One could understand if some investors may feel a bit queasy about Afren?s geographical focus. With significant oil and gas projects in five countries in Sub-Sahara Africa including Sao Tome, Gabon, Congo, Angola and Nigeria, including significant investments in the Niger Delta, political risk is always going to be at the forefront of people?s minds. The reality is that the vast majority of the world?s oil and gas reserves are located in somewhat volatile regions, and one could easily argue in today?s world that an oil and gas exploration and production company is exposed to equal amounts of risk in many parts of South America, Russia and Eurasia. In other words, if you want exposure to the high impact hydrocarbon sector, a good dose of political uncertainty is part and parcel.
So let?s not beat around the bush. Afren carries exposure to political instability ? but it has mitigated a great deal of the risk through its highly experienced board of directors. Many smaller capitalised resource companies become unstuck in difficult regions of the world because they either don?t have enough experience working in those regions, or they attempt to run the operation from a cosy office in London. This is where Afren really does stand out from the pack. Co-founder and Executive Chairman Dr. Rilwanu Lukman is a Nigerian born, western educated figure that has exactly the kind of curriculum vitae one would want from a company with considerable interests in Nigeria. To name just a few of his more notable roles before Afren, he was Nigerian Minister of Petroleum Resources, Adviser to the Nigerian President for Oil and Gas, President of OPEC for 9 sessions and Secretary General of OPEC for 5 terms. To make a long story short, he is one of the most respected individuals in the oil and gas industry and has extensive experience working with OPEC and Nigeria, which is a member of OPEC. The team around Dr. Lukman is almost as impressive, with an executive board that boasts extensive experience working in many parts of the international oil and gas industry including mergers and acquisitions, downstream and upstream development and financing. If any company is going to make a success of working in Sub-Sahara Africa, this is the one that certainly has the right team in place to make it happen.
Of course there is one other additional required ingredient for success - quality assets to develop. Considering Dr. Lukman?s previous roles working in the Nigerian Government, it comes as no great surprise that Afren has earned into some interesting projects. The company?s near term production opportunity is the development of the Okoro and Setu fields. Afren recently completed a fully underwritten US$200 million, five year debt facility to finance the project through BNP Paribas. As an additional sign of confidence, both BNP Paribas and Standard Bank have also agreed to subscribe to approximately 13.5 million shares at 57 pence per share injecting an additional US$15 million into the coffers.
The most recent independent reserves estimates for Okoro and Setu is 25 million barrels (1P) and 32 million barrels (2P). Afren anticipate receiving approval for their field development plan shortly and will begin a nine month development program in the 3rd quarter of 2007. First oil production in expected in the first quarter of 2008 and at peak production the fields are anticipated to produce between 15,000-20,000 barrels of oil per day of which Afren will have a 70% net interest.
Afren also announced in December 2006 a ?gas monetization strategy? in co-operation with the African Gas Development Corporation (Afgas) and Sociedad Nacional de Gas (Sonagas). The joint venture (JV) offers Afren the first right of refusal to supply upstream gas to the JV from gas supplies in the Gulf of Guinea which is controlled by Nigeria, Cameroon and Equatorial Guinea. There is estimated to be at least 200 trillion cubic feet (tcf) of stranded gas in the Gulf of Guinea, and Afren is looking to earn into a number of fields in the area. This is the sort of deal that sums of Afren?s vision best. Even though the company is often classified as high risk exploration, it is in fact focused on using the extensive experience of its senior management to commercialise oil and gas assets that no other group has managed to do.
So while the market waits for production from Okoro and Setu and news on gas developments in the Gulf of Guinea, Afren is also participating in three additional exploration wells in 2007 on its other acreage. First up will likely be the Doungou prospect (Afren 14%) in Congo which has a ?most likely? estimate of 65 million barrels. This well will be shortly followed by an exploration well on a 40 million barrel target on the Themis Marin prospect in Gabon (Afren 12.9%). Despite both of these exploration wells holding sizeable targets for a company the size of Afren, most excitement still surrounds the Obo-1 follow up well on the JDZ Block 1, where Afren holds a 4.41% indirect net working interest with energy heavyweights Chevron (51%) and ExxonMobil (40%). The Obo-1 well confirmed the presence of hydrocarbons, but because of the depth and location of the block, it is believed that it could take two or three oil discoveries with a cumulative total of 400 million barrels to deem the project economically viable. Exact results from Obo-1 were never released from Chevron/ExxonMobil, but it is widely believed that the decision to drill an additional well means that the group did discover an oil field, and now need to prove up additional reserves before making a decision. The total unrisked mean recoverable reserve potential for JDZ Block 1 is 3.8 billion barrels and a risked mean of 1.2 billion barrels. This means that Afren?s comparatively small stake still has a risked mean net interest to the company of 52 million barrels.
Afren?s focus on Sub-Sahara Africa is starting to show its potential. The company has made impressive progress since listing, and looks set to continue to build a strong production profile over the next two years. With first cash flow coming from Okoro and Setu in 2008, Afren finds itself with strong financial backing, a range of various assets and of course the ever so important ingredient of a hugely experienced management team.