AFTER decades of isolation, Libya is emerging as the hottest prospect for oil and gas exploration in the Middle East.

Europe's big operators are lining up to develop possible undiscovered resources estimated by the National Oil Corporation (NOC) at more than 3 million million cubic metres.

The warming of relations between European governments and Libyan leader Muammar Gaddafi is speeding up the process. And the summer of co-operation over the Lockerbie trial and the release of hostages held by the Abu Sayyaf Islamist group in the Philippines has boosted prospective investors' confidence.

Not all Europe's leading oil and gas companies have neglected Libya. Italy's Agip has a long history of working in the North African state and is the country's largest foreign producer. France's TotalFinaElf, Spain's Repsol and the UK's Lasmo are also present and, along with Agip, are pressing ahead with new development and exploration. They are now being joined by other big European operators, including the Royal Dutch/Shell Group and BP of the UK, keen to gain a foothold in what promises to be a rewarding area of production.

The Royal Dutch/Shell Group has emphasised its renewed interest in Libya by creating a new operating subsidiary, Shell Libya Petroleum Development Company.

'Shell is currently discussing new exploration and production activities with NOC to explore how Shell can contribute to Libya's oil and gas industry, ' says managing director Joep Coppes. 'A dedicated company was created in June to support these initiatives.'

Rising foreign interest in Libya has been fuelled by NOC's decision to release a new round of exploration licences. In May, the state-owned company unveiled plans to offer foreign parties up to 70 per cent of the remaining unexplored acreage in six key basins, as part of plans to raise production capacity to 2 million barrels a day (b/d), from 1.4 million b/d, over the next five years.

Initially, NOC is offering 14 blocks mainly in the Sirte and Murzuq basins. They have been bundled into three packages for auction.

The first package contains M1 in the Murzuq basin, offshore blocks 0-9 and 0-10, Block S36 in the Sirte basin and an undefined area in the Kufra basin. The second package is for blocks S25 in the Sirte basin, C5, C6 and C7 in the Cyrenaica basin and G20 in the Ghadames basin. The final package includes blocks S11 and S59 in the Sirte basin, C3 in the Cyrenaica basin and offshore 012 and 013.

Interest in the new acreage has been high.

In May, representatives from 50 companies attended a meeting in Tripoli, outlining the new licences. No deadline has been given for the licence issue, but NOC confirms several big European oil companies have already submitted applications.

Foreign oil companies have been attracted by the quality of the country's sweet crude oil, the market's close proximity to Europe and favourable extraction costs. Onshore production costs in Libya can be as little as $1 a barrel. Even offshore costs are considered low by world standards, because of the shallowness of the Mediterranean.

Ironically, the strong international response to NOC's announcement appears to be delaying the award of licences. European oil executives say the sheer number of smaller operators seeking to cash in on the newly released acreage is slowing the whole process down.

Some have also expressed concern that further delays could arise from the early-October departure from NOC of Abdullah Salem al-Badri, the widely respected former oil minister. However, NOC has moved to reassure companies, saying Al-Badri's appointment as assistant minister for services will not affect the licensing round and that the data rooms will be closed in November.

It is in NOC's interest to push ahead with the award of licences as soon as possible.

Libyan oil capacity has remained stagnant at 1.3 million-1.4 million b/d for a decade, because of lack of investment. The industry has also been hit by the continuing absence of US companies - the dominant force in the sector until the 1980s.

US oil majors are still prohibited from operating in Libya by the 1996 Iran Libya Sanctions Act (ILSA), which bans investment of more than $20 million in either market.

Nevertheless, companies have been maintaining contact with NOC. In late 1999, executives from Amerada Hess, Conoco, Marathon Oil Company and Occidental Petroleum Corporation were all given permission to visit their old Libyan facilities.

Tripoli is keen to see the Americans return, not least because it would offset the European influence. 'The regime wants to re-establish a domestic balance of power among operators, ' says Raad al-Kadiri, country analyst at Washington-based Petroleum Finance Company. 'But the Libyans will only wait so long for US companies.'

Unexplored potential

Libya's potential has been further underlined by the UK's Robertson Research International, which is in the final stages of completing a multi-client report on the undiscovered resources of the new acreage on offer.

Commissioned by 10 leading international oil companies, the report looks at six of the country's largest basins: at Sirte, Murzuq, Ghadames, Palagian, Cyrenaica and Kufra.

The survey - including technostratigraphic framework analysis, petroleum play elements and systems and trapping styles - provides a detailed summary of the remaining hydrocarbons potential.

From the analysis of onshore basins, Robertson highlights Sirte and Murzuq as the prime areas for investment. The giant Murzuq basin promises a 50 per cent chance of prospective resources of up to 5,800 million barrels of oil equivalent, of which 83 per cent is likely to be in the form of gas.

Murzuq's potential has already been confirmed by findings at the gigantic Elephant field in the southwest. Lasmo estimates the concession has recoverable reserves of up to 500 million barrels. The company is aiming to produce 200,000 b/d from the field by 2002.

Repsol is already producing 140,000 b/d from neighbouring fields, and production from the Elephant field is said to be outstripping the capacity of the existing pipeline infrastructure.

The Robertson report is upbeat about opportunities for new oil and gas production offshore. Technical manager Eugene Iwaniw says: 'The potential of deep water and shallow water offshore exploration warrants investment.'

Evidence of source rock migration and the continuation of mainland trends into deep water areas off the Palagian shelf are encouraging indications of oil and gas with condensate.

The results from TotalFinaElf 's five discovery wells in the offshore block NC137 indicate possible recoverable reserves of 150 million200 million barrels. However, the exploitation of substantial hydrocarbon reserves will depend on the speed and amount of investment international operators and NOC are prepared to commit.

The industry's infrastructure is struggling to keep pace with the speed of new exploration and production. The deadline for the $5,500 million Libya-Italy gas pipeline project has been put back to December. The 600-kilometre pipeline is intended to transport 8,000 cubic metres a year of gas to mainland Italy via Sicily. The client, Agip Gas, has planned for it to come on stream by 2003.

Industry sources have also spoken of a proposal to extend the pipeline to Turkey.

Onshore, the construction of new pipeline and production facilities is progressing sporadically. Sweden's Lundin Oil has recently received bids for construction of a 95-kilometre pipeline linking its En Naga oil field with the existing network at Samah, which ties in with the El-Sider terminal on the Gulf of Sirte. The Swedish operator will not be able to begin production from the field discovered in 1998 before the pipeline is commissioned. Its completion, scheduled for July next year, will allow Lundin to begin production at a rate of 14,000 b/d. A second phase is planned, which will take capacity up to 26,000 b/d.