Analyst: Libya is 'exploration buzz' among IOCs for 2005
HOUSTON, Nov. 3 -- Libya is "the central exploration and production buzz for 2005" among international oil companies looking for access to potentially giant oil and gas fields, said energy analyst Catherine Hunter in a report drafted for the World Markets Research Centre, part of the London-based Global Insight group of companies.
"With new acreage on offer and accessible after the lifting of US sanctions, Tripoli airport is teeming with oil and gas executives as the long-awaited vision of Libyan oil and gas investment begins to take shape," Hunter reported.
Industry consolidation and the growth of megacompanies in recent years have increased the need for oil and gas projects large enough to enable the biggest companies to replace reserves and retain shareholder interest. The Middle East and Africa are seen as "the last remaining areas offering this type of organic growth potential," said the WMRC report, so "any opening in [one of those] prospective states is being seized on by the IOCs, aware that much of the region remains a closed shop."
With the lifting of US trade sanctions, Libya is coming into the market just as a number of international oil companies face an otherwise "limited rage of alternative opportunities," particularly in Iraq, where many were hoping to expand prior to the escalation of violence. Companies already working in Libya are eager to consolidate and build on current holdings.
State-owned National Oil Co. is capitalizing on this interest by extending its first open-bid license round to 15 areas from an expected 8. That move has been widely interpreted by observers as a possible test run for the new, fourth-generation exploration and production-sharing agreement. The reaction of oil companies to this first tender will largely determine whether Libya continues offering two, 15-block rounds/year after 2005 or returns to one-on-one negotiations for acreage, as it has done in the past, officials said.
"Delays in developing a petroleum law and standardized nonexploration contracts suggest that the more laborious one-on-one route will persist, at least for development work and integrated projects, although exploration remains the immediate NOC focus," the report concluded.
Libya's initial open-bid licensing round is almost "a beginner's guide to Libyan acreage," Hunter said. Blocks are being tendered in all of the major oil and gas basins. Included are:
-- Sirte basin, which has 80% of Libya's reserves and 90% of its production. It's also the focus of most exploration, including 77% of all 3D seismic data acquired in Libya since the late 1980s. "There are limited remaining prospects at easy targets, but deeper targets are relatively unexplored," Hunter said. "Developed infrastructure should theoretically speed development and marketing of future discoveries."
-- Ghadames, Libya's second-most-explored basin, includes fields such as Eni SPA's Wafa. "This is also geologically linked with oil and gas-bearing structures in Tunisia and Algeria's Berkline basin," Hunter said.
-- Murzuq, the "most successful" area for recent investors, with limited exploration to date. Fields in that basin include Al-Sharara, with production of 200,000 b/d, and Eni's NC-174, which came on stream this year at 50,000 b/d and is expected to increase to 150,000 b/d by 2006. However, Hunter said, "Lack of infrastructure and facilities in the south of the area mean high capital costs."
-- Cyreneica-Batnan, where "only 70 wells" have been drilled so far, with only minor finds. "However, rewards on the Egyptian side of the basin have been extensive over the last 5 years," Hunter said, especially for Apache Corp. and Royal Dutch/Shell Group. OMV AG has nominally been awarded three blocks in the area, and RWE Dea AG, Hamburg, took two blocks in 2003. Crossover interest is expected to be high among companies who have been successful in exploring neighboring countries.
-- Kufra, considered new acreage with minimal exploration and some distance to infrastructure. RWE Dea and OMV in association with Repsol-YPF SA, Madrid, took acreage in the area in 2003, the report said.
-- Offshore, which has seen limited exploration so far. "The area is seen as particularly prone to gas," said Hunter. "Some of the southernmost acreage links into Sirte basin structures, while the northern area is in the Benghazi basin. However, development and capital costs are seen as relatively high."
Competition is expected to be intense for acreage in the northern oil regions of the Sirte and Ghadames basins, particularly for Sirte Block 106.
"NOC is charging hefty data room fees of $129,565 for this block, nearly twice the amount of any other area," said Hunter. "Alongside the historical prospectivity of these basins, there is more data available for these areas, cutting down exploration risks. Nevertheless, targets in Sirte are also expected to be relatively deep, entailing higher development costs than some of the area's historic fields."
With only 15 areas offered in the first round, Hunter concluded, "not everyone will be satisfied. A number of companies are likely to try to maximize their chances through working within consortia." She also noted, "The geographical reach of this first round belies the fact that the quality of the blocks looks like a distinctly mixed bag. The data room information—available at the end of October—will be more telling than the NOC background information released to date and will also include the individual work programs allocated to each of the blocks." NOC may be "testing the market" in this first round to gauge investor interest in both the acreage and licensing terms.
"For the moment, Libya's risk ratings are at the lowest level for some time, judged at 3.36 or 'significant' on WMRC's own country risk ratings, down from 3.71 or 'high' before this year's concessions on weapons of mass destruction," the report said. Muammar Qadhafi's continued tenure as president of Libya remains a "concern, given that leader's history in fostering regional and global instability and his creation of a circuitous political system that consists of giving the vestiges of power to many while limiting real authority to a few," it said.
Still, the WMRC report said, "The preponderance of reform-minded technocrats in government and . . .Qadhafi's potential successor, Saif al-Islam, also suggest that liberalization and reform are being developed on fertile ground. Nonetheless, Qadhafi's early demise or a return to revolutionary fervor and activist foreign policy will continue to pose a threat until a more regularized political and economic order can emerge."
The report noted, "Libya, like Iran or Saudi Arabia or Kuwait, is one of those 'old money' kind of producers that has been instrumental in making the fortunes of some of the current market leaders," including ConocoPhillips, Marathon Oil Corp., and Occidental Petroleum Corp. In 1970, Libya was the world's fourth largest oil producer, but it now ranks about 13th. Investment and exploration fell as a result of Libya's nationalization of the oil industry in the 1970s and US economic and political sanctions since 1986.
Described now as "a former rogue state," Libya languished under international trade sanctions for nearly 20 years. The sanctions severely reduced hydrocarbon output and development, keeping Libya's oil production below 1.5 million b/d, compared with more than 3 million b/d in the 1970s. With oil reserves estimated in excess of 39.5 billion bbl and crude prices recently in excess of $50/bbl, Libyan officials say they can achieve those earlier production levels again, with new exploration and technical investment at existing fields.
They also claim major opportunities for natural gas, although most of Libya's 56 tcf of gas reserves is "the result of chance rather than focused exploration." Some Libyan basins, such as Ghadames and Cyreneica, are adjacent to areas in Egypt or Algeria that have proven to be natural gas successes.
"The country's proximity to expanding European markets has positive implications for export development," the report said. Officials also see downstream "spin-off opportunities" for utilizing natural gas in petrochemicals, LNG, and the power sector.
Libya's "historical legacy, which saw the discovery of outsize oil fields such as Sarir [with reserves] of 4 billion bbl and more, is fundamental to understanding the diverse range of players [state companies, supermajors, independents, and so on] jostling so aggressively for a stake in Libyan exploration," the report said. "A modern sheen has also been added to Libya's traditional oil credentials by investors such as Eni who battened down the hatches and weathered the sanctions period, and by others who came in ahead of the suspension of United Nations sanctions in 1999, despite the greater political risk."
The report lists five international oil companies that "dominate current Libyan production," together accounting for around 30% of crude output, equivalent to some 488,000 b/d:
-- Eni is described as a "first-row investor with considerable oil and gas production and exploration acreage." It produced 87,000 b/d of Libyan oil this year and expects to increase to 200,000 b/d as new fields come on stream in 2005. Eni is the sole integrated gas player in Libya with the Wafa gas development and pipeline to Italy. It also has substantial offshore holdings in Egyptian waters and has identified North Africa as its main production growth area (accounting for 28% of its growth) through 2007 and its second-largest capital investment area at 21%.
-- Total SA is focused on oil in Libya with significant development interests and net production of 42,000 b/d. Although it has made no recent acquisitions in the country, it has an exploration program under way.
-- Petro-Canada, Calgary, has widespread assets, having acquired the Lundin Petroleum AB, Stockholm, and Veba Oil & Gas GMBH operations in Libya. It also operates the giant Amal oil field and the new development en-Naga, as well as holding "a number of small stakes in about 20 other areas." Its Libyan net production was reported at 48,000 b/d in 2003.
-- Repsol Exploración Murzuq SA, a wholly owned subsidiary of Repsol-YPF, is involved in groups of mainly European companies (including OMV, Total, Hellenic Petroleum SA of Greece, Norsk Hydro AS, and Woodside Energy NA Ltd. It has interests in two production blocks and at least 15 exploration blocks, with net production of 10,044 b/d in 2003. The company also has expressed interest in integrated natural gas ventures.
-- OMV bought 25% of Occidental's Libyan assets in 1985 and is a partner with Repsol-YPF in a number of operations in the Murzuq area, with net production of 23,400 b/d of oil equivalent. It signed an exploration package in 2003 for Murzuq, Sirte, Kufra, and offshore acreage. A second package including T20 in the Ghadames basin, Block S25 in the Sirte basin, and three blocks in the Cyreneica basin is still to be ratified.
A tender of 137 blocks in 2000 provided entry into Libyan acreage for midsize producers such as RWE Dea, Wintershall AG, Norsk Hydro, and Woodside, often within consortia. The result has been an upsurge in exploration. "The number of rigs had nearly doubled by August 2004 to 20 (1 offshore and 19 onshore) compared with 11 in 1998, according to Schlumberger figures," said the report. "Nevertheless, this remains significantly short of comparable North African and Middle East states such as Algeria, which, given production of 1.3 million b/d and 2010 targets of 2 million b/d, provides the most useful model for comparative purposes."
The report acknowledges, "Many investors are likely to be frustrated in the near term by the limited number of entry options as NOC works its way through the glut of would-be players. . . BP PLC is one of the only companies to state that it is not pursuing Libyan ventures, although it still sent representatives to the NOC presentations of acreage."
Contact Sam Fletcher at [email protected]
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