Production targets will test Libyan oil sector

03 January 2013

While Libya has beaten expectations in restoring its energy production, it must now articulate a clear strategy for the oil and gas sector if it wants to hit ambitious long-term output targets

Libya has made progress in restoring its oil and gas production to pre-war levels over the past year and excitement is growing over a potential new round of oil and gas licences. But the lack of a clear strategy for hitting long-term production targets or terms for a new oil licensing round mean the biggest challenges facing the oil sector are still ahead.

Libya’s oil production has returned to about 1.6 million barrels a day (b/d), after falling to as low as 400,000 b/d at the height of the conflict. But restoring output to the sector has not been without difficulties. Production levels have varied sharply, particularly at refineries where operations have been disrupted by strikes and protests. The 120,000 b/d Zawiya refinery was closed for two days in early November due to protests preventing production at the Murzuq fields, which supply it with crude oil.

Oil sector frustrations

London-based political risk consultants, Menas Associates, reported a fight on 17 December between transport workers at the Al-Hamada al-Hamra oil field and armed militia men from the town of Zintan. Working as the installation’s guards, they were protesting about a lack of payment for their services. Menas Associates describes the militia’s situation in dire terms, with no housing or water and long delays in salary payments. The incident can be seen as a further reflection of the frustration felt by many Libyans over the revolution’s failure to bring about quick improvements in living standards.

These kinds of incidents are hardly surprising in a country still struggling with its newly found freedoms. Speaking at a conference in Vienna in November, Nuri Berruien, chairman of state firm National Oil Corporation (NOC) described the industrial disputes as a “healthy sign” of Libya’s new democracy and freedom of expression.

Berruien may have joked about strikes and protests in the new Libya, but NOC is also taking steps to settle the nerves of anxious oil firms. It has established a joint oil field defence force with the Defence Ministry to protect the country’s hydrocarbon infrastructure and personnel. The 8,000-strong force consists of former rebels, providing another opportunity to reintegrate them into society.

Restoring production levels is not the biggest challenge facing the oil sector. NOC’s masterplan for 2005-15 aimed to raise oil output to 3.5 million b/d by 2020, from 1.8 million b/d in 2005, by increasing exploration in offshore and frontier areas.

The figure has been revised down by the interim governments that have run Libya since the fall of the Gaddafi regime, but oil remains key to Tripoli’s economic growth plans. The National Transitional Council (NTC), which governed the country until elections in July, set a target of raising oil production to 2.2 million b/d by 2015, with the possibility of lifting production further to 3 million b/d by 2020.

International oil company officials are optimistic about the potential to significantly boost oil output, provided security issues are resolved. “Libya in the 1970s pumped more oil than Saudi Arabia,” says Fareed Salem, vice-president of Middle East and North Africa business development at the US’ ConocoPhillips. The energy major renegotiated its entry into Libya in 2005 after US sanctions on the country were lifted. ConocoPhillips is one of three US firms, along with Hess and Marathon Oil, that formed Waha Oil Company, a joint venture with NOC to operate four fields in the Sirte basin.

Oil production challenges

Libya’s proven oil reserves, estimated at 47.1 billion barrels in 2011 by UK oil major BP, would certainly support higher production levels.

“Potentially, I could see Libyan oil production double, going on our experience in Waha,” says Salem. “We could double output within the next five to 10 years and this applies to several other producers in Libya. But this will be more difficult and expensive to produce, compared with what we have done before.” 

Before the 2011 civil war, NOC also announced plans to increase the country’s natural gas production to 3.5 billion cubic feet a day (cf/d) by 2016, from about 1.6 billion cf/d in 2010, to supply feedstock for power generation and free up oil for export.

“Libya’s biggest challenge is gas,” says Salem. “This is one resource the country has never focused on. Like most countries in the region, until recently gas production was seen as a non-economic activity. But clearly gas is a critical fuel for basic water and power needs, which is the biggest consumer and like most countries, Libya is gas short. The lack of focus on gas in the past few years has created a huge challenge for Libya to realise some of its growth targets.”

Salem says Libya currently flares close to 200 million cf/d of associated gas, a situation that could be reversed relatively quickly with a series of gas-capture projects. But, he says, there needs to be swift and clear decision-making from the Oil Ministry and NOC to make gas a focus area, to find more gas, develop more discoveries and to eliminate gas flaring.

Waha Oil Company has its own plans to more than double its crude oil output to 600,000 b/d by 2017, from about 300,000 b/d currently. This includes the development of 80,000 b/d of condensates at Block NC-98 and 200 million cf/d of gas from the Faregh field.

The bulk of Libya’s expansion, however, will come from the development of the offshore Bouri field by Mellitah Oil & Gas, a joint venture of NOC and Italy’s Eni. In September, Mellitah invited firms to prequalify for a contract to design a new offshore platform and onshore gas-processing facilities at the Block NC-41 concession, about 75 kilometres off Libya’s coast in waters with depths of 93-145 metres.

The platform will include gas separation and dehydration facilities able to process 160 million cf/d. Once processed, the dehydrated gas and partially stabilised condensate will be exported to the existing onshore Mellitah complex, in the northwest of Libya, through two dedicated subsea pipelines for final treatment. Gas from the complex is transported to gas compression facilities based at the same site.

Energy exploration in Libya

Despite the success in restoring oil production, restarting Libya’s exploration activities has been slower, although it is starting to gather pace. On 15 December, Paolo Scaroni, chief executive officer of Eni, met Prime Minister Ali Zeidan to announce a $8bn investment plan for the upgrade of production and new exploration activities over the next decade.

Eni has resumed onshore oil and gas exploration activities in Libya, and is being joined by other firms gradually returning to the North African country. Drilling began on 29 November, at the onshore A1-108/4 discovery well in the Sirte Basin, about 300 kilometres south of the city of Benghazi. It will drill to a target depth of 14,500 feet to test the Alnobian geological layer.

We could double oil production there within the next five to 10 years … but this will be more difficult

Fareed Salem, ConocoPhillips

Along with most other oil firms working in the country, Eni declared force majeure following the outbreak of civil war in early 2011. It has since been the first international firm to resume production in September 2011, through its Mellitah joint venture. Eni lifted its force majeure status in Libya in December 2011 and resumed offshore exploration activities in February 2012.

Turkish Petroleum Overseas Company (TPAO) is also planning to move ahead with exploration. The firm has asked contractors registered in Libya to submit expressions of interest by 10 January 2013, to support its planned exploration drilling campaign in its onshore Block-147 concession in the Murzuq basin.

TPAO signed an exploration and production sharing agreement (EPSA) in 2000 with NOC for Block NC-188 in the Ghadames basin, Block NC-189 in the Sirte basin and Block 147/3-4 in 2005.

So far, only Algeria’s Sonatrach International Petroleum Exploration and Production Corporation has started exploration drilling in its Block-65 acreage in the Ghadames basin, near the Algerian border. The company signed up to drill eight wells in 2007, and plans to spend more than $150m. It is expected to begin testing for the first exploration well at the Block 95/96 concession before the end of December.

Some firms are still waiting on the sidelines. Poland Oil & Gas Company (POGC) plans to restart onshore exploration activities at its Area 113 blocks in the Murzuq basin in early 2013, having only lifted force majeure in November. It had planned to drill three wells almost a year earlier. POGC committed to an eight-well drilling campaign when it signed its EPSA in 2008.

In 2010, BP said it was committed to spending $900m by 2015 exploring its block in the Ghadames and Sirte basins. Depending on its success upstream, plans have been drafted for a downstream investment of up to $25bn. This includes pipelines, processing facilities and up to four liquefied natural gas trains.

BP has acquired more than 31,000 square kilometres of 3D seismic data, but drilling operations have yet to commence. Its EPSA contract includes a commitment to five offshore wells. This year could see Tripoli launch a new EPSA licensing round, under which the Libyan government, through NOC, retains exclusive ownership of the oil fields, while signatory companies act as contractors. Numerous previous rounds have been held, the last of which, EPSA-IV, was staged by the old regime in 2005.

According to UK law firm, Clyde & Co, EPSA-IV created tough new terms for international oil firms, who agreed to low profit shares and large signature bonuses in return for their concession licences. The terms are so tough, in fact, that UK/Dutch Shell stopped its offshore exploration activities in 2012, saying its efforts could not be economically justified under the agreement.

Lacking strategy

Before handing power over to the 200-member General National Congress (GNC), the outgoing NTC articulated its hopes that a new set of production-sharing agreements could be signed, suggesting improved terms to attract oil firms investing in enhanced oil recovery.

A new licensing round is unlikely, however, before the interim GNC is replaced by a full-term government, backed by a new constitution. Elections are set to take place in July 2013.

Likewise the planned reorganisation of the oil sector will have to wait for the political situation to stabilise. Abdelbari al-Arusi, the new energy minister, has proposed the NOC to be split into two separate bodies to be headquartered in the capital, Tripoli, and Benghazi in the east of the country. The ministry has also suggested separating the company’s upstream and downstream activities. Exploration and production would remain in Tripoli, while refining and petrochemicals responsibilities would be transferred to a new company, The National Corporation for Oil Refining and Petrochemicals Industry, headquartered in Benghazi.

The upstream company in Tripoli would be known as the National Corporation for the Exploration and Production of Oil and Gas. Both firms will have branches in Tripoli and Benghazi. The proposal is still being considered by the government, and will have to go before the GNC before any action is taken.

“Libya needs to establish clear strategic objectives for the oil sector,” says Salem. “This is missing today. There are some short-term specific goals, but there is no long-term strategy that describes Libya’s intent in the upstream and downstream.” Although Tripoli has beaten expectations in restoring output, much uncertainty lies ahead for the hydrocarbons sector in the Ghadames and Sirte basins.

Key fact

Libya’s proven oil reserves stood at 47.1 billion barrels in 2011

Source: BP

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