Libya steps on the gas

Last month, Italy’s Eni signed up to a new a wide-ranging energy investment program. And, in the summer, BP returned to Libya after a 33-year absence in what CEO Tony Hayward described as „BP’s single biggest exploration commitment”. Exxon Mobil has signed a heads of agreement for an exploration and production sharing agreement (Epsa) with Libya’s National Oil Corporation (NOC), the state-owned oil company. The agreement covers four deep-water blocks in the Sirte Basin. Virtually unexplored, the offshore Sirte area is thought to be on-trend with the onshore Sirte basin – the country’s most productive basin, which has produced over 20 billion barrels of oil equivalent so far. The US supermajor describes the acreage as „one of the most prospective unlicensed areas in the Libyan offshore” and will undertake a five-year work program. OMV and Occidental Petroleum, meanwhile, have signed an agreement with NOC revising and upgrading several existing petroleum contracts to the Epsa-4 contractual framework, in line with government policy.

Big spender
With the duration of the agreement set at 30 years, the two companies plan investments of about $5 billion over the next five years to redevelop producing oilfields and expand exploration in the Sirte Basin. They intend to increase production from the fields covered by the agreement from around 100,000 barrels a day (b/d) to 300,000 b/d. The new contract also provides for a $1 billion signature bonus payable over three years, which OMV says reflects the high quality of the reserves. At a time when big oil companies are increasingly pushed to find attractive upstream growth opportunities, Libya has obvious attractions: it is under-explored, highly prospective and close to a big market – Europe.

Well aware of this, Tripoli is pricing investment opportunities accordingly. To secure their long-term participation, Oxy and OMV will pay a $1 billion signature bonus and have had to accept a much lower share of production than they enjoyed previously. Depending on field size, the Epsa-4 standard production share is 10-12% of total production, compared with up to 20% on some of Oxy’s oldest assets. However, Global Insight, a consultancy, points out that the changes in operating terms are not completely negative for the foreign investors: their new Epsa-4 regulated production share will be calculated after tax and royalties, so net production received by the companies will come with a „substantially higher” profit margin, Global Insight says.

And although Libya is toughening terms in line with policy in other oil-rich countries, foreign investors seem to be queuing up for investment opportunities, suggesting Libya may have found the right balance. (A distinct advantage offered by Libya is that it continues to use production-sharing agreements – unusually for a country with such high geological potential -- the investment framework favored by international oil companies.) Exxon Mobil’s significant investment suggests that may be the case.

The CEO of the US supermajor, Rex Tillerson, gave a speech at the World Energy Congress in Rome this month, in which he warned that resource nationalism could eventually undermine energy security: „isolationist or protectionist policies”, he argued, could deter the long-term, high-cost investments germane to the energy business, pushing capital elsewhere and stifling oil companies’ technological creativity. „Resource nationalism threatens to stymie innovation and slow energy development critical to continuing economic progress,” he said. Libya would not appear to fall into this category.
Eni plans to double gas exports

Eni, meanwhile, recently announced plans for major new investment in Libya that will see the Italian company, in partnership with NOC, nearly double the country’s gas-export capacity (by upgrading the 8 billion cubic meters a year (cm/y) Greenstream export line to Italy by 3 billion cm/y and building a new 5 billion cm/y LNG plant) and invest in the upstream and midstream sectors. As with Oxy and OMV, Eni’s existing petroleum contracts will be converted to Libya’s tougher Epsa-4 contract model in exchange for substantial contract extensions.

Who’s next?
PetroCanada may be next; Tarek Hassan-Beck, a senior official at the firm, has been quoted (by Dow Jones newswires) as saying his company is on the verge of completing the renegotiation to move its oil contracts with NOC onto the Epsa-4 framework. Plenty more big names are spending heavily in the country. BP and Shell have signed large-scale bilaterally negotiated deals with NOC. BP’s May deal, which includes Sirte acreage, calls for upstream spending that could amount to an eye-watering $2 billion. The exploration is gas-focused and, the major hopes will lead to LNG investments. Under BP’s production-sharing arrangements, the state receives 77.7% of production, with 22.3% shared between BP (taking 85% of the 22.3%) and state-owned Libya Investment Corporation (15%). BP paid a $350 million signature bonus.

The terms – more generous than those applying to Oxy and OMV – reflect the fact that BP is undertaking exploration work, whereas the agreements signed with Oxy and OMV relate to producing assets as well as exploration assets. Shell reached an agreement with NOC four years ago under which it plans to boost gas production at its five blocks in the Sirte basin. And this year, Shell and NOC signed a co-operation agreement covering studies for the construction of a LNG facility at Ras Lanuf and the refurbishment of the existing small LNG plant at Marsa el-Brega. (energypublisher)