The overwhelming conclusion of respondents to MEED’s survey of government-operated oil companies is the need for Libya’s state-owned oil producer, National Oil Corporation (NOC), to free itself from political control. All those who express an opinion on NOC’s performance – most of whom are from international procurement, construction and service companies – say the company demonstrates poor independence from state control and rate its transparency as either ‘poor’ or ‘very poor’.
|Company||National Oil Corporation|
|Oil Reserves||41.5 billion barrels|
|Oil Production2007||1.8 million barrels a day*|
|Gas Reserves||52.8 trillion cubic feet|
|Gas Production 2007||15.2 billion cubic metres|
|*includes NGLs. Source: BP Statistical Review 2008|
When asked what the corporation must do to improve, one respondent says it is necessary for it to “detach from the political influence of the country as far as possible”.
Another respondent, speaking to MEED on condition of anonymity, blames the culture of control on deep-seated cultural factors, including the political importance of Libya’s traditional tribal links. “You have to work with the local environment, whether [it means] greasing the palms of the local tribal leaders,” he says. “You have to reach an optimum solution – whatever that means. You have to play the political game and the local game to get the maximum that you can.”
The environment may be harsh, but the benefits are great. While Tripoli’s target to increase oil production to 3 million b/d by 2012 from the current 1.8 million b/d is ambitious, there is a real prospect of it increasing output to at least 2.5 million b/d. “Of course you can make it work,” says the respondent, who in spite of his complaints is happy to be working with NOC.
The past 12 months have shown NOC’s determination to push commercial terms to the limit with its international partners. But despite mumblings of discontent from oil executives regarding potentially uncommercial profit shares, they are still queuing up to sign long-term, multi-billion-dollar renegotiated contracts.
Most of the complaints come from companies who have tried and failed to take a stake in Libya’s oil sector through Tripoli’s upstream bidding process, which is based on an exploration and production sharing model know as Epsa IV. Dozens of oil blocks have been awarded under the system since international sanctions were lifted on the country in 2003-04, but they are becoming ruthlessly competitive.
Most IOCs conclude that the fourth Epsa bidding round in December 2007 – in which five of the 12 gas-prone blocks received no bids – was a failure. Several companies that won territories in earlier rounds did not compete. One executive from a Far East company says he was hoping for production shares of at least 15 per cent. In fact, the lowest share to be bid was the 9.8 per cent offered by Russia’s Gazprom, which most commentators regard as impossibly uncommercial and probably motivated by a longer-term agenda on the part of the state-owned company. This theory gained weight in May, when NOC allowed Gazprom to farm into Eni’s West Libya Gas Project, giving it at one stroke a powerful stake in the country’s biggest gas project.
The Libya country manager of one European oil company says it has not participated in the round as the conditions are too competitive. “Each bid round, another few companies step back,” he says, predicting that the era of competitive bidding could be coming to an end. “In the short term it is good for the country, but in the long term it is not so good.”
So far, there have been no public indications of regret within NOC, which has confirmed approximately three-quarters of a billion dollars worth of exploration investment from seven international companies and consortiums since the beginning of the year.
Potential problems are likely to appear further down the line, as they have for Turkish Petroleum Overseas Company (TPOC) and its partner, India’s ONGC Videsh, which in May relinquished one of the two Sirte basin blocks secured almost eight years ago. After drilling two dry wells, the companies say the prospects were “not very attractive commercially”. NOC refused permission for the partners to farm out a third of the block to Indonesia’s Medco. Other companies that had a dry 2007 include Repsol, Amerada Hess, Occidental and Woodside.
The problem is the lack of flexibility, says the African business development manager of one oil major. “You cannot just farm in,” he says. “You have to deal with NOC.”
This, added to the tough competition and the difficult exploratory environment, is what makes Libyan deals so unattractive to many IOCs despite its huge reserves potential.
For those already producing in the country, it is a different story. The list of NOC’s partners at producing fields who have signed fresh contracts based on Epsa IV conditions is impressively long. Most recently, Occidental and Petro-Canada confirmed commitments made in 2007. In May, Italy’s Eni signed new contracts that will keep it in the country for the next 35 years. Occidental will invest $5bn over a five-year period; Petro-Canada will invest $7.5bn. All three are embarking on a mixture of current oil field redevelopment and fresh exploration.
But despite these impressive commitments, NOC still faces major challenges. In particular, there are concerns over its ability to redevelop fields operated by its own subsidiaries, such as Sirte Oil Company, Waha and Arabian Gulf Oil Company (Agoco), and over the development of its gas strategy. Shell’s planned refurbishment of the country’s only liquefied natural gas (LNG) terminal at Marsa el-Brega is only just beginning, and other LNG projects along the coast are still no more than theoretical. “Libya has missed the LNG market for the next 10 years,” says one consultant in the industry.
Downstream oil developments have been equally slow. NOC has struggled to develop a commercial strategy to bring investment into its ageing refineries. It now has a “general open pol-icy” towards downstream investment, according to Ahmed Aoun, who until May was head of corporate planning, studies and projects on NOC’s management committee, and is now dep-uty general manager of Shell Libya. “International investors are welcome to build refineries anywhere along the Mediterranean coast from Tobruk to Tunisia,” he says, adding that NOC will supply crude feedstock at “international prices minus a small discount for handling”.
As if reflected by the respondents to MEED’s survey, most of the difficulties Libya is experiencing in its oil and gas sector have at their root the bureaucracy and cultural idio-syncrasies of the country’s system of government. Political influence remains a major problem throughout the sector. BP’s June 2007 deal with NOC, which could in time lead to a fully integrated development, was held up for six months in a political wrangle connected to the potential repatriation of convicted Lockerbie bomber Abdelbasset al-Megrahi. Although the problem was satisfactorily resolved, it demonstrated the political vulnerability of even a relatively powerful organisation such as NOC in the country.