Matthew Allen – Managing Director & CEO, Otto Energy, Tanzania
Matthew Allen discusses Otto Energy’s two plays in Tanzania, NOC relations, counter-cyclical opportunities, and the country’s potential to become a major oil and gas producer.
Otto’s only engagement outside of North America is in Tanzania. Could you begin by explaining what drew you to Tanzania initially, as opposed to neighbouring Mozambique or other East African oil and gas producing nations, and if or why you plan to stay long-term?
Otto found the TPDC to be a very open and approachable regulator who actively worked with operating companies to accelerate exploration activity in the region.
The initial discoveries in the East African Rift System that started around 10 years ago saw a large exercise in leasing acreage prospective for similar plays. Otto spent about two years understanding the East African Rift play trend and engaging with regulators across the East African region before bidding on two licences in Tanzania in 2011. At this stage, the oil and gas industry remains very much in its infancy in the region, despite some very encouraging and large discoveries to date. Otto found the Tanzanian regulator, the Tanzanian Petroleum Development Corporation (TPDC), to be a very open and approachable regulator who actively worked with operating companies to accelerate exploration activity in the region. The TPDC also recognised the challenges and the need to be flexible in working with operators to ensure that the best industry practices were being followed in order to give the best chance of success in unlocking new discoveries similar to those in Uganda and Kenya.
Otto and its joint venture partners are on the verge of undertaking the most important test of this play trend yet with the drilling of the Kito-1 exploration well scheduled for the second half of 2016. The success or otherwise of this highly anticipated activity will determine the forward strategy in this region.
At a time when many juniors are putting projects on hold, Otto has actually been very busy. To what extent does the prevailing downturn in oil prices present a counter-cyclical opportunity for companies like yours with capital to invest?
The rapid drop in oil prices experienced in 2014/15 saw many companies underprepared. If you did not have your balance sheet in good order and were able to be flexible with your work program, you were in for a world of hurt. Otto is now able to hire the equipment and personnel required for exploration and development activity at a significant discount from the heights of five years ago. There is also ample capacity with newly built and latest generation technology available to small companies like Otto. As an example, we are now able to hire drilling rigs for half the day rates that we were paying two to three years ago – and those rigs are newly built, have the latest technology and we generally have a choice of the best equipment.
Despite this, frontier areas like East Africa are still a higher cost environment than comparable, more developed regions. There will continue to be limited activity in frontier regions until the global economic environment and confidence improves. Otto is preparing for the inevitable improvement in the sector that will occur in the next two to three years.
Otto is the main investor in both the Kilosa – Kilombero and Pangani projects, with a 50% stake in both. What was the rationale behind investing in these particular assets and what are the differences between them?
Both the Kilosa-Kilombero and Pangani areas are frontier exploration areas with no previous drilling on either, but are potentially extensions of the rift valley discoveries made in Uganda and Kenya.
Otto and our joint venture partners are the first companies to bring modern exploration techniques to these areas, including the use of airborne gravity and magnetic surveys along with the acquisition now of over 1,200 kilometres of 2D seismic. This has identified that the Kilombero Basin in southern Tanzania is prospective for oil with a basin that sits in the same maturity window that has been successful in the Albertine graben in Uganda and the Lokichar Basin in Kenya. The joint venture is planning to drill the Kito-1 exploration well later in 2016 to test this play and determine if oil or gas is present in this area. Any success will see a rapid follow-up of the additional leads that have been identified in this area.
The Pangani area unfortunately has not been identified as prospective from these early exploration efforts and no further work is planned for this area. This is the nature of exploration, not every opportunity will work. We have high hopes for the Kito-1 exploration well and the results will be known later this year.
As you told our colleagues at Inside Oil & Gas Australia, Otto will drill its first exploration well onshore in Tanzania in September 2016. Could you explain the significance of this important milestone for the company?
The drilling of the Kito-1 exploration well is significant not only for Otto, but our joint venture partners and the industry in Tanzania in general. Discovery of oil at the Kito-1 exploration well will open an entirely new play that hasn’t yet been discovered. The flow-on benefits for Tanzania in the form of further exploration, subsequent development, local jobs and opportunities and the revenue generation from these type of projects will be significant. This is the true definition of a rank wildcat well – no-one knows what the result will be but, if it is a discovery, there will be a rush to follow.
Under the Joint Venture obligation in the Tanzania Petroleum Act 2015, private companies must partner with the TPDC, Tanzania’s National Oil Company, on oil and gas projects. How would you characterise Otto’s relationship with the Tanzanian government? Are they supportive of international investment in oil and gas in general?
TPDC are a very supportive regulator, both with their ability to assist international companies looking to invest in Tanzania and in their very strong industry experience. The conversations with TPDC are very much of a peer or collegiate nature with both parties looking to do the best exploration job possible. I have personally been very impressed with the strong technical training and dedication that the TPDC staff have demonstrated towards maturing an industry still very much in its infancy.
How big can Tanzania become as an oil and gas producer, especially in light of the election of President Magufuli?
Tanzania stands on the cusp of potentially becoming a major Liquefied Natural Gas (LNG) producer in the coming decade. Having seen the impact that this has had in my home state of Western Australia, I can attest to the flow-on effects to jobs, employment, education, future careers for young people, and ultimately the ability to improve the infrastructure in the region.
I sincerely hope that an oil industry is also developed along the lines of the discoveries in the Rift Valley play that have been seen in Kenya and Uganda recently. Liquid hydrocarbons require a significantly shorter timeframe to be bought into production and the impact of becoming an oil producing nation for Tanzania will also be highly beneficial.