Tullow Oil, a United Kingdom-based firm that has been conducting successful oil explorations in Kenya and Uganda says it is hopeful it will discover oil in Ethiopia.
The firm signed an agreement with the Ethiopian government to commence three explorations this year.
Tullow started the first exploration last month and is expecting "encouraging results."
Drilling works on the first well began on January 14 at the Sabissa 1 site in southern Ethiopia's Omo valley. The 2600 meter-deep hole is in its final stages, according to Tullow.
The company announced that the drilling began after an extensive 18 month seismic study, which covered around 18,000 kilometers.
Ethiopia's oil reserves are estimated at around 2.7 billion barrels, according to a report released by the firm.
The Horn of Africa country has not produced oil in commercial quantities since its first oil seep was reported in 1860, although by the 1920s prolific seeps of oil in the Red Sea coast were widely known.
Industry sources say Tullow Oil will announce its findings by mid-March.
Tullow's partner, Canada-based Africa Oil Corporation (AOC) has explorations in Ogaden basin in Ethiopia, as well as in Kenya and Puntland.
Last week AOC was given a warning by rebels of the Ogaden Liberation Front to quit explorations in the region.
But the firm has been defiant after it signed a new agreement with the government.
The agreement, signed between Ethiopian mines Minister Sinknesh Ejjigu and AOC vice-president for business development James R. Phillips, allows AOC to commence petroleum explorations in southern Omo on 42,000sq kilometers and in Ogaden on 50,000sq kilometers.
Oil exploration in Ethiopia began after the first exploration in 1915, and early reports refer to oil seeps in the Ogaden basin, where oil exploration dates back to the 1940s.
After having been granted an oil exploration license covering all of Ethiopia in July 1945, Sinclair Petroleum relinquished the concession in December 1956.
Preliminary work on the regional geology and detailed discussions with AGIP geologists focused on the Ogaden region and field survey began in that area.