Since international sanctions against Libya were lifted in 2003-04, Tripoli has set a bold course for its oil industry. One of the few significantly underexplored oil provinces in the world, Libya has official oil reserves of 41.5 billion barrels. But the government says its actual reserves are closer to 100 billion barrels.

National Oil Corporation (NOC), Libya’s state-owned energy company, has set itself a target of increasing oil production to 2 million barrels a day (b/d) by 2008, and to 3 million b/d by 2010-13, from 1.8 million b/d in 2006. Over the past five years, Tripoli has held four international licensing rounds, letting dozens of upstream contracts to international oil companies (IOCs).

Limited returns

But while oil prices were rising steeply, the returns on offer to IOCs from these concessions were becoming increasingly unattractive. In the early bidding rounds, based on an exploration and production sharing agreement (Epsa) model known as Epsa IV, foreign oil firms were able to retain a 30-40 per cent share of any production from the fields. But by the fourth round, this share had fallen to less than 20 per cent. One of the blocks, won by Russian oil giant Gazprom, was awarded following a bid to retain just 9.8 per cent of production.

So far, successful bidders have had limited success in finding hydrocarbons deposits, in the exploration areas where they have licences. Companies awarded contracts in the early Epsa rounds are already in the latter stages of their five-year exploration programmes, having conducted seismic surveys and drilled their first wells.

“Companies tend to drill their best prospects first, so it does not look good for the next one-and-a-half years,” says the country manager of one European oil major.

The one company to succeed so far under the Epsa IV programme is Canada’s Verenex, which submitted a multi-field development plan to NOC in November 2008, for the Area 47 concession in the Ghadames basin, which it won in the first Epsa round in 2005. The field, which has estimated reserves of 2.15 billion barrels, is expected to produce 50,000 b/d of oil and 50 million cubic feet a day (cf/d) of gas by early 2011.

In late November, Verenex opened data rooms in London for firms interested in buying the company, which it described as “one of the strategic options” being considered as part of a review that it plans to complete in the first quarter of 2009.

Two major deals for upstream gas exploration have also been signed on a bilateral basis, but both are at an early stage. In the spring of 2008, the UK/Dutch Shell Group spudded the first well in an 18-well drilling programme in the Sirte basin, having signed a headline gas agreement with Tripoli in 2005. “We expect it to reach total depth in early 2009,” Mark Hope, Shell country manager, told MEED.

“A second rig will start work in mid-2009 and a third in the third quarter. We are hopeful of the prospects, but it is a risky business. Our knowledge level will jump after we drill the first well. By the end of 2008, we will start seismic work on Area 89, which we won in the December 2007 bid round.”

Work is also under way on an offshore exploration programme being carried out by the UK’s BP. Worth an estimated $2bn, the programme is BP’s biggest exploration commitment anywhere in the world. Exploratory drilling is set to begin in 2010, with further exploration and appraisal drilling in 2011-12. So long as the oil price rebounds in 2009, the company expects first production from the field in 2018.

Despite the fanfare with which new entrants have been welcomed into Libya’s oil and gas market, it is the development of existing territories that gives Tripoli the best chance of increasing oil production in the medium term.

The potential for enhanced oil recovery (EOR) and improved oil recovery (IOR) to increase output from Libya’s ageing fields has long been acknowledged. Speaking at a conference in Tripoli in December 2004 following the launch of the first Epsa, David Chenier, senior executive at US oil company ConocoPhillips, stated his belief that the “improved enhanced oil recovery opportunity is even larger”.

Several IOCs are now working to turn this theory into reality. EOR and IOR projects being undertaken by PetroCanada, Spain’s Repsol, France’s Total, a consortium of Occidental of the US and Austria’s OMV, and the Oasis Group -a consortium comprising US oil companies ConocoPhillips, Amerada Hess and Marathon Oil Company -are expected to double total production from a series of fields from 680,000 b/d to 1.3 million b/d by 2015.

However, the recent downturn in oil prices means that the timescales for the EOR and IOR programmes are likely to be delayed. “Most of the programmes will probably be pushed back about a year, while companies wait to see what happens with the oil price,” says the European executive.

“If oil prices stay at $40 a barrel, it will be quite tough to get the money. The work does not necessarily need expensive EOR -it can be done with IOR techniques, infilling and water flooding -so if the price goes up to $50-70 a barrel it should be okay. But it won’t be done as quickly as it would have been if the price was still $140 a barrel.”

A further complicating factor is the threat of Tripoli nationalising its oil assets. Libyan leader Muammar Gaddafi floated the idea in a speech to students at Georgetown University, in Washington DC, on 21 January, although no firm moves have yet been made to push through the policy.

Gaddafi told the students that “Libya and perhaps other oil producing countries may move towards nationalisation because of rapidly declining prices”, and added that the idea of nationalisation was being discussed “seriously”.

Although Gaddafi cited the fall in oil prices as one reason for the possible move, other sources in the country say tribal groups are putting pressure on the government to take greater control over national resources.

A planned discussion on nationalisation of oil assets was due to be held by the General People’s Congress in early February but the meeting was delayed, and it is not clear how any nationalisation would proceed.

However, the comments by Gaddafi have been followed by separate moves by NOC to ban the practice of awarding work to firms based overseas, in an effort to build a skilled workforce within Libya.

NOC met more than 30 international firms on 25 February to discuss its proposal that bans long-distance working, also known as offshore engineering, and requires them to base their engineering staff and expertise in Libya if they wish to compete for contracts.

Shokri Ghanem, chairman of NOC, told the meeting NOC had decided to build engineering capacity within Libya as part of a larger plan to reassert control over its energy resources. In light of the lack of Epsa discoveries and expected delays to the development programme, Tripoli has revised its production targets.

One senior NOC official says he now believes it can reach 2 million b/d by 2012 and 3 million b/d by 2015. The target is certainly more realistic and, assuming that Opec quotas do not prevent it from increasing production, its 2012 target may be attainable. But unless the oil price recovers quickly, 3 million b/d by 2015 still looks out of reach.