Wide open spaces: Increased interest in exploration and a shake up of the sector are creating new opportunities

With the recent economic growth spurt serving as a testament to Côte d’Ivoire’s recovery, the subsequent increase in energy consumption has also highlighted gaps in provision. Under pressure to satisfy growing domestic demand and to consolidate its position as a regional energy supplier, the power segment is currently going through an ambitious expansion exercise. Meanwhile, in the upstream oil and gas segment, operators are ramping up exploration and production (E&P) activity in a bid to feed the country’s predominantly gas-fired thermal power plants. Such efforts should drive capacity to 3000 MW by 2020, up from 1600 MW in 2014 – an ambitious target alongside equally bold objectives of doubling production of natural gas and increasing oil output five-fold to 200,000 barrels per day (bpd).

Facing Prices

Pressure on the country’s balance sheet has prompted a revision of subsidies for electricity, as well as a renegotiation of contracts with gas producers. The most recent wave of increases in global gas prices has led the government to default payments to producers, which has been addressed by a reduction in prices and an increase in minimum off-take guaranteed until 2025. Amadou Touré, the director-general of petroleum products distributor Corlay Côte d’Ivoire, told OBG, “For many years, the government has been providing subsidies to maintain stable consumer prices – notably for butane gas, which is consumed in large quantities by households. Nonetheless, at some point, measures must be taken to reduce the government budget deficit, which would involve cutting subsidies.”

In addition, the government has allocated CFA8bn (€12m) under the Presidential Emergency Programme to accelerate critical infrastructure projects, much of which will be used to improve and subsidise access to the electricity network. As it stands, domestic demand stands at around 270m standard cu feet (scf) per day. According to figures from the Ministry of Petroleum and Energy ( Ministère du Pétrole et de l’Energie, MPE), by the end of 2013 natural gas output hit 220m scf per day, up from 110m scf per day in 2012, and is projected to have reached 250m scf per day in 2014. While the progress is significant, the volumes remain modest and are fully consumed by the country’s power plants.

In view of their earlier described expansion, serving both domestic and regional power needs, this figure is rising by around 8% every year. As a result the government is hard pressed to encourage higher production. While hopes exist that the difference will be met by in-country resources, alternative options are being considered, such as liquefied natural gas (LNG) imports and a possible connection to the West African Gas Pipeline. “The growing demand for natural gas, coupled with a toughening competitive environment among producers, lead us to consider diversifying in segments like LNG in order to meet local and regional needs” said Roger Dago, managing director of Oryx Gaz Côte d’Ivoire.

Thermal Power

Since the end of electoral unrest in 2011, the power segment has experienced significant growth, in generation in particular. Following the sector’s liberalisation in the early 1990s, a number of independent power producers (IPPs) invested in gas-fired thermal plants, although recent years have seen a rise in combined-cycle turbines.

The Compagnie Ivoirienne de Production d’ Electricité (CIPREL) is an IPP owned by the French utility group Eranove and the government of Côte d’Ivoire, and is the country’s biggest power supplier, generating close to 30% of total volumes in 2013, according to figures from the Central Bank of West African States. Following the completion of a third tranche of investments in 2009 that brought the plant’s capacity to 321 MW, up from an initial 100 MW, a fourth expansion project was launched in 2011, partly financed by the African Development Bank. CIPREL IV will add a 111-MW combustion turbine and a 111-MW steam turbine extending capacity to a total of 544 MW, making it the largest operating thermal plant in sub-Saharan Africa, according to the company’s own sources.

New Entrants

Azito Energy, which is owned by UK-based Globeleq (76.9%) and Industrial Promotion Services West Africa (23.1%), runs the country’s second-biggest gas-fired facility. Following two expansion projects since it first began operating in 1999, the plant is currently spending €349m to add 130 MW to its installed capacity of 288 MW. In December 2011 Korean engineering firm Hyundai Engineering and Construction was contracted for the engineering, procurement and construction of a combined-cycle turbine that uses waste heat from the existing gas turbines. This will allow for an additional output of 1000 GWh per year on top of the current 2200 GWh, without an increase in gas consumption or emissions. Once operations start in 2015, the additional electricity will be sold to the Ivorian government under a 20-year concession deal.

Scotland-based Aggreko was the latest to enter the Ivorian market in 2010 when it started operating a 70-MW gas-fired facility. Since that time it has been rolling out a gradual expansion plan, bringing total capacity to 200 MW at present. In April 2014, following negotiations with government parties, the company announced plans to optimise capacity levels and double its output by 2016.

Meanwhile, plans are solidifying for the construction of a 330-MW, gas combined-cycle thermal plant at Abatta, a site located close to the city of Bingerville in the country’s south-east. In 2012 the national petroleum company Société Nationale d’Opérations Pétrolières de la Côte d’Ivoire (Petroci) awarded US energy company ContourGlobal the build-operate-transfer concession agreement for the facility. In October 2013 local news reports announced that funding for the project, valued at $500m, would come from the Qatar Petroleum Company.

The deal is part of the Gulf state’s bigger plans to invest some $3bn in the Ivorian energy sector and also concerns the supply of up to 240m scf per day – which will double current production – from an offshore floating LNG storage and resgasification unit located 12 km off Grand-Bassam on the country’s south-eastern coastline. Delivery would cover the current deficit, as well as secure the future needs of the new power plant, while Côte d’Ivoire keeps up its search for more domestic reserves.

Hydro

Similar expansion is ongoing in the nation’s hydroelectric segment. At the moment, six state-run facilities have a combined capacity of 600 MW. However, unstable rainfall led to production losses of 25.2% over the course of 2013. Significant losses were incurred at the Kossou facility, which saw its annual contribution fall by half the year before. In a bid to mitigate similar volatility going forward and increase the share of renewable energy in the energy mix, the government has contracted various large-scale projects to outside investors. The largest planned project constitutes the 275-MW Soubré hydropower plant located on the Sassandra River, north of the city of San Pedro and scheduled to begin operations by 2018. The government also announced a total of seven new hydropower projects in January 2014, combining some 1150 MW of additional capacity by 2019 (see analysis). Provided these projects follow their course, hydro capacities will account for more than 60% of the nation’s total installed capacity by 2020, up from 25% today.

Alternative Sources

There has also been a number of initiatives to increase renewable energy’s contribution to Côte d’Ivoire’s energy mix. The lack of a supporting legal framework is one of the factors limiting development of the segment. However, in an encouraging sign for the sector, work is ongoing on a revision of relevant legislation and was confirmed by the introduction of a revised regulatory framework in 2013. The new legislation discerns renewables from conventional sources and reportedly provides guidelines for an adaptation of tariffs to be implemented through a set of legal applications, which are yet to be defined. While specifics have yet to be confirmed, the new framework stipulates fiscal and financial incentives as a primary way to attract investors into the segment.

Speaking to local press about the new legal framework in May 2014, Adama Toungara, the minister of petroleum and energy, stated, “Our goal is to increase the share of renewable power in the energy mix by developing our nation’s potential in biomass, small-scale hydro and solar resources.” In addition, the revised framework provides for a new regulatory body that will oversee the development of local renewable energy sources, as well as an agency to promote energy efficiency and renewables. Aside from securing a modest part of southern-based industrial needs, renewables can be of particular importance for communities in the north of the country, where grid infrastructure is limited.

Distribution

While the government owns and maintains the national transmission and distribution grid, it is managed by Compagnie Ivoirienne d’Electricité (CIE), majority controlled by Paris-based holding company Finagestion. The company has been active in Côte d’Ivoire since 1990 and saw its licence extended by 15 years in October 2005. CIE collects electricity payments on behalf of the state and transfers these in full to the government in return for management fees. Both the planning and execution of transmission and distribution infrastructure investments are in the hands of the Societé des Energies de Côte d’Ivoire (CI-Energies), while the National Authority for Regulation of the Electricity Sector oversees the sector and sets tariffs.

Growing Needs

Rising domestic demand has seen an increase in CIE’s sales figures from 4494 GWh in 2012 to 5045 GWh in 2013, representing an increase in turnover of CFA36.56bn (€54.84m). This was predominantly due to growth in domestic demand and a rise in the average billed price, which was partly influenced by a 15% hike in the industrial tariff in 2012. Growth figures were the highest in low-tension supplies to households. Demand in this segment rose by 14.1% year-on-year and was particularly driven by a 38.2% boom in consumption in the Abidjan region. Over the course of 2013, the total number of residential customers rose by almost 60,000, reaching 1.2m at the end of the year. During the first half of 2014, CIE also reported net profits of CFA3.55bn (€5.32m), a 10% rise over CFA2.94bn (€4.41m) in the first half of 2013.

Overall, the domestic network registered an increase in efficiency, as measured by the difference between electricity received and billed for by CIE, from 73.7% in 2012 to 77% in 2013. This can be attributed, in particular, to a clamp down on unregistered connections in the Abidjan metropolitan region and CIE’s gradual return to formerly rebel-held areas in the country’s north. Although the improvements are significant, the figures demonstrate the ongoing challenges created by persistent inefficiency, representing annual losses of some CFA45bn (€67.5m). Furthermore, the market for smuggled products is also creating problems for other segments of the energy sector. In fact, Touré told OBG, “The lubricant business is being hammered by illegal imports. It is growing fast and gaining market share a little bit more every day. Those illegal lubricants often prove to be of very poor quality.”

To this effect, CIE is investing in expanding its revenue collection capacity in a bid to further curb illicit connections. Through CI-Energies the government is also overseeing the rollout of a CFA400bn (€600m) investment plan targeting the construction of 1200 km of new power lines, which will lift transmission capacity from 1200 MW to 3000 MW, repair voltage transformers, and add more than 2000 villages to the national grid by 2020.

Upstream Framework

As previously mentioned, the gaps in gas supply, which can be compounded by seasonal fluctuations in hydro generation, have highlighted the importance of increasing domestic production to meet demand. One way in which the government is trying to spur upstream activity is by revising the regulatory framework. The country’s 1996 Petroleum Code, which governs the oil and gas segments, oversees the distribution of oil exploration and production permits, most of which are structured as production-sharing contracts (PSCs) overseen by departments attached to the MPE.

Upon signature of a PSC, the winning party pays the government a signature bonus that ranges from $2m to $20m. Exploration typically follows a similar model, under which commercial players finance all exploration and development costs, including that of national oil company Petroci, which can take carried interest of between 5% and 15%. Costs are partially recovered from production afterwards, which is divided according to the conditions of the PSC. While there are no laws that stipulate minimum volumes, the government’s take typically increases in line with production growth. Following a successful exploration period, exclusive authorisation for production usually applies for a period of 25 years, after which it can be extended for up to 10 years.

PSCs stipulate a range of fiscal incentives. As such, with the exception of a corporate income tax rate of 25%, oil and gas companies are exempted from all taxes, contributions, levies and duties applicable to the upstream industry, including import charges and value-added tax. These supersede general tax incentives provided in the nation’s investment code. Sub-contractors benefit from an extension of these benefits and are generally faced with composite taxes ranging from 3% to 6%. Petroci Industries-Services, the national oil company’s service branch, is always granted a free 10% participating interest with an option to acquire up to 20%.

Gas Production

The majority of national gas production comes from Foxtrot International, which operates the shallow water CI-27 field in partnership with Enerci, a local subsidiary of France’s GDF Suez, Petroci and local limited company SECI. Its proximity to the shore has allowed for the construction of a pipeline to the Vridi terminal in Abidjan after which it connects to the Azito network, also serving Ciprel and the Société Ivoirienne de Raffinage, which operates the country’s refinery. Following the conclusion of negotiations with the Ivorian government in 2012, which saw their sales price drop and the daily off-take rise, the company announced a $1bn investment plan that will add seven wells to the six that are currently in operation. It will also construct a new platform at its Marlin gas field – expected to go on-line in 2015 – that will handle 156m scf per day of natural gas.

With domestic demand outstripping supplies, new investors are guaranteed of a domestic market with a government willing to commit to long-term acquisition. This is illustrated by the conclusion of amendments to the PSC for CI-202, a gas block. Australia’s Azonto, formerly known as Rialto, renegotiated its contract with the government following two unsuccessful wells. According to the company, the terms of the new PSC stipulate three consecutive exploration periods over a total of seven years from the date of signature, after which an exclusive exploitation authorisation will be issued.

Under the new framework, Switzerland-based oil trader Vitol has a 65% stake, while Petroci holds 13%, with the right to increase its working interest up to 16%. Azonto is currently analysing 3D seismic data, after which it will draw up an exploration plan and launch a tender for a drilling rig. If all goes to plan, activity should start in the second quarter of 2015, according to the company’s own estimates. “We’re looking at a relatively straightforward development [at Gazelle which would be] multi-phase oil and gas to shore,” Rob Shepherd, the Australian firm’s CEO, stated in an interview with international media in late 2014. Company announcements have further stated that the project would involve two new development wells and the completion of one existing well that would target resources of 40bn scf at 90% probability level and 85bn scf at 50% probability.

Oil Resources

Côte d’Ivoire’s oil production has been somewhat unstable in recent years. According to figures from the US Energy Information Administration, the sector saw a jump in 2001 when production rose from just over 11,500 bpd to more than 63,200 bpd five years later in 2006. However, after two volatile years, output slowed to around 59,000 bpd in 2008. Over the course of 2013, it gradually stabilised at just under the 40,000 bpd mark. If the sector is to meet the government’s ambitions to reach 200,000 bpd by 2020, production on existing licences will need to be ramped up significantly.

At present, the lion’s share of oil production comes from one of three offshore fields. Baobab, located in block CI-40, some 65 km south-west of Abidjan, produced close to a third of national output. The field is operated by oil independent firm Canadian Natural Resources (CNR), which holds a 57.61% share in the project, together with Sweden-based Svenska Petroleum Exploration (27.39%) and Petroci (15%). It has been under production since 2005 and holds estimated recoverable reserves of 200m barrels of oil. Following the completion of the second drilling campaign in 2011, it holds eight production wells in 1219 metres of water. Excess gas is transported north to the Espoir Invoirien floating, production, storage and offloading (FPSO) vessel, also operated by CNR, from where it links it to pipelines heading to the shore. Due to a decline in output from wells in the field’s initial development phase, CNR has contracted a drilling rig for a third campaign that is targeting the addition of 11,000 bpd through five production wells and one water well; the exercise is scheduled to start in the first half of 2015.

Other Fields

Closer to the shore, some 19 km south of Jacqueville at depths of up to 600 metres, lies the Espoir field situated in block CI-26. While it was not thought to be economically viable upon discovery in the 1980s, modern drilling and production techniques, secondary oil recovery and improved terms for PSCs have made the block a key contributor to current and future national production. Following its acquisition in 2001, CNR holds a share of 58.67%, while Irish player Tullow Oil holds 21.33% and Petroci owns 20%. With estimated recoverable reserves of 93m barrels of oil and 180bn scf of natural gas, the field has a life expectancy of 20 years. Peak oil is assessed at over 35,000 bpd, while gas is likely to plateau at 35m scf per day. Besides oil, which is exported by shuttle tanker, it also produces some 30m scf per day of associated gas, which is taken to shore via a 19-km subsea pipeline that links the field to the country’s power plants. In 2012, signalling confidence in the block’s mid-term potential, CNR extended the lease on the field’s FPSO until mid-2017 with an option for an additional 20 years. As of late 2014, the company was preparing for a well-drilling programme that is aiming to achieve an additional net production of 5900 bpd of light crude.

Block CI-11, located on the western side of the Abidjan basin, holds both the Lion oilfield and the Panthere gas field which produce approximately 4000 bpd and 24m scf per day, respectively. Despite its modest contribution and proven reserves of 4.4m barrels, Lion’s crude is the country’s lightest at sulphur levels of 0.18%. Its location in shallow water and relative proximity to the capital have allowed for direct evacuation of oil to the Abidjan refinery, while gas is delivered to the state-owned Lion Gas Plant. With a capacity of 75m scf per day, the plant processes gasoline and butane from natural gas from the CI-11 block and CNR’s CI-26 (60 km south-west of Abidjan) and CI-40 (25 km offshore).

In 2013 Afren, the AIM-listed Nigerian oil and gas company, concluded the sale of its 100% stake in the Lion Gas Plant to Petroci, as well as its 47.96% stake in the CI-11 block to Petroci for $26.5m. However, the company confirmed its interest in exploring CI-01, which contains the Kudu, Eland and Ibex fields situated adjacent to the Ghanaian maritime border in the Tano basin. With estimated reserves of 102bn scf of natural gas and 20m barrels of oil, the block holds considerable promise. In the third quarter of 2014, Afren concluded ongoing negotiations with the Ivorian government to re-draw the block into two new larger areas, CI-523 and CI-525, allowing the company to extend its acreage both to the south and the north of the original block. As part of the new deal, Afren took a 20% share in CI-523 and a 51.75% operating share in CI-525. The latter is operated by London-based Taleveras Group, which holds a 70% stake in CI-523, as well as 38.25% in CI-525. Petroci has a carried interest of 10% in both blocks. By late 2014, Afren and its partners had already started an 1800-sq-km 3D seismic acquisition programme, which is to be followed by an exploration drilling campaign to commence in the first quarter of 2015.

New Pastures

The move to boost existing production is being paralleled by efforts to expand new acreage, both in terms of shallow and deep offshore (see analysis). Particular enthusiasm has been raised by the discovery of Ghana’s Jubilee oilfield and neighbouring finds in the deepwater Tano basin and West Cape Three Points blocks. Hoping for similar geological compositions on the Ivorian side, oil majors have stepped up their drilling activity in the region. Shortly after the first wells were drilled in the deepwater CI-401 and CI-101 blocks situated in the Tano basin, Russian major Lukoil announced oil discoveries earlier in 2014. Lukoil entered into a PSC for both blocks through a 2005 agreement with US-independent Vanco Energy. The latter still holds a 28.34% share in both blocks, while Petroci owns 15%. In 2006 the firm concluded a deal with Nigeria’s Oranto Petroleum International, acquiring a 63% share in the PSA for the exploration, appraisal, development and production of the deepwater CI-205 block, which shares similarities with proven commercial findings in the neighbouring Espoir, Baobab, Lion-Panther, Jubilee and Tweneboa fields, with reserves ranging from 100m to 1bn barrels of oil equivalent.

Lukoil is currently in the third exploration phase scheduled to last until mid-2015. In June 2013 the company expanded its portfolio in Côte d’Ivoire’s eastern border by acquiring a 65% share in Taleveras Energy’s PSA for block CI-504. The asset borders CI-205 in the south and is situated at a depth of 800-2100 metres. Thus far, the company has confirmed the drilling of two exploration wells within the next five years. In the same region, Tullow Oil is looking to emulate the success it had with Ghana’s Jubilee field. In June 2012 its exploration campaign on deepwater block CI-103, which it operates in partnership with US-based Anadarko and Petroci, proved oilbearing geological conditions. A second appraisal well, named Paon-2A, completed in December 2013, encountered water and was plugged, questioning the size and commercial viability of the find.

More promising news came in April 2014, when French conglomerate Total confirmed its second discovery in the country’s deep offshore. The Saphir1XB exploration well on the CI-514 block, at a depth of 2300 metres below sea level, was drilled to a total depth of 4655 metres, “encountering around 40 metres of net pay containing light 34° API oil”, according to Total’s website. The find was promising as, in contrast to most deep offshore exploration including that of Total, it is situated in the San Pedro margin along the border with Liberia. Thus far the area has received far less attention than the eastern Abidjan basin. Total also has a 54% interest in CI-514, which it operates in partnership with CNR (36%) and Petroci (10%), as well as two other ultra-deep offshore exploration licences for CI-515 and CI-516.

In late 2013 the company announced a $300m investment plan to explore its ultra-deep assets, and with the results of the CI-514 find still being analysed, it has declared a continuation of its efforts on CI-515 and CI-516, with the two wells planned to be completed before the end 2014. Following the amendments to the PSCs for CI-509 and CI-513 in April 2014, UK-based African Petroleum Corporation has been awarded extra time to fulfil its obligations on the licences’ first exploration period, which will now expire on March 2016 and December 2015, respectively. The added time will allow for the analysis of recently completed 3D seismic studies and the ensuing drilling campaign.

Outlook

Côte d’Ivoire’s push to improve energy security at home, as well as expand exports into the region has opened up a raft of promising opportunities for the private sector in terms of upstream, downstream and generation. As the slate of ongoing projects in the power segment demonstrates, a guaranteed market and the commitment of the government to enable returns on investment, including sharing the financial burden, has made for an attractive investment environment. While tariffs have some ways to go to reflect market forces, increasing electricity penetration and improvements in distribution leakages are contributing to the long-term health of the power segment. The government is aware of the need for competitive regulations to keep exploration activity going and production increasing.