International oil companies hesitant in Libya and Algeria

11 September 2013

Political uncertainty in Libya and unattractive commercial terms in Algeria mean North Africa’s largest oil producers are struggling to attract international investment in their energy sectors

With oil production of more than 4 million barrels a day (b/d) in 2012, Algeria and Libya are two of the most important oil producers in the Opec group. But despite this, both markets are struggling to attract the kind of international investment they need in order to reverse declining crude output.

Setting aside their geographical and cultural proximity, the North African neighbours face very different challenges. While Algeria is viewed politically as relatively stable, its oil and gas sector has struggled to attract foreign investment because the commercial deals it offers international oil companies (IOCs) are unattractive. The country’s sector has also been hampered by allegations of rampant corruption. By contrast, Libya is now entering its third year of political turmoil and its hydrocarbons sector is showing signs of deteriorating, despite claims that progress is being made.

Following the end of the civil war in November 2011, Libya’s state oil company, National Oil Corporation (NOC), and its international partners were applauded by observers for the speed at which the country restored oil production to pre-civil war levels, reaching about 1.6 million b/d within months of the conflict’s end.

Industrial action

Since the end of May 2013, however, Libya has faced protests and industrial action at almost all of its refineries and export facilities. The terminals affected include two of the country’s largest, the Ras Lanuf and El-Sider oil export facilities, which have a combined export capacity of 600,000 b/d. These have faced repeated closure due to strikes by staff, which have prevented loading.

The source of discontent has varied. In some cases it is the oil workers demanding better pay, in others it has been the security guards, paid to protect the facilities, who are holding the government operator to ransom.

“The disruptions at the terminals are mainly caused by security guards demanding increases in pay, while in some cases the surrounding communities have taken advantage of the chaos and blockaded installations to press their demands for jobs,” says Femi Oso, senior analyst for North Africa upstream research at UK-based consultancy Wood Mackenzie.

Libya is looking to modify its energy law to boost investment, but this is unlikely to happen until its crises are solved

Femi Oso, Wood Mackenzie

“Some of the protests are opportunistic, with people demanding wage increases and benefits. Others are politically motivated, with activists trying to grab greater power over the eastern provinces through crude production. Federalists pushing for increased autonomy in the eastern provinces – the hub of oil production – are believed to have contributed to the disruptions, in the run-up to the elections of a constituent assembly and the drafting of Libya’s new constitution.”

The protests have meant upstream production at several fields, which are unable to ship the usual quantities of crude, has been shut in. According to Opec, in July, Libya’s production sank to 1 million b/d. In mid-August, Deputy Oil Minister Omar Shakmak said output had fallen to just 600,000 b/d and the rapid decline has continued, reaching a low of less than 60,000 b/d in early September.

With the 19 storage tanks at the El-Sider terminal full to the brim, Waha Oil Company, which normally produces 300,000 b/d, has had to halt production. The terminal can hold as much as 6.2 million barrels of crude. At Zueitina, crude from the 100,000-b/d Bu Attifel field has been shut in.

Waha Oil is a joint venture of NOC and three US oil firms, Hess, ConocoPhillips and Marathon Oil. To make matters worse for NOC, at the end of July, Marathon was reported to have notified the Libyan oil firm of its intention to sell its stake in the venture for $2bn-3bn.

“Marathon has not commented on the speculation yet”, says Oso. “[The firm’s] Libyan portfolio, while attractive, has some exposure to political risk. A portfolio rationalisation to focus on less risky North American assets would be an attractive prospect”

IOCs back-pedal

Some of the IOCs operating in Libya are also working in the US. Development costs there are higher, but with crude priced at more than $100 a barrel, oil sands and shale projects become profitable. For them, it becomes a question of whether they want to be exposed to Libyan political risk. Marathon could be the first of the international partners, particularly from the US, to rationalise its portfolio, shedding risky Libyan assets.

The changes Algeria has made to its oil and gas law are open to interpretation and many operators are still wary

Adam Pollard, Wood Mackenzie

As Libya is a crucial source of sweet crude, European producers are less likely to abandon the country. For example, in March, Italian oil firm Eni suffered a shutdown at its Mellitah gas processing plant, following clashes between rival militias and guards outside the facility. The plant supplies the Greenstream pipeline to Italy. Eni’s joint ventures with NOC also operate a number of other facilities and major oil fields.

Despite declaring force majeure on September oil deliveries, NOC Chairman Nuri Berruien has brushed off concerns about Libya’s long-term production capacity. “The current security situation does not constitute any hindrance to investment in the medium term and, of course, the long term,” he told local press.

The immediate risks to the oil sector are just one of the problems facing the country. Further ahead, the still-transitional government will have to make several key political decisions that will shape the future of the industry.

“Libya’s oil ambitions are uncertain,” says Oso. “They are looking at modifying the hydrocarbons law to boost upstream investment, but this is unlikely to happen until solutions are found to the current political crises.”

NOC is currently in the middle of a sector-wide strategic study that will set out future ambitions and investment requirements. Some officials at the state company complain about the lack of clarity over the sector’s direction. A new oil field licensing round seems a distant ambition for now.

Ahmed Shawki, NOC’s head of crude and petrochemicals sales, told MEED in June that the Libyan government was working on tentative plans to raise oil production to about 2.2 million b/d by the end of the decade. The increase would come through the use of enhanced recovery techniques, a novelty in the country, as well as the reworking of existing fields. The downstream segment of the study was expected to be completed in July, but has yet to be published. It is expected to address the inherent inadequacies in Libya’s oil transport, distribution and storage infrastructure, which have led to the current crisis.

In Amenas conflict

Algeria has had its own security crises. A siege at the In Amenas gas facility in January claimed the lives of 37 expatriate workers and prompted serious questions about how Islamist militants could hijack a hydrocarbons asset so easily.

The In Amenas gas field is operated by the UK’s BP in partnership with Norway’s Statoil and Algerian state-owned oil giant Sonatrach. It is located close to the country’s border with Libya, about 40 kilometres southwest of the town of In Amenas and 1,300km southeast of Algiers.

However, the real challenge for Algeria will be to adapt its legislation and ease its terms to attract greater investment in its energy sector.

According to Adam Pollard, upstream analyst at Wood Mackenzie, the country has not announced any new crude production targets, but hopes to reverse recent declines in output. Production reached a peak in the mid-2000s at more than 1.3 million b/d, but has since fallen back to less than 1.2 million b/d.

Algeria’s last attempt at bringing in IOCs came in 2010, when it offered 10 oil and gas blocks for auction. The response was poor. At the end of the auction, only two blocks were awarded, and one of those went to state-owned Sonatrach.

The lack of interest was hardly a surprise. The country’s hydrocarbons law in 2005 changed the terms for the oil and gas blocks on offer in a number of key areas. Firstly, the traditional production sharing agreements were switched to concession agreements. Then came a mandatory 51 per cent majority stake for Sonatrach, and finally the addition of an exceptional profits tax, introduced to take advantage of the prevailing high oil prices.

“The effect was immediate; in the three rounds in 2008, 2009 and 2010, only nine blocks were awarded, a major step down in activity,” says Pollard.

In September last year, the Algerian government passed changes to the 2005 energy law, adding a framework for unconventional hydrocarbon developments such as shale oil and tight gas projects. The authority also aimed to address the lack of movement in exploration work, providing tax breaks for foreign companies.

The changes were ratified by parliament shortly after the In Amenas attack, which perhaps helped speed the legislation through.

Moving forward, there is a new licensing round planned in the country at the end of this year. Algeria signed an amendment to the hydrocarbons law, trying to increase incentives for exploration. But it remains to be seen if the new regulation will lead to a new oil round.

Getting a fresh oil licensing auction ready before the end of the year is optimistic, says Pollard. So far, no details on the proposed oil and gas blocks have been released, so it is difficult to gauge what the level of interest is likely to be. 

Wary operators

“Operators are holding off [on the proposed oil licensing round] until further details emerge,” says Pollard. “The changes to the law are open to interpretation and many are still wary of the way the published documents have explained things. The bare bones are there for an economic model but the details of how it will be applied need to be sounded out.”

From an IOC perspective, this is a step in the right direction. The main problem, however, is how complicated the licensing round process has become.

“There are now different parameters, depending on where production is occurring, what is being produced, what type of technique is needed and so on,” says Pollard. “That makes it hard to say at present whether the changes are an improvement. It all depends on the scheme, so everyone takes a cautious case-by-case approach.”

Key fact

Algeria’s 2005 energy law stated that a majority stake for state-owned Sonatrach was mandatory for oil and gas blocks

Source: MEED

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