Libya : now a white sheep for IOC’s

LNGLibya has become an attractive investment destination for UK and US companies, which are returning to the North African oil exporter to secure a share of the country’s largely under-explored gas and oil reserves.

BP (NYSE : BP) recently announced it would begin exploration activities in Libya by the end of the year. “We’ll start seismic acquisition in the third quarter of this year. Seismic will take about a year for the offshore and two and a half to three years for the onshore,” Peter Manoogian, president of the company’s exploration division in Libya, recently reported. He said he was “very optimistic” about prospects in the Ghadame and Sirt basins, two of Libya’s five major basins, where BP secured exploration rights to over 54,000 sq km last year.

Sirt onshore has been the country’s most productive basin to date, having given up over 20bn barrels of oil equivalent, while offshore deepwater Sirt is presently unexplored. The formation is described by the company as “a buried rift with multiple play opportunities similar to those found in the North Sea” – and hopes it will mark a continuation of the onshore Sirt basin.

BP’s other new well will be located in the Ghadame Basin, an onshore field split into two concessions, North and South. The North concession alone is the size of Kuwait, and is a geological extension of Algeria’s lucrative Alrar gas field. Manoogian reported the company is targeting natural gas accumulations and said that, if exploration is successful, production could begin as early as 2018.

BP’s investment in Libya marks a return to the country following a hiatus of more than 30 years. BP withdrew from Libya when the country’s oil industry began being nationalised by Colonel Qadhafi in 1971, and the state-run National Oil Company (NOC) was established to manage the industry. The BP/Bunker Hunt Sarir field was the first to be nationalised, although it was not until 1974 that an agreement was finally reached between BP and the government regarding the settlement of assets.

Not all international oil corporations ceased operations in Libya though. For instance, Spain’s Repsol and Italy’s Eni maintained assets held in conjunction with NOC. The majors were, however, further kept away by Anglo-American sanctions, following the 1988 bombing of Pan Am flight 103 over Lockerbie. The US lifted those sanctions in 2004, and two visits by British Prime Minister Tony Blair in 2004 and 2007 have seen deals signed not only with BP, but also Shell, BG Group and ConocoPhillips.

The BP deal itself was signed in May 2007, and will see the company invest a minimum of $2bn in Libya in coming years. BP will be working with government partner Libyan Investment Corporation (LIC) and NOC. The latter hopes to expand Libya’s oil production to 3.5m barrels per day by 2020, from current figures of 1.835m (2006), and also to aggressively expand gas production. It is already having some success, with Libya’s 2005-06 annual increase in gas production (the last year for which figures are available) showing a 31% rise – the highest in the world.

For its part, BP also hopes to correct a slide in oil production. Output fell 3% last year to 3.82m barrels per day. Capital expenditure by the company has not increased in real terms for a number of years now, and will be pressured further by the company’s efficiency plans, which are expected to cost $1bn this year. In this respect Libya represents an excellent opportunity for the company. The Sirt basin is Africa’s largest, containing an estimated 22% of the continent’s 300bn barrels of reserves, while Ghadame is already of proven viability.

Libya’s position as an energy supplier is likely to see its strategic importance to Europe increase in coming years. Given the growing risk associated with supplies from Russia, it may well join neighbouring Algeria as a perceived safe haven, particularly with regard to natural gas.

Royal Dutch Shell (NYSE : RDS.A)  also decided to return to Libya and signed a contract in 2005 to invest between $105m and $450m in the Marsa Al Brega LNG plant. Shell hopes to increase LNG output at the plant from the current level of 0.7m tonnes a year to 3.2m. Depending on its success in discovering new gas fields in its Sirt concession, Shell may construct another LNG plant at Marsa Al Brega.

LNG offers Libya the opportunity to exports its energy products further afield than is currently possible through traditional pipeline technology. By switching production to tanker-based transport, Libya will be hoping it can open up new markets in northern Europe. In furtherance of this policy, a Joint Announcement of Cooperation was signed between BG Group and NOC in May 2007. The British gas specialists will work with NOC to study optimum methods of supplying natural gas to domestic and export markets.

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