Libya slides back into petro-politics
Political interference in Libya's energy sector is on the rise, but, for now, it remains business-as-usual for IOCs, writes James Gavin
INTERNATIONAL oil companies (IOCs) tend to overlook Libya's reputation for troublesome politics and arcane decision-making processes. The prospect of exploiting substantial untapped hydrocarbon reserves offsets many of the disadvantages. Yet even long-standing investors are concerned by recent events, which coincided with the 40th anniversary of Muammar Qadhafi's assumption of power.
Libya's penchant for using its oil sector as a political tool has resurfaced. A controversial decision in October to cut the output of Suncor's Petro-Canada unit – apparently out of pique at the Canadian government's public disapproval of the welcome afforded the convicted Lockerbie bomber, Abdel Basset al-Megrahi, on his return to Libya – seems to confirm many firms' fears about the politicisation of the country's hydrocarbons industry.
The result of this tit-for-tat was to reduce Petro-Canada's Libyan output by half, to 45,000 barrels a day (b/d). Already, the company is moving core staff out of Libya.
For a country that has struggled to boost production in the six years since it restarted licensing rounds with IOCs, the action appeared counter-productive, serving only to remind oil companies of the fragile investment climate. National Oil Corporation (NOC) relies heavily on its partners to stem declines in output from mature fields, largely through a series of technically complex and capital-intensive enhanced oil-recovery (EOR) schemes.
IOCs' confidence levels had fallen the previous month because of the resignation of NOC head, Shokri Ghanem, the former prime minister. Ghanem had pioneered Libya's outreach to foreign oil companies over the past few years.
Ghanem had appeared increasingly discomfited by the actions of government officials towards IOCs in recent years. Although Ghanem himself had sanctioned one of the more controversial actions – obstructing the sale of Verenex Energy, a small Canadian explorer with Libyan interests, to China's CNPC (see p9) – he had opposed Libya's determination to acquire Verenex at a below-market price.
The Libyan Investment Authority is acquiring Verenex for $295m, about a third less than CNPC was prepared to pay. That decision followed the creation, in August, by the General People's Committee of a new Supreme Council of Energy Affairs, headed by prime minister Baghdadi Mahmudi. This presaged greater political involvement in the hydrocarbons decision-making process – the body is made up of government cabinet ministers – and was the main reason for Ghanem's resignation.
And NOC could lose yet more of its powers. The state-owned Economic and Social Development Fund is reported to be about to take full control of the country's refining and petrochemicals sectors – the only area in which NOC remains dominant.
If NOC has been on the defensive, so have IOCs. In August, a government edict instructed them to appoint Libyan nationals to head their local operations; in February, NOC said contracting and engineering companies would have to base their engineering staff in Libya if they wished to bid for contracts in future.
Many IOC executives had formed a view of Ghanem as a reliable partner in a country with a reputation for unpredictability. However, they also knew he could prove a tough negotiator. This perception was reinforced by the renegotiation over the past few years of a series of oil contracts; the affected companies included Petro-Canada, Austria's OMV, Eni, Total, Repsol and StatoilHydro. The revised terms strongly favoured the state: the companies accepted a halving of production shares in return for licence extensions of up to 30 years.
However, IOCs want NOC – now run by Ali Seghir Mohamed Saleh, its former director-general – to reassure them that it will honour its commitments under these revised contracts. "IOCs are extremely keen to commit to EOR schemes, but they can do that only when these development projects are sanctioned and 50% funded by NOC," says Craig McMahon, a Libya analyst at Wood Mackenzie, a consultancy.
Early in 2009, NOC announced a significant downward revision in its 2013 oil production target, scaling it back from 3.0m b/d to 2.3m b/d. At present, output amounts to 1.55m b/d – constrained by its Opec quota. EOR activities were supposed to have added 0.72m b/d to Libyan output, with new discoveries adding a similar amount.
Progress, however, has been limited by a lack of political support. "The potential is there for Libya to go way beyond 2.3m b/d, but that requires investment. And the reality is that what IOCs can produce is dictated by what NOC does and is allowed to do," says McMahon.
Yet there are reasons for optimism. Last month, NOC received approval for an output expansion. It will invest $10bn on 24 oilfields between now and 2013, which could add over 5bn barrels to the country's proved reserves of 44bn barrels. The assets include the Sirte basin's Gialo oilfield, where NOC plans to invest $1.3bn and boost production by 100,000 b/d. It will also spend $1.1bn at the Nafoora oilfield, also in the Sirte basin, with the aim of boosting output by 130,000 b/d. But whether $10bn is sufficient to achieve these ambitions is doubtful.
And there are other reasons to doubt Libya's commitment to ramping up production: with a small population of 5 million, it has substantial cash reserves and no pressing need to increase output. In addition, the tough terms imposed on IOCs under the EPSA IV contract model were not conducive to a rapid increase in production.
The government's priority has instead been to ensure oil prices remain firm. Libya has been one of the main proponents of Opec cuts in the past year. "The Libyans are paying more attention to oil prices and are more focused on producing valuable barrels than in the past. They remember $147 a barrel oil – and they liked it," says McMahon.
Despite the shock of the government's recent actions against foreign oil companies, however, their future participation is probably assured. "Most IOCs active in Libya will have built up strong enough networks to know which way the wind is blowing," says one adviser to IOCs operating in the country. The message, he says, is that it remains business-as-usual for IOCs with established operations, even if potential new entrants have been deterred by political interference. "At the end of the day, business keeps going. It always has."