Resource World Magazine

THE OIL PATCH REPORT Joe l C hury Vanoil Energy treads carefully in Kenya O il and gas investors have been led on an exciting safari in Kenya over the last few years, and many are coming back with sizable trophies to boast about. Kenya is becoming a major focus in the prolific East African region. Characterized by high-risk, high-reward plays, Kenya is blossoming into a legitimate player on the world's oil and gas stage. Good results have come from both majors such as Tullow Oil PLC and Vancouverbased junior Africa Oil [AOI-TSXV], whose Ngamia and Paipai wells respectively have turned heads. In particular, the Africa Oil story was one of a stock's meteoric rise in what looked like a short amount of time. However, with each of these tales of triumph, the back story is what counts, and in the case of AOI, this was an "overnight success" which actually took many months to build. Now investors looking to piggyback that success are judging the merits of other juniors in the vicinity who present Africa Oil type potential. One particular company that could step up to those kinds of expectations is Vanoil Energy [VEL-TSXV]. Both of Vanoil's Kenyan flagship properties are in the Anza Basin that also houses Africa Oil's Paipai-1 well. It's worth pointing out that on Paipai, Africa Oil recently announced a discovery of a 55-metre thick hydrocarbon-bearing sandstone. In fact, all four wells that have been drilled into the Anza have resulted in oil discoveries; no gas, just pure liquid gold. "Based on the maturity of the source rocks, we know we're dealing with a pure oil producing basin," says Aaron D'Este, President and CEO of Vanoil Energy. Paipai's discovery proves D'Este's theory. There's still much to do on Paipai to bring it to market, but the 55-metre thick hydrocarbon showing is undeniably positive. Kenya's petroleum industry is still young. Africa Oil's Paipai was stalled due 48 www.resourceworld.com to the country's lack of testing equipment capable of handling such high reservoir pressures. The company is likely going to need to pour over the data they received from this well, which was drilled recently during Q4 of 2012, and completed in Q1 2013. High pressure reservoirs require delicate handling, and expertise. But what AOI learns through its trials, the rest of the region's players get to learn vicariously. However, Vanoil has knowledge that the others don't; they have 3D seismic data. So far there has been a glaring hole of 3D data in the region. Over the company's current first drilling, Vanoil was prepping its strategy by completing a 3D survey last July. During the process, very important infrastructure was constructed and put in place. While some companies were jumping to the rig, Vanoil was assessing its new ground wisely and biding its time. "We are the closest to the capital in Nairobi, and we have invested already in the largest infrastructure in Kenya onshore to date," says D'Este. "This was required to do our 3D seismic survey." The result? A much more cost effective roadmap for moving ahead and increased familiarity of the ground they'll be treading upon. Even building a road brings about important data, even if it's a matter of looking around and getting a better lay of the land. Now Vanoil has an enviable infrastructure with enhanced access to drilling locations, which could mean shortening the time it takes to get into production. Unlike some of the more complicated and extremely expensive wells we've seen in the region, Vanoil's have the potential to be much cheaper, and a higher likelihood of hitting the target on the first attempt. "We are well positioned to minimize costs on our wells compared to what Africa Oil experienced in Paipai, and certainly compared to what Tullow and Africa Oil experienced in Ngamia," says D'Este. "They are quite far from a road in and they had some seriously difficult terrain to cross, which we do not have. Thus logistics in our block are a lot simpler than any of our peers." It's estimated that the dry hole cost (if production isn't factored in) will be under $20 million. In Alberta terms, this is an expensive undertaking, but in Kenya, campaigns costing more than $50 million are not unheard of, nor uncommon. However, the economics still work when companies like Tullow are drilling wells like the nearby Twiga South-1 well that's set for a combined 2,850 barrels a day, into a Brent-priced market. Knowing that many of the Kenyan players have had to clear roads, build pads in the middle of nowhere, and operate solely with 2D seismic data, Vanoil may now have a real advantage. They're sitting in the middle of a 100 km2 high-density grid of 3D seismic data, surrounded by infrastructure, and drilling is now on the horizon. At this stage, Vanoil, unlike their peers, won't have to do the same cartwheels to get their product to market, once production is secured. n "We are well positioned to minimize costs on our wells compared to what Africa Oil experienced in Paipai, and certainly compared to what Tullow and Africa Oil experienced in Ngamia," says D'Este. M AY 2 0 1 3

• Cover