Issue 122 • 21 September 2007

Value chain full of opportunities in Libyan round

NOC wants to bring in partners with a range of skills – and markets – at their disposal, writes John Hamilton.

The shortlist of companies approved by National Oil Corporation (NOC) to participate in its gas licensing round indicates the likely shape and scope of the sector’s development. Officially the winning tenders will be selected in mid-December, and officials say the process will be as efficient and transparent as in all three previous EPSA-4 bidding rounds.

EPSA-4 has been an organisational achievement that surprised many at the outset. The process is now established despite the pressures building on NOC to deliver results with a very small team – that has been haemoraging key staff in recent months.

However, in this round the award of tenders will mark only the beginning of a lengthy period of negotiation and renegotiation as companies begin to tackle the mountains of Libyan bureaucracy, issues of resource nationalism, deals’ commerciality and the need to invest heavily in infrastructure to get the gas to market.

The upfront costs and institutional challenges of developing a successful gas play in Libya seem so immense that they could only be overcome by super-heavyweights. It is no surprise that the list of 35 approved operators – companies able to demonstrate a minimum of 2trn ft3 of gas reserves and output of 200m ft3/d – reads like a roster of almost every major global player. BP and Royal Dutch Shell, who have struck successful bilateral deals, are competing for more blocks alongside the US’ ExxonMobil and Chevron, Russia’s Gazprom, Gaz de France and Norway’s Statoil.

This line-up begs the question: with such an array of talent to draw upon, what does the second tier of 21 “investor” companies, who can join consortiums led by approved operators, bring to the party?

Some are juniors with expertise in frontier exploration. The UK’s Burren Energy is getting its first look at Libya (see Oil), as is Swiss-based, Toronto TSX-listed Addax Petroleum, already a major independent in West Africa, actively exploring the Taq Taq field in Kurdistan and looking at Algeria and Egypt too. The list also contains a smattering of Central European, Indian, Japanese and Korean companies, some already active in Libya but others are fresh to the Jamahiriya (State of the Masses) and even to Africa.

The presence of major downstream operations and energy conglomerates with large power generation interests such as Korea Gas Corporation, the UK’s Centrica, Spain’s Unión Fenosa, E.ON Ruhrgas, and the US’ Edison International show that NOC’s thinking is focused not only the question of how to get gas out of the ground, but where and how it will be marketed.

Massive investment in infrastructure will be needed to get the gas to the planned power plants, industrial complexes and export terminals. Failure to win a tender at the outset will in no way be the end of the road for many of the companies on either list. As one Western European industry analyst put it “nothing is set in stone, especially in Libya”.

Aggressive tendering followed by tough talking

Companies are expected to bid very aggressively following the trend set in earlier rounds. Some bidders will be aiming to establish a foothold with a competitive offer even if it is uncommercial. “Nothing is preventing them from trying to renegotiate afterwards,” said the European analyst.

It is not an approach devoid of risk, but neither is it unsuitable to the Libyan business environment – in contrast to Algeria, where there is little flexibility to haggle for better terms after the fact, as Repsol YPF and Gas Natural have just found to their cost (AE 121/24). Indeed, the Spanish consortium’s recent loss of the Gassi Touil integrated gas project in Algeria may illustrate why the Libyans are adopting a more piecemeal approach. Worldwide experience shows that integrated gas plays are difficult to set up – there are few examples of such projects that have worked smoothly. It is better and less risky perhaps to parcel out bits of such projects in manageable portions.

Unsurprisingly for the Jamahiriya, analysis of IOC attitudes towards the Libyan gas opportunity circle round an apparent contradiction. There is much grumbling about the rich prospective areas that BP has manoeuvred out of contention via its bilateral deal and trepidation about fiscal terms (AE 116/16).

However, there is also considerable hope that Libya’s geology may hold much larger reserves than have so far been officially declared. Libyan officials believe this is the case, and NOC’s policy is to slightly more than double proven reserves from the current conservative estimate of 53 trn ft3 to 120trn ft3, and to increase production to 3.8bn ft3/d from 2.7bn ft3/d.

Libya’s attraction is also partly relative to the tough reception that IOCs have received elsewhere. The Jamahiriya is at least still inviting foreign participants in; NOC clearly needs them and the technological expertise they bring. “When people say Libya is a good place, that is in comparison with other countries they are getting kicked out of,” the European analyst concluded.