Sasol’s Moz exploration disappoints as costs soar

Sasol’s exploration programme in Mozambique has fallen short of the company’s oil discovery expectations and has proved vastly more expensive than the company had expected.

In June last year, John Sichinga, Sasol Exploration and Production International senior vice-president, told City Press in Vilankulo during a media tour of Sasol’s natural gas operations that onshore wells cost about $20m (R263m) each, which would put 13 wells at $260m.

However, Sasol said this week that the first six wells had already cost the company $384m, which means that on the basis of the cost of the first six wells the full 13 wells could cost $832m – more than triple the initial estimate of the cost of the exploration programme.

Adding to that is that oil exploration results have not met Sasol’s expectations of what the drilling could uncover.

Sasol co-CEO Steve Cornell said the amount of oil that could be developed from this licence area would be a “little under” 10 000 barrels a day. “We had hoped for it to be higher than that. In our original evaluation, when we were doing the analysis of the field, we had expected maybe as much as 15 000 barrels a day. It is quite a bit less.

“The flow rates on the gas wells are in line with what we expected.”

Sasol declined to say what oil and gas reserves the company had forecast to discover from its latest drilling programme in Mozambique before the drilling programme started.

“We expect that we will disclose reserves in our 2019 financial year. Volume forecasts were contained in the field development plan. We can confirm at this stage that gas resources have met our expectations and that the light oil resources are between the mid- and low-case range,” Matebello Motloung, a Sasol spokesperson, said in response to questions.

“We are currently in the early stages of the execution of the development plan and are currently incorporating the subsurface data obtained to date. Detailed reservoir characterisation and development studies are underway to determine the volumes resulting from the development,” Motloung said.

Due to the exploration miss, Sasol is trying to reduce the cost of its planned surface facilities that will be used to extract the oil and gas from the exploration project to improve the return on the project.

Cornell said the remaining seven wells would be drilled over the next 18 months.

“Originally the spend on the project was expected to be $1.4bn for this first phase. We are not sure yet what we can shave off that,” he added.

Cornell said Sasol was looking to reduce “a sizable chunk of capital from what we had expected”. He said the saving could amount to tens of millions of US dollars.

“It will take quite a number of months to redesign and decide what we are going to do.”

Cornell said that construction of the facilities could start next year with completion expected in 2020.

Bongani Nqwababa, Sasol’s other co-CEO, said because the oil find had been in the “mid to lower end of the range” of Sasol’s expectations, the surface infrastructure was being redesigned. “In terms of engineering, we no longer need the facilities we previously anticipated,” he said.

In another development, Sasol is facing the possibility of a monster extra tax bill of R12.8bn, which is equal to 60% of the group’s profit for the year to June.

The extra tax charge is related to a dispute around Sasol’s international crude oil procurement activities.

UPDATED 01/09/2017: 
In the response to the above story, Sasol this week wanted it noted that:

The US$384m Sasol disclosed in its full year financial results presentation of Monday, August 21, relates to the total costs of the entire product sharing agreement license (exploration and appraisal) and not just the current development activity. Therefore, the conclusion drawn about the extrapolation of the drilling costs is not entirely inaccurate. 

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