Nov 08 2009 |
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Libya: Energy policy to remain stable despite changes
Subject: The outlook for Libyan oil and gas policySignificance: Libya has the potential for substantial growth in oil and gas production and export to Europe. Despite occasionally renewed controversies, relations with the West are stable, and economic ties with Europe and the United States have grown rapidly in the past five years.
Analysis: The development and prospects of Libya's hydrocarbons sector depend on a combination of the intrinsic oil and gas potential, current Libyan management and policy, underlying Libyan interests, and foreign energy company interest.
Institutions. In late September, the Libyan authorities formed a new body, the Council of Energy Affairs (CEA), to oversee oil and gas policy -- which, in effect, replaces the Council for Oil and Gas Affairs, formed in 2006. The CEA is chaired by Prime Minister Ali Baghdadi al-Mahmudi, and has a seat for the head of the National Security Council, Libyan leader Muammar al-Qadhafi's son Moatassim, who has no track record of advocating economic reform, unlike his older brother Seif al-Islam.
Libyanisation. In September, the General People's Congress (Libya's parliament) called for Libyans to be appointed to run the operations of foreign companies in Libya.
However, these developments are consistent with longer-term patterns of policy and management in Libya and do not herald fundamental shifts in outlook
For instance, the idiosyncratic nature of politics and government in Libya, under Qadhafi, entail regular tinkering with institutions but make sweeping economic liberalisation impractical.
Calls for Libyanisation are not new, and implementation is generally diluted. Foreign firms complain that Libyan staff are often inadequately skilled, but tensions about staffing and training are long-standing.
Meanwhile, Libya's underlying interests in the development of its oil and gas reserves mean that, as in the past, the authorities do not want to alienate major foreign oil and gas companies.
NOC . In late October Shukri Ghanem announced that he had been reinstated as NOC chairman, the post from which he resigned in September to be replaced by Ali Seghir Mohammed Saleh, the NOC director-general. Ghanem was a strong advocate of economic reform during his time as prime minister (2003-06) and since then as NOC chairman, though his plans have often been frustrated by conservatives who fear that economic reform may weaken their control over political power and wealth. Ghanem's reinstatement is reassuring for foreign companies, but ultimately, even when he is replaced, NOC policy will not change significantly for the worse.
At root, Libya has been consistent since the 1990s in wanting foreign oil and gas companies to help explore and develop its reserves and its downstream infrastructure -- hence, for example, it honoured licences with US companies even during US sanctions. It is not going to change policy now, as it wants to see oil and gas output increase, and it has awarded many licences to US, European and Asian oil companies in the past five years. This does not preclude legitimately renegotiating shares and fees with foreign firms, or buying foreign companies' assets in Libya, to benefit the NOC itself or an NOC subsidiary.
For example, in mid-September, the NOC at last agreed to buy the Canadian oil company Verenex, which has substantial assets in Libya, for a price of about 316 million Canadian dollars (298 million US dollars). In February, the NOC blocked a 460 million Canadian dollar bid for Verenex by the China National Petroleum Corporation (CNPC), saying that it would exercise its right to make its own bid for Verenex, rather than just impose a 10% fee on the sale. Between February and October, Verenex's share price suffered because of the uncertainty about the outcome.
Oil. Libya's current oil output averages around 1.55 million barrels per day (b/d), around 5% over its OPEC quota of 1.469 million b/d. Production capacity is around 1.8-1.9 million b/d. After slower than hoped for production growth in the past three years, the NOC has reduced its target for output in 2013 from 3.0 million b/d to 2.3 million b/d. This or a slightly lower figure is realistic:
In terms of exploration and development, apart from the numerous positive discoveries by Verenex on Area 47, exploration on other blocks has been slow and results have been disappointing. However, the outlook is still good, and the pace of discoveries should accelerate.
At end of August an NOC subsidiary, the Arabian Gulf Oil Company (Agoco), announced an oil discovery on the B1-NC4 field in the Ghadames Basin; and Tatneft of Russia announced a discovery on Area 82. The UK firm BP plans to start drilling the first of at least 17 exploration wells in the second half of 2010. The initial five-year exploration period of some licences is due to expire in 2010. Rehabilitation of old fields should also boost output: the NOC and the Oasis consortium of US firms recently agreed to spend 10 billion dollars developing and rehabilitating 24 oil fields, which will boost output by 230,000 b/d.
Downstream, plans to upgrade and expand refineries in Libya have made slow progress. However, in March, the NOC formed a joint venture with the UAE Trusta Group to upgrade the 220,000 b/d Ras Lanuf refinery, after the US firm Dow Chemical pulled out. Meanwhile, the state-owned refining and distribution company Tamoil continues to look to expand abroad.
Gas. In 2008, Libya's gas output was 15.9 billion cubic metres (bcm). Provided that new gas exploration and developments make progress, gas output has been projected nearly to double in the next five years, reaching around 31 bcm in 2013. This target is likely to be missed, but production growth should still be strong, with much of the new gas output being exported to Europe.
A major project following the example of the West Libya Gas Project and the Greenstream pipeline to Sicily has yet to take shape definitively, but may emerge from forthcoming exploration. Anglo-Dutch Shell is working with the Sirte Oil Company (an NOC subsidiary) to upgrade Mersa al-Brega, Libya's only liquefied natural gas plant.
Business environment. The main hazards of doing business in Libya are eccentric behaviour and decisions originating from Qadhafi, and common bureaucratic problems such as late payments and slow, opaque and centralised decision-making. However, Libya's oil and gas sector remains attractive to foreign investors relative to other countries in the region (such as Algeria, Egypt, Gabon and Nigeria).
Libya's punitive retaliation against Swiss companies and Swiss businessmen following the brief arrest of one of Qadhafi's sons in Switzerland in 2008 is an example of the overarching influence of Qadhafi. However, it would be unlikely to occur against larger countries.
Conclusion: Prospects for Libya's oil and gas sector remain strong, despite political interference and changes in officials and institutions. Larger foreign companies will continue to be better placed than small companies to cope with Libyan bureaucratic difficulties and hazards.
© Oxford Analytica 2009
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