ERHC Energy Inc. (OTCBB: ERHE) is a publicly traded American company with oil and natural gas assets in Sub-Saharan Africa. The company is actively pursuing two offshore West Africa zones, the São Tomé and Príncipe Exclusive Economic Zone (EEZ) and the Joint Development Zone (JDZ), and has an additional three onshore exploratory blocks in the Republic of Chad.
However, on July 9, 2012, the company announced the expansion of its African exploration assets. ERHC signed a production sharing contract (PSC) with the Government of the Republic of Kenya that covers 2.95 million acres on Block 11A in northwestern Kenya. This represents the company’s second large PSC onshore in Africa – the first being its three blocks in Chad, and its first foray into one of the more active areas in East Africa.
East Africa emerged in recent years as a well-known oil province with the multiple discoveries – namely the discovery of over 1 billion barrels of recoverable oil in Uganda’s Block 1 (EA1) located West of ERHC’s block in Kenya. According to a recent Dow Jones report, Total (ticker: TOT) is planning to spend at least $300 million on exploration and appraisal activities in its two exploration areas in Uganda this year, Block EA-1 and Block EA-1A. OAG360 notes that Total, China National Offshore Oil Corporation (ticker: CEO) and Tullow Oil (ticker: TLW) in February signed a $2.9 billion deal to ramp up output Uganda. It is clear that larger companies in the industry are allocating billions of dollars into onshore East Africa.
Tullow, which is really the industry leader in terms of Kenyan exploration programs and discoveries, has farmed into blocks 10A, 10BA, 10BB, 12A, 12B & 13T, which surround ERHC’s Block 11A. TLW says its acreage covers the Turkana Rift Basin, which has similar characteristics to the Lake Albert Rift Basin (near Uganda Block EA-1), and includes a south-east extension of the geologically older Sudan rift basin trend. The Sudan rift also extends through ERHC’s Block 11A. Effectively this places ERHC’s Kenyan Block 11A in between Tullow’s existing Kenyan and Ugandan exploration plays, bearing in mind TLW’s Uganda exploration program is approximately 300 miles further west.
To further place Block 11A in context, the 2.95 million acres is approximately 11,937 km2 (4,609 mi2), roughly five times larger than the Wattenberg Basin in Colorado, which is 2,530 km2 (978 mi2). Why do we point out this relatively simple mathematical comparison? Large acreage numbers cited with African explorations blocks often create the impression that exploration and developing the blocks is an insurmountable hurdle for smaller companies. Although generally larger than the Wattenberg Field, exploration blocks in Kenya, if prospective, are broadly similar in size to many other basins. The main difference between any of the large onshore African exploration blocks is that relatively few exploration wells have been drilled when considered in the context of established producing fields like the Wattenberg, which has has over 21,000 wellbores drilled since the 1970s. The opportunities in Block 11A and others are unique because the plays are nascent as the industry has really only just begun to discover the resource potential in Kenya.
Funding a Capital Intensive Exploration Program
The vicinity of ERHC’s Block and PSC with Kenya is exciting as they seem to be surrounded by major international oil companies searching for oil, with the understanding the “close-ology” in Africa is measured in terms of huge exploration blocks and drilling locations/discoveries separated by millions of acres. Investors, whether private equity or public market players, are likely to ask questions of smaller companies winning these huge concessions how the exploration programs are to be funded.
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OAG360 notes that as of Q1’12, ERHC had approximately $5.0 million in cash and $5.0 million of treasuries, the implication of which is ERHC must attract a larger farm-in or financial partner in order to begin a G&G program prior to any exploration drilling across the 2.95 million acres in Block 11A. Clearly additional sources of funding are required to truly accelerate the pace of exploration in Kenya on Block 11A– whether it be seismic or an organic drilling exploration program. We also note ERHC has demonstrated its ability to farmout exploration acreage on a cash-and-fully-carried basis when the company brought Addax (later Sinopec) into its exploration blocks offshore São Tomé and Príncipe.