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After initially hoping for first oil by 2026, Namibias government is working with operators to agree on a single plan with common infrastructure for the 8.7 tcf of unexpected gas
PARIS/CAPE TOWN - International companies and the government of Namibia had high hopes only months ago they could quickly cash in on offshore discoveries and turn the country they saw as the worlds last frontier of untapped oil into a prolific producer.
They have since hit a major complication: an unexpectedly high percentage of gas in the fields, meaning they need to install additional infrastructure. That will slow development and may make projects unprofitable, according to executives, politicians and industry sources.
"What we are seeing is that all our discoveries have a very high gas-to-oil ratio," Namibias Petroleum Commissioner Maggy Shino told an industry conference last month.
Namibian law bans flaring - or burning gas off, releasing CO2 into the atmosphere - meaning companies will have to inject the gas back into the reservoir or process it for consumption, which Shino said was in any case the right thing to do.
"We really want to utilise the gas and generate as much value as possible ... and start then the industry of gas-to-power and petrochemicals, established in Namibia," she said.
After initially hoping for first oil by 2026, Namibias government is working with operators to agree on a single plan with common infrastructure for the 8.7 trillion cubic feet (tcf) of unexpected gas.
The idea is to revamp a long-stalled project to pipe gas to an onshore gas-fired power plant to supply Namibia, then neighbouring South Africa and the wider region.
Initially designed to handle 1.3 tcf from Namibias smaller Kudu field, the power plant project and related gas infrastructure would need significant upscaling.
Namibias government has started talks with Shell, Total, Galp and Norways BW Energy, and wants Namibias national oil company Namcor lead the gas development plan.
For the companies, the problem is the additional work could delay oil production into the 2030s, making it harder to monetise.
Although the industry says oil will be needed for decades to come, the International Energy Agency (IEA) estimates global use will peak before 2030 as the world weans itself off carbon-emitting fossil fuels and as electric vehicle use increases, led by the worlds biggest commodities consumer China.
For the major companies that have acquired or are seeking to invest in stakes in development blocks, that is a setback, industry sources told Reuters.
GUYANA DREAM FADES
The oil industry leapt to attention in February 2022 when Frances TotalEnergies and London-listed Shell announced major discoveries in Namibias Orange basin holding a cumulative 5.1 billion barrels of oil.
Investors piled in this April when Portugals Galp said it found as much as 10 billion barrels in the same area.
Many drew comparisons to Guyana, where discoveries in 2015 led to an oil bonanza that has given the country GDP growth above 20% for the last five years.
But the high gas content, which became apparent over the last year as operators carried out more extensive drilling of reservoirs in Namibia, has since made oil majors cautious.
"We are working on it ... Its a matter of being able to re-inject all this gas in the reservoir at a cost that is acceptable," TotalEnergies CEO Patrick Pouyanne told investors in New York last month.
Injecting gas back into rock under 3,000 metres (9842.52 ft) is already expensive, Pouyanne said. "If we have to have a big gas machine handling 500 million standard cubic feet per day instead of 200 or 300, of course, it changes the dimensions."
Total is struggling to get production costs in Namibia under $20 per barrel - an internal requirement for a final investment decision (FID) on new projects. The company is considering re-negotiating terms with authorities to try to lower costs.
It still hopes to take a FID next year and produce first oil in 2029 based on a plan to reinject all the gas rather than wait for a common solution, said one person familiar with the companys thinking, speaking on condition of anonymity.
The final decision would depend on whether the project would still be profitable enough, another source said.
"Namibia underwhelms," Jefferies analyst Giacomo Romeo summed up in an investor note. Total proposed a smaller-than-expected development of 160,000 barrels per day and did not restate previous hopes for a FID in 2025, Romeo said.
Shell has considered building a floating gas liquefaction unit at the oilfield to produce LNG for export at the block where it made the Graff discovery, according to one source. That would significantly increase development costs and delay oil output start-up.
Shell declined to comment.
Shell CEO Wael Sawan told analysts on Oct. 31 that Namibias acreage was "very challenging," and that the lower permeability of the rock made extracting oil and gas harder.
"A lot of our focus is on figuring out whether we can find ways to be able to develop commercially investable projects," Sawan added.
Galp, which has put half its Namibian stake up for auction, has postponed the sale pending results of additional exploratory drillings later this year. U.S. major Chevron, as well as Rhino Resources, which is backed by BP and Eni’s joint venture Azule Energy, are also expected to drill in Namibia this year. |
