2,900 b/d from Gabon, and capital spending of $75 million (Canadian).

It says that, at an average price of $16 (U.S.)/bbl for West Texas intermediate, capital spending would be $40 million and average production would drop to 6,300 b/d of liquids and 17 MMcfd of natural gas.

Gabon exploration

In addition to its Panthere Nze permit, Ocelot has exploration and production-sharing contracts for two other contiguous areas in Gabon.

Ocelot Maghena Gabon Inc. has exclusive rights to explore a 411-sq mile area between the Panthere Nze permit and the M'Bindji permit. The Maghena permit was acquired in June 1997, and 466 miles of previously shot seismic are being reprocessed.

The contract for the M'Bindji permit provides exclusive rights to explore a 1,459-sq mile area to the north and east of the Panthere Nze permit. The permit extends about 62 miles south from the city of Lambarene on the Ogoue River and as far east as the interior highlands that define the eastern margin of the coastal sedimentary basin.

Five wells had previously been drilled on the M'Bindji permit area. Two of these, Onal 1 and Onal 2, tested 30° gravity paraffinic crude from the basal sand unit, the Gres de base. Ocelot M'Bindji has committed to shoot additional seismic and drill up to three exploratory wells as part of an agreed work program on the permit. A large structure on the permit, previously tested with two wells, has been postulated to contain potential oil in place of 100-200 million bbl.

Tanzania update

In Tanzania, Ocelot and its partners, including TransCanada PipeLines Ltd., Calgary, are completing preparations for a gas-to-electricity project originating on Songo Songo Island, 12 miles offshore. Ocelot and TransCanada won approval to develop Songo Songo in a bidding process.

Since 1995, plans to develop Tanzania's initial gas infrastructure have been proceeding through Songas, a consortium comprised of Ocelot International Tanzania Ltd., TransCanada, the government of Tanzania, Tanzania Electric Supply Co. Ltd., and others. The project includes development of the gas field, a 65 MMcfd gas processing plant, a 12-in. pipeline to Dar es Salaam, and an already-constructed 110-MW electric power plant at Ubango.

Songo Songo gas development started in 1996, including refurbishment of three offshore and two onshore wells. Testing established a current combined production capacity of over 100 MMcfd. Songas will have sales requirements of 40 MMcfd of deliverability and 250 bcf of gas over 20 years. The initial infrastructure has capacity to accommodate later phases and gas sales.

Contract documentation to take Songas to financial closure was completed at the end of first quarter 1997. The government of Tanzania has approved contract documentation, and acquisition of a pipeline right-of-way from Songo Songo to Dar es Salaam is nearing completion.

Despite government approval of contract documentation, financial closure was delayed by differences between the government of Tanzania and the World Bank on development of the Tanzanian power sector.

A 100-MW oil-fired independent power plant, capable of conversion to natural gas operation, is near completion at Dar es Salaam by a Malaysian-based group. The project at first was not integrated with the Songas project. A potential conflict has been resolved, and the new project is now integrated into the Songo Songo project and will use gas from Songas as fuel when it is available.

Ocelot expects financial closure on the Songas project by yearend. Construction of a gas plant and pipelines and conversion of the Ubongo power plant will require 24-30 months after closure, with the project expected to go on stream in 2000.

Other operations

The company also has active exploration and development programs in Alberta and the Northwest Territories and a pipeline construction unit that is currently participating in the expansion of export pipelines.

Ocelot's properties at Sylvan Lake, Alta., last year had average production of 3,725 b/d of crude oil and natural gas liquids and 13.9 MMcfd of natural gas. It plans an extensive development program and bought an additional 7,200 acres in 1997 adjacent to its existing land base. Ocelot also operates a gas plant that processes production from its own wells and other operators.

Production at Ocelot's Sturgeon Lake, Alta., properties averaged 546 b/d of oil and NGL in 1997. Development of the field is continuing. A 3D seismic program was begun in 1997 and is continuing. The company acquired an additional 2,560 acres in the area in 1997.

O.J. Pipelines, the company's wholly owned large-diameter pipeline unit, received a contract in December for more than $200 million (Canadian) in construction for the proposed Alliance Pipeline project from British Columbia to Chicago. It completed two contracts in 1997 worth $75 million.

O.J. Pipelines also was awarded a $14 million contract in first quarter 1998 by TransCanada and a second contract in May from the same company worth $75 million for installation of large-diameter pipe in Ontario.