The great hopes for oil and gas from Algeria and Libya

31 July 2008
After years of under-investment, but with vast tracts of potentially hydrocarbons-rich land still unexplored, Algeria and Libya are attracting much attention from the energy majors.

It was not long ago that oil and gas investors looked on the hydrocarbons-rich North African states as missed opportunities. Thanks to political and civil turmoil in Algeria and economic sanctions against Libya, most potential investors chose to stay away, favouring more lucrative and accessible opportunities in the Gulf.

But not any more. The 2001 peace accords in Algeria have enabled it to focus on international issues rather than internal ones, and sanctions against Tripoli were lifted in late 2003 following the surprise denunciation of its nuclear weapons programme. Today, the states are seen as two of the great hopes of the oil and gas industry as it struggles to raise production in the face of growing demand.

The changes to their investment environments could not have come at a better time. International oil companies (IOCs) are finding it increasingly difficult to gain access to upstream and downstream assets in the Gulf, as high oil and gas prices prompt the region’s national oil companies to revise terms in their favour.

Production incentives

Algeria and Libya, on the other hand, are considered unparalleled investment oppor-tunities. Vast tracts of potentially hydrocarbons-rich acreage remain unexplored and the countries’ badly depleted infrastructure provides ample investment opportunities to be tied into potential exploration and development deals.

“These two countries really are the next big thing in the industry,” says one senior UK contractor. “You can expect some major activity in both [states] over the next 10 years.”

The IOCs agree. In the half-dozen or so oil and gas exploration and production licensing rounds Algiers and Libya have launched over the past five years, practically every major IOC has taken part and won access to acreage.

“The Libyans are very receptive towards foreign investment right now,” says Hameed Salahuddin, director of UAE-based contractor ETA Ascon Star Group. “They are already discussing a few other projects based on gas feedstocks with international companies. The government is very much focusing on upstream [in terms of what it can do itself].

“With regard to downstream, it is looking for partners that can bring finance, know-how and experience.”

In parallel, Algerian state energy company Sonatrach and Libya’s National Oil Corporation (NOC) have been signing directly negotiated bilateral deals for the development of upstream and downstream opportunities, while tying in exploration and production incentives with the ability to market and sell the end-product.

Such deals include an agreement between NOC and the UK/Dutch Shell Group for the development of a liquefied natural gas (LNG) plant in return for the exploitation of gas reserves, and between NOC and the US’ Dow Chemical Company for the upgrade and expansion of the existing Ras Lanuf petrochemicals complex.

In Algeria, the most eye-catching deal is that signed by Sonatrach and Spain’s Repsol and Gas Natural in 2004 on the multi-billion-dollar Gassi Touil integrated LNG project, although this later went disastrously wrong.

After three years developing the project, which involved the construction of upstream processing facilities and downstream LNG export facilities, Gas Natural and Repsol were dumped from the scheme by Sonatrach in September 2007. Sonatrach claims the two IOCs were reneging on their contractual agreements and causing unnecessary delays to the project. It subsequently decided to fund and develop the scheme itself.

Gas Natural and Repsol say the delays were due to rising engineering, procurement and construction (EPC) costs, and other factors beyond their control. They are appealing Sonatrach’s decision, and the matter is understood to be in arbitration.

All three parties are understood to have lost several hundred millions of dollars on the failed venture.

NOC & Sonatrach have also been signing extensions to existing licences. NOC has renegotiated several exploration and development agreements that were signed before the implementation of its exploration production-sharing agreement (Epsa) IV framework. In return for meeting specific investment targets and adopting the new model, which has modernised terms and given better returns to the state, IOCs receive extended access to upstream production opportunities.

For example, Austria’s OMV, France’s Total and Norway’s Statoil in mid-July signed up their two Murzuq basin blocks to the Epsa IV framework. By promising to invest up to $3bn to increase existing oil production by 80,000 barrels a day (b/d) to 380,000 b/d, the IOCs gain the safety net of having their concessions extended by 10-15 years.

“The extended access to those world-class fields and in-depth knowledge of their future potential reassure us that these assets in Libya will remain an essential and profitable part of our portfolio,” says Helmut Langanger, the OMV executive board member responsible for exploration and production.

The most recent bilateral deal is between NOC and ETA Ascon Star Group and Trans-Asia Gas International, a subsidiary of Alghurair Investments, to set up a joint venture company to own and upgrade the Ras Lanuf refinery. Under the terms of the deal, the firm will invest $2bn in expanding the facility’s refining capacity to 240,000 b/d, from its current operational rate of 200,000 b/d.

“It is a great opportunity for both the parties,” Salahuddin tells MEED. “While NOC will be unlocking the value of its existing assets, Alghurair Investments and ETA Ascon Star Group will be contributing to the equity as equal partner, and the joint venture company will enjoy the combined managerial, technical and financial capabilities of both the partners.”

Damaging confidence

Yet despite the opening up of the oil and gas sectors in Algeria and Libya, there remain deep-rooted concerns over the security of potential investments.

These worries are greatest in Algeria, where the problems surrounding the Gassi Touil integrated LNG project could have a major negative impact on investor confidence.

“The industry is still reeling from the impact of such a high-value casualty,” says one Algiers-based oil executive. “It is difficult to see how potential investors will not take this into account when considering future deals.”

There are also some serious concerns on the contracting side. On 23 July, Sonatrach announced that it had disqualified the $3.9bn low bid submitted by a team of UAE-based Petrofac and Indonesia’s IKPT in favour of the second-ranked offer, just days after declaring Petrofac the winner. No thorough explanation of the decision has been given.

“The whole process threatens to thoroughly discredit Sonatrach, and places severe doubts about the transparency of the tendering process in the country,” says one UK contractor. “There are few major international EPC contractors active in Algeria as it is, and they cannot be seen as being anything other than whiter than white if they are they hoping to attract more.”

Algeria’s controversial 2006 Hydrocarbons Law may also have an effect on investment. Much like Libya’s Epsa IV framework, the legislation is aimed at giving the state a greater share of the proceeds from oil and gas production by reducing both the equity and production ratios of the IOCs.

It is still unclear what effect the law will have, but events so far suggest the need for IOCs to gain upstream access will outweigh the less advantageous terms. Certainly, there does not appear to be any less interest in Algeria’s most recent oil and gas licensing round, launched in July, with most analysts expecting as much interest, if not more, than auctions held before the introduction of the new law.

“The regulatory changes were negative from a foreign investment point of view,” says Craig McMahon, North Africa upstream analyst at UK oil consultant Wood Mackenzie. “But this has to be weighed up against the limited opportunities [for IOCs to gain upstream assets] elsewhere and the general global environment for the oil industry and the current high oil price. I think there will be a good level of interest [in the licensing round], although some companies may think their exposure to the Algerian market is already significant.”

There have not been the same high-profile issues in Libya, but the country is renowned for taking its time, often years, over finalising deals, sometimes leaving potential partners in the dark over its intentions.

Delayed deals

For instance, Norwegian fertiliser producer Yara signed a memorandum of understanding with Tripoli to develop a fertiliser production plant at Marsa el-Brega as far back as 2004, but it was only in July this year that the deal was finalised. Similar deals, initialled at the same time, with Dow and Shell for LNG facilities are also yet to be completely sealed.

“Libya may be more open now than before,” says one Tripoli-based contractor. “But that does not mean that everything has changed. The bureaucracy, delays and indecision are the same, if not greater than before.”

Algeria and Libya clearly have great potential, which should ensure investors maintain their interest. But at the same time, they need to remain open and attractive enough not to deter interested partners. After all, their time in the sun will not last forever, and they may find themselves placed in the shadow again by other countries that do take the initiative.

Value of exports

Algeria: $62.3bn

Libya: $45.7bn

Morocco: $27bn

Tunisia: $19.8bn

Source: IMF

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