Since Tripoli volunteered to abandon its programme to develop weapons of mass destruction in December 2003, it has become one of the most attractive territories for international oil majors.
The move to end its weapons programme followed months of secret negotiations with Washington and London and came as a surprise to almost everyone.
It immediately opened up the country to international investment after nearly two decades of UN sanctions.
In that time, Tripoli had been branded a terrorist state following a series of state-sponsored attacks in the 1980s, including the 1988 bombing of Pan Am flight 103 over Lockerbie in Scotland.
Libya’s return to the fold is one of the few foreign policy successes of President George Bush’s administration and one of the more positive events in the Middle East in recent years.
Even if the country remains under the control of leader Muammar Gaddafi, Tripoli is no longer on the US State Department’s list of terrorist states, and is introducing wide-ranging market reforms of its economy, albeit slowly.
While banking and others sectors are opening up, it is the hydrocarbons industry that has felt the greatest impact of the 2003 agreement.
With world oil prices remaining above $100 a barrel, finding fresh sources of oil and gas is a priority if global supplies are to keep pace with demand.
From a low of just 1.3 million barrels a day (b/d) in 2003, when UN sanctions were lifted, Tripoli has succeeded in raising crude output to almost 2 million b/d. It hopes to hit a production target of 3 million b/d by 2013.
In the long run, there is the possibility of even higher output. Thanks to its history of sanctions and a slow, inefficient bureau-cracy, vast areas of the country remain untouched by drilling activity. UK energy consultant Wood Mackenzie describes Libya as “highly unexplored”.
As a result, there is a real chance that Tripoli’s oil wealth is far larger than the official reserves figure of 41.5 million barrels. The same can be said for its 51 billion cubic feet of gas reserves.
So it is not surprising that Libya has performed well in recent years in the International New Ventures Survey carried out by The Netherlands’ Fugro Robertson, a specialist data provider for the oil, mining and construction industries.
Oil majors named it as the country with the most attractive oil and gas prospects for three years running up to 2006.
“We had begged foreign companies to come to Libya before 2003 but now the situation has changed in our favour,” Saif al-Islam, the most high-profile son of Gaddafi, told a rally in Libya earlier this year.
He went on to say that the country had earned $10bn from foreign investments in its oil sector over the past five years.
In that time, international oil companies (IOCs) have queued up to become involved in upstream activity in the country, having previously been barred or discouraged by sanctions.
Today, more than 30 of the world’s largest oil firms have exploration and production sharing agreements in Libya, and more are lining up to enter the next oil and gas licensing round.
The influx of IOCs since 2003 is starting to bear fruit. Tens of thousands of kilometres of 2D and 3D seismic surveys have been carried out in the search for locations for exploratory drilling. Tenders for drilling rigs and well support services are issued on a regular basis as exploration activity is ramped up.
Oil firms have already started reporting major finds, with discoveries of fields ranging between 10,000 b/d and 75,000 b/d.
They are hoping to follow the success of Italy’s Eni, which in 1997 discovered the Elephant field. Just 11 years later, the field produces as much as 150,000 b/d.
Libya remains one of the few places where potentially large field discoveries are still possible.
Its crude is also generally sweet and light, the best possible combination for refiners, and it is located close to Europe with access to the Atlantic via the Mediterranean Sea.
As oil and gas is discovered, attention has been turning to field development. Contractors and oil-field services companies are beginning to increase their presence in the country as the need for their expertise grows.
“Libya as a whole is really exciting,” says one UK contractor involved in the country. “The amount of work available will increase rapidly over the coming five years.”
But it will not be easy. As most of the exploration and production-sharing agreements were signed within a small, two-year timeframe starting in 2004, a lot of development will be carried out at the same time, leading to a squeeze on staff and materials resources. This is particularly problematic as Libya has poor infrastructure.
Contractors also report difficulties in finding the necessary time and energy for developments in Libya when there is so much activity in the Gulf.
And for contractors new to the country, setting up an office and obtaining a commercial licence can take months of frustrating effort.
“It is hard arguing with the board that more resources should be allocated when there are more than $500bn worth of oil and gas projects in the Gulf alone,” says one Gulf-based engineering, procurement and construction (EPC) contractor.
“Plus, many of us used to be in Libya during the leaner years and have not forgotten what a difficult place it can be to work in.
At the moment, the other main headache is whether to concentrate on Algeria or Libya. Few contractors can do both.”
One executive at a large Korean EPC contractor voices a similar view. “It is not that we do not like Libya as a market,” he says.
“It is just that we think there are greater opportunities in Egypt and Algeria at the moment, and it is those that we are currently focusing on.”
Libya does not have the best environment for contracting practices. The country’s top-heavy bureaucracy and lengthy delays can deter many firms from doing business there.
Funding is also an issue with the country’s state clients. Payments are often late and letters of credit can be difficult to obtain.
Even taxation can be a problem. Libya has few tax agreements with other countries. Those it does have are with Egypt, Pakistan, Malta and India, although it is working to expand this list.
“Libya recognises that extending its network of taxation treaties makes a Libyan investment more attractive for potential investors from overseas,” says Shaun Hardiman, a lawyer at UK law firm Trowers & Hamlins, which has offices throughout the Middle East.
“Although no taxation agreement has yet been signed between Libya and the UK, negotiations have taken place and key principles have been agreed. It is expected that the treaty will be signed by the beginning of 2009.”
However, it is not clear how long IOCs’ interest in the country can be maintained. Already, there are signs that after the initial influx of oil majors, their commitment is wavering.
Much of the best acreage has already been auctioned off and Tripoli is setting increasingly stringent terms for hydrocarbons companies.
Oil firms used to be able to take a 75 per cent equity stake in fields, but following the latest licensing rounds, the average is now 7-12 per cent. There are also hefty sign-up fees that the IOCs must pay.
Partly as a result of these changes, Libya has slipped back to fifth place in the most recent Fugro-Robertson survey, behind the UK, Egypt, Algeria and Australia.
Matters have not been helped by the strict staffing conditions applied by Tripoli. Foreign firms operating in the country have to employ a high percentage of Libyan nationals, but finding local staff with the necessary experience and expertise can be a challenge.
The management committee of the state owned National Oil Corporation (NOC) recently reiterated that oil companies must have a Libyan national as deputy chairman.
According to NOC, the oil companies have been asked to provide the names of potential candidates. If they fail to do so, NOC says it will assign a person to the position.
But despite these difficulties, contractors will always tend to gravitate to where the work is in the long run.
So even if there is no established base for them in Libya, they will still bid if there are valuable contracts to be won.
The next major test of contractor appetite for upstream projects in Libya will come next year when the first major EPC contract for field work is tendered.
This will almost certainly be in one of the 15 blocks awarded in the first licensing round in early 2005.
Verenex Energy’s Area 47 is the most likely candidate as front-end engineering and design work is already under way.
Over the next three years, dozens more field development and pipeline contracts are due to be carried out as commercial quantities of oil and gas are discovered and their exploitation approved.
By then, Libya should not only be a hub for exploration activity but also for construction. But what has become clear in the past year is that maintaining IOC interest in the country will remain a challenge for Tripoli, with or without the threat of sanctions.
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