Oil contractors lose appetite for Libyan oil and gas projects

30 November 2010

Since 2004, foreign engineering firms have been anticipating new opportunities in Libya after sanctions were lifted, but slow progress is forcing many to lose interest

Oil & gas in numbers

3 million b/d: Libya’s oil production target by 2015

3.5 million b/d: Libya’s oil production target by 2020

2.3 million b/d: The Libyan government’s current target by 2013, according to Deutsche Bank

b/d=Barrels a day. Sources: MEED; BP

The attitude of senior executives at international engineering contractors towards Libya reveals a lot about the state of the country’s market.

Publicly, they are diplomatically optimistic about Libya’s prospects. Privately, they are deeply critical of the continuing difficulties in the business environment, the pace of development, and the slow and opaque tendering process. Increasingly, many say that Libya is no longer a priority.

There are plenty of plans. But not much in the way of big deals has gone through

Senior contractor

“When the [UN] sanctions were lifted, there was a lot of optimism about Libya,” says a senior contractor.

“People rushed to set up offices in Tripoli, to get into the country. Now, there are other priorities; not much has happened, and for the foreseeable future not much is likely to happen. But [engineering firms] will keep a presence here and hope it picks up.”

Small oil and gas contract awards

Four years ago, international engineering, procurement and construction (EPC) contractors had been positioning themselves in the country in anticipation of a glut of major project contracts worth tens of billions of dollars being tendered. In reality, very few major deals have happened.

Chances that there will be great leaps and bounds in Libya any time soon are unlikely

UK-based chemicals consultant

“There are plenty of plans,” says the contractor. “But not much in the way of big deals has gone through. For the really big contractors to take an interest, there have to be deals worth billions. So far, we haven’t seen many contracts worth more than $200-250m.”

According to regional projects tracker MEED Projects, $2.5bn of EPC contracts were awarded in the oil, gas, refining and petrochemicals sectors in Libya between the first quarter of 2006 and the third quarter of 2010. The average value of the contracts was $257m.

Major oil and gas EPC spends, 2006-10 ($m)
CountrySpend ($m)
Saudi Arabia72,000
Source: MEED Projects

By comparison, $16bn of contracts have been awarded in Iraq over the same period; $33bn in Qatar; $62bn in the UAE; and $72bn in Saudi Arabia. Even in neighbouring Algeria, which is often described as a slow-moving market by regional contractors, $32bn of contracts were awarded between 2006-10. The expectation was that Libya would open up with the lifting of UN economic sanctions in 2003, and then, in 2004, of US sanctions, with the oil industry a prime target for foreign firms.

The sanctions had forced many US-affiliated international oil companies (IOCs) and engineering firms to leave the country in the early to mid-1980s.

The appointment of Shokri Ghanem, a Libyan petroleum economist and former prime minister, as chairman of state oil firm National Oil Corporation (NOC) in 2005, was seen as another reason for optimism. Ghanem was seen as a liberal reformer and an advocate of foreign investment into the country.

“The IOCs really thought they could work with him,” says one former IOC executive. “And they could in fact. But he wasn’t the whole story.”

The first post-sanction international oil field exploration licensing round was held in January 2005. Three more followed in the subsequent two years. However, despite billions of dollars of investment from IOCs, which have been held to extremely tough contract terms, there has been little palpable improvement in oil production levels in the country.

According to the UK’s BP, Libya produced 1.4 million barrels a day (b/d) of oil in 1999. By 2004, when sanctions were lifted, output totalled 1.6 million b/d. It peaked at 1.8 million b/d in 2007 and 2008, before dropping to an average 1.6 million b/d in 2009, largely because of the Organisation of the Petroleum Exporting Countries (Opec) quotas.

NOC had hoped to boost production to 3 million b/d by 2015 and 3.5 million b/d by 2020. Analysts at Germany’s Deutsche Bank now believe that the government’s current targets are closer to 2.3 million b/d by 2013.

Bureaucracy issues with national oil companies

In October, NOC announced that a number of companies which won exploration and production licences in 2005 had elected not to extend them. The list included US firms Chevron Corporation and Occidental, and Australia’s Woodside Petroleum.

Other executives say that the amount of red tape involved in developing new projects, and the bureaucracy of government bodies involved in the sector has also served to slow down the pace of development.

“There has not been the kind of success that a lot of the IOCs expected,” says a Tripoli-based executive, with close ties to a number of international producers. “Given the kind of sign-up fees involved, and the difficulties they had faced in exploring they just decided that it wasn’t worth it.”

Major EPC deals would have come from the construction of permanent oil and gas production facilities, says engineering executives.

Other major opportunities could come from downstream developments. In particular, the $54bn plan by the government-run Energy Cities Development Company to turn the coastal towns of Marsa el-Brega and Ras Lanuf into industrial hubs for oil and gas processing, distribution and refining along with petrochemicals production stand out as a key project.

With disappointing results upstream, progress in the downstream sector is also likely to be frustrating. The major downstream development planned since the country opened up is a joint venture scheme to rejuvenate and expand the country’s aging liquefied natural gas (LNG) facility at Marsa el-Brega. But plans to tender the EPC contract for the first phase of the scheme have been delayed on numerous occasions since UK/Dutch Shell signed up to work on the scheme with state-owned Sirte Oil Company in 2005.

Unrealistic budgets for downstream projects

“On the downstream side, some of the budgets being discussed look unreal,” says Samuel Ciszuk, senior Middle East and North Africa analyst at US consultancy IHS Global Insight. “The budget being discussed for the LNG project is something like $300m; the reality of the matter is that it will probably cost closer to around $1bn.”

Meanwhile, sources close to the scheme say that the second phase of the project – the expansion of the existing facilities – is contingent on an exploration programme being undertaken by Shell. However, it is yet to make a major new discovery, which would make expansion of LNG production feasible.

Sources close to Energy Cities Development Company say talks have begun with IOCs over its plans, but that no concrete deals have been sealed. Industry executives with experience of projects of this scale say that even if they do go ahead, it will be 2012-13 before real opportunities for international contractors open up.

“There have been delays to big refining and petrochemicals schemes even in Saudi Arabia and the UAE, where these things are relatively painless,” says one UK-based chemicals consultant. “If [the US’] Dow Chemical and [state energy firm] Saudi Aramco haven’t been able to make a big integrated refining and petrochemicals scheme go ahead yet, then the chances that there will be great leaps and bounds in Libya any time soon are unlikely. These are big investments, and foreign firms will proceed with caution.”

The consultant points to uncertainty in the industry structure in recent years as an example of why the investment environment is still a challenge. As recently as 2009, Libya’s leader Muammar Gaddaffi threatened to nationalise the country’s oil and gas resources.

And in September of 2009, Ghanem resigned his post at the top of the oil industry, reportedly because of tensions within the government, only to return in October after meetings with Gaddafi and his son Said al-Islam, who is seen by many as the political figurehead of the liberal reform programme.

But further signs of tensions in the government were revealed in early November 2009, when journalists at a media company run by Al-Islam were detained by police after printing criticisms of the government.

Gaddafi intervened to have the journalists freed, but many observers saw the move as a reaction by conservatives in Tripoli to Al-Islam’s political liberalisation programme.

“There has been a lot of tension in the past couple of years,” says Ciszuk. “Maybe we have seen some groups reassert their power, but I don’t think it is going to change anything in the short term.”

Closed oil and gas market in Libya

The lack of major contract opportunities has forced many of the big EPC firms that have set up in the country in recent years to look abroad for work, leaving local construction firms and established international players like Germany’s Man Group, Italy’s Bonatti and India’s Punj Lloyd, to pick up the deals on offer.

“For the big engineering firms it is still a closed market,” says a senior business development manager at one international engineering firm.

“The people who have been doing work there that aren’t such a big presence in oil and gas elsewhere in the region will get prequalified for deals, and be able to bid low because of their presence. The contracts aren’t big enough to really interest the major engineering firms. If you are only getting a maximum deal of $250m, then the really big contractors won’t see the point.”

Other executives point out that South Korean firms, famous in the region for entering new markets and aggressively bidding low for new projects, are yet to have major successes in the Libyan oil and gas market. With IOCs now directing billions of dollars into recently-awarded field exploration and development concessions in Iraq, many of the big engineering firms are refocusing their efforts towards the re-emerging Gulf giant, which could become the biggest oil producer in the world over the next decade.

Until there are some major upstream successes in the country, and until Tripoli can ensure more consistent market conditions, the interest of international engineering firms in Libya will continue to wane.

With the UK’s BP about to start a major new deepwater exploration campaign, and Italy’s Eni announcing billions of dollars of plans to develop new fields in the country, anything is possible. But no one will be holding their breath.

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