22 June 2010
Event: The 'Libya Gas 2010' conference begins in Rome on June 28.
Significance: International companies have invested heavily in oil and gas exploration concessions in Libya. However the erratic policy environment in Libya, and concerns about the speed of discoveries and developments, have raised questions about the competitiveness of Libya relative to opportunities in Algeria and Egypt.
Analysis: Since the influx of foreign companies, the pace of development in Libya's hydrocarbons sector has been slower than many investors and analysts expected. Nonetheless, the pace of development and the outlook remain adequate for most parties' needs.
Oil. The sustained strength in oil prices, and the typical relatively low production costs, mean that the exploration and development of new concessions in Libya is still very attractive. Oil prices have been averaging about 75-80 dollars per barrel since October, and prices have never fallen below the levels prevailing during the four Libyan licensing rounds conducted between 2005 and 2007. Meanwhile, foreign oil companies have completed dealing with the one-off adjustments and compensation payments imposed by the Libyan authorities. Understandably, the adjustments faced some resistance but were ultimately accepted.
Discoveries. Progress in exploration and development has been slow, and no major discoveries have been made for several years. Some drilling programmes have had disappointing results, but the overall balance of results and prospects remains adequate for most companies and the Libyan authorities. Recent discoveries include:
two this year by Tatneft of Russia, on Area 82 in the Ghadames Basin, where Tatneft acquired blocks in 2005 and 2006; and
a discovery in April by Sonatrach (Algeria) and the National Oil Company (NOC) on a new field in Area 65, also in the Ghadames Basin.
The extent of delays in exploration is not excessive, although in some cases politics has interfered. For example, Libya's dispute with Switzerland has threatened to impinge on Swiss-based Transocean, which has a contract with Gazprom to begin drilling in July. The bilateral 'action plan' signed on June 16 may ease tensions, but further problems could yet emerge.
Capacity. Libya's oil output is estimated to be about 1.8-1.9 million barrels per day (b/d), although OPEC currently reports Libya's output to be about 1.52 million b/d, little different from its OPEC quota of 1.47 million b/d. The NOC is still aiming to increase capacity to 2.3 million b/d by 2013, but in the absence of a sustained fall in oil prices, and a concerted change in industry management, there is little pressure to meet this target.
Gas. No dramatic new gas discoveries have yet been made and progress in gas exploration has been slow. Nonetheless, several major companies are only in the early stages of exploration, and interest remains strong, because of indications of large reserves and the proximity to European markets. The Western Libya Gas Project continues to function well and to serve as a model of what is possible in gas in Libya. A 'Libya Gas 2010' conference is being held in Rome from June 28-30:
Prospects. BP has licences for onshore areas in the Ghadames Basin and offshore areas in the Sirte Basin, and is expected to start exploratory drilling this year. BP's venture in Libya is its biggest financial commitment to exploration anywhere, and the largest single foreign investment in oil and gas in Libya. Given BP's problems in the United States, and the fact that its activities elsewhere are heavily skewed towards Russia, the company is in desperate need of diversifying its operations; the Libya project will thus take on additional importance.
Proven natural gas reserves in Libya are about 1.54 trillion cubic metres (tcm) (compared with Egypt's 2.17 tcm), while annual output is only about 16 billion cubic metres.
Discoveries. In December, Hess (United States) discovered gas in Area 54 in the offshore Sirte Basin, to which Hess acquired the rights in 2005. BP, ExxonMobil and Gazprom are also pursuing gas prospects in the Sirte Basin.
Gas flaring. The need to reduce gas flaring also offers some opportunities. Italy's Eni, for example, is implementing the first phase of a project to reduce gas flaring on the Bouri field, and to sell the recuperated gas.
Downstream. The NOC has long aimed to upgrade and increase oil refining capacity. Some progress has been made -- for example, two Indian companies increased capacity at the Zawai refinery -- but this is much less than aimed for, and the NOC is trying to bring in new partners:
Upgrades. In April, NOC head Shokri Ghanem said that the government was willing to sell a 50% stake in the 120,000 b/d Zawai oil refinery to a joint venture partner which was able to upgrade the refinery. In March 2009, the NOC and the Dubai-based Al Ghurair Group formed a 50:50 joint venture -- the Libyan Emirati Refinery Company (Lerco) -- to operate and upgrade the 200,000 b/d Ras Lanuf oil refinery, Libya's largest refinery. This month, Lerco announced that it had achieved profits of 65 million dollars over the past year.
Ethylene. According to Ghanem, the NOC is in the final stages of negotiating the terms for a 50:50 joint venture with US Dow Chemicals to expand the Ras Lanuf petrochemicals complex, which produces ethylene and polyethylene.
Overseas. The NOC and Libyan overseas investment bodies continue to look for downstream investments abroad, with occasional forays into upstream opportunities. For example, in early May Ghanem said that the NOC was considering investing in the construction of two 300,000 b/d refineries in Indonesia. Medco and Pertamina of Indonesia hold licences for oil exploration in Libya.
Policy. As ever, there is plenty of scope to improve hydrocarbons policy and management: decision-making is slow, and bureaucracy and red tape are persistent obstacles. However, the authorities are not under pressure to increase energy sector productivity, especially given their strong fiscal position (foreign exchange reserves reached a new high of 102 billion dollars in November). Meanwhile, policy and management have at least not deteriorated:
Laws. The current standard exploration and production-sharing agreement (EPSA-4) was introduced in 2004 and is not in need of urgent revision. Nevertheless, the Libyan authorities are drafting a new law aimed at improving governance and management of the oil and gas sector:
In an interview on May 11, Ghanem said that the new law would cover gas and downstream activities, unlike the existing oil law, and would emphasise "transparency and competitiveness".
Ghanem said that the law would not affect existing agreements, and that he expected that parliament would debate the law in two to three months time.
The preparation of the new law may help to assuage the concerns of foreign companies about the risk of interference by the authorities. Concerns were raised by the case of Verenex in 2009, the sale of which to China National Petroleum Corporation was blocked by the NOC, which itself then bought the company in mid-September.
Management. Overall management of the energy sector has not fundamentally changed, despite the establishment in 2009 of the Supreme Council for Energy Affairs (SCEA), which is chaired by Prime Minister Ali Baghdadi al-Mahmudi. Ghanem is still prominent in negotiations and is as secure (and insecure) in his position as any other senior Libyan official. Although there continue to be tensions between reformists and conservatives, SCEA has interfered in oil and gas sector management less than some observers feared.
Conclusion: The results of exploration by major companies this year will be the subject of much attention. However, despite the slow pace of exploration and development, the prospects for oil and gas remain positive, especially given the strength of oil prices and Libya's relatively low production costs.
© Oxford Analytica 2010
Event: The 'Libya Gas 2010' conference begins in Rome on June 28.
Significance: International companies have invested heavily in oil and gas exploration concessions in Libya. However the erratic policy environment in Libya, and concerns about the speed of discoveries and developments, have raised questions about the competitiveness of Libya relative to opportunities in Algeria and Egypt.
Analysis: Since the influx of foreign companies, the pace of development in Libya's hydrocarbons sector has been slower than many investors and analysts expected. Nonetheless, the pace of development and the outlook remain adequate for most parties' needs.
Oil. The sustained strength in oil prices, and the typical relatively low production costs, mean that the exploration and development of new concessions in Libya is still very attractive. Oil prices have been averaging about 75-80 dollars per barrel since October, and prices have never fallen below the levels prevailing during the four Libyan licensing rounds conducted between 2005 and 2007. Meanwhile, foreign oil companies have completed dealing with the one-off adjustments and compensation payments imposed by the Libyan authorities. Understandably, the adjustments faced some resistance but were ultimately accepted.
Discoveries. Progress in exploration and development has been slow, and no major discoveries have been made for several years. Some drilling programmes have had disappointing results, but the overall balance of results and prospects remains adequate for most companies and the Libyan authorities. Recent discoveries include:
two this year by Tatneft of Russia, on Area 82 in the Ghadames Basin, where Tatneft acquired blocks in 2005 and 2006; and
a discovery in April by Sonatrach (Algeria) and the National Oil Company (NOC) on a new field in Area 65, also in the Ghadames Basin.
The extent of delays in exploration is not excessive, although in some cases politics has interfered. For example, Libya's dispute with Switzerland has threatened to impinge on Swiss-based Transocean, which has a contract with Gazprom to begin drilling in July. The bilateral 'action plan' signed on June 16 may ease tensions, but further problems could yet emerge.
Capacity. Libya's oil output is estimated to be about 1.8-1.9 million barrels per day (b/d), although OPEC currently reports Libya's output to be about 1.52 million b/d, little different from its OPEC quota of 1.47 million b/d. The NOC is still aiming to increase capacity to 2.3 million b/d by 2013, but in the absence of a sustained fall in oil prices, and a concerted change in industry management, there is little pressure to meet this target.
Gas. No dramatic new gas discoveries have yet been made and progress in gas exploration has been slow. Nonetheless, several major companies are only in the early stages of exploration, and interest remains strong, because of indications of large reserves and the proximity to European markets. The Western Libya Gas Project continues to function well and to serve as a model of what is possible in gas in Libya. A 'Libya Gas 2010' conference is being held in Rome from June 28-30:
Prospects. BP has licences for onshore areas in the Ghadames Basin and offshore areas in the Sirte Basin, and is expected to start exploratory drilling this year. BP's venture in Libya is its biggest financial commitment to exploration anywhere, and the largest single foreign investment in oil and gas in Libya. Given BP's problems in the United States, and the fact that its activities elsewhere are heavily skewed towards Russia, the company is in desperate need of diversifying its operations; the Libya project will thus take on additional importance.
Proven natural gas reserves in Libya are about 1.54 trillion cubic metres (tcm) (compared with Egypt's 2.17 tcm), while annual output is only about 16 billion cubic metres.
Discoveries. In December, Hess (United States) discovered gas in Area 54 in the offshore Sirte Basin, to which Hess acquired the rights in 2005. BP, ExxonMobil and Gazprom are also pursuing gas prospects in the Sirte Basin.
Gas flaring. The need to reduce gas flaring also offers some opportunities. Italy's Eni, for example, is implementing the first phase of a project to reduce gas flaring on the Bouri field, and to sell the recuperated gas.
Downstream. The NOC has long aimed to upgrade and increase oil refining capacity. Some progress has been made -- for example, two Indian companies increased capacity at the Zawai refinery -- but this is much less than aimed for, and the NOC is trying to bring in new partners:
Upgrades. In April, NOC head Shokri Ghanem said that the government was willing to sell a 50% stake in the 120,000 b/d Zawai oil refinery to a joint venture partner which was able to upgrade the refinery. In March 2009, the NOC and the Dubai-based Al Ghurair Group formed a 50:50 joint venture -- the Libyan Emirati Refinery Company (Lerco) -- to operate and upgrade the 200,000 b/d Ras Lanuf oil refinery, Libya's largest refinery. This month, Lerco announced that it had achieved profits of 65 million dollars over the past year.
Ethylene. According to Ghanem, the NOC is in the final stages of negotiating the terms for a 50:50 joint venture with US Dow Chemicals to expand the Ras Lanuf petrochemicals complex, which produces ethylene and polyethylene.
Overseas. The NOC and Libyan overseas investment bodies continue to look for downstream investments abroad, with occasional forays into upstream opportunities. For example, in early May Ghanem said that the NOC was considering investing in the construction of two 300,000 b/d refineries in Indonesia. Medco and Pertamina of Indonesia hold licences for oil exploration in Libya.
Policy. As ever, there is plenty of scope to improve hydrocarbons policy and management: decision-making is slow, and bureaucracy and red tape are persistent obstacles. However, the authorities are not under pressure to increase energy sector productivity, especially given their strong fiscal position (foreign exchange reserves reached a new high of 102 billion dollars in November). Meanwhile, policy and management have at least not deteriorated:
Laws. The current standard exploration and production-sharing agreement (EPSA-4) was introduced in 2004 and is not in need of urgent revision. Nevertheless, the Libyan authorities are drafting a new law aimed at improving governance and management of the oil and gas sector:
In an interview on May 11, Ghanem said that the new law would cover gas and downstream activities, unlike the existing oil law, and would emphasise "transparency and competitiveness".
Ghanem said that the law would not affect existing agreements, and that he expected that parliament would debate the law in two to three months time.
The preparation of the new law may help to assuage the concerns of foreign companies about the risk of interference by the authorities. Concerns were raised by the case of Verenex in 2009, the sale of which to China National Petroleum Corporation was blocked by the NOC, which itself then bought the company in mid-September.
Management. Overall management of the energy sector has not fundamentally changed, despite the establishment in 2009 of the Supreme Council for Energy Affairs (SCEA), which is chaired by Prime Minister Ali Baghdadi al-Mahmudi. Ghanem is still prominent in negotiations and is as secure (and insecure) in his position as any other senior Libyan official. Although there continue to be tensions between reformists and conservatives, SCEA has interfered in oil and gas sector management less than some observers feared.
Conclusion: The results of exploration by major companies this year will be the subject of much attention. However, despite the slow pace of exploration and development, the prospects for oil and gas remain positive, especially given the strength of oil prices and Libya's relatively low production costs.
© Oxford Analytica 2010
