Finding is Easy; Profits Prove Hard

Modern hydrocarbon exploration began in Mozambique in 1948, when Gulf Oil was awarded an onshore concession covering much of the southern half of the country.

Gulf drilled five wells there during the 1950s; the Temane #1 found gas in a structure along the Indian Ocean coast south of the Save River.

Amoco joined Gulf in 1958, and in 1961 the partnership drilled a second successful gas well, the Pande #1, on a structure northwest of Temane. The initial appraisal of Pande by the Pande #2 well was successful, but the appraisal of Temane (Temane #2) located gas only in a thin shaley interval. Temane #2 tested at a low rate, and the Temane structure was abandoned.

Gulf and Amoco drilled Pande #3 and #4. The #4 well blew out and flowed uncontrollably at an estimated 1 bcf/day for 400 days before the blowout was capped.

With no market for the discovered gas, the companies abandoned exploration in Mozambique. In 1973 the Portuguese left Mozambique, and Mozambique erupted into civil war. The war lasted until the United Nations brokered a cease fire in 1993 and held a UN-managed general election in 1994.

Arco's Initial Involvement

The Mozambique national oil company, Empresa Nacional de Hidrocarbonetos de Mocambique (ENH), approached Arco exploration manager Paul Willette shortly after cessation of hostilities to try to interest Arco in entering the country and participating in developing ENH's 40 percent of the Pande gas. Enron was ENH's partner in the field.

Owing to the unstable political situation in Mozambique, Willette declined to enter into serious talks with ENH in these early encounters. Willette recognized the obvious commercial problem — the only market for the gas was South Africa, and Arco would be unable to do a viable gas deal in South Africa in the face of U.S. sanctions.

In 1995 ENH arranged a tour of the United States to drum up interest in participation in Pande. Shukri Saleh Yayeh, chairman of Zarara Oil and Gas of Dubai, approached Brad Sinex of Arco's Business Development and Negotiations group to look at Pande, and also to review the Temane block, which Shukri had licensed on his own.

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Modern hydrocarbon exploration began in Mozambique in 1948, when Gulf Oil was awarded an onshore concession covering much of the southern half of the country.

Gulf drilled five wells there during the 1950s; the Temane #1 found gas in a structure along the Indian Ocean coast south of the Save River.

Amoco joined Gulf in 1958, and in 1961 the partnership drilled a second successful gas well, the Pande #1, on a structure northwest of Temane. The initial appraisal of Pande by the Pande #2 well was successful, but the appraisal of Temane (Temane #2) located gas only in a thin shaley interval. Temane #2 tested at a low rate, and the Temane structure was abandoned.

Gulf and Amoco drilled Pande #3 and #4. The #4 well blew out and flowed uncontrollably at an estimated 1 bcf/day for 400 days before the blowout was capped.

With no market for the discovered gas, the companies abandoned exploration in Mozambique. In 1973 the Portuguese left Mozambique, and Mozambique erupted into civil war. The war lasted until the United Nations brokered a cease fire in 1993 and held a UN-managed general election in 1994.

Arco's Initial Involvement

The Mozambique national oil company, Empresa Nacional de Hidrocarbonetos de Mocambique (ENH), approached Arco exploration manager Paul Willette shortly after cessation of hostilities to try to interest Arco in entering the country and participating in developing ENH's 40 percent of the Pande gas. Enron was ENH's partner in the field.

Owing to the unstable political situation in Mozambique, Willette declined to enter into serious talks with ENH in these early encounters. Willette recognized the obvious commercial problem — the only market for the gas was South Africa, and Arco would be unable to do a viable gas deal in South Africa in the face of U.S. sanctions.

In 1995 ENH arranged a tour of the United States to drum up interest in participation in Pande. Shukri Saleh Yayeh, chairman of Zarara Oil and Gas of Dubai, approached Brad Sinex of Arco's Business Development and Negotiations group to look at Pande, and also to review the Temane block, which Shukri had licensed on his own.

The initial step was a meeting with the minister of Mineral Resources and Energy for Mozambique, John Kachamila, to discuss options for proceeding. A strategy was developed, with Zarara Oil and Gasto taking a position in the upstream while also approaching Sasol -- a large South African chemical company that could provide an anchor project for gas commercialization -- to join the partnership.

Willette dispatched Steve Sinclair and Jeremy Greene to meet with ENH and Zarara. Sinclair and Greene made the key technical observations that seismic amplitude anomalies appeared to be associated with the gas reservoirs at Pande, and that there were seismic anomalies on the Temane Block.

The two recommended that both areas deserved further evaluation, and the project continued.

Willette and Sinex arranged for political risk and gas marketing studies, which showed that:

  • The political risk was acceptable.
  • South Africa was changing rapidly with the election of Nelson Mandela to the South African presidency.
  • The most viable gas purchaser was the South African chemical company Sasol, which could use the gas at Secunda about 900 kilometers southwest of Pande and Temane.

Sinclair and Greene returned to Maputo to work the data in ENH's files, and they discovered that the Cretaceous Grudja sands at Pande and Temane were present over a large area -- and had outstanding reservoir properties at Pande.

They confirmed the correlation between seismic amplitude anomalies and the gas-filled sands at Pande, and noted that seismic amplitudes in the Temane Block appeared to extend far beyond the limited area drilled by the first two Temane wells.

They also saw a large amplitude anomaly on open acreage in Sofala Bay and recognized that a very large structure offshore northeast of Temane called M-10 had major potential.

In 1996 Willette presented the project to his exploration management, which included Hamid Al-Hakeem, Tom Velleca and Marlan Downey. Downey expressed some of his famous "tummy" twitching at the political and marketing risks.

Sinex suggested tying up as much acreage as possible with technical evaluation agreements (TEAs) that contained pre-negotiated production sharing agreements (PSA) terms. The TEAs basically would commit Arco only to studies while the gas marketing and political risk issues were further investigated. Al-Hakeem, Velleca and Downey approved this strategy.

Sinex proceeded to make offers on Temane, Sofala and M-10 while the exploration group continued its technical work. The effort to tie up the Pande structure was not successful.

Personnel and organizational changes took place in Arco's exploration leadership. Jamie Robertson and Dodd DeCamp became the new exploration management.

TEA negotiations with ENH were successfully concluded in November 1996 by Sinex. Arco signed the AFC establishing 18-month TEAs on three blocks for a total gross cost of $2.7 million. Steve Grimsley became the chief seismic interpreter on the project.

Sasol's attitude changed dramatically once Arco had a legal position in Mozambique and could be either a partner or a competitor. Negotiations on a Sasol farm-in to the three TEAs were concluded in mid-1997, and Sasol agreed to take the exploration risk on the first of the Arco/Sasol/Zarara Temane wells.

With political and gas market risks now judged to be acceptable, Arco president Bill Wade approved gas sales negotiations and conversion of the TEAs to production sharing agreements (PSAs.)

From TEAs to PSAs

Dave Sutter took the lead in negotiating the production sharing agreements and associated operating agreements in 1997. Mike Foley took the lead in negotiating a gas sales agreement with Sasol. Sasol was both Arco's upstream partner and the downstream buyer of the gas, and Acro needed a Memorandum of Understanding for gas sales prior to converting the TEAs to PSAs and committing money to seismic and drilling.

In September 1997, Prabodh Pathak and Janet Weimer began analyzing options for:

  • The technical plan for field development.
  • Arco's ownership in the pipeline to South Africa.
  • Participation in gas marketing in South Africa.
  • Tariffs and transfer prices.
  • Reserves certification.
  • A possible internal market for Sofala gas.
  • Strong differences of opinion with Sasol's upstream unit over probable costs and project management scenarios.

Arco wanted to start drilling on Temane early in 1998 in order to avoid the rainy season in Mozambique. Marty Ward was in charge of planning and execution of the drilling campaign.

Steve Ross and Lee Russell joined the project and took over some of the rising G&G workload. Robertson and deCamp presented the Mozambique project for approval to Arco's management group in Los Angeles on Dec. 12, 1997.

The Drilling and Discovery

The Temane Production Sharing Agreement was signed in Maputo by Arco's Robertson and Willette on May 15, 1998. Denny Tower arrived to be appointed Arco's resident manager in Maputo.

The Nabors 235 drilling rig was waiting offshore. Twenty-four hours after signing, the drilling rig came ashore to the site of the Temane #3 well. The well was spudded in July, and tested 25 MCFPD on Aug. 24, 1998, from the Cretaceous Grudja G-9 horizon.

Subsequent appraisal drilling (Temane #4 through Temane #7) and a 2-D seismic program delineating the amplitude anomalies and tying the wells to the seismic have shown that the Temane Field is a 2 TCF discovery.


And what did we learn from this discovery?

Perhaps, that exploration can be the guiding light -- but wise business approaches are the levers to success.

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