Shell Shows Exploration Momentum Rising
BMI View: Shell's decision to increase its interest s in Albania reflects the promising indications of the country's resource potential despite recent drilling setbacks and minimal current output. While Albania could be the latest CEE country to see a wave of exploration investment, above ground risks remain a key threat to the outlook for the oil and gas sector.
Royal Dutch Shell has upped its stake in an onshore block in Albania , taking a larger share from its existing partner on the block , Canadian independent Petromanas . Shell is to pay US$22mn for an additional 25% interest in Block 2 -3, which will eventually give the supermajor a 75% interest in the Block following its 2012 farm-in. Petromanas will remain operator with a 25% stake assuming regulatory approva l of the deal
The decision to sell down comes after Petromanas announced it would relinquish its production sharing contract (PSC) for nearby license covering Block A-B after drilling encountered non-commercial hydrocarbons. However, the Canadian player and partner Shell were hoping for better results from ongoing drilling on Block 2-3, which was underway with the Shpirag-2 well reaching target depth of approximately 5,500metres (m) on June 24. A third well, Molisht-1, is also planned to be spud mid-August using the rig from the recently completed Shpirag well.
Although there was muted reaction in the share performance of Petromanas, news that Shell would increase its presence in Albania adds a lot of credence to the country's upstream prospects. Despite disappointing dr illing results, Shell's presence suggests that the ongoing exploration campaign to prove up the country's onshore prospectivity will not suffer from a lack of resources given the super major's continued presence. Moreover the Anglo-Dutch giant has experience in the geologic play type being tested from its' existing carbonate acreage onshore Italy.
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|Petromanas Share Performance (CAD)|
The particular assets which Shell will take a larger share of, Block 2-3, are near to existing fields where oil is currently produced . They are also thought to be geologically analogous to discoveries across the Adriatic Sea in Italy , wit h the onshore Val D'Agri oil complex a source of both current supplies and sizable upside . Indeed first production from the Tempa Rossa in the Val D'Agri region is due to deliver some 50,000 barrels per day (b/d) in additional volumes from the onshore complex by 2016. Also underscoring the area's resource potential is the proximity of Block 2-3 to the Patos-Marinza field in Albania . With 7.7bn barrels of oil in place originally, the field was the largest onshore field in continental Europe.
|Small With Big Upside As Exploration Advances|
|Albania Oil Production & Consumption ('000b/d)|
Growing interest in the hydrocarbons potential of Central and Eastern Europe is attracting investment into markets that IOCs once shunned. Although onshore exploration is set to see up to US$200mn in investment from efforts by Shell and Petromanas, Albania's offshore is also drawing interest. Irish independent San Leon is planning an drilling campaign and a farm-in from a major IOC (not unlikely to be Shell considering its stakes in Albania) on its offshore Duressi licence, estimated to hold up to 1bn boe.
Yet longstanding efforts to turn the country into a major oil play have struggled, and although promising recent activity still risks being undermined by above ground threats. While Petromanas notes attractive fiscal terms which would allow export of 100% of crude oil in prices based on Brent, the country's status as a net importer may result in pressure on producers to satisfy domestic demand first before exports are allowed. While low royalty rates have attracted attention, the country is seen as among the most corrupt in Europe and disputes over PSC's such as the government's 2011 decision to cancel a license issued to Sky Petroleum in 2011 have reinforced perceptions of risks in the country.