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Oil moves give many operators hope, but profitability is still a long shot

Oil moves give many operators hope, but profitability is still a long shot

In the last week of July, Nymex crude prices rose every trading day closing the week at US$49.87 per barrel. Brent was a tad higher at US$52.60. This immediately prompted a flurry of responses from analysts with the leading narrative, more or less attributing the rise to OPEC members’ decision to cut production by one million barrels per day.

Ostensibly this move is to improve crude prices so that member countries can get closer to budget balance, especially those whose only real economic contribution comes from oil.

The obvious question then becomes: What do these OPEC countries deem a reasonable price?

A combined report by Fitch, Highmark Capital and the IMF, of which the Wall Street Journal published an excerpt, shows that the only country that can survive sub-fifty oil prices, is Kuwait. For the rest, the target lies anywhere between U$51 and US$130 with the Middle East countries, except Saudi Arabia, occupying the bottom ranks of the list while it is glaringly obvious that Africa’s two major producers, Nigeria and Angola are in the top five.

Another report where the impact of the crude price was discussed in much broader strokes, I happened to find on YouTube of all places. Here a non-country specific picture emerged showing how certain crude sub-sectors are affected by the current glut in oil.

If one look at the bigger picture, the target price for oil sands and fracking producers will be between US$70 and US$80 per barrel while deep-sea production only makes investment sense above US$110. If the YouTube analyst is correct, it tells us a lot about the future of oil exploration in Namibia.

The target range of 70 to 80 dollars I accept as fairly accurate since this is corroborated by North American oil sands producers. There is a tsunami of literature available on the number of wells drilled in sands and in rock (fracking technology) and these all point to a drilling cost of around US$10 million per well. Oil wells in non-traditional sources have been shut down in droves over the past two years, another indication that crude around 50 can not sustain them. But then there are equally authoritative analyses showing that the oil from these producers contributed to the over-production. Add to that the export of oil and oil products from the United States and it becomes axiomatic that the world produced more oil than it needed.

Of the accuracy of the deep-sea estimates I am not so convinced for one simple reason, – there are very few places in the world where actual deep-sea extraction is taking place. Conversely, the technology is still in a pioneer stage, and is extraordinary expensive.

North Sea extraction, which is done typically in water depths of 200 to 400 metres, is an established and evolved industry, a fact reflected in the Brent price which is a mere three dollars higher than Texas Light Sweet Crude. So, there is a recognisable convergence in the price levels.

Deep-sea is done in water depths exceeding 1000 metres and the only notable field I know of is the Tupi field offshore Brazil, where the drilling depth is 1600 metres. It means there are too few deep-sea producers to get a credible indication of what future extraction costs will be. If the recent history of US oil sands provide any clue, deep-sea will quickly improve in both technology and efficiency as more producers come on line. But that is not the case yet.

Enter Namibia and our simmering aspirations of becoming a second Angola or Nigeria. First, these two countries extract from shallow waters, so no comparable deep-sea costs there. Secondly, all Namibia’s most promising prospects are deep-sea, typically in water depths around 1600 metres, very similar to Tupi.

So, let us play a few wild cards and speculate on some outcomes. If oil sands are looking at US$80, and deep-sea at around US$110, then it can be assumed that, with better technology and a lot of luck, future Namibian producers will target a crude price around US$100 per barrel.

The open question is, will that happen. Now the report I quoted earlier becomes important. If most of the OPEC members can make their budgets balance around US$65, it is highly unlikely that crude will go to 80. If higher prices create market space for US oil sands producers to come on line again, then the price will stabilise, and over the long term, deflate again. If it is true that the OPEC agreement is not worth the paper it is written on, then the recent rise is just market speculation and not based in any reality.

Whichever way it goes, it is highly unlikely that crude will return to US$100 and that means it is impossible to extract deep-sea oil in Namibian waters profitably. For us, over the medium term, I expect a lot of activity in the prospecting sphere, and many more baffling announcements from clueless politicians, but I doubt we will actually see one barrel being pumped to the surface.

In my mind, local oil discoveries will be marked and sealed in great secrecy but not actually exploited. So expect big announcement and even more outrageous claims, especially where exploration if driven by politics and not by market fundamentals, but do not expect any industry of note.

A Namibian deep-sea industry only makes sense when crude is at US$100, and I do not foresee that for a long time. Deep-sea resources are simply too insignificant to make any dent in the market, and the technology still needs another twenty to thirty years to mature. I do not see any immediate bright oil future for us, unless the Russians or the Chinese happen to sink a black well on the mainland.


 

 

About The Author

Daniel Steinmann

Brief CV of Daniel Steinmann. Born 24 February 1961, Johannesburg. Educated at the University of Pretoria: BA, BA(hons), BD. Postgraduate degrees are in Philosophy and Divinity. Editor of the Namibia Economist since 1991. Daniel Steinmann has steered the Economist as editor for the past 29 years. The Economist started as a monthly free-sheet, then moved to a weekly paper edition (1996 to 2016), and on 01 December 2016 to a daily digital newspaper at www.economist.com.na. It is the first Namibian newspaper to go fully digital. Daniel Steinmann is an authority on macro-economics having established a sound record of budget analysis, strategic planning and assessing the impact of policy formulation. For eight years, he hosted a weekly talk-show on NBC Radio, explaining complex economic concepts to a lay audience in a relaxed, conversational manner. He was a founding member of the Editors' Forum of Namibia. Over the years, he has mentored hundreds of journalism students as interns and as young professional jourlists. He regularly helps economics students, both graduate and post-graduate, to prepare for examinations and moderator reviews. He is the Namibian respondent for the World Economic Survey conducted every quarter for the Ifo Center for Business Cycle Analysis and Surveys at the University of Munich in Germany. He is frequently consulted by NGOs and international analysts on local economic trends and developments. Send comments to daniel@economist.com.na

Following reverse listing, public can now acquire shareholding in Paratus Namibia

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20 February 2020, Windhoek, Namibia: Paratus Namibia Holdings (PNH) was founded as Nimbus Infrastructure Limited (“Nimbus”), Namibia’s first Capital Pool Company listed on the Namibian Stock Exchange (“NSX”).

Although targeting an initial capital raising of N$300 million, Nimbus nonetheless managed to secure funding to the value of N$98 million through its CPC listing. With a mandate to invest in ICT infrastructure in sub-Sahara Africa, it concluded management agreements with financial partner Cirrus and technology partner, Paratus Telecommunications (Pty) Ltd (“Paratus Namibia”).

Paratus Namibia Managing Director, Andrew Hall

Its first investment was placed in Paratus Namibia, a fully licensed communications operator in Namibia under regulation of the Communications Regulatory Authority of Namibia (CRAN). Nimbus has since been able to increase its capital asset base to close to N$500 million over the past two years.

In order to streamline further investment and to avoid duplicating potential ICT projects in the market between Nimbus and Paratus Namibia, it was decided to consolidate the operations.

Publishing various circulars to shareholders, Nimbus took up a 100% shareholding stake in Paratus Namibia in 2019 and proceeded to apply to have its name changed to Paratus Namibia Holdings with a consolidated board structure to ensure streamlined operations between the capital holdings and the operational arm of the business.

This transaction was approved by the Competitions Commission as well as CRAN, following all the relevant regulatory approvals as well as the necessary requirements in terms of corporate governance structures.

Paratus Namibia has evolved as a fully comprehensive communications operator in Namibia and operates as the head office of the Paratus Group in Africa. Paratus has established a pan-African footprint with operations in six African countries, being: Angola, Botswana, Mozambique, Namibia, South Africa and Zambia.

The group has achieved many successes over the years of which more recently includes the building of the Trans-Kalahari Fibre (TKF) project, which connects from the West Africa Cable System (WACS) eastward through Namibia to Botswana and onward to Johannesburg. The TKF also extends northward through Zambia to connect to Dar es Salaam in Tanzania, which made Paratus the first operator to connect the west and east coast of Africa under one Autonomous System Number (ASN).

This means that Paratus is now “exporting” internet capacity to landlocked countries such as Zambia, Botswana, the DRC with more countries to be targeted, and through its extensive African network, Paratus is well-positioned to expand the network even further into emerging ICT territories.

PNH as a fully-listed entity on the NSX, is therefore now the 100% shareholder of Paratus Namibia thereby becoming a public company. PNH is ready to invest in the future of the ICT environment in Namibia. The public is therefore invited and welcome to acquire shares in Paratus Namibia Holdings by speaking to a local stockbroker registered with the NSX. The future is bright, and the opportunities are endless.