Oil majors reassess their positions in Libya

28 August 2009

National Oil Corporation chairman Shokri Ghanem speaks to MEED about the impact on Libya’s oil and gas sector of low oil prices and disappointing discoveries

The news that several international oil companies (IOCs) could be scaling back their operations in Libya has spread within the oil and the gas community in Tripoli.

It has been almost six years since the UN lifted its sanctions on Libya and the National Oil Corporation (NOC) welcomed inter-national investors back into the country’s hydrocarbons sector. The companies that were first through the door, including the US’ Occidental Petroleum and Italy’s Eni, are now coming to the end of their exploration periods and it is time for them to take stock. A lack of discoveries has forced some companies to reassess their presence in the country.

“With the drop in oil prices, the first cuts that the oil companies make are to high-risk investments, including exploration projects that have not shown results,” says one Tripoli-based oil industry source.

Speaking to MEED in early August, Shokri Ghanem, chairman of NOC, dismissed concerns about the outcome of exploration efforts. 

“Looking at the percentage of discoveries to drilling wells, it is very high,” he said. “It is higher than we used to get in the 1960s. Maybe it is different because we have not discovered prolific fields. We have not caught the big fish, only the small fries.”

Ghanem points out that many companies are only starting to drill. He is hopeful that with the help of new technology, they will be more successful than their predecessors.

Contract restrictions

Another industry source says the five-year  exploration and production-sharing agreements (Epsa) NOC signed with the oil majors in the first place, known as Epsa IV, are partly to blame for the dis-appointing results. In most cases, the deals limit exploration to a five-year period, leaving oil majors with relatively little time to consolidate the results of their seismic programmes.

“The companies had to sign the agreement, mobilise in Libya from scratch, tender seismic work, design and implement it and then process and interpret the data,” says the source. “There wasn’t enough time to identify where the oil is.”

Libya has held four oil licensing rounds based on the Epsa IV model since the sanctions were lifted. The first of these closed in January 2005 and the last in December 2007. NOC has sought to bring exploration deals older than this into line with the Epsa IV framework and has successfully renegotiated contracts with several oil majors to that effect.

“We are working hard on migrating all our old agreements to Epsa IV,” says Ghanem. “Most companies have accepted [the new terms], after almost three years of strenuous negotiations. Some have not yet reached an agreement.”

Italy’s Eni was the first to sign a renegotiated contract in June 2008, agreeing to cut production from most of its major fields by half. Later that month, a team of Occidental and Austria’s OMV signed a 30-year deal giving it a reduced production share in return for a commitment to invest $5bn in its fields.

A series of deals with France’s Total, Ger-many’s Wintershall and Norways’ Statoil Hydro have cut their oil production share from 50 per cent to 27 per cent, and their share of gas production from 50 per cent to 40 per cent.

Production delays

“It is reflective of the global oil and gas climate,” says the country manager of one oil major. “NOC is trying to get better returns. The problem is, this delays activity and defers production, and that cannot be in anyone’s interest.”

For the time being, NOC has no plans to launch any more licensing rounds. In the future, exploration deals will be agreed on a negotiated basis.

“We have already had four rounds,” says Ghanem. “Now we need to digest what we have already chewed.”

Given that the last bid round NOC, held in 2007, was not particularly successful, with only four of the 14 areas on offer awarded, the move towards negotiated deals makes sense.

“With an Epsa round, it is embarrassing if no one comes to the table,” says the country manager. “It is a much safer strategy to go with companies that are expressing an interest.”

The hope is that if a new offshore exploration phase proves successful, it could whet the appetite of foreign oil majors again.

But foreign companies will first be looking for more than just news of discoveries if they are to invest. In particular, they will need to be convinced that NOC is a reliable partner.

An ongoing disagreement between NOC and China National Petroleum Corporation International over the sale of Canada’s Verenex has damaged investor confidence. Under the terms of its exploration contract with Tripoli, Verenex needs the approval of the Libyan authorities before any sale can go ahead. But on 10 August, Verenex released its second-quarter financial and operating results stating it was still seeking consent for the sale. But instead of giving its approval, NOC announced its intention to buy Verenex. It also suggested that the Canadian company was improperly prequalified for the first Epsa IV bid round in January 2005.

In its 10 August statement, Verenex warned investors that there was no guarantee NOC’s consent would be forthcoming or that the sale would be concluded. “Verenex is considering and evaluating all of its options in light of these recent events, including legal remedies available under the Epsa contract such as arbitration,” said the company statement, adding that it had already drafted an arbitration claim.

“It is not very good for investors to see this,” says one industry source.

Ghanem would not be drawn on the subject of Verenex, saying only that the case was now with the General People’s Council (cabinet).

But the Verenex case can only heighten the feeling of uncertainty that foreign investors invariably experience in Libya, because of the unpredictability of cabinet decision-making.

It is the second time this year that the hydrocarbons industry has been at the centre of contro-versy. In January, Libyan leader Muammar Gaddafi announced he was considering nationalising the country’s oil assets. A month later, the General People’s Congress (parliament) voted against the move.

Despite the negative publicity, , NOC is keen to encourage foreign companies to carry out more of their work in the country. To this end, it has issued a directive banning long-distance working and requiring firms to carry out engineering work in Libya. “We want to locate the industry in the country,” says Ghanem. “If we need a few experts, we can bring them in.”

Engineering firms will need to establish a local presence and take a Libyan partner -either NOC or a private company. According to Ghanem, companies have responded well to this initiative.

“Clearly, this is a good move on the part of the NOC and will make a tremendous push for the recruiting, training and development of local technical staff,” says the oil industry source. “In the beginning, costs will be higher as a number of expensive expatriates will have to be located in Libya. However, in the long run those will be replaced by Libyans, with important cost savings.”

But some contractors in Tripoli are doubtful  of the feasibility of the scheme because of the cost of relocating staff. “If you win a $100m contract to design a refinery, you won’t transfer five people here with all the associated costs,” says one foreign contractor.

Keeping international oil companies happy while looking after its own interests by issuing directives such as the requirement to work locally puts NOC in a difficult position. “The challenge is that it acts as the regulator and an oil company in its own right,” says the country manager. “NOC has 50 companies to work with. They are all very different and it has a small team. It is a hugely challenging task to keep the momentum up and make decisions in the best interests of NOC.”

Getting the balance right is particularly important given Libya’s wider economic dependence on the hydrocarbons industry. The sector accounts for about 95 per cent of export earning and 25 per cent of gross domestic product. It also provides 60 per cent of public wages.

Libya’s long-term goal has been to boost oil production from its current level of 1.6 million barrels a day (b/d) to 3 million b/d by 2015.

At the height of the oil boom in July 2008, with prices soaring to $147 a barrel, NOC grew confident it could reach its target by as early as 2012. But now it has gone back to quoting its original goal, as a result of Organization of the Petroleum Exporting Countries (Opec) cuts and lower oil prices, which weaken the commercial incentive for upstream investment.

“While our target was 3 million b/d by 2015, we could have reached it even before then since we had reached 3.7 million b/d in 1970,” says Ghanem.

He refutes media reports that the company has already cut its target to 2.3 million b/d by 2013. “We are in the process of revising our targets,” he says. “The figures will depend on the budget allocation and demand forecasts.”

Opec forecasts that demand for its crude will average 28 million b/d in 2010. This represents a 0.5 million-b/d decline on this year and the third consecutive annual fall. However, Opec also states that given the decline is significantly lower than the drop of 2.3 million b/d over the previous year, it may be seen as a sign of recovery.

Ghanem stresses that a decision to lower targets will not be taken lightly. “We feel that in doing this, it is not our best course of action simply because we feel this could lead to an oil crunch in the future because most oil producers are following the same route,” he says.

With few new discoveries, and many field developments unlikely to be completed before 2014, a downward revision is inevitable. But NOC must seek ways to speed up exploration activity in the sector.

It is a telling sign of Libyan bureaucracy when even oil majors struggle to secure visas for their employees. Removing basic obstacles like this would allow international partners to get on with the job they went to Libya to do.

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