Investing Pioneer – 1/12/2023
For the country of Namibia – as with all countries of similar standing – uncovering a substantial resource (oil, gas, etc.) of recoverable and commercial potential can be enough to permanently alter the economic evolution of the nation, presumably for the better. The prime example used to indicate the positive side: Norway. All the same, proper regulation and policy (both on the development, and investment side – from revenues incurred) are necessary to ensure that the blessing does not become a curse, a point often brought up when talks of prosperity from major resource prospects arise.
In Namibia, both on and offshore prospects have garnered significant attention over the past couple of years. Certainly, the off-shore developments appear positive thus far, though this article will focus on an on-shore oil and gas basin prospect. Specifically, the recently delineated Kavango Basin. For those who have followed the exploration project – headed by Recon Africa in association with Namcor (the Namibian state O&G entity) – it is agreeable to say discourse surrounding the prospect has been polarizing, making it difficult to understand the probabilities, potential, and effects surrounding the development. Who to trust?
One may think it is to be expected that activist environmental groups and individuals will craft narratives, in an attempt to inhibit the introduction of a potentially massive O&G development. Some of these stories or claims may be rooted in truth, maybe exaggerated, and others may be purely inapplicable or false.
This could prove particularly the case when estimates of a world-class basin in the 10s of billions of barrels are made (especially with the ecosystem that the basin finds itself in – surrounded by elephants, etc.). That is not a suggestion of the fact that proper O&G exploration and extraction procedures are necessarily at any marked risk of posing harm to these species, or the ecosystem as a whole. Certainly, however, it is a forefront consideration, hence the presence of regulations and compliance ensuring proper conduct.
On the other hand, some entities – associated individuals – and social media figures in the geology/O&G investing sector have remarked negatively upon the play, to varying degrees. Some unaffiliated geologists have also spoken poorly of the probability that any commercially recoverable oil will be discovered. At the same time geologists in support of the basin (to the extent that it warrants further exploration) are not hard to find.
A talking point consistently made by detractors, now fueled by the significant drawdown in share price and non-commercial findings in the latest drill results, is that RA is eventually under threat of running out of cash for exploration operations. Others state that an eFTG program – a cutting-edge new technology developed and built by Lockheed Martin, an American aerospace, defense (etc.) technologies company – coupled with another test well and seismic results, has a sufficient probability of success, or could provide the necessary data to establish a joint venture partnership, strengthening the financial situation.
So, what is the prudent evaluation of Recon Africa and the Kavango basin?
An important point is the following: The presence of apparent discourse and disagreement by experts and non-experts alike are to be expected for an exploratory play. Unfortunately, definite protestations are commonly made in the absence (or in spite of) applicable data.
When pioneering a new play in a previously considered non-existent oil basin, it is only expected to have counterclaims in the earlier stages (i.e., before marked quantities of recoverable and commercial oil have been totally confirmed). Spectacular share price rises draw more attention, and a narrow perspective of the development may be made, without consideration for the underlying thesis and long-term picture.
Speaking to the expertise and credibility of geologists associated with or employed by Recon Africa, it is unfair to negate their thesis by virtue of certain dissenters, as it is not clear any relevant information has been brought forth to eliminate the general thesis suggesting the potential of a world-class oil basin.
In the early stages of Norway’s oil adventure, in 1958, the Geological Survey of Norway wrote to the Ministry of Foreign affairs that the possibility of finding coal, oil, or sulfur could be discounted. Is the geological picture of north-east Namibia better understood today than off-shore Norway in 1958? Definitely. Especially to the geologists associated with or employed by Recon Africa. Still, it serves as support for the idea that in the absence of exhaustive data, such definite protestations, as effectively made by the Geological Survey of Norway in 1958, should be carefully evaluated to consider their merit.
Let’s look at early 20th-century U.S. Steel. Ron Chernow, in his book, The House of Morgan, writes, “An unending controversy would surround U.S. Steel: was it Pierpont’s greatest deal, as he believed, or a giant scam?”
There can be no doubt, at its core, a significant degree of speculation surrounding Recon Africa’s issued securities has occurred in the past. “From Vanderbilt, [Pierpont] Morgan had learned the trick of basing value not on current assets but on projected earnings.”
“U.S. Steels’ subsequent history provided evidence for both detractors and admirers.” According to Chernow, reaching heights of $55/share, it fell to less than $9/share during the panic of 1903. Finally, “Yet it is fair to say that in time the enterprise expanded to the contours of Morgan’s vision, becoming America’s foremost steel company. It amply rewarded its investors – at least, the patient ones.” (The House of Morgan, Ron Chernow, 1990)
The differences between these two companies are more plentiful than their similarities (to say the least), but that aside, a general, and simplistic lesson – on the assumption that the geological thesis suggesting recoverable oil remains to be disproven or was strengthened by findings and data collected thus far – can be made.
Remarkable risks are the very nature of exploration plays (some less so than others and weighing potential benefit to risk is prudent). To the intelligent investor, participation must be weighed accordingly. Now, we await further data to reveal the true nature of the basin. In this crucial period for energy, Namibia, the global economy, and Recon Africa could benefit significantly in certain ways if new extensive reserves are established.
