The Road to Damascus: Lebanese Banks Expand in Syria

Executive magazine

Dark, heavy storm clouds continue to linger over the heads of many bankers worldwide, troubled by the subprime market crisis, fraud, financial havens and the plunging dollar. Lebanese banks have weathered this fiscal hurricane, although dark clouds in the otherwise clear skies of Beirut are dampening the sector’s dynamism.
But while the West wakes up to yet another financial scandal, and Beirut’s political impasse drags on, Lebanese banks in Syria have been having a field day since the sector was liberalized in 2001 and the Lebanese pin stripes moved into Damascus.
“Generally speaking all private banks have improved – improved assets, number of branches, liabilities, deposits and turnover, and all have made profit,” said Georges Sayegh, General Manager of Bank of Syria and Overseas, BLOM Bank’s Syria arm.
Indeed, private banks accounted for over a third of all private sector deposits at the end of 2007, according to the Central Bank of Syria. This has surged from 2004, when the first private banks entered, with a 4% share of deposits, and in private sector loans, from 3% in 2004 to 16% in 2007.
Lebanese banks are at the forefront of Syria’s fledgling private banking sector, with Bank Audi Syria, Banque BEMO Saudi-Fransi, Bank of Syria and Overseas (BSO), and Byblos Bank Syria already well established. They are to be joined by Fransabank, Banque Libano-Francaise and the Bank of Beirut.
“The banking sector looks nothing like it did four, or even two, years ago,” said Bassel Hamwi, Deputy Chairman and General Manager of Bank Audi Syria. “There is a lot more flexibility in the private sector, and we are just at the beginning.”
The sector has certainly come a long way since the decision to open up the sector was made amid concerns over the motivation of private banks in a socialist economy.
“I had a role in drafting the law in 2000, and discussion at the table and in society was that private banks would come and take our money. There was not a clear understanding of banks or motivations, but this has improved, and banks’ motivation is more or less clear,” said Hamwi. “The environment is very conducive to banking, and it is increasingly so and the reason for so much interest,” he added.
The initial teething problems common to all liberalizing economies were faced in the first few years of operations, between 2004 and 2006, while the Central Bank has completed 21 out of 30 steps of its financial reform plan.
“As we weren’t the first bank to have opened the key obstacles were faced by the first entrants at the start, but gradually things are smoothing out, one due to the Central Bank governor being very open and that he listens,” said Semaan Bassil, Vice Chairman and General Manager of Byblos Bank. “Sometimes they study [laws and regulations] for too long, but do make decisions, although we’d like it faster.”

Branching out

All the Lebanese banks are rapidly rolling out their presence in Syria. Bank Audi Syria has 10 branches, BEMO 20 branches, and BSO 10 branches with 19 slated by the year end, with plans to double the number in the next five years. Byblos Bank Syria has six branches with plans for 20 in the next three years, Fransabank Syria will have two to three branches by the end of the third quarter, and Banque Libano-Francaise’s Bank Al Sharq plans to have 12-13 branches by 2011.
Such rapid expansion is due to the country’s low banking penetration, with only one branch for 300,000 people, according to Hamwi. “A huge number have no access to banks, and don’t see them enough,” he said.
However, with Syria’s real estate market undergoing a boom, finding suitable locations is proving to be a problem. “It’s difficult to find adequate real estate and prices are quite unbelievable, more expensive than the seafront in Solidere in Beirut,” said Walid Raphael, Deputy General Manager of Banque Libano-Francaise.
Syria’s real estate boom is generating demand for mortgages though, with Byblos the first to offer such services last year, and other banks getting in on the act. Bank Audi Syria is to offer a housing loan within the next four months as a “show case product.”
“There is huge pent up demand for housing loans,” said Hamwi.
Introducing mortgages has not been a straightforward process however.
“The challenge is not the type of services, we are offering basic needs, but infrastructure,” said Bassil. “To get a mortgage you need to present a bill that the building was legal, but many built outside of regulations, so can’t present a clean bill. Potential borrowers also go to government agencies for paper work, and such bureaucrats have not faced such requests before, so infrastructure and mentality are going to change,” he added.
Banks didn’t venture into retail banking at first, initially focusing on commercial banking, but that is changing as the sector has developed.
“Retail takes time, otherwise we could have had retail products from the first month, but a cookie cutter approach to meet a huge number of people is not an easy process,” said Hamwi.
The banking sector has, after all, started from a low base, with strong demand for all personal loans, as well as a low base in terms of average income, which is around $150 a month.
“We would be able to sell more loans if disposable income was higher and more transparency from companies. People in Syria often have second or third job which they do not declare and thus cannot be easily taken into consideration these revenues versus the available consumer loans we are selling,” said Bassil.
Overly liquid

Ironing out bureaucracy and other related issues with banking services pales when compared to the high liquidity of the banks due to the lack of a government debt market.
“Banks are flooded with deposits, but the problem is what to do with it. Some banks are even discouraging people from putting in deposits,” said Dr Nabil Sukkar, Managing Director of the Syrian Consulting Bureau for Development and Investment.
The issue has become increasingly acute over the past year as private sector deposits with the Central Bank have surged, more than doubling in the case of certain banks. Bank Audi Syria’s deposits, for instance, were SYP 2.194 billion ($42.96 million) in December 2006, and SYP 4.49 billion ($87.93 million) by September 2007.
The Central Bank has repeatedly said over the past few years that it plans to issue treasury bills, but just like the stock market was intended to launch in the first quarter this year, no one has an idea when this will happen.
Banks do know what kind of return they would like to see happen with their deposits, which is currently set at 0% at the Central Bank.
“It is treated like a checking account,” said Hamwi. “We would like a government debt market that reflects sovereign risk. My guess is a minimum of 2.5% to 5%.” Sayegh at BSO suggested 3-4%.
“We need to have treasury bills and they know that,” said Bassil, referring to the Central Bank. “All depends on the market and interest rates. I’d be more cautious about setting the ideal rate, saying depends on supply and demand at a specific time, and on the bank, whether it is more or less liquid, and this depends on the lending opportunities linked to foreign investments, economic and political prospects, as well as bureaucracy and red tape for channelling these investments.”
Banks also want the labor law to be more flexible, amendments made to leasing laws, the establishment of a central credit agency, and for foreign exchange laws to be altered for electronic cards.
“Constraints are in issuing electronic cards, as you can’t transfer funds abroad,” said Mohamed Khaled, Retail Marketing Manager at BSO. “It’s an issue for international Visa cards, only linked to transfer accounts, so you are limited to a minority of people that have funds.”
A further issue is the lack of an electronic banking regulator, with most banks using Lebanon’s Creditcard Services Company (CSC), which is on the state-run Commercial Bank of Syria’s network, which rivals the state-run Real Estate Bank network. There are currently some 250 ATMs in Syria, which could reach 500 to 600 by the year end, according to Khaled.
Lebanese banks are also facing pressing human resources issues.
“Three challenges face Lebanese banks, one the brain drain in Lebanon so fewer good people are available and we need the best to set up and manage branches; two the cost of expatriates; and three the psychological barrier for some of the highly qualified Lebanese to come and work in Syria,” said Bassil. “There is a high need for expertise, so the Gulf and Lebanon are competing, and the costs are high.”

Free Zones and Extreme Views

The scramble by Lebanese banks over the past few years to get licences has been recently compounded by the government’s decision to close banks in Syria’s six free zones, which were opened prior to liberalizing the banking sector. Some banks, such as SGBL, will have to close completely.
Others, such as Banque Libano-Francaise, which is in the final stages of receiving a licence for its Bank Al Sharq, will have to move operations, as will Fransabank, which finished its IPO in March heavily oversubscribed, offering 36% and raising $14 million.
Lebanese banks have been able to retain majority control despite Syria’s requirement that private banks are 51% Syrian owned, through Syrian investors already linked to the Lebanese mother bank. For instance 10% of Fransabank Syria is in the hands of the Saade Group, and 5% with Ahmed Shehabi from Aleppo, said Nadim Moujaes, Deputy General Manger for Strategy and Development at Fransabank.
For Bank Al Sharq, which is to offer a 20% IPO, “the signature holders are all shareholders in Banque Libano-Francaise, so we will be in control of this entity,” said Raphael.
There is a draft law on the table however to increase foreign percentage ownership to 60%, as well as raise capital requirements to $100 million. But such an approach is putting off international banks from entering Syria.
“Go ask a European bank to give a percentage and they won’t accept, but the Lebanese will,” said Sayegh.
Bassil said the expected new high capital requirement may be a penalty for banks and shareholders. “Our French shareholders in the insurance venture there for example said Syria needs more capital in the future as the economy picks up and the projects start taking place, but why today? From day one, not gradually, say in two to four years. Syria is still growing gradually, and so the challenge is not capital but the ability to deploy it in feasible projects,” he said.
Syria’s status as a ‘rogue state’ in the eyes of Washington DC is also having ramifications for Lebanese and private banks, with bankers believing there is widespread aversion in the Western banking community to deal with Syria, and a reason no big players have entered.

Syria's support for Hizbullah and other groups is warding off international players and affecting Syrian banks' dealings with Western financial institutions.

Some banks in Europe have taken an “extreme view” in not dealing with Syria, said Hamwi, citing a leading German bank, while Bassil mentioned “global political issues.”
“I cannot call them major obstacles but there are some banks overseas, whether Arab or Western, that have refused to accept deposits from Syria. Also letters of credit,” said Bassil. “Some banks overseas don’t deal with Syria at all, and don’t want to touch Syria as it becomes a reputation issue – human rights and that they may support unacceptable states or armed groups. So today the political pressure on Syria is not yet a major issue but could be a potential threat if things get increasingly difficult.”
For the time being, Lebanese banks are enjoying Syria’s clear skies while hoping regulatory issues will be sorted out and treasury bills will be offered sooner rather than later.

ALL PHOTOS BY PAUL COCHRANE

Up and Down Trade: Syria and Iraq

By Paul Cochrane in Damascus, Abu Kamal and Lattakia for Executive magazine

Look at any map of maritime shipping routes and there are two geographically ideal ports for goods Iraq bound: Umm Qasr for ships from Asia, and Lattakia and Tartous in Syria for cargo from Europe, the Americas and Africa.
Maps however do not convey the realities on the ground, with the obvious points of entry to Iraq fraught with complications. Umm Qasr’s ports are in a state of infrastructural disarray, shippers report corruption and theft, and some $13 billion is needed for the first stage of a new port, the ‘Larger Port.’ Further billions are needed for the new Al-Faw port, and the other four harbors in the Shatt Al Arab all require serious upgrades.
Kuwait, a potential contender for major trade hub status with Iraq, is currently hampered by customs, high taxation and foreign ownership issues in addition to inadequate port facilities, although the development of the $1.2 billion Bubiyan island port facility will change this in coming years.
All of this has left Iran, Turkey, Jordan and Syria to take up the slack as the main maritime and trade routes into beleaguered Iraq. Iran however is benefiting in terms of exporting Iranian goods and machinery, Turkey likewise, leaving much of the maritime trade for Iraq to come through Jordan’s Aqaba port – logistically far from Iraq, particularly the urban zones of the Jazira – and better geographically positioned Syria.

Up and down trade

Syria, despite its proximity to Iraq, has not exactly pushed the boat out to capitalize on the geographical attributes that make the country a natural trade partner with its neighbor and a major transit route from the West and Africa. Official trade figures from 2004-2006 are only indicative of one particular trend, declining imports from Iraq, from SYP 4.53 billion in 2004 to SYP 958 million in 2006.
The trend for Syria’s exports to Iraq can be best described as a reverse bell curve, from SYP 23.95 billion in 2004, down to SYP 13 billion in 2005, and then surging to SYP 32 billion in 2006. With the figures for last year yet to be released, it is not known whether Syria’s exports spiked or declined in 2007, particularly given the reasons for 2005’s plunge in exports not clear from talks with the public and private sectors.
Equally, on a visit to the North East Syrian-Iraqi border at Abu Kamal-Al Qaim, there was no traffic to speak of and locals reported minimum activity. This was not overly surprising given the state and size of roads from Deir E Zour to the border, in addition to the lack of a major highway on the Iraqi side, despite Abu Kamal’s strategic position 648 km from Lattakia, and 403 km to Baghdad, one of the shortest routes to the Iraqi capital and immediate north.
Indeed, the state of Syria’s infrastructure does beg the question of why Damascus is not doing more to improve connections to Iraq, although the Logistics Performance Index released by the World Bank last year does give an idea. Out of 150 countries reviewed Syria ranked 135, and 15 out of 16 countries in the MENA region, ranking best for domestic logistics costs and worst in ‘logistics competence.’

The Syrian-Iraqi border at Abu Kamal

Considering Abu Kamal’s logistical difficulties, the South Eastern border at Al Tanf is the more favored crossing, connecting to a major highway in Iraq’s Anbar province that also merges Jordanian traffic to Ramadi and Baghdad, clocking in at around 955 kilometres from Lattakia to Baghdad.
Syria’s northern border at Tall Kujik is also a preferred route, for both Turkish and Syrian traders.
“For security reasons a lot of people take cargo to Aleppo and then to Northern Iraq to the Kurds, as they have established some form of security,” said Samir Hamod, manager of Maersk’s trade coordination office in Lattakia.
Goods are also transported from Aleppo by train on a rather circuitous route via Qamishle in the far north to Mosul. “It’s the best way, safe and lower costs,” said a Lattakia-based logistics company that preferred to remain anonymous.
Syria is to improve this route however, currently laying a railway via Deir E Zour that will run to Mosul and on to Iran, although when the Iraqi side will be operational is far from clear (the first stage of a 284 km railway around Baghdad, slated to cost $8 billion, is expected to take six years to complete).


Low quality trade

One reason for such unpredictable trade, aside from security on the Iraqi side, is the accessibility of the border crossings. “It’s hard to know about the borders, they are sometimes open, and at other times closed, so trade is good at times, bad at others,” said the logistics company.
Indeed, according to a Voices of Iraq (VOI) report in February that quoted the head of Al Qaim City Council, the border with Abu Kamal was only re-opened in November after closing for an undisclosed time after security improved on the Iraqi side.
Although trade has increased since then, local traders complained in the VOI report of second-level quality or expired goods entering from Syria. “Despite the Al-Qaim border now being open, I am still importing foodstuff items from Turkey because Turkish products are of a much higher quality and competitively priced when compared to similar Syrian products. Locally consumed products in Syria are high quality, and Syrians export low quality products to Iraq,” a trader is quoted as saying.

Truck on the Damascus to Deir E Zour highway

According to Jihad Yazigi, editor of economic and business newsletter The Syria Report, Syria’s manufacturing sector has benefited from bolstered trade with Iraq, as following the 2005 Greater Arab Free Trade Area (GAFTA) pact local production has been affected by higher quality products and packaging.
“Usually the Syrian manufacturing sector has difficulties exporting, and Iraq is an easy market. It has given breathing space to a lot of manufacturers, with Iraqis coming and paying cash,” said Yazigi.
He added that goods exported to Iraq are primarily foodstuffs and manufactured products.

Port development

Syria has much to do in developing infrastructure for trade with Iraq, but its major ports are getting much needed investment. In February, a cooperation agreement was inked between Syria and the Japan International Cooperation Agency to modernize and improve goods shipping and infrastructure at Lattakia’s port. A Chinese firm is also to install a gantry crane in the next three months.
Meanwhile, the Tartous International Container Terminal is being upgraded by a Filipino firm, ICTSI, which is also to manage the port as part of a 10-year concession.
“For Syrian decision makers the country’s position as an infrastructure route is so strategic that at the Tartous port they contracted a private company to manage it. This is new for the government, to encourage BOTs (Build Operate Transfer), and this is a significant contract,” said Yazigi.
Although Tartous is geographically better suited for trade with Iraq, the port currently handles considerably fewer containers than Lattakia, handling 38,649 containers in 2006 compared to Lattakia’s 471,970. Cargo at Tartous however is significantly higher, at 12.76 million tons as opposed to Lattakia’s 8.09 million tons.
But just as customs issues need to be ironed out at the Iraqi border, Maersk’s Homod said Lattakia’s port authorities’ need to streamline inspections.
“Lattakia can handle a lot of containers but one problem we are suffering from is customs. A lot of commodities have to be inspected - strip searches - inside the port so that causes congestion. The normal procedure at a terminal is to go to a warehouse and empty it there,” he said.

Port of Lattakia

Influx of Iraqis

Legislation and regulations are certainly not lacking for trade with Iraq to flourish, with bilateral agreements in place, gas and electricity networks in operation, and relations between Damascus and Baghdad warmer than they have been for 30 years. Turkey, Iraq and Syria have even agreed, just last month, to set up a joint water institute to share their water resources. Syria’s first private airline, Sham Wings, is also now flying to Baghdad, competing directly with Iraqi Airways.
“It’s not so much legislation [that needs to be amended] as attitude,” said Dr Nabil Sukkar, Managing Director of the Syrian Consulting Bureau for Development and Investment. “We are liberalizing trade, but it’s difficult to know what is happening on the ground. That has to be talked about rather than through legislation.”
As economists and businessmen point out, aside from official trade statistics there is minimal information about the scale of trade, what is traded, and where it is bound.
“We know the origin of containers but it’s difficult to determine where the cargo will go,” said Homod. “A lot of cargo is declared in transit, or to the free zone, and can then go to Jordan, Turkey, Iraq or Lebanon.”
Furthermore, informal trade with Iraq is presumed to be extremely high, as well as inflows and outflows of cash to the 1.36 million Iraqi refugees currently in Syria.
The number of refugees increased 19% last year, which has had negative effects on the Syrian economy since 2003, triggering inflation, higher rents and costing the treasury some $1 billion a year, but on the other hand has strengthened ties.
“There has never been as strong a relationship between the two countries as due to the refugees – intermarriage, contracts and investment in factories, and a private university. A lot will also stay on when there is stability in Iraq,” said Yazigi.

ALL PHOTOS BY PAUL COCHRANE

SYRIAN ART: The Ayyam Gallery - Damascus

Detail from Safwan Dahoul's 'Reve' series

Aishti magazine

There was never much business in the Syrian art business, and the art world knew little about the insular world of contemporary Syrian art. But this has all begun to change as Syrian art becomes a hot commodity, from Dubai to London to Hong Kong.
At the forefront of this renaissance is Khaled Samawi, whose Ayyam Gallery in Damascus has brought both business and the world to the Syrian art scene.
Samawi, a former private banker in Switzerland, had retired to Damascus with his collection of 300 mostly non-Arab paintings. “I got back, played golf, and then got interested in art. I didn’t realize the wealth of art here or the price,” says Samawi. “Artists were de-valued because people didn’t know about them.”
With an empty building, and no desire to have tenants above his own residence, Samawi decided to open a gallery in late 2006. “I was convinced of the strength of the art,” he adds.
Samawi hasn’t been proven wrong, with the price of Syrian art up 500% since the Ayyam Gallery opened.
“January was our best month, with 40% of sales to Lebanese. People come with their interior decorators and before they know it their whole house is full of Syrian art,” he says.
“And in international auctions we’ve seen that the Syrian section used to be the smallest, but now it’s the biggest along with Iran.”
Samawi has brought his business acumen to the sector, but his passion lies in promoting art and providing stability for artists.
“We are probably the first gallery in the Middle East to sign contracts with artists. Most artists go to galleries and then take their junk and leave. We work for artists as managers, to allow artists to concentrate on their art,” he says.
Ayyam currently represents some 20 artists – including Safwan Dahoul, Ammar Al Beik, Youssef Abdelke, Fadi Yazigi, Mouteea Murad, Louay Kayyali, Mouneer Al Shaarani, Asaad Arabi and Asma Fayouni - displaying work through 12 exhibits a year and at international art fairs in the Emirates, New York and Hong Kong. Samawi is also planning to open a gallery in Dubai.

Detail from Ammar Al Beik's Museum Warden

Youssef Abdelke: Untitled, charcoal on paper (2008)

Ammar Al Beik's The Strong Believers

The Ayyam Gallery started showing art from the last 20 years, but is now looking at 2006 and onwards. “We started with pioneers and the established, and now focus on established and emerging artists,” he says.
To encourage emerging young artists, Ayyam Gallery carried out a competition last year called Shabab Ayyam where 150 artists vied for $10,000 in prize money. Three winners were awarded and 10 artists picked to be promoted by Ayyam.
“It was very satisfying. Some of these kids were part-time artists, part-time taxi drivers,” says Samawi.
Indeed, galleries have become an important space to introduce Syrians to contemporary art, with the Ayyam Gallery attracting between 500 to 1000 students to each gallery opening.
But one notable trend is that Syrians are not buyers. “Syrians traditionally collected carpets, antiques and silverware. Now with Syria opening up, more are interested in buying cars, jewellery and haute couture, but when done people might start collecting modern art,” says Samawi.
But what makes Syrian art so attractive to international buyers? “If you look today at the Middle East, Syria and Iran have the best art. The art is unique and strong because they’ve been closed to contemporary art. The artist is not doing it to sell it – he hopes it sells – but doing it because he believes in it,” he says. “The best thing the Syrian government ever did for art was not to interfere, they left it alone.”
However, Syrian art did raise eyebrows at last year’s ArtParis exhibition in Abu Dhabi.
“At ArtParis people said why’s your art traditional, not contemporary or installation? But I said a woman with a veil and a vibrator, that’s not Syrian art, or what we represent. You can’t ask an artist to do derogatory art, he should do his own art.”

Detail from Safwan Dahoul's 'Reve' series

PRINTS COURTESY AYYAM GALLERY

Focus on Foreign Investment: Energy in Libya

Petroleum Review (UK Energy Institute)

The opening up of Libya’s economy couldn’t have come at a better time for international oil companies, which have been beset in recent years by dwindling easily accessible oil reserves, tighter controls over exploration rights and extraction, and heightened security concerns.
Libya has proven oil reserves of 41.5 billion barrels, the ninth largest reserves worldwide, which could be trebled if modern extraction techniques were used and exploration expanded from the current 30% of Libyan territory.
Up until 1974, Libya was pumping out 3.3 million barrels of oil per day (bpd) and had all the major players involved. The plan now is get Libya’s production back to the level of pre-nationalisation days, slated for 2012.
Following the 2004 warming of relations with the United States, once Tripoli renounced its weapons programmes and shrugged off its reputation as a ‘rogue state’, a raft of licences were signed with some 40 IOCs. The big players also returned after a 30-year hiatus, Shell in 2005 with an onshore gas and LNG project, the Oasis Group, a consortium consisting of ConocoPhillips, Marathon and the Hess Corporation, in 2006, and BP and ExxonMobil in 2007.
Investment correspondingly flowed in and Libya’s output surged from 1.5 million bpd in 2004 to an anticipated 1.9 million bpd this year, and gas at 3 mill scf/day or 85 bcm.
But in the three years since Libya came in from the cold, the initial scramble by IOCs competing to extract Libya’s light sweet crude and gas has started to peter out as the country imposes increasingly tighter production rights and hand picks companies.
Such, at least, was apparent at the last round of bidding in December, where 35 companies were pre-selected to bid for 41 gas blocks offshore and onshore, but only 13 companies put in bids and only four blocks were awarded out of 12 licences. Six licenses, five of which were offshore and one in southern Libya, didn’t find any bidders.
The four successful bids were won by Shell, Russia’s state-run natural gas exporter Gazprom, Algeria’s Sonatrach with Indian Oil Corp. and Oil India Ltd., and Polskie Gornictwo Naftowe i Gazownictwo SA of Poland. Occidental Petroleum Corp. and RWE AG were the sole bidders for the other two blocks.
The lack of interest by IOCs was attributed to the blocks offered by Libya’s National Oil Corporation (NOC), and the selection of companies that would provide the highest share of production, with Gazprom offering 90.2% of any production in finds in western Libya, and Shell offering 85% to search for gas in central Libya.
Indeed, one IOC, on condition of anonymity, explained why they didn’t put in a bid as a “lack of potential in the blocks put forward combined with expected tough fiscal requirements.”
The winning bids also came at a cost of paying a minimum bonus of $10 million once contracts were signed, and the expectation of spending up to $2 billion on exploration.
“Training and education of Libyan professionals is also high on NOC’s wish list in all negotiations,” said an IOC source. BP, for instance, is to spend $50 million on education and training projects for Libyan professionals during the exploration and appraisal period, and will spend a further $50 million from commencement of production.
Like other oil countries, Tripoli has been able to demand more attractive deals due to higher energy prices, with Libya’s annual oil sales at $20 billion, and in the knowledge that IOCs are eager to add new operations to their portfolios.
BP’s $900 million agreement last May guaranteed the company a 19% stake in any field found, Libya a 78% stake and the state-owned Libya Investment Corp. (LIC) 3%, while in 2005 the Japan Petroleum Exploration Company went as low as a 6.8% stake in future production rights from its block, and ExxonMobil and China National Petroleum Corporation taking 28% respectively.
But as Wolfram Lacher, a North Africa analyst with the Control Risks Group, pointed out, the tougher terms for contracts “have been affected by more transparent and fair methods than in many other countries, which is encouraging.”
Other on the ground issues are affecting IOCs in Libya however, experiencing bureaucratic problems moving equipment into the country, acquiring visas and the shortage of qualified employees.
A further issue that certain IOCs are facing is the perception that Libya favours certain companies to cement political ties, evident in bids going to Russia, Europe, Algeria, and in particular, the US.
“The feeling remains that NOC prefers to deal with US companies,” said a leading European IOC.
Such a policy indicates the growing importance of strong relations with the West, a reversal of which seems unlikely, said Lacher.
Other political issues are of concern for the long run however, with the reforms underway likely to lead to bids for power, especially when Colonel Gaddafi steps down or passes away. And although terrorism is not currently an issue, said Lacher, with Islamist armed groups suppressed in the 1990s, “that could potentially change in coming years as it appears that the Libyans are quite a significant number of the fighters in Iraq, and if they go back, hypothetically speaking, could form a new group and form a threat to foreign interests.”

The Master Plan

Libya’s tougher stance on tenders runs counter to the NOC’s goal of boosting production to 3 million bpd by 2012. With claims that Libya’s infrastructure is at least 20 years behind, in addition to a Libyan worker quota despite a human resources supply gap, observers say that Libya will be hard pressed to meet the 2012 slated production capacity.
Libya has the technical reserves and exploration acreage to hit the target, but IOCs are calling for changes in Tripoli’s fiscal regime. “To attract foreign investments in the oil industry and to increase Libyan production up to its target of 3 million bpd, it is in our opinion necessary to improve the fiscal regime,” said a source at an IOC.
“The less interest by the IOC’s in the last bid round illustrates this point. This is particularly applicable to the entitlement production left to the IOCs, which in the last Exploration and Production Sharing Agreements (EPSA) was getting marginal,” he added.
Nonetheless, IOCs are banking on the long run, making concessions and investing billions. Indeed BP, which is hoping to seal a further deal in May, said it is “working on a 20 year timetable, so we’re only at the beginning.” Petro-Canada, Austria's OMV, Occidental and Eni have also negotiated extensions to their contracts by 25 to 30 years.
With Libya decades behind in infrastructure and only 30% of Libyan territory explored, the NOC has a ‘Exploration Master Plan’ for 2005-2015, which seeks to increase reserves to 20 billion barrels of oil equivalent by increasing exploration in offshore and frontier areas. By 2020, production is expected to be 3.5 million barrels bpd.
To achieve this the NOC is targeting a minimum of 50 wildcat wells drilled per year and the shooting of a minimum of 4000 km2 of 3D seismic and 10,000 kilometres of 2D seismic per year, according to BP. These targets are to be met through NOC and Joint Venture operations and from some $7 billion in investment by IOCs.
BP’s deal last year is part of the plan, with BP and the LIC to explore around 54,000 km2 of the onshore Ghadames and offshore frontier Sirt basins, two of Libya’s five major basins. The colossal blocks, with the North Ghadamas equivalent to the size of Kuwait and the offshore Sirt basin the size of Belgium, will require BP during the exploration and appraisal phase to carry out 5,500km of 2D seismic and 30,000km2 of 3D seismic tests, and the drilling of 17 exploration wells.
The Sirt basin, which has an estimated 22% of Africa’s 300 billion reserves, has been the most productive field to date, having produced over 20 billion barrels of oil equivalent. With up to 300 kilometres of offshore deepwater Sirt unexplored, the basin is believed to be ‘on trend’ geologically with onshore Sirt and is thought to be a buried rift with multiple play opportunities, similar to those found in the North Sea.
Libya’s plan to boost output will require an estimated $30 billion for infrastructure, from new pipelines to refineries, with current refinery output only at 380,000 bpd.
In January, UAE-based firms Star Petro Energy and the Star Consortium of TransAsia Gas International inked a joint venture agreement with NOC for a $2 billion upgrade of the 220,000 bpd Ras Lanuf export refinery. Expected to take five years, the upgrade will initially refurbish the existing plant to increase capacity and improve quality, while the second stage will expand the refinery and add the latest technology for converting fuel oil into high-value products and bring output in line with international standards.
Dow Chemical already has a separate deal with NOC to operate and expand Ras Lanuf's petrochemical facilities, which include naphtha, kerosene, light gas oil and heavy gas oil, and other units producing ethylene and polyethylene.

Gas

In addition to overhauling refineries and oil exploration, Libya is seeking to boost extraction of its proven 53,000 billion cubic feet of proven gas reserves and explore further as the global demand for gas spikes.
Italy’s Eni is the country’s major gas player in Libya, with the $5.6 billion West Libya Gas Project in the Sahara. The project includes the 482 kilometre underwater Green Stream pipeline, the first direct gas link to Europe, which runs from Mellitah to Sicily, which is expected to produce at full capacity 10 billion cubic meters of gas a year, of which 80% will be exported to energy hungry Europe.
In LNG, the major development underway is by Shell in the Sirte basin, through a May 2005 agreement. According to Shell, seismic activity at the Sirte basin acreage is nearly complete, with the first well to be spudded in the first quarter of the year using a rig capable of reaching depths of 20,000 feet.
In January, a new joint operating agreement was signed between Shell, the Sirte Oil Company (SOC) and NOC to rejuvenate and upgrade the Marsa El Brega facility and search for gas reserves that could lead to a greenfield plant.
The SOC will operate the LNG plant at Marsa El Brega during the $350 million upgrade, which is expected to return output from the current 700,000 tonnes per annum (tpa) – which is currently supplied through a contract to Spain – to 3.2 million tpa. The rejuvenation of the plant is to cost $293 million, and if more gas is discovered, a greenfield liquefaction facility is to be built at Ras Lanuf at an estimated cost of $2 billion to $3 billion. Feasibility studies indicate that trains in the range of 4 million to 5 million tpa would be the optimum amount for a greenfield facility.
Boosting gas production will also cater to a growing domestic demand, as Libya’s economy grows on the back of liberal reform. But such increases in energy output will require Tripoli to renegotiate OPEC quotas from its current 1.6 million bpd.

Closing the Doors on Oil’s Big Boys

Commentary - Executive magazine

The halcyon days of cheap energy, pliable governments and a public that didn’t give a damn about pollution or global warming are over for the international oil companies (IOCs). This we all know, or are slowing coming out of a somnambulant state to realise, but recent trends in the oil industry are presenting further concerns for IOCs at the very same time as IOCs report bumper profits on the back of high oil prices.
Energy giant ExxonMobil reported a $39.6 billion profit for last year, BP $17.39 billion and Shell $27.6 billion. Such profits were deemed ‘obscene’ in the British popular press, as indeed they might be perceived to be, but what was less noted amid the hullabaloo was that BP saw profits plunge 22% on 2006 – and is now laying off employees - and that Shell is to sink $26 billion of its profits into developing new projects. Likewise ExxonMobil spent $21 billion in capital expenditure last year, but production increased by less than 1%.
So what is behind this change in fortunes? After all, the IOCs had enjoyed year-on-year record profits for the past five years, demand is still rising and oil looks like it will continue to hover around $100 a barrel.
The problem that IOCs are facing is production and access to energy reserves. The cost of production has surged from $5 a barrel in 2000 to $14 in 2006, largely due to the rising costs of extraction as well as construction of upstream and downstream facilities.
This was evident in the amount Kuwait’s National Petroleum Company (KNPC) had to shell out to build the 615,000 bpd Al-Zour refinery, the world’s largest purpose built facility of its kind.
The original budget was $6.3 billion, but with the cost of raw materials doubling and even tripling in the Gulf, no construction firm would touch the project and the refinery was on the verge of being shelved. But so important is the refinery to the Kuwaitis that the government eventually capitulated last September, earmarking a staggering $14.29 billion to get the job done.
“We are now touching un-chartered territorial waters, the value of contracts in the billions of dollars,” said Ahmed Al-Jemaz, KNPC Deputy Managing Director of the Shuaiba refinery.
Such spiralling costs are naturally of concern to IOCs – Shell admitted a 10% annual increase in inflationary costs - but of more pressing concern is the access to energy rich countries.
One by one doors are being closed to the IOCs as countries re-nationalize resources. Last year Russia put the screws on BP and Shell to hand over majority stakes in gas operations to the state-run Gazprom, Bolivia nationalized gas and oil fields, Ecuador used military force to take over Occidental Petroleum’s holdings, and Hugo Chavez gave IOCs a choice: handover majority stakes to Venezuela’s national oil company or face complete nationalization of operations in the Orinoco River basin.
In the case of Venezuela, BP and Norway’s Statoil Hydro opted to stay but for ConocoPhillips, which pulled out, the loss of its Orinoco holdings saw the American company’s second quarter earnings plummet 94%.
The loss of these countries, coupled with growing competition from national oil companies (NOC) around the world – a cursory glance at the countries NOCs operate in is more than ample to see they are not confined to exploiting their own national resources – is what Jeroen van der Veer, Shell's chief executive, was quoted as saying is a dangerous trend.
IOCs can be thankful then that the MENA region is not part of this re-nationalization phenomenon, but Arab governments are savvy enough to know they don’t have to be taken for a ride.
IOCs are having to face the reality that to access the likes of recently de-nationalized Libya, with proven oil reserves of 41.5 billion barrels and only 30% of the country explored, deals are getting tough.
This was apparent at the last round of bidding in December, where 35 companies were pre-selected to bid for 41 gas blocks, but only 13 companies put in bids and only four blocks were awarded out of 12 licences.
The lack of interest by IOCs was attributed to ‘uninteresting’ blocks offered by Libya’s NOC, but most notably it was Tripoli hand-picking companies that would provide the highest share of production, with Gazprom offering 90.2% of any production in finds in western Libya and Shell offering 85% to search for gas.
Such tight restrictions were not there to access Palestine’s recently discovered gas, with only 25% going to the Palestinian Authority, and Iraq’s oil law looks like it will hand over the lion’s share to IOCs, but Libya is not alone in the region with its tough stance.
The only thing that the IOCs have on their side right now is the skills and technology that NOCs don’t – as of yet – have.
All in all, it looks as if 2008 will be another roller-coaster year for the IOCs while NOCs, albeit not necessarily laughing all the way, can at least show some bravado on their way to the (central) bank.
Photo courtesy of BP