Until recently Tunisia was considered to be a minor league and relatively underexplored venue in Africa’s rapidly expanding oil & gas scene. This situation has quickly changed with new bid rounds and forced relinquishments creating an opportunity for new companies to come in.

Major American E & P companies like Shell have jumped at the opportunity to acquire ground that had been dominated for decades with little to no work conducted, mostly by European State oil & gas companies in this former French protectorate. For the first time major spending has been committed to test Tunisian basins which are arguably equally prolific as those in neighbouring environments with more work performed, such as Libya.

Tunisia is now in focus for investors because exploration is increasing within the producing Pelagian Basin, which leads us to ask the following questions:

Should Tunisia now be on energy investors watch list?

Is Shell just the start of “big oil” making inroads into the country? And which are the plays that people should be watching?

To help us look at the developing situation in the region we managed to speak with oil industry veteran John Nelson.

John Nelson is CEO of Canadian-listed Africa Hydrocarbons Inc. (NFK). A veteran geologist, Nelson spent much of his career in East and Central Africa—much of it for Mobil Oil--studying regional and mapping rift basins at a time when no one else was shopping around in Africa’s interior. Over his 27 years in the industry, Nelson has also had junior E & P experience, recently serving as CEO for Lion Energy Corp., which was bought out by Africa Oil Corp 'AOI' in 2011 as a way for AOI to gain access to their impressive Kenyan land package that John had put together.

Africa Hydrocarbons Inc has a 47.5% interest in the Bouhajla Block, located onshore Tunisia and surrounded by major Shell Oil.

In an exclusive interview with Oilprice.com, Nelson discusses:

• What makes Tunisia a great game for the juniors
• How Tunisia’s geology compares to the East African Rift
• What’s hot in Tunisia: conventional or unconventional plays?
• Why security isn’t as grave a concern as one would think
• What some of the next great exploration areas will be for juniors
• Why it’s a lack of capital, not venues that is holding new entrants back
• How to mitigate risk in Somalia
• Why Ethiopia may be about to see its first major discovery
• Why things are moving—but slowly—in Eritrea
• How close we are to commercial viability in Kenya

James Stafford: Is Tunisia right now a venue for the juniors or majors, and what makes Tunisia a good venue for small companies?

John Nelson: There is a good cross-section of different sized oil companies exploring and operating in Tunisia. Some of the majors are present such as ENI, Total, CNOOC and Shell; however, most of the activity is with the smaller companies.

Junior companies can be very successful on projects that may not meet the economic threshold of the majors, but can propel juniors quickly to mid-tier producers. This makes Tunisia a good place for smaller companies to explore.

The basins in Tunisia are well established and understood. Services for seismic and drilling are available. There is a capable work force and French rule of law. Infrastructure in the way of roads and pipelines can be found across the country. Fiscal terms are good and the government is stable and reasonable to deal with. There are a number of smaller Canadian companies already there.

James Stafford: Can you tell us a bit about Tunisia’s potential. What is the biggest field and what are the best exploration prospects?

John Nelson: There is a lot of geological diversity in Tunisia which creates a number of different play types to explore for. The biggest onshore oil field is the Sidi el Kilani field in north central Tunisia. This field has produced over 50 Million barrels of light sweet crude from a small number of wells. In fact it is the similarities in Africa Hydrocarbon's targets to Sidi el Kilani that got me interested enough in the "home run" size of the first drillable target, to decide to come and run this company.

James Stafford: How does the geology compare to East Africa and the East Africa Rift System?

John Nelson: The geology of Tunisia is not exactly like that of the great Tertiary rift system of east Africa. There are of course some geological similarities on a smaller scale where extension has caused the formation of horst and graben structures in some areas of Tunisia. In general what we are looking for is actually arguably more straight forward.

James Stafford: What’s the business atmosphere right now in Tunisia?

John Nelson: Business as usual. We have not seen any significant risks or changes in business practices since we have been involved there. In terms of North Africa, Tunisia is probably at the top as a jurisdiction in which to do business, and stability of the politics, etc. The economy seems to be doing well. There is construction going on in many of the cities. The country has not suffered at the same level from debt and poor fiscal mgmt like some of the Eurozone countries on the northern Mediterranean side. The country, like many countries these days, has unemployment issues especially with the younger generation.

James Stafford: So if Big Oil is not looking in Tunisia, how does that help NFK?

John Nelson: It is hard to compete against majors when it comes to acquiring sizeable acreage and making commitments. It allows smaller companies to cost effectively get positioned and undertake exploration initiatives. However, if a significant discovery is made then Big Oil may appear back on the scene to partner with or acquire small companies like NFK. Shell Oil surrounds our Block now but we were there first and were able to position ourselves with over 130,000 acres.

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 govt 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 govt 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.

James Stafford: What about Ethiopia and Eritrea? Eritrea seems open for business now after preferring to focus on its mineral resources for so long--and thanks to the new technology on the scene--and it’s got Red Sea territory that is virtually unexplored.

John Nelson: Eritrea has been slow to open up to oil and gas exploration despite a fairly high level of interest. New laws and policy changes move slowly in many parts of Africa. Eritrea has been explored in the past and there are known oil seeps there. No major discoveries have been made yet.

James Stafford: How do you view prospects in Ethiopia, as a possible extension of finds in Kenya?

John Nelson: Ethiopia has a variety of play types throughout the country that are soon to be drilled. Africa Oil is currently drilling in SW Ethiopia along the Tertiary rift trend that extends north of Kenya. They may make the first significant oil discovery for Ethiopia in that area.

James Stafford: How close are we to commercial viability in Kenya, and what do you think the next year to year and a half will show?

John Nelson: Tullow and Africa Oil are close to determining commerciality. The recent testing suggests the rates and accumulations may be sufficient. Some additional drilling success in some of the other sub-basins on their acreage in blocks 10BA and 10BB as well as in Ethiopia will help initiate further development decisions. There is a lot of drilling and testing to be done over the next couple years. I am pretty sure the results will lead to major infrastructure plans for the area. It will take time--years--due to the remoteness and current lack of infrastructure in the area as well as political involvement of neighbouring countries.

James Stafford: So what can we expect by the end of the year from Africa Hydrocarbons? What do potential investors need to know?

John Nelson: We anticipate drilling our first well in April and should know the results in May. In over 27 years, I haven’t seen many wells with this kind of risk-reward—a $7 million well that is geologically so similar to a proven field only 25 km away where one well produced more than 20 million barrels.

We have worked up the target with 2-D and 3-D seismic that are remarkably clear, and that give us what we call in the business a "play chance" that is much much higher than your typical International exploration well. Usually with a target this size you are looking at a 10%-15% chance of success - we have heard our chances rated by third parties between 28% and into the low 30% chance of success. This is actually a geometric difference in probabilities - really an order of magnitude.

With success on our first well, we would look to start production from Bouhajla North, and follow in that area by preparing to penetrate the reservoir again with new wells. We would also establish a reserve and resource calculation to highlight the size of the produceable reservoir in that area.

Concurrently we would develop an inventory of prospects all over our acreage which we would develop with additional seismic programs.

Real success just on our first well would turn us from an explorer into an intermediate producer immediately.

James Stafford: What happens if you hit—what kind of NPV do we get compared to current market cap.

John Nelson: Well James, if we don't hit we are backstopped by cash in the treasury as well as our land position and additional targets which we would then set our sights on.

But with a discovery similar to a Sidi el Kilani well, our NPV10 based on our 47.5% working interest would be close to $100MM, which is about 10 times the current market capitalization of the company of $9 million - we will know within 8 weeks. .