Chariot off to a flyer

Chariot Oil & Gas is a junior exploration company sitting on vast oil licences that consultants estimate could hold over 10bn barrels of oil. That potential has already secured a joint venture deal over one licence with Brazilian giant Petrobras. Following unprecedented interest in its three other licences, Chariot expects to announce further deals in the early part of 2011, which could finance exploration drilling by the end of the year.

Chariot holds substantial acreage over four lightly-explored oil and gas licences (comprising eight blocks) off the coast of Namibia in south-west Africa. When the company’s shares were floated on the Alternative Investment Market in 2008 much of the interest stemmed from the hope that offshore Namibia shared the same, prolific salt basin geology as offshore Brazil, having been connected as one land mass long ago. The west African salt basin is now known to end short of Chariot’s acreage; even so, that acreage looks attractive in its own right as drilling in the 1990s encountered some oil reserves and special technology has detected oil slicks that could have been produced by subsea oil seeps.

The Namibian margin extends along 1,000 km of coastline and is comparable in size to the North Sea, yet only nine exploration wells have been drilled. Chariot is the second-largest acreage holder in Namibia. It has mapped 11 prospects and six leads that consultants estimate could hold over 10bn barrels of oil and gas.

"Prospective" resources are only estimates of the volume of hydrocarbons that a reservoir could contain. Explorers need to drill prospects to find how much is really there. However, what adds credibility to Chariot’s licences is the farm-in investment by Petrobras, which is a highly experienced and successful explorer in offshore Brazil.

One drawback is that Chariot's prospects are deep at up to 2,500m beneath the seabed, itself below 1,000m to 1,500m of water. Wells are consequently expensive to drill, each costing around $45m to $55m (£29m to £35m). And these costs might now be higher in the wake of last year's Gulf of Mexico offshore disaster.

To reduce drilling costs and risks, Chariot is looking to bring partners to all its licences. The company set strict criteria for potential partners (demanding that their equity was worth at least $1bn and that they had experience in both deep waters and west Africa). Such has been the interest that 31 major firms have asked for the seismic data, a second data room had to be opened and the closing date for bids had to be extended.

Chariot now plans a deadline of mid-January and hopes to announce results in the first quarter of the year. The outcome should help validate the value of Chariot’s blocks, and should help finance Chariot’s drilling costs for the first wells on each licence.

Deep-water drilling rigs were in short supply, but - as a consequence of the Deepwater Horizon disaster - no longer. With luck, drilling will start in the year.

True, Chariot will remain loss-making for long after it makes a discovery. That won't stop its share price from motoring if the news is good.