Invictus Energy (IVZ) - Large Green Gas Field to Feed Local Markets

Invictus Energy Limited is an independent upstream oil and gas company focused on sub-Saharan Africa. Invictus is opening one of the last untested large frontier rift basin in onshore Africa, the Cabora Bassa Basin in northwest Zimbabwe.

The first high-impact well, Mukuyu 1, is scheduled to spud in August where the company is looking to test 20 Tcf (trillion cubic feet) and 845 million barrels of conventional gas-condensate (~4.3 billion barrels of oil equivalent on a gross mean unrisked basis) through 7 stacked targets in the Mukuyu prospect.

Matt Gordon caught up with Scott MacMillan, Managing Director, Invictus Energy. Mr. Macmillan is a Reservoir Engineer and Founder of Invictus Energy Resources. He is a member of the Society of Petroleum Engineers (SPE) with over 15 years of experience in exploration, field development planning, reserves and resources assessment, reservoir stimulation, commercial valuations, and business development.

Mr. Macmillan was previously a Senior Reservoir Engineer at Woodside Energy on large Oil & Gas filed developments and Business Advisor in the Global New Ventures team focused on Africa exploration. He also worked as a Senior Resource Engineer for AWE, working on the Waitsia Gas Field, the largest onshore gas discovery in Australia in the last 40 years. He has extensive business experience in Zimbabwe.

Company Overview

Invictus Energy Limited is an independent upstream oil and gas company listed on the Australian Securities Exchange (ASX: IVZ) and the OTC Markets (OTCQB: IVCTF). The company’s asset portfolio features a highly prospective licence, the Special Grant 4571, in the Cabora Bassa Basin in Zimbabwe, one of the largest under-explored interior rift basins in Africa.

SG 4571 contains the world-class Mukuyu conventional gas-condensate project, the largest un-drilled prospect onshore Africa. Drilling operations on the Mukuyu 1 are expected to commence in August 2022 with Exalo’s 202 Rig which is currently on location at the well site. The Mukuyu 1 will test one of the largest prospects to be drilled in 2022.

Invictus Energy’s asset consists of a Special Grant 4571, located in northern Zimbabwe. The company is drilling the world-class Mukuyu prospect from August 202, targeting 20 Tcf and 850M barrels of condensate in 7 stacked targets.

In the past few months, the company appointed ERCE, an independent consultant to provide an updated prospective resource estimate for the Mukuyu prospect. Based on historic Mobil data, the company had reinterpreted and reprocessed a resource estimate at 8.2Tcf and 247M barrels of condensate. Over the last year, the company collected extensive seismic data over a much finer grid. This data has provided a deeper insight into the underlying resource. The updated resource is estimated at 20Tcf and 845M barrels of condensate or around 4.3Bn barrels of oil equivalent. This asset is a world-class target that is being chased onshore at a very modest cost.

Planning and Development

In order to commence drill operations, several processes need to be carried out. It requires a lot of planning. There are often long lead times for securing casing well heads. As part of the process, a company needed to contract a rig and determine recent oil and gas rig deployments in the region, which in this case, is Zimbabwe. The company also has to identify the prospect that needs to be drilled along with the trajectory of the well being drilled. A drill program needs to be developed, which is followed by well pad construction. Next, the logistics come into play as all the oil equipment is moved on-site. The company’s team has put in extensive efforts to source equipment from every continent barring South America in order to move the program ahead.

As part of last year’s seismic program, the company collected infill data and merged it with the old Mobile data that was originally shot in 1990. The historic data had a 15km-20km line spacing, as a result,  a lot of gaps needed to be filled between the existing lines. The company was able to infill to 1.7km line spacings. Over the last 30 years, seismic acquisition technology has seen massive improvements. The seismic survey conducted by Mobil is over 3 decades old.

While both the historic and current surveys were similar in terms of length, the data density for the newer survey was 200 times higher. This enabled the company to view the subsurface in far more detail, allowing it to pick up new horizons and targets within the Mukuyu prospect. The feature is spread across an enormous 200-square-kilometre land area under closure. The company already had coverage from the previous Mobil grid, which was infill drilled. The added data and insights have drastically changed the company’s view on the asset along with its prospectivity and risk profile.

Notably, onshore drilling is relatively cost-effective. Invictus Energy had spent about $6M to acquire the 840km program. The seismic processing is included in this cost and accounts for about 10%. From the point the seismic program began in the second half of 2021 to drilling, the company successfully advanced the in-house interpretation at a rapid pace. Normally, companies require a lot of time to interpret the data. Since Invictus Energy had the Mobil data set, it was able to move ahead quickly and commit to drilling.

While 3D seismic work offers a much better picture, it is significantly more expensive. The company chose to conduct 2D seismic work as it was focused on identifying the big structural targets with robust closure and trapping mechanisms. As per the company, when working on a frontier basin, it is a better strategy to hunt and drill the big structural prospects first. Historically, this strategy has led to the discoveries of big fields, which can easily be identified in 2D surveys. 3D coverage isn’t required to identify such huge structures.

Drill Operations

At Mukuyu 1, the company is looking to drill the first well, which goes up to a depth of 3,500m. The estimated cost for drilling the first well is $16.5M. Next, the company is looking to drill the shallower basin margin well which goes up to a sub-2,000m depth. The estimated costs for drilling the second well is estimated at $10.5M. Drilling for oil and gas is significantly different from mineral exploration. Due to this reason, the company carried out seismic work and identified the right drill prospects and trajectories before testing the actual targets.

Invictus Energy inherited a comprehensive data set from Mobil’s exploration program in the 1990s. Mobil was able to identify a huge Muzarabani anticline, which is a big dome structure. The anticline is an enormous feature of the 200 square kilometre area and is under closure of the largest un-drilled structure in onshore Africa.

Mobil left the project in the early 90s as there wasn’t a market for gas at that point in time. Mobil thought that the Kapora Acid Basin was more gas prone as opposed to oil-prone. At this stage, the onshore discoveries in Mozambique were yet to be monetized. As a result, the company realised that there was no point in trying to find additional gas or continue exploration drilling.

Upon acquiring the project from Mobil, Invictus Energy also inherited the Mobil data set in the form of paper sections along with the field tapes. These paper sections clearly show the anticline structure. The company reprocessed and cleaned up the data, which led to the discovery of the huge Mukuyu structure along with interesting structural features along the basin margin. In the second play, the company is looking to test out these structural features. As per the company, these features appear quite similar to an East African rift system, while the smaller freeway closures up against the basin balming fault are similar to the Lokichar Basin where companies like Tullow Oil PLC, and Africa Oil Corp. have been highly successful.

Through the utilisation of Mobil’s data,  Invictus Energy was able to refine the infill seismic program that was shot last year. This ensured that the company was chasing the right targets and gathering relevant data. At this point, the best margins were leads that weren’t mature enough to be prospects. The company infilled these lines in between the Mukuyu prospect to develop the right well trajectory. Since the company has static targets, it is looking to intersect them in the right locations in order to test the Mukuyu prospect in the best possible way, ensuring that the company has the best chance at success.

The decision to drill 2 wells is the company’s way to test out 2 independent play types.  Drilling the first well will give a lot of information that would be useful in understanding the seismic data. If the drilling is successful, it will enable the company to play fairway further away from the basin and identify similar plays and prospect trends. This will be followed up by drilling at Mukuyu. The company currently has 2 different play types, which consist of a petroleum system element, source rock, reservoir, seal, and trap. Notably, the traps for these 2 targets are different, and it is anticipated that there’s an additional source rock element in the basin that can contribute to the margin play as well.

Drilling 2 wells with different play types will reduce risk and increase the chances of success. Achieving success in either one of the 2 wells will unlock room for prospects that belong to the specific play. Within the basin, the company has stacked prospectivity. It has plans to drill through a number of horizons. At Mukuyu, the company has 7 step targets that it is looking to test. Drill success at any one of these targets will lead to massive volumes, that would be transformational.

The company isn’t looking at probabilistic aggregation. The higher the number of targets, the more chances of success in the monster prospects in one of the horizons. This is why it has selected prospects that enable the drilling of stacked targets

It is looking to test out as many horizons as possible in order to maximise the chances of success, which, in turn, will unlock the basin’s value. If the petroleum system works, it won’t work standalone.  This is similar to how all the discovery trends in the North Sea are found in multiples rather than an isolated discovery.

Currently, the company’s gas reserves are in place along with several chemicals that are used in fertiliser manufacturing. This 510Bn cubic feet reserve is expected to last for 20 years. While the company did not reveal exact prices due to confidentiality agreements, it provided a few indicative metrics. The South African domestic gas pricing in the current environment is $10/mcf (million cubic feet), which makes a 510bcf (billion cubic feet) supply worth around $5Bn over a 20-year period.

In May 2022, Invictus Energy raised $12M in capital. It has received extensive support from its shareholders and institutional investors. The company’s appeal is the size and potential of its project which is being chased from an exploration perspective. The company has 80% equity in the project with 20tcf and 845M barrels of condensate in a single prospect. From an exploration point of view, funding has been challenging for juniors due to the associated risks. However, Invictus Energy has a strong risk-reward balance which is quite rare.

In a case where the company makes a discovery and successfully unlocks the full scale of value, it is looking at a long development period. The Zimbabwe and South African markets are rich as they provide gas-fired power to Zimbabwe and other places in South Africa. Within these regions, economic growth is being constrained by a lack of power availability. Invictus Energy has the ability to supply gas across the region and monetize it quickly and inexpensively. The company won’t need to build a lot of pipelines and the existing infrastructure is fairly modest.  An increase in the gas supply will help South Africa wean off coal-fired power, which would have an additional benefit from a carbon emissions standpoint.

If the company can successfully develop the project, raising capital won’t be an issue. The company has had preliminary discussions with several multilateral institutions and the interest has been largely positive.

The Market Landscape

From Mozambique’s supply perspective, 100% of South Africa’s gas consumption is very mature. It has been on stream since 2002, and it came off a plateau at the end of 2021. Similar to Europe, South Africa is used to cheap gas prices. The fields are now maturing and there is a growing supply crisis brewing in South Africa. Energy Africa, a US-based group, predicts that by 2030, there will be a 1bcf/day supply shortfall in South Africa.

To put it into perspective, the 1bcf/day shortfall is the same amount consumed by the entire East Coast of Australia, which includes manufacturing, residential requirements, and more. Over the past decade, there has been extensive drilling in the fields in order to source additional supply for South Africa’s gas market. However, these efforts have been unsuccessful so far.

During the peak of the pandemic, gas prices fell to $3. At the time, having similar pricing to source onshore gas from Mozambique seemed like a sound strategy. Given the current gas prices, South Africa will need to compete against Europe and Asia for LNG (Liquified Natural Gas). The surge in demand and competition has driven gas prices to $20, which is unaffordable in South Africa. Invictus Energy can provide a solution through long-term take or pay contracts that would supply the domestic gas market in South Africa. The company does not have plans to export as there are a lot of opportunities that exist within the region. It anticipates that gas supply is desperately needed and the move would receive overwhelming support.

As per the company, the knock-on effect of the Russia-Ukraine situation could be positive for South Africa. This is because there are a lot of undeveloped gas discoveries, particularly offshore. The northern Mozambique fields are also expected to come online in due time. Interestingly, a lot of these volumes are already contracted out for the first 10 years. Meanwhile, in West Africa, there are numerous undeveloped gas projects due to low prices and narrow markets that have hindered LNG trends and offshore development.

As Europe seeks to secure long-term supply alternatives to Russian gas, South Africa can be a winner as the development in the energy industry is also expected to bring in domestic gas. This is because there’s a compulsory domestic market obligation that comes along with energy development. These developments will put gas into the local economies of countries such as Angola and Senegal, aiding in industrialization and electrification. Africa is currently experiencing a massive power shortage. In fact, 650M Africans do not have access to electricity. In order for the continent to realise its potential, power shortages need to be addressed.

Zimbabwe’s Jurisdiction

According to Invictus Energy, there have been changes in Zimbabwe from the previous regime, particularly in the second half of the Mugabe era. Previously, highly draconian investment policies were brought in that made foreign investments virtually impossible. The new government, however, has brought in investor-friendly reforms as it seeks to attract foreign investment back into the country. This change has already started to pay dividends.

These changes have led to a lot of new investments coming in from existing companies. For instance, Amplatz and Anglo-American are working on developing a new stainless steel plant, which requires a lot of electricity and gas to get up and running. Prospect Resources, an ASX-listed company developed a lithium project in the region and sold it successfully through a highly-competitive bidding process. According to Invictus Energy, the doors are now open and people are realising that investments in Zimbabwe are now possible.

Following a successful discovery, Invictus Energy is looking to bring in a development partner. Given the size, potential, and upside of the project, the company anticipates that the development partner could potentially fund a significant portion of the project. Given the company’s existing equity and the option to sell a portion of the project to acquire funding, the balance sheet won’t face any problems.

The company also has several multilateral institutions such as Africa Development Bank and Africa Finance Corporation that can provide concessional-type loans for development. Funding wouldn’t be an issue due to the integrated nature of the project with the region’s electricity. Electrification would also have a positive impact on fertiliser production within the region.  Given the size of the project and the strategic opportunity it offers, the company is open to a potential M&A (Mergers and Acquisitions) as well.

Currently, the Exalo rig is deployed at the drill site. The company is carrying out maintenance work before commencing drill operations. Depending on the duration of the maintenance program, the drill operations are expected to commence by mid-August. The company expects the drilling program at Mukuyu 1 to last between 45-60 days based on the targets being drilled. In case of success, the company would need to carry out extensive logging, fluid sampling, and core cutting.

The company has 7 stacked targets and is looking to publish news flow at regular intervals. 200 horizon is the first target which is located about 850m below the surface. It is expected to come up in the first 2-3 weeks of drilling. Once the Mukuyu well is completed, the company will initiate drilling. Following this, the company will assess the results and move on to the basin margin.

To find out more, go to the Invictus Energy website