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.