FEATURE: Oil investors still bullish on Namibia despite ‘wakeup call’

Deepwater oil discoveries by Shell and TotalEnergies catapulted Namibia's Orange Basin to international prominence in early 2022 and led to comparisons with Guyana, where huge offshore discoveries in 2015 triggered an economic boom.

Three years and 17 wells later, Namibia's oil sector is facing a less rosy picture, with a major Shell write-down and disappointing drilling results denting enthusiasm.

Yet industry players and Namibian officials remain cautiously optimistic about the prospects for Namibia's hydrocarbons -- and their ability to transform its small economy.

"The mood is still optimistic in Namibia," said Graham Hopwood, a senior advisor at Horizon Engage. "The sense is that the dream is not yet over."

Technical challenges

The Venus and Graff discoveries, by TotalEnergies and Shell respectively, led to an oil and gas bonanza, with supermajors, independents and tiny explorers piling into the Orange and nearby Walvis basins.

Estimates from Namibia's government put its crude resources at more than 10 billion barrels, a figure matched by approximations from Galp's Mopane discovery alone.

When the Portuguese company announced it intended to farm down half of its 80% stake in block PEL 83, supermajors expressed an interest, sources said, while Brazil's Petrobras announced publicly that it intended to bid.

However, recent developments in the sector have been a dose of cold water.

In early January, Shell said it was writing down $400 million on its PEL 39 discovery -- after drilling six exploration and three appraisal wells -- because it "could not currently be confirmed for commercial development." The precise parameters of the write-down were not clear.

Days later, a closely watched Chevron spud in PEL 90 proved non-commercial, the US supermajor said.

In response, energy minister Tom Alweendo said that "while the Shell write-down is unfortunate, the Ministry of Mines and Energy believes that we have barely begun to scratch the surface of the country's offshore resources."

But the hiccups exposed technical and cost challenges that could slow Namibia's oil boom.

"Given the long string of successful well outings, there was an easing into this idea that this was going to be a smooth straight line-up, and I think that the Shell write-down and the Chevron non-commercial location were a bit of a wakeup call to everybody -- the government, investors -- about the business that we're actually in," said Robert Bose, CEO of Toronto-based Sintana Energy, which holds stakes in Orange Basin blocks operated by Chevron and Galp.

"That confluence amplified the level of deflation in the overall level of enthusiasm."

Among the biggest issues for operators are the high gas-to-oil ratio -- given Namibian law bans flaring -- permeability and porosity.

"The discoveries remain challenging due to resource mobility and permeability, and a high gas-to-oil ratio making extracting oil and gas harder," a Shell official said in a statement to Platts. "This coupled with current market conditions, have not yet enabled clear commercial pathways that meet Shell's investment criteria/requirements."

Even TotalEnergies, whose Venus discovery is expected to be the first to come online in 2030, according to S&P Global Commodity Insights forecasts, has seemed lukewarm in recent weeks.

CEO Patrick Pouyanne pushed the estimated FID date back to 2026 and trimmed the estimated production capacity of the project to 150,000 b/d, with gas injection in water depths of over 3,000 meters expected to inflate production costs. TotalEnergies requires a breakeven cost of up to $20/b to proceed, Pouyanne told analysts.

The oil discovered is light and sweet, comparable in gravity to WTI Midland crude.

Shell's write-down, Hopwood said, has "re-emphasised the technical difficulties and cost factors around drilling in deep waters so far out from the coast."

However, Bose noted that there is "heterogeneity across the blocks and within the blocks".

"Is there anything from a gas-to-oil ratio perspective that would lead me to think there is a fundamental flaw in this basin that is going to essentially prevent the delivery of commercial resources? No," Bose said.

Cautious optimism

Technical challenges aside, analysts and industry insiders remain optimistic about Namibia, which is on course to become a significant African producer in the 2030s.

"The recent financial write-down by Shell is widely interpreted as a strategic portfolio management decision rather than an indication of diminished resource quality or viability," Teresia Kaulihowa, a professor at Namibia's University of Science and Technology, told Platts of the view from Namibia. "Overall investor confidence in Namibia's petroleum sector remains robust."

Beyond the Venus and Mopane projects, companies continue to drill wells and carpet Namibian acreage with 3D seismic. TotalEnergies will drill two additional wildcats this year, Marula and Olympe, while Rhino Resources and its partners -- including BP-Eni joint venture Azule Energy -- recently encountered hydrocarbons with their Sagittarius-1X well in PEL 85.

Shell said it would continue "to explore potential commercial pathways to development" in PEL 39, while Chevron has reaffirmed its commitment to further exploration.

Kaulihowa said Windhoek, meanwhile, "remains committed to fostering an enabling investment environment through targeted regulatory reforms and strategic infrastructure-led development."

On March 21, Namibia's first female president, Netumbo Nandi-Ndaitwah, will take office following the Swapo party's seventh successive election win in November.

Experts predict a status quo for energy policy, including "pushing on with plans to increase the state's free-carry share of PELs to 30%", Hopwood said. State-run Namcor currently holds 10% of each PEL. He cautioned that the change would only occur in future PEL contracts, in order to not spook investors.

Namibian officials did not respond to requests for comment.

In addition, a local content policy, mooted since 2021, must become legislation by early 2026. Namibian officials are also understood to be working with operators on a gas plan to open up opportunities for local consumption.

Rather than casting a pall over Namibia's nascent oil sector, Bose said, the latest hiccups have instead injected a dose of realism.

"People are moving from spending sheer exploration dollars, to appraisal dollars to spending dollars to facilitate getting to a development decision," he said. "So there is progress across the arc of activity that is required to get to the finish line. That's the best signal that there is reason for cautious optimism."