Invictus Energy has capacity to handle the multi-billion dollar Cabora Bassa Project that encompasses the Mzarabani Prospect and there is nothing amiss with its funding model, managing director Scott Macmillan has revealed.
This comes as some quarters had questioned Invictus’ capacity to meet the enormous financial demands for the Muzarabani Project, which might require billions of dollars if oil is to be discovered.
Invictus has already spent around $1 million in its first year and will spend another $1,5 million or so to conclude the rest of its study work. More funding will, however, be needed if and when the project moves to the drilling stage.
“We expect the drilling to cost between $10-20 million for each well we drill depending on the depth. If we make a discovery, however; the total investment will then be measured in billions including wells, processing facilities, pipelines and associated infrastructure over the life of the project,” said Macmillan in an interview with Business Weekly.
Conventional oil drilling
Drilling for conventional oil and gas is very expensive (tens of millions for each well) due to the depths involved which requires specialised and hi-tech drilling equipment and personnel to run the drilling activities, said Macmillan.
He, however, said his company had been disappointed by comments that Invictus, because of its size was neither suited nor has the financial capacity to handle this project.
“It’s been very disappointing to read some vitriol, on social media by a number of parties. People are questioning our ability to fund that, well you can go and have a look from when we entered into this transaction when we did our due diligence, spent six months going through and our shareholders voted in support of the transaction knowing fully well that we are going to Zimbabwe.
“We only needed around $2,5 million for the first stage of the work programme that we are currently in at the moment,” Macmillan said.
He said when time comes for drilling, Invictus which has already raised $4,5 million through an oversubscribed placement in which the company’s own directors participated in, will come to the market for more funding.
“When time comes for drilling, the capital market in Australia is one of the best capital markets worldwide in terms of junior resource companies, what we are trying to raise is a very easy amount to raise,” said the Macmillan.
He, however, said because exploration is high risk, there might be need to bring in additional partners to spread risk.
Drilling is expected to take place before the middle of 2020.
Macmillan said while it seems like the process will take a long time, it was in line with the work that still needs to be done and the ordering of equipment.
“There are no rigs available in the country that can drill to the depth of 4,5 km, which is what we are trying to do.
“Then you also need specialised equipment that need to be ordered and custom built, and that takes months,” he said.
While the junior miner is fully funded for the ongoing geological studies, with a two-year budget secured, it will have to target other partners for farm-out when it gets to drilling stage. Government approval may be necessary before a farm-out deal can be finalised.
In the oil and gas industry, farm-out is the assignment of part or all of an oil, natural gas or mineral interest to a third party for development.
The typical services described in farm-out agreements is the drilling of one or more oil and/or gas wells.
A company may decide to enter into a farm-out agreement with a third party if it wants to maintain its interest in an exploration block or drilling acreage, but wants to reduce its risk or doesn’t have the money to undertake the operations that are desirable for that interest.
Farm-out agreements are very popular with smaller oil and gas producers who own or have rights to oil fields that are expensive or difficult to develop. One company that makes frequent use of this type of arrangement is New York Stock Exchange Listed Kosmos Energy.
Kosmos has rights to acreage off the coast of Ghana, but the cost and risk to develop these resources is high because they are under water. To help reduce these risks, Kosmos “farmsout” its acreage to third parties like Hess, Tullow Oil and BP.
Experts say farm-out agreements are effective risk management tools for smaller oil companies due to the high risks facing any single operator.
Smaller miners are also increasingly turning to specialist investors such as private equity or companies that seek returns in mining royalties.