Security Fears And Regional Tension Overshadow Libyan Progress

A protest that shut the offices of National Oil Corporation’s (NOC’s) Benghazi-based affiliate AGOCO for two weeks was resolved only after AGOCO shut in 30,000 b/d of production — a tactic that exacerbated tensions with Tripoli. Overarching security fears, increasingly acknowledged as valid by NOC, mean exploration efforts will remain piecemeal and oil production likely stuck at 1.55-1.6mn b/d for several months at least, James Cockayne reports .

Workers at Benghazi-based NOC affiliate AGOCO will return to their desks on 13 May after Tripoli finally cleared protestors who had blockaded AGOCO’s Benghazi offices since 22 April. But this was only achieved after AGOCO first threatened and then actually cut production by 30,000 b/d in protest at Tripoli’s inaction — production that will take several weeks to restore.

The 9 May intervention to clear the 35 or so protestors camped outside AGOCO’s HQ was coordinated by Libya’s “Higher Security Committee together with a squad of revolutionaries,” according to the state-owned WAL news agency. “There were discussions with the protestors last week [29 April – 3 May] but we didn’t reach any agreement. In the end there was no option but to take the offices by force,” said an AGOCO spokesman. “We blamed the government — they took no action for 17 days,” he said, adding that “it was not our aim to pressure the government” with the production cut.

AGOCO production is now running at 340,000 b/d, down from 370,000 b/d in late April, after the Benghazi company initially on 3 May shut in 20,000 b/d of recently-added production from the Sarir and Mesla fields and then added a further 10,000 b/d increment.

However the picture remains somewhat murky. NOC denies that any shut-in took place, slamming “rumors on Arab satellite TV channels” — despite the fact that AGOCO was not shy about publicizing its plans and actions. Meanwhile, an AGOCO source himself acknowledged that there are reasons other than the deliberate shut-in that the fields cannot for “several weeks” be brought back up to 370,000 b/d. “There are many technical reasons preventing [immediate] restart, for example the pressure of the wells,” he said, before acknowledging that electrical supply issues — an earlier reason that Sarir and Mesla production could not be brought close to their full capacity (MEES, 9 April) — remained a problem despite the installation of a new generator. This makes further increases beyond 370,000 b/d towards AGOCO’s 405,000 b/d pre-war capacity unlikely in the foreseeable future, the AGOCO source acknowledged.

‘Security, It’s Really Security’

NOC appears to be finally acknowledging that the security situation in Libya, which at best could currently be described as poor but stable, is the key factor preventing production in the country returning to prewar levels — not to mention the full restart of drilling and maintenance activity required to ensure that any gains are permanent.

The need for organized security, in particular the protection of oil sites, was the first item on the agenda when NOC head Nouri Berruien chaired a 7 May meeting of NOC affiliates. The attendees agreed on the pressing need to “put in place an organized structure for guarding [oil and gas] installations, including the allocation of a dedicated budget,” according to an account of the meeting posted on NOC’s website.

The meeting discussed the delayed return of oil and gas sector contractors to Libya, which they noted was “partly due to the security situation at oil installations.” More hopefully the participants noted that “where the security situation has improved on a sustained basis a number of contractors have begun to return and implement work.”

The AGOCO source for his part slammed NOC’s actions, including the 7 May meeting, as ineffective. “Security, it’s really security. Security is the key issue [preventing a return to normal production]. We pay them all these revenues and they can’t even supply security. There isn’t even a budget for security — there is something wrong with this situation,” he said. AGOCO did, however finally receive approval for its overall 2012 budget in mid-April, just before the company’s offices were blockaded: finalizing spending plans for the remainder of 2012 will be top of the agenda when workers return to their desks on 13 May, although significant exploration activity requires improved security.

Meanwhile, to try and keep Libya’s oil workers sweet, NOC has approved a LD750 ($596)-per-head bonus for all NOC staff (including affiliates), payable in 12 monthly installments from May.

Tentative Exploration Efforts

Exploration efforts are slowly picking up speed — particularly offshore; US firm Hess in March lifted force majeure on its offshore Area 54 exploration acreage in the Gulf of Sirte and says it is currently “in commercial negotiations” with the Libyan authorities. Tripoli has been slow to acknowledge the validity of continued security-related force majeure claims — making discussions over compensation (both in monetary terms and in terms of compensatory license extensions) protracted. Hess discovered significant hydrocarbons with two previous wells on the block and was granted a five-year license extension in late 2010. Total (on Block C-137, which produces al-Jurf crude) and Eni (Melitah Oil’s Block NC-41) earlier said they had returned to offshore exploration.

Meanwhile, Repsol plans to recommence exploration drilling on 1 November as part of what it calls its “2011-2013” exploration campaign on Murzuq Basin Blocks NC-115 and NC-186. In a 7 May notice posted on NOC’s website Repsol Exploration Murzuq “requests expressions of interest from qualifying contractors for the provision of well testing services and downhole equipment…to support its exploration drilling campaign in Murzuq NC-115 and NC-186 Libya 2011-2013.” Expressions of interest are required by 30 May. By referring to its “2011-2013” drilling campaign, Repsol is attempting to stress the continuity of its Libyan exploration efforts despite a 20-month hiatus by the time of the planned November re-start.

Exploration had already kicked off before last year’s civil war — with the Spanish company making a significant discovery on Block NC-115 in February 2011 just before suspending its activities. For Repsol too, security remains less than perfect. Security on Murzuq basin blocks is provided by the Zintan brigades; NOC recently condemned an instant in April whereby armed members of the brigade showed up at Repsol’s Tripoli offices demanding payment.

Overall, there are eight rigs currently active in the country – compared to 40 before the revolution — according to a source at an international services company, who however noted that most current activity consists more of finishing off development wells (including on acreage operated by the Waha consortium) rather than fresh exploration activity.

Even if security concerns can be overcome, motivations for companies to return to drilling are mixed. NOC has been pressing firms to return to exploration — providing a motivation for companies to re-start (or at least lift force majeure ) in order to enter NOC’s ‘good books’. On the other hand some companies, particularly smaller ones for which any drilling campaign is a major expense, are reluctant to restart efforts before a clearer picture emerges of the post-Qadhafi operation environment, MEES understands. Libya’s current ‘transitional’ authorities, whilst saying that current investigations only risk reopening “unfair” contracts, acknowledge that any post-election permanent government may conduct a more wholesale contract review (MEES, 16 April). On the whole it is bigger companies whose interest in Libya is strategic and are in for the long haul that are prepared to commit to a drilling re-start. 

The Final 10%

For key foreign producers such as Repsol and OMV, as well as AGOCO, restoring the final 10% of their pre-war production, and thus increasing Libya’s overall production beyond the current 1.55-1.6mn b/d, will prove difficult if not impossible without improved security: security which is essential to carry out both routine maintenance and war damage-related repairs, not to mention a return to ‘normal’ exploration.

Repsol Chief Financial Officer Miguel Martinez told a 10 May conference call that gross production of al-Sharara crude from the Repsol-operated Akakus joint venture is running at 310,000 b/d, just over 90% of the 340,000 b/d Mr Martinez gives as the fields’ peak capacity (MEES has pre-war Akakus capacity at 360,000 b/d). However the last increment will be the most difficult — Repsol only tentatively hopes to edge up production to 320,000 b/d by the end of the year.

Austria’s OMV for its part in a 9 May conference call said that whilst its net Libyan production has reached 85-90% of the pre-war 33,000 b/d the security situation in the country and the improvised nature of current activities mean any significant near term advance beyond this is unlikely. OMV’s Libyan production is in “manual instead of automated mode,” said upstream head Jaap Huijskes. Security issues mean pipeline repairs and other damage that needs to be fixed to achieve the final 10% are unlikely in the near term with production for the coming months likely to fluctuate around current levels, he said.

Meanwhile, Hans-Ulrich Engel, Chief Financial Officer of Germany’s BASF, parent company of Wintershall which produces al-Sarah crude from Sirte basin blocks NC-96 and NC-97, reported no progress on the pipeline maintenance required to bring the fields’ production back to pre-war levels. “At this point, we cannot predict when we will be back at a [gross] production level of 100,000 b/d,” he told a 27 April conference call, adding that “the technical condition of the infrastructure remains the bottleneck.” Wintershall reported average first quarter gross production of 70,000 b/d, although a temporary fix allowed production to rise to 95,000 b/d in early April (MEES, 23 April).

© Copyright MEES 2012.