21 January 2003

Africa: Finding Africa's 'Big Oil' - in Deep Water

Washington, DC — When Gene Van Dyke, a native of Illinois, graduated from the University of Oklahoma with a degree in geological engineering 50 years ago, he wasn't thinking about Africa.

For two decades, he operated an independent oil business in Texas and Louisiana, before switching, in 1973, to international exploration in North Sea. In 1996, he became convinced that Africa has vast untapped reserves. While most production in Africa to date has been onshore or in offshore waters not very distant from land, Van Dyke is a believer in deep water. After just over six years in the region, his company, Vanco Energy, has acquired licenses for almost double the undersea acreage of any other company, including all the petroleum majors that have been pumping oil out of Nigeria and Angola for decades.

Vanco is a privately held firm headquartered in Houston, with 50 employees and regional offices in Côte d'Ivoire, Equatorial Guinea, Madagascar, Morocco and Namibia. Van Dyke is the owner, president and chief executive officer of the firm, which also operates in Gabon and Senegal and, mostly recently, Ghana, where surveying to determine the prospects for finding oil offshore began in October.

While independent producers like Vanco have little name recognition, Van Dyke is a familiar figure in the industry. In 2000, the Houston Geological Society named him a "Living Legend in Wildcatting." In November, at a business roundtable at the State Department addressed by Colin Powell, as well as his counterparts from Treasury and Commerce, Van Dyke made an attention-grabbing address in which he forecast that West Africa would soon overtake Saudi Arabia in output of oil per day. "The potential of West Africa is really phenomenal," he said. A few weeks later, Vanco cosponsored a West African Oil and Gas Forum, organized by the Corporate Council on Africa, and Van Dyke hosted a reception for attendees at his palatial home in an exclusive Houston suburb. He was interviewed in his Houston office.

Since you have made Africa the focus of your company's work in recent years, you must have calculated that the prospects there are pretty good.

Yes, it's very good. Traditionally, in the United States, the discovery ratio [for oil wells] has been about 10%. In West Africa, the discovery ratio has been between 50 and 60%. More than half of the exploration wells result in a discovery.

I have been a fan of deep water for a long time and I think the future in the oil business is deep water. About 1996, we started looking for an area in the world that was deep water where you could use FPSOs (Floating, Production, Storage and Offloading vessels). FPSOs are great for West Africa because the weather is benign. You don't have to have turrets. You can spread-moor them. So we focused on West Africa. It's oil prone.

The stage of exploration at that time in West Africa was not as nearly as far along as Mexico or Brazil and the companies hadn't really started drilling in deep water. There had been a couple of deep-water wells drilled in Angola and maybe one or two in Nigeria, but other than that, deep water in Africa was very virginal. We had the concept of getting in there and getting acreage before the majors woke up, and that's what we did.

You're investing a lot of money. You must be pretty confident that the oil is there.

Oh, yeah. We're going to find big oil. We probably have under our acreage, alone, over 10 billion barrels, recoverable. The United States has 22 billion barrels.

Reserve wise, I think West Africa could go up to the range of 100 billion barrels, which is equivalent to Iran or Iraq or Kuwait. And it's light oil. It's better than Middle East oil. In terms of production, West Africa could get up to nine or 10 million barrels per day production pretty easily. Saudi Arabia produces 8 million barrels at the moment. And West Africa is half as far away from the U.S. as is the Middle East. There are no canals to go through, and you don't have the security problems you do in the Middle East.

And you're working only in deep water? No onshore exploration?

All our licenses are for deep water, deeper than a thousand feet. A thousand feet going up to 10,000 feet. We have licenses for up to 30 million acres in eight different countries.We are the largest license owner in deep water West Africa. We have probably twice as much as Shell or Exxon or any other major. We have the equivalent of nearly eighty percent of the deep-water acreage Gulf of Mexico. You can't really appreciate what 30 million acres is until you see it on a map like this.

You began by working in the Gulf of Mexico. How different is offshore Africa?

In deep water Gulf of Mexico, there are 5000-acre blocks, so you have to do a lot of drilling to maintain the license and keep it from expiring. Our blocks in Africa are in a million acres blocks. In Morocco, we have an 8-million acre block. You don't have to drill as many wells to hold on to it. We have large blocks and maybe only one or two wells have to be drilled in a year.

How do you locate oil at such depths?

To find the oil in Africa, we use 2-D (two-dimensional) and 3-D surveys extensively, along with existing data. Seismic (technology) is very, very sophisticated now. Exploration is very sophisticated.

In the past, you looked for structures. If you didn't find a structure you didn't drill. But most of Africa's oil is stratigraphic. Africa was uplifted fairly recently in geologic time. You had a number of rivers -- maybe 30 or 40 major rivers flowing out to sea. Like a garden hose, swishing back and forth, the rivers dumped sediments way out -- in fingers. . The oil is trapped in sand on both sides by shale. Deep water in West Africa has phenomenal potential, primarily because of these turbidite sands that come off the shelf.

Production is primarily from stratigraphic traps, not structures. That makes the oil harder to detect, and it can only be detected by modern seismic. But it's also why the discovery ratio is so high. Companies have been able to do seismic work in deep water for the last 20 years, but the drilling technology and production technology in deep water has only been around for five or six years.

How did you go about getting acreage under license?

Every license we have, we got from the government. Most of these governments have a national oil company. As a general rule, we negotiate with that oil company. We have not taken deals from other oil companies. What we do is study an area. We study the available published information on the area and the tax laws of the country, the geology of the country. When we decide that the area might have merit, we try to find out who shot it in the past [i.e. conducted seismic surveys]. A lot of times the seismic is owned by the government. Other times it is service organizations. We get that seismic and look at it. And if we see some big structures with potential, we go for a license. We talk straight to the government. We don't go through brokers, as a general rule.

And once you've got the acreage, what are the steps you take to move forward?

Then we go out there and shoot it. Generally you start out doing 2-D shooting - that's reconnaissance seismic. After you have results of the 2-D, then you pin down the area that you think is interesting for 3-D. We've done the 2-D seismic and in many cases 3-D seismic. We've just spent $30 million on 3-D seismic.

We never get any surprises because we already knew what we were going to get before we went through all that process. Instead of just going off and getting a big block and crossing our fingers and hoping we have something, we know what we have before we do it. The seismic does not change that much, and we usually know we have some big structures that are worthwhile pursuing before we get a license in the first place. In Equatorial Guinea, Amerada Hess initially drilled a couple of dry holes. But then they drilled about eight straight discoveries on wildcats. You have to learn your area. But once you get a handle on it, there's not much reason to drill dry holes.

When will you begin drilling?

In Morocco, we have to drill a well by the end of 2003. We're going to drill a well in Cote d'Ivoire, probably in late 2003. We plan to drill three wells in Equatorial Guinea toward the end of 2003. And probably at the end of 2003, we'll also drill a well in Namibia. All wildcat wells. (A "wildcat" is an exploration well a well that is not drilled within a field.)

Now we're in the process of bringing in partners. In each of these properties, we're bringing in two large oil company partners each taking 25%. I'm keeping 50%. We're going to operate the properties -- the drilling of the wells, completion of the development of the fields.

What has been your experience doing business in Africa?

Every country wants capital, and essentially, every country wants U.S. capital. Governments are interested in working with the United States and getting closer to the United States. And all of them are interested in dealing with independents. The majors tend to move slowly. The independents get in, go after it, and turn on production fast. I had a hard time getting started, but we've reached the point now where countries say: 'Why haven't you talked to us?' It's become much easier for us.

At what stage in this process does a country begin to receive revenue from its oil?

Generally there is a bonus payable on signing. You get a service contract. You have an educational fund. We send people from these countries to various schools for training. They get their training and come back to work in the oil business. That's the extent of their income until you get production.

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