Morocco - A hot Thematic play on unlocking the Atlantic rift margin pre-salt.

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Morocco has been a hotbed of activity in the last few years as King Mohammed VI has structured a favourable regime for oil and gas exploration. A host of foreign Companies, such as Kosmos, Cairn, Galp, Chariot, Genel, Long Reach, San Leon, Fastnet, Tangiers and Circle, have staked their claim to various blocks with farm ins becoming the order of the day. The most recent move has been by Chevron, who have bought over 11,000 square miles of offshore acreage. Like Aussie CBM stocks in ’07 & ’08 this looks like a hot theme that is gradually being pushed as a story into the market (Citi note last week highlighting M&A, Ambrian note last year), where relative pure play exposure can be gained with Tangiers Petroleum (LSE:TPET) and FastNet Oil and Gas (LSE:FAST). 

The Favourable Moroccan Regime

The Moroccan Government has initiated a royalty rather than PSC structure based system, with a 25% participation by ONHYM, the Moroccan NOC. They have constructed a moratorium on the 30% corporation tax for ten years to spur on more rapid development.

Petroleum History in Morocco

The Petroleum History is a similar play to that of Brazil’s pre-salt Tupi finds, and Angolan/North Namibian conjugate matching above the Walvis ridge and Rio Grande Rise (the HRT/Galp Energy and Petrobras thematic play). The theory being as Gondwana split (Early Jurassic 184Ma) into South America and Africa, a land locked saltwater lake formed and dried, which over time has provided trapping features due to its non-porous buoyant nature. These salt diapirs and ridges rise due to their lower density and break through rock to form structural traps for oil and gas and can alter hydrocarbon migration paths favourably, but, have been tricky to accurately image with seismic due to salts attenuation effects until the advent of wide azimuth towed steamers.

Coupled with this are advances in 3-D seismic analysis and computing power, such as PSDM (Pre-Stack Depth Migration) and RTM (Reverse Time Migration), which mathematically fudge around the data to pull out 3-D images of the subterranean structures and identify traps & seals – and hence increase CoS when drilling. Also AVO (amplitude variation offset) analysis can be an important tool in pinpointing fluid density changes and so indicating potential oil and gas reservoirs.

Shell had tagged these salt diapir plays and had minor success with their last drill in ’04 before relinquishing their licences in ’06. Another main play type, however, where the elephants are expected to be lurking, is the cretaceous fan pre-salt play. In fact, this play type was opened up by Kosmos & Tullow in 2007 in Ghana with the Jubilee field and recoverable reserves of 370m barrels, and this is where the hotbed of activity around Morocco is concentrating.   

Since the turn of the millennium until 2011, more than 20,000 km^2 of 3-D and 70,000km^2 of 2-D were shot in offshore Morocco (although these numbers will have increased by now) – a significant effort in understanding the nature of the offshore sedimentary basins. This is from a total offshore area of 249,000 km^2 split roughly 50:50 between shallow (<200m) water and higher depth.

There has been scarce drilling over the past century in offshore Morocco. There have been 34 wells drilled since 1968, with 29 of those drilled prior to 2003 – with 3 more in 2004, 1 in 2008 and 1 in 2009 with most showing hydrocarbons – according to Cairn Energy.

Considering the Cap Juby oil field (a salt uplift of the carbonate shelf) flowed 2377 barrels of 12 degrees API in ’68 after being drilled by Esso forty years after first oil was discovered, it has been a slow wake up call for petroleum exploration in a country that has relatively good political stability.

You may ask why has it taken so long… well there is no definitive answer. Maybe the gist of it is a combination of the technological advances, the new favourable regime, the province falling through the cracks somewhat, and a more off piste approach by O&G Companies.

So how do you gain Exposure?

The Chariot’s, Cairn’s and Circle’s of this world don’t really give enough bang for your buck if you want Moroccan exposure in spades (although (LSE:COP) is looking quite cheap in itself). There are two Companies that spring to mind as giving solid farm in partnerships, a go or two at the drill bit, respected management (not lifestyle Companies) and high potential, namely – Tangiers Petroleum and FastNet Oil and gas. Both have other assets on the side, Tangiers in Oz and FastNet in the Celtic sea, where the Barryoe field was discovered last year.

Tangiers Petroleum

The stock is dual listed on AIM and the ASX. The Company is headed by Eve Howell, a veteran of Apache and Woodside. The most recent catalysts have been the announcement regarding the Galp Farm in of $42m – leaving the Company with an estimated cash balance of $15m (plus the return of a $3m bank guarantee) on returning costs of $7.5m and a carried crack at drilling its main triple stacked Tarfaya prospects with the estimated cost of $33m being carried by Galp with the remaining farm in proceeds.

Recent 3-D seismic has confirmed the 750mmbbl potential recoverable oil as well as leading the Company to increase its CoS to 23% from 14%, although none of this news has managed to spur the stock from languishing in the doldrums (i.e. a trading range of c.19-25 pence).

The Permits:

Tangiers has amalgamated 8 permits of 11,282 km^2 under the Tarfaya licence. They have identified numerous prospects but most importantly the Assaka (Upper Jurassic), Trident (Middle Jurassic & TMA (Lower Jurassic), which looks set to face the drill bit first under the operatorship of Galp Energy. Although the exact time of the spud hasn’t been decided – mainly due to the Moroccan government approving the Farm-in – but there has been talk (and hope) on the BB’s and in broker reports of it being later this year.

The Company has signed a heads of agreement with CWH to sell 70% of its stake in its Australian Licenses for A$35 in funding activities leaving it with 27%.

Potential catalysts are approval of the Moroccan farm-in, further asset acquisitions, Farm –out approval of Aussie licences, and the spud dates in particular if accelerated.

FastNet

The IPO last year has been taken positively by the market mainly through the regrouping of the value accretive ex-Cove management, and through their acquisition of Pathfinder have gained exposure (18.75% net) to the Foum Assaka block, south of Agadir Port, in partnership with Kosmos Energy (who also have blocks further to the south in the disputed SADC and have seen success in their analogous Ghanaian cretaceous fan plays). They also have a 50% option on the Onshore Moroccan license of Merada, which is expected to hold biogenic gas.

The 3-D seismic that is due, will allow management to decide whether to farm down their 25% working interest further, or whether to use their cash after the £15 fund raising in December. And reading between the lines, this seems to be contingent on signing a rig sharing agreement so reducing the costs to the low end of the $60-100m drill estimate, alongside the trade off with the results of the 3-D seismic and sacrificing interest for further attempts at the drill bit.

The Management also acquired the Celtic Sea Molly and Malone blocks in June last year. As noted by Carol Law, they expect the tender for 3-D seismic to be awarded (now awarded to CGG) in the next couple of months and shooting to commence in the summer. Again management are plying their old strategy of acquiring over looked licences and adding value, but this, in terms of stock value, is on the back burner for the time being – although drilling success by competitors in the region should have some read across.

Potential catalysts for FastNet are the 3-D seismic and decisions on whether to keep their present working interest, rig agreements and drill dates for Morocco, whilst for the Irish assets, Exxon drilling the Porcupine Basin in Q2 and progress with the shooting of 3-D seismic (now awarded to CGG).

Conclusion

Brokers targets have FastNet pinned at c.30- 40p and Tangiers at c.30 & above, with the blue sky upside spectacular for both at over 500%. But these are risky wildcat drilling Companies and are definitely not for the faint hearted, so best to keep them to gambling money and the speculative part of your portfolio. Although on the plus side, they look well priced at these levels for a good punt (Tangiers more so), and the relatively slow take up by the market on this thematic Moroccan play makes it look as if the trickle of industry and specific Company RNS’s towards the drilling date could bolster the share price performance. The question then would be whether to de-risk or sit in for the results.

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