Libya oil in numbers

25 per cent: Portion of BP’s exploration budget allocated to Libya

2.3 million b/d: Tripoli’s oil production target by 2013

3 million b/d: Libya’s oil peak production in the 1960s

b/d=Barrels a day. Source: MEED

Libya’s attraction to international oil companies is easy to understand. The country holds the largest proven oil reserves in Africa and is geographically well placed at the south of the Mediterranean Sea, providing access to US and European markets. The country’s oil is commercially highly attractive because Libya has some of the lowest extraction costs in the world. Plans by the UK’s BP to spend 25 per cent of its global exploration budget this year in Libya is a clear indication of the expectations that international oil companies have for the size of the potential prize.

There is a subdued mood in terms of exploration. But there is still great potential in the frontier areas

Ross Cassidy, Wood Mackenzie

Although Libya has a long history as an oil and gas producer, its potential remains hugely underdeveloped thanks to two decades of international sanctions, which were gradually lifted in 2003-2004.

Foreign investment in Libya

Closed off from international investment, Libya’s oil production has been in steady decline after peaking at more than 3 million barrels a day (b/d) in the 1960s. In 2009, output touched 1.7 million b/d, according to BP’s Statistical Review of World Energy 2010.

State-owned National Oil Corporation (NOC) accounts for the vast majority of Libya’s oil and gas production. Since 2003, the country has opened up to international oil companies (IOCs), with four oil and gas exploration licensing rounds aimed at producing 3-3.5 million b/d by 2015. However, recent exploration efforts have proven disappointing.

Libya crude oil production
(Thousand barrels a day)
1999 1,425
2000 1,475
2001 1,427
2002 1,375
2003 1,485
2004 1,623
2005 1,745
2006 1,815
2007 1,820
2008 1,820
2009 1,652
Source: BP

“Expectations were high, but so far the results have been pretty disappointing,” says Ross Cassidy, Middle East analyst at Edinburgh-based consultancy Wood Mackenzie.

“There are companies with significant exploration experience, but they have not made any significant discoveries. It has been 3-4 years since the country opened up for foreign investment and there has not been much progress despite high expectations.”

General programmes are ongoing. BP, in particular, remains hopeful and is due to start drilling at onshore and offshore concessions in Libya by the middle of this year. The UK/Dutch Shell Group is also planning offshore activities. “There is a subdued mood in the country in terms of exploration. But there is still great potential in the frontier areas,” Cassidy says.

Yet the optimism with which most IOCs entered Libya has dwindled and some have decided to exit the country. US energy major Chevron signed an exploration and production sharing agreement (EPSA) in a 2005 bid round, paying a $600,000 signing-on fee. It agreed it would spend at least $20m on the development of Block 177 concession in the south of country.

In May this year, Chevron began winding down its Tripoli office after deciding to let the agreement expire. Sources in Tripoli say the company has reduced the number of staff at the office and has reassigned country manager Dale Ryan to Kuwait, where he will set up a new upstream development centre. Ryan’s appointment in Kuwait has not been confirmed by Chevron, but the company has said that it will not continue work on the Block 177 concession.

“After an unsuccessful exploration well was completed, the company elected to relinquish its 100 per cent interest in the onshore Block 177 exploration licence in the fourth quarter of 2009,” says Kurt Glaubitz, head of media relations at Chevron (MEED 13:5:10).

The company’s decision to reduce its presence in Libya follows similar moves by Australia’s Woodside Group and the UK’s BG Group, who let their licences won in the 2005 bid round lapse after similarly unsuccessful drilling campaigns. “Most IOCs with licences in Libya are readjusting what they think they can achieve in the next five years. In the long term, production and exports of gas will increase but it will be a lot slower than NOC would like,” says Cassidy.

Tripoli has also scaled back its ambitions for production increases as lower quotas imposed by Opec have dented its enthusiasm to invest in boosting production. “Originally, [it was] targeting a return to 3 million b/d by 2013, now NOC wants to increase capacity to only 2.3 million b/d by 2013. The increases are expected to come from enhanced oil recovery techniques,” says Terry Willis, managing director of the Middle East branch of UK energy trade association EIC.

While the lack of fresh discoveries has caused some IOCs to exit the country, firms opting to stay will face challenges of a different kind. Doing business in Libya is often a protracted, unpredictable and complex process. Political relations between Tripoli and the West remain strained.

Libya’s operating environment is also not easy. “Most of the fields are joint ventures. IOCs have to second their employees to work with NOC. They operate with two different cultures that aren’t always aligned,” says Cassidy. “The joint venture model is a struggle. The IOC may have grand plans, but can’t always have the influence.”

Power struggles

The balance of power in the joint venture lies in favour of NOC and tensions between the partners often hamper development. This was made clear in 2008 and early 2009 when Tripoli forced several IOCs to accept a lower share of revenues from the oil and gas they produce.

Libya revised its contracts with Italy’s Eni, the US’ Occidental Petroleum Corporation, Spain’s Repsol and France’s Total. Tripoli also renegotiated the terms of its production sharing agreements for various oil and gas concessions with Germany’s Wintershall and Norway’s Statoil Hydro.

Under the new terms, the firms will take 27 per cent of oil production at the concessions, rather than the 50 per cent previously agreed. The foreign partners will receive a 40 per cent share in gas production, later to be reduced to 30 per cent, instead of the 50 per cent in their original agreements. The only reason given by NOC was the “difficult financial and economic circumstances”.

“This is probably a sensible approach for NOC, but they want it done immediately. This process normally takes 10-15 years. There is a drive to get it done quickly, but the expertise is not there yet,” says Cassidy.

Tripoli’s dealings with Verenex Energy highlights some of the risks involved in operating in Libya. In September 2009, the Canadian oil exploration company was bought by the Libyan Investment Authority for $304m after forcing China National Petroleum Corporation to withdraw the $500m offer it had made for the firm. Tripoli invoked a clause in the Canadian firm’s exploration licence in the country, which gave it first refusal in the event of a sale.

“The incident is a reminder of the risk of operating in Libya. The politicising of the industry leads to uncertainly in investments,” says Cassidy.

New oil law in Libya

The drafting of a new oil law could go some way in helping ease IOC worries. NOC chairman Shukri Ghanem has sought to reassure foreign investors over fears of political pressure on companies to revise contractual terms. “A new oil law is being drafted, but there is not a lot of information on what the legislation will look like. Ministers have made assurances that the law will not adversely affect the IOCs, but the lack of details creates another layer of uncertainty,” says Cassidy.

The new law should also resolve the struggles for influence over the industry. Libya dissolved the oil ministry in 2006, leaving NOC in charge of policy and oversight of the hydrocarbons sector. Reforming the oil ministry is now back on the table, which would see the NOC return to the role of an operator with limited policy making powers.

Until the law is passed, IOCs will be understandably wary and Tripoli’s hopes of increased oil production will be difficult to achieve in the short term.