Ethiopian oil plays could contain billions of barrels, but challenges abound

Ethiopia, one of the fabled locations of the biblical Ark of the Covenant, may have another treasure buried in its depths.

A study commissioned by an Ethiopian company that hopes to be the first to bring oil to market there suggests two basins hold more than two billion barrels of oil.

But getting at that crude could be as challenging as getting a look at the Hebrew religious relic, which Ethiopian Orthodox Christians believe is in one of their churches. And as with the Ark, the location and even the existence of marketable Ethiopian oil are elusive.

Tewodros Ashenafi, CEO of SouthWest Energy, headquartered near the capital of Addis Ababa, sees promise in the Gambella and Jijiga basins.

In a study for SouthWest, British consulting firm Senergy estimated the the regions could hold 1.6 billion to 2.9 billion barrels of oil.

“Anywhere there are camels, there is oil,” said Ashenafi, noting that East African neighbors including Egypt and Kenya already have profited from bountiful underground resources. “We are at the frontier in Ethiopia — the industry is still in the early stages.”

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SouthWest Energy, established in 2005, has mineral rights for 46,000 acres and plans to drill three exploration wells in the Jijiga basin this year and in 2014. Both Ashenafi and other executive team members, as well as its board of trustees – all of whom have international business resumes – have staked their own money in the project, in addition to other private and corporate investors. The company has raised $50 million for its initial efforts and hopes to secure $100 million more from private equity, as it aims to be the first to bring oil to market in Ethiopia, seeking investors in several international oil centers, including Houston.

SouthWest Energy CEO Tewodros Ashenafi (Southwest Energy)
SouthWest Energy CEO Tewodros Ashenafi (Southwest Energy)

But competition for investors is fierce, and even if a company finds oil it will have to figure out a way to get it to market since Ethiopia has no pipelines.

One of the challenges in proposals like SouthWest’s is persuading would-be investors that the project will be economic, said Robert Hamill, a partner with Mayer Brown specializing in international corporate finance.

“We have seen exciting discoveries in the middle of Africa, but one has to think about the logistics of selling the oil into the international market,” Hamill said.

Oil was discovered in Ethiopia in the late 1800s, but never has been produced in commercial quantities. Only two of 50 exploration wells have struck oil.

“The report confirms what we have always believed; our blocks have strong oil potential,” Ashenafi said. “Our work now turns to the next phase of exploration, to further refine the seismic data set and look towards our well program, which we hope to commence later this year.”

While Ethiopia does not have pipeline infrastructure to bring oil to Djibouti, the closest port, its dense population of 90 million inhabitants create a domestic demand of 50,000 barrels a day, Ashenafi said. He also suggested that oil could be shipped by rail, and that pipelines to Djibouti could be established as the industry matures in Ethiopia.

Hamill said it will most likely be the small companies like SouthWest that will begin the search for Ethiopian oil in earnest, because venture capitalists tend to be more tolerant of the higher risk involved than the international oil companies.

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“It is a familiar pattern that the high impact explorers are the first entrants in these countries,” Hamill said, explaining that specialist funds and venture capitalist tend to be more tolerant of the higher risk involved than the international oil companies.

But while the risks and potential rewards are upfront for operators, Ethiopia’s ability to manage the new industry will be key to ensuring that it will benefit its citizens.

“Africa is an exciting place to operate,” Hamill said. “What you want as an objective observer is that Ethiopia has the political wisdom to develop it resources responsibly and to use them for the benefit of the country, so that it is a resource blessing not a resource curse. ”