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Should Tunisia Now Be on Energy Investors' Watch List?

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To help us look at the developing situation in the region, we spoke with oil industry veteran John Nelson.

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James Stafford: Africa Hydrocarbons has a nice piece of contiguous acreage in Tunisia. Can you tell us a bit about the two blocks in question and where you are right now in the exploration process?

John Nelson: We have a 47.5% interest in two adjoining concessions, the Bouhajla and Ktititir blocks, located in north central Tunisia and only 25 kms west of the Sidi el Kilani oil field. The blocks were acquired approximately 3 years ago when the government made them available for bidding after being off the market for over 25 years. Our local partners were there first, and that is the opportunity.

James Stafford: What are you chasing here? Conventional or unconventional plays? What do you think you'll hit with drilling?

John Nelson: We have several conventional type prospects and leads on our blocks and that is what we will be targeting initially. Our first well will be testing a fractured carbonate chalk reservoir, which is very similar to what is found producing at Sidi el Kilani. Last year, Shell acquired a large land position around us and have committed to spending over $150MM on their blocks. We have heard that Shell and others have an interest in testing shale (also called "unconventional") plays within the region. The possibility for an unconventional play type also exists on our acreage but we have chosen what we believe is the "low hanging fruit" to target first.

James Stafford: You've mentioned before the ability to "de-risk" exploration and development in Tunisia. Can you take us through the math here and demonstrate the economic feasibility of operating in Tunisia?

John Nelson: Our situation is somewhat unique compared to many others in Tunisia or exploring in other remote parts of Africa. Only 25 kms from our block is the facility and pipeline for the Sidi el Kilani oil field. The facility was built to handle up to 25,000 bbls/d but now is only handling 1000 bbls/d. So there is much excess capacity in this nearby facility. There is also a pipeline in place from the field all the way to the port facility on the coast that is also under-utilized.

That means it won't take much time or money to get any future production on stream. As a result, we can still be profitable in the event of a smaller discovery size due to the infrastructure already being in place. It also allows the option to truck oil to the facility to obtain some cash flow while onsite facilities and a short pipeline are built to Sidi el Kilani if we make a discovery.

In other words if we are successful on our first well next month, we should be able to start cash flowing very very quickly.

James Stafford: Do you need a major operator in there like Tullow with Africa Oil in Kenya? What happens if you make a discovery? Can you develop it cost-effectively?

John Nelson: In our situation we do not need the expertise or deep pockets of a large partner. In the event of a discovery we would be able to adequately finance a development project. We anticipate that fewer than five wells would be needed to optimize drainage of our first target area, which is substantially larger than the area of production of 50 million barrels at Sidi el Kilani.

James Stafford: How does the cost of drilling wells compare in Tunisia, Kenya, Somalia …?

John Nelson: Our costs to drill a 2500m well is in the area of $7 million. The cost seems excessive compared to drilling costs in North America, but on an international scale it is reasonable. This actually isn't very deep, and given the size of the target, not very expensive. We also have easy terrain and a network of roads in our area of Tunisia. Access is pretty easy and services are relatively close if needed.

In more remote projects such as in Puntland, Kenya, Ethiopia or other areas far from infrastructure, the drilling cost of a similar well may be well over $50MM.

James Stafford: Outside of Tunisia, where should smaller companies be looking? Can you rank the prospects for us here in terms of junior capabilities and potential?

John Nelson: Juniors provide a valuable service to the industry by often being the first entrants into a new area or applying new technology to older areas. There are niches in most parts of the world. Myanmar is opening up. New opportunities may now come up in Venezuela. The rift basins of Niger, Chad and Sudan are attracting new investment. The new discoveries off of Israel are opening up a lot of new exploration initiatives there that look quite attractive. There is not so much a shortage of ideas and opportunities as there is a shortage of capital to pursue them.

James Stafford: We understand that you have experience in Somalia-specifically in Puntland. Can you debunk any myths about working in Somalia and take us through the challenges?

John Nelson: There were a lot of concerns about security issues both onshore Puntland as well as piracy in the offshore. It took a lot of careful planning to mitigate much of the risk. Local communities were engaged, informed and employed. Our security people worked with the government and contractors to remove any possible threats along transportation routes. The airstrip and drilling camp were well protected. In the end, all the people and equipment were mobilized and the drilling took place without incident.
No positions in stocks mentioned.
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