Libya ignores European advances

Apr 27, 2005 02:00 AM

In January 2005, Abdullah Salem el Badri, the head of Libya's National Oil Corporation (NOC), announced the winners of the country's first new exploration licences since sanctions against the country were eased in 2003.
The occasion also marked the first time a public energy auction had ever been offered by the Libyan government. There were a total of 15 new exploration permits in the bid round, (9 onshore blocks and 6 offshore), and the total available acreage was 51,000 sq miles (127,000 sq km).

Predictably, after years in the diplomatic and economic wilderness, the Libyan licensing programme auction provoked keen interest, as evidenced by expressions of formal interest from 163 companies around the world. However, of these only 63 met the pre-qualification requirements allowing participation in the bid round proper.
The potential benefits for any company fortunate enough to win exploration and production rights in Libya are enormous. The country is the world's neglected energy giant with proven oil reserves of 36 bn barrels, making it eighth in global tables.

When the results were announced, US companies had been awarded 11 out of the 15 available permits, whether as part of consortiums or as sole bidders. Among their partners were companies from Australia and India. However, not a single award went to a European company.
For the Americans, it meant a triumphant return to Libya after an absence of more than 18 years, following the 1986 imposition of US-led economic and political sanctions. The successful US companies were Amerada Hess International, ChevronTexaco and Occidental Petroleum, with Occidental winning five sole operator licences and a further four as part of consortiums, including one with the Australian company, Woodside Petroleum.

Other winners included Sonatrach, Algeria's national company, the Brazilian Petrobras, Canada's Verenex Energy, Indonesian Medco Energy International, India Ltd, India Corp and Liwa from the United Arab Emirates. In all, 12 non-European companies were represented.
With a long history of operating in Libya, the results proved especially frustrating to those European countries that remained close to Libya throughout the wilderness years. Italy's ENI has been working in the country since the first discovery of oil there in 1959. Other European companies already operating in Libya included Austria's OMV, Hellenic of Greece and Spain's Repsol.

For the past year, European leaders have been reaching out to the Libyan regime, flying in to visit Muammar Gaddafi on an almost monthly basis. So many Europeans leaders have made this journey that one could be forgiven for imagining Libya had joined an expanded EU.
Tony Blair of Britain, Italy's prime minister Silvio Berlusconi, and French President Jacques Chirac have all had meetings with "brother leader" Gaddafi in the past year, welcoming him back into the fold.
So why did the results of the crucial first international oil bid round appear to deliberately snub the Europeans?

All bids took into consideration two figures: the percentage share of production the bidder was prepared to offer the NOC and the size of the offered signing bonus. The winning companies were all looking for the smallest production share, most settling for 20 % or less. This is a problem for bigger companies, as shareholders expect a higher rate of return on an investment than one fifth of production would allow.
As for the signing bonus, the average was in the region of $ 5 mm, which Europeans presumably fell short of offering. As one official put it, "The Europeans were too mean. They weren't successful because they were not prepared to give enough to the National company."

The Libyan prime minister, Shokri Ghanem, said recently that he expects the bigger oil companies to make strong representation in the next round. He would, he added, be happy to listen to their opinions about how to make future rounds more attractive. Sources within the NOC have suggested they are considering the introduction of a minimum signing bonus. This, added to stronger commitments regarding expected investment levels, would change the face of future bid rounds significantly.
Libya has the largest oil reserves in Africa and is further blessed with a light, low-sulphur crude oil, which is ideal for producing the very gasoline that drives American demand. Additionally, the transport time for Libyan crude to US refineries is about half that of crude coming from Saudi Arabia.

Today, the country produces 1.6 mm bpd of oil (bpd), down from peak production of 3.3 mm bpd in 1970. This decrease in production is the direct result of sanctions and subsequent lack of foreign investment, but all that is about to change.
With the right foreign partners, and investment which the Libyan government has said may amount to as much as $ 30 bn, the Libyans hope to double production by 2010. Apart from Iraq, Libya is the only nation in the world capable of such an increase.

The March auction of licences consisted of 40 exploration blocks, againin 15 exploration areas and a third round -- in the autumn -- is expected to involve bids on mature fields.
So, did the Europeans lose out in January because of their meanness, American generosity, or Libyan greed? It may be that Libya was keen to mark its new friendship with the US by offering a grand gesture. If this is the case, then European oil companies need not worry too much.

Regardless, if they are serious about getting a piece of what will prove to be is an enormously lucrative market, then they will have to make a stronger pitch in each of the bid-rounds.
There seems to be little choice but to give the Libyans what they want -- cuts in production percentages and increases in signing bonuses and investment guarantees.

Source: The Middle East
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