Tunisia: Oil Production Slump Exacerbates Budget Shortfall

Tunisia, the country that started 2011’s Arab Spring, was much less rocked by violence than neighboring Libya and nearby Egypt. But economic and political turbulence combined with a (largely unrelated) slide in crude output below 70,000 b/d have left the country facing a serious payments crunch. New oil fields are unlikely to make up for lost output, James Cockayne reports.

Tunisia’s 2012 budget deficit will be 6.6% of GDP, according to recently updated official forecasts. The country’s trade deficit meanwhile soared to TD3.3bn ($2.1bn) for the first four months of 2012 with TD8.6bn ($5.5bn) exports giving only 72% import coverage. Although exports rebounded by 6% from the instability-hit first four months of 2011, imports were up by over 13%. Inflation meanwhile edged up to 5.7% for the year to April.

Sliding domestic crude production is a key contributor to the worsening trade figures. Tunisia has largely been a net importer of crude since 2000. A boost to production in 2007 when the offshore Oudna field came onstream left the country more or less in balance for a couple of years but net imports have again returned to average 10,000 b/d since the second half of 2010 (see table on page 9). Tunisia’s position as a modest net importer of both gas and oil of course means that, unlike its neighbors Libya and Algeria, the country loses out from high oil prices. The 2012 budget forecasts are based on $110/B crude.

Although instability in the first few months of 2011 impacted crude production, a bigger production slide actually came in the second half of 2010. Production slid from 82,000 b/d in mid-2010 to around 70,000 b/d for the fourth quarter. With several of the country’s key producing fields in permanent decline, production has not consistently topped this level since — averaging 66,000 b/d for the first quarter of 2012. With the country’s single 35,000 b/d Bizerte refinery able to cover only around 40% of local demand the country is a net exporter of crude an importer of light end products (see page 23).

Tunisian Oil Imports, Exports And Production ('000 B/D)

* Import/export figures are for June-Dec 2011 due to an absence of official statistics for Jan-May.

**Import/export figures are for Jan-Feb 2012.

***Figure for January-April 2012 (TD -589mn) expressed on an annualized basis.

Sources : JODI, ETAP, Tunisian institute of national statistics, MEES calculations.

Whilst gas production has edged up in recent years it remains at only about 60% of the 5 bcm/year domestic demand, with the remainder coming from Algeria via the TransMed pipeline (part of this is received free in lieu of a transit fee for the pipeline which continues to Italy).

Tunisian Crude Oil And Natural Gas Production

Source : ETAP, JODI.

Continued Instability

The aftermath of last year’s revolutions (that of neighboring Libya as well as Tunisia itself) continues to reverberate. Although the direct impact on oil and gas output was limited — production at most fields continued throughout — there were interruptions at some fields and average production for January-March 2011 fell to 63,000 b/d. The level of demonstrations and labor unrest in the country remains substantially higher than pre-revolution.

Canadian independent Chinook notes that in recent months “there have been isolated incidents where sporadic peaceful demonstrations targeting improved labor conditions have disrupted the movement of crews and equipment”. Meanwhile, Australian minnow ADX has for the past month been trying to drill a planned test well on its onshore Chorbane permit near the port city of Sfax in central Tunisia. Efforts to move the drilling rig and other equipment to the test site have been severely delayed due to “repeated disruptions to road access by a large number of local people demanding employment.”

Perhaps more serious has been an overflow of violence from neighboring Libya. Whilst most observers (including certainly the IMF) regard Tunisia’s lack of subsidies for gasoline and diesel as wise, this has had the consequence of providing major incentives for gasoline smuggling from heavily-subsidized Libya. With a paucity of (official) security in Libya since last year’s ouster of Qadhafi, and a surfeit of weapons in the hands of gangs and militias, border smuggling of gasoline from Libya has become big, and violent, business in Tunisia’s sparsely populated Saharan south.

The region has also been hit by violence related to drug smuggling — when three Libyans were arrested in Tunisia last month for drug smuggling an armed militia on the other side of the border abducted 80 workers of Tunisian engineering company Socomenin in retaliation, although they were later freed (MEES, 23 April). The Libyan coastal city of Zawya, where the Tunisian workers were abducted, is 100km from the border and has been the scene of some of the worst recent instability in that country.

Bureaucratic Hold-Ups

Perhaps the biggest long term impact of the Arab Spring on Tunisia’s hydrocarbon sector is that the decision-making process in the Tunisian bureaucracy has yet to return to normal and that this has set back investment decisions required to maintain the progress of new projects needed to help counterbalance decline at existing fields.

Chinook, which has big plans for Tunisia, notes not only that “the effectiveness and focus of the agencies upon which we rely…[was] at minimally acceptable levels,” during last year’s revolution, but also that the continued “high turnover of appointed officials” impedes decision making and that there are continued challenges “with respect to the effectiveness of the bureaucracy.”

Cashflow Problems

The Tunisian upstream is dominated by a plethora of minnows who struggle to raise the cash for an extended drilling campaign at the best of times. Continued upheavals, during which fixed capital costs continue to mount, have hit the already stretched balance sheets of independents operating in the country, with resulting cashflow problems causing further delays. An example is Sweden’s PA Resources and Canada’s Sonde, which are currently sitting on Tunisia’s largest undeveloped oil and gas field, the 85mn barrels of oil equivalent (boe) Zarat offshore discovery whilst they look for farm-in partners to enable them to fund development (MEES, 9 April).

Likewise, Toronto-based Candax estimates that deep Triassic formations beneath the company’s Ezzaouia and El Bibana fields at the southern end of the Gulf of Gabes contains in place resources of over 3 trillion cu ft of gas — massive for Tunisia even if only a small portion were ultimately recoverable — but that it will only be able to conduct appraisal drilling “when finances allow.” The company has cash reserves of only C$16mn, even following a C$11.7m equity financing completed in February 2012.

Cygam is yet another Canadian independent that is “currently unable to self-finance its operations and capital expenditure requirements” and thus is “looking to obtain additional capital” as well as joint venture partners in order to fulfill its exploration commitments — one well on each by mid-2013 — for its Bazma and Sud Tozeur permits. The company had a mere $865,000 of working capital at the end of 2011. Of more immediate concern is the company’s inability to fund “beyond mid-2012,” its $10-15mn share of development costs related to a 14% stake in fellow Canadian firm Chinook’s Bir Ben Tartar production concession (see below).

Rapid Decline

Many of Tunisia’s former key producing fields are in steep decline. Production at the offshore Oudna field operated by Sweden’s Lundin has rapidly fallen from 15,000 b/d in 2007 (when it was Tunisia’s second largest producer) to 1,750 b/d for 2011 and a mere 1,000 b/d for the first quarter of 2012. Indeed, Lundin is currently evaluating whether it is economic to repair the damage caused by March storms that have shut in production, which in any case has been expected to expire at the end of 2012. This is likely to mark the end of Lundin’s interest in the MENA region — the company has no current exploration plans for its only other Tunisian permit (Zelfa) and says it will focus on the Norwegian offshore and Southeast Asia going forward.

The Eni-operated Adam field remains the country’s biggest producer, but production here has slid from 24,000 b/d in 2007 to around 12,000 b/d last year (see graph). The Didon field, close to Libya’s maritime border, operated by PA Resources, has suffered even more precipitous decline. Production briefly hit 16,000 b/d in 2008 but had fallen to 2,500 b/d by the first quarter of 2012.

Crude Production From ETAP Concessions* ('000 B/D)

*Concessions in which state firm ETAP is a partner account for around 75% of Tunisian production.

Source: ETAP.

New Promise

Some big (for Tunisia) new fields are on the horizon, but none of these appear large enough to compensate for decline. In addition to Zarat, which could produce “tens of thousands of boe/d by 2017-18,” PA Resources has a further significant discovery, Elyssa on the southern limit of the Zarat permit. Finances permitting, the company plans to drill an appraisal well late this or early next year.

Chinook, meanwhile, has big plans for both the Ben Bir Tatar discovery 10km from the Libyan border in the country’s far southeast and the offshore Cosmos discovery where it hopes to produce 15,000 b/d from 2014. Ben Bir Tatar production should reach 5,000 b/d of sweet 40° API crude by late 2012 or early 2013, up from the current 2,500 b/d with an accelerated drilling program from the third quarter (following the addition of a second rig) and average one well a month for the remainder of 2012.

UK firm BG, meanwhile, is the country’s largest gas producer, supplying over 60% of domestic production from the Miskar and Hasdrubal fields. Production (net to BG) of 2 bcm of gas for 2011 was 11% down on 2010 as civil unrest delayed the restart of the Hasdrubal gas processing plant following planned maintenance early in the year. Liquids production was around 8,000 b/d. BG’s Executive Vice-President for the Middle East and Africa Sami Iskander in early May told Tunisian Prime Minister Hamadi Jibali that the company was planning to expand its Tunisian exploration efforts in the Gulf of Gabes, site of the company’s three Tunisian blocks.

Attractive Climate

Notwithstanding last year’s upheavals, foreign operators praise Tunisia’s stable investment climate, low tax take relative to neighboring countries (royalties range from 2% to 15%) and well-developed existing oil and gas infrastructure, which makes it relatively painless to bring even small discoveries to production and market. Firms are also attracted by a competitive pricing regime, for gas as well as oil (gas prices are linked to fuel oil and are currently around $11-12/mn cu ft).

As with mature Egyptian provinces such of the Gulf of Suez, these low barriers to entry attract small independent firms. Instead of holding bidding rounds Tunisia prefers to permanently advertise its relatively limited number of open blocks for which interested companies may apply — blocks are then apportioned following direct negotiations.

Brent Bonus

Canadian independents are especially well represented. One particular attractive aspect of Tunisia (and Egypt) to Canadian independents is that the openness of the country’s upstream enables them relatively easily to pick up small stakes in producing fields — fields that produce high quality crude that can be sold at Brent-linked international prices. The latter is of key importance in that it provides a hedge against relatively depressed prices for Canadian heavy oil and gas.

Chinook, whose other key asset is Canadian gas production, in its first quarter 2012 results commented that “in this soft natural gas price environment we have benefited and will continue to benefit from having this premium Brent-priced production in our asset base” — one reason the company has moved to “accelerated development” at Ben Bir Tatar. The company receives an “exceptionally high netback” on its Tunisian sales ($82.39/B for 2011 sales concluded at an average price of $111.54/B) verses a meager $16.15/boe for the company’s Canadian production. Whilst North American gas prices are currently depressed, Brent-linked crudes (including Tunisian and other North African grades) have been trading at close to record prices relative to North American marker WTI. Although Chinook’s net Tunisian production (1,600 b/d) accounted for only 12% of the company’s overall 13,600 boe/d first quarter 2012 output, this equated to 63% of the company’s revenues.

© Copyright MEES 2012.