West Africa deep-water discovery disappoints

Investors are increasingly anxious to see if exploration in subsea geographies known as pre-salt can translate into more big oil discoveries that would make the cost-intensive terrain worth the effort.

Houston-based firms Marathon Oil and Cobalt International Energy announced a deep-water natural gas find Monday in a pre-salt play off the coast of West Africa.

But shares of both companies fell on the news, as investors were hoping for black gold, in big numbers, because of the premium oil brings.

“Instead, they got gas, and not so much of it either,” said Oppenheimer & Co. analyst Fadel Gheit.

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Cobalt also failed to hit pay dirt in a deep-water field in the Gulf of Mexico.

The well operator for the West Africa discovery, French oil and gas firm Total, doesn’t break down the amount it has spent on this specific operation off the coast of Gabon, but last year its capital expenses for all of its Gabon operations was $922 million, 22 percent more than a year earlier, while crude oil production from fields operated by Total’s Gabon operations fell 2 percent year-over-year.

Marathon holds a 21.25 percent stake in the license associated with the Gabon well, known as Diaman-1B, where the new natural gas discovery was made. Total is the operator and has a 42.5 percent stake. Cobalt International Energy has a 21.25 percent stake and the Gabonese Republic has a 15 percent stake.

The well hit 160-180 net feet of pay, which refers to the vertical thickness of rock that is estimated to contain hydrocarbons, and be capable of contributing to production. The well, in 5,673 feet of water, was drilled to a total depth of 18,323 feet.

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The well will be temporarily abandoned pending further analysis of the well data, Marathon said.

Diaman-1B is more than 60 miles from any other commercial pre-salt discovery, the companies said.

Pre-salt refers to oil- or gas-bearing rock that has a salt composition and is located beneath another layer of salt that is often thick.

Pre-salt fields are common off the coasts of Africa and Brazil. The fields can be expensive places to explore and produce oil and gas, but they can also hold a lot of potential for firms to expand their reserves. Advanced seismic imaging and other technology is used to locate and extract the resources.

A Cobalt International Energy graphic shows pre-salt layers offshore Brazil and West Africa, which are oil and natural gas reservoirs formed before the salt formation.
A Cobalt International Energy graphic shows pre-salt layers offshore Brazil and West Africa, which are oil and natural gas reservoirs formed before the salt formation.

The potential has led to a number of megaprojects. Among the biggest ones are in Brazil, where state-controlled oil company Petrobras is a major player in the pre-salt space.

Brazilian energy officials visited Houston recently to talk up an upcoming auction of offshore oil leases, hoping to attract foreign investment for a new field estimated to hold as much as 12 billion barrels of hydrocarbons. At the Offshore Technology Conference in Houston in May, Petrobras officials said the company has used horizontal drilling and other techniques to predict success more reliably and increase productivity from pre-salt formations.

Petrobras expects to grow pre-salt production to more than 2 million barrels per day by 2020.

The deep waters off Africa also have opened the doors to pre-salt plays for exploration firms in recent years.

In a statement, Cobalt said the well results are “an excellent start to the exploration of the emerging pre-salt basin in deep-water Gabon.”

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But investors weren’t impressed, and they were especially hard on Cobalt, which had two bits of not-so-good news.

In addition to the news out of West Africa, Cobalt said that its Ardennes #1 exploratory well in the Gulf of Mexico reached a total depth of 36,552 feet, but it was unable to find oil or gas that was commercially viable. Cobalt, as operator, owns a 42 percent stake in Ardennes.

Cobalt said that following operations on the Ardennes #1 well, an Ensco rig will move to drill the Aegean #1 exploratory well in another offshore block. Cobalt, as operator, owns a 60 percent stake in Aegean.

In Monday trading in New York, Marathon shares fell 4.3 percent to $32.61, while Cobalt shares fell 15.2 percent to $24.90.

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