Gas – and Gazprom
With its vast untapped gas reserves and proximity to European markets, the new investment-welcoming Libya is top destination for Europe's big gas companies. Hence the chill in the air after Gazprom went public with its plans for the country, Martin Quinlan writes
RUSSIAN Gazprom's chief executive, Alexey Miller, visited Libya's President Muammar Qadhafi in July with the offer to buy "total [uncommitted] export volumes of gas, oil and liquefied natural gas (LNG) from Libya at competitive prices", according to a Gazprom statement. Also on the table was an offer to "negotiate the potential construction of new capacities to transmit gas from Libya to Europe".
In a visit a few months earlier, Miller had signed an agreement making way for Gazprom to co-operate with Libya's National Oil Corporation (NOC) in ventures in exploration and development, gas processing, LNG, gas-fired electricity generation and refining. Gazprom already has an international strategic co-operation agreement in gas with Italy's Eni – the leading player in Libya's gas sector – under which, according to Gazprom, it is "negotiating the possibility of swapping assets, including assets in Libya".
Gazprom has made a start in acquiring exploration and production assets in the country. In 2006, it was awarded Area 19, an offshore exploration area, and at the end of last year it was one of only six companies to secure territory in the fourth licensing round, when it was awarded the gas-prone Area 64 in the Ghadames basin. Meanwhile, an asset-swap agreement with BASF's Wintershall in December gave Gazprom an oil-producing interest in the country: 49% of two Wintershall-operated blocks, C96 and C97, in which nine fields flow 120,000 barrels a day (b/d).
According to Gazprom, the firm has set its sights on north Africa, primarily Libya, because it is facing the challenges of "access to new markets, expansion of the resource base and diversification of production capacities". But Europe's big gas companies, concerned about the control Gazprom has built up over gas entry-routes to their east, will fear the strangle-hold being extended to the south.
The stakes are high because of Libya's immense gas potential. With very little exploration having been carried out over the last quarter of the last century, estimates of gas resources are unreliable – but the numbers are large, extending from industry estimates of about 1.50 trillion cubic metres (cm) to others of more than twice that figure. With production last year amounting to only 15.3bn cm (see Figure 2), according to Cedigaz, Libya boasts one of the world's largest reserves-to-production ratios.
Although much development and infrastructure work needs to be done within the country, the logistics of moving Libya's gas to Europe are favourable. The country's existing export pipeline, the Eni-operated GreenStream link, runs a distance of 520 km under the Mediterranean from the western part of the Libyan coast to Sicily, where it links up with the pipeline carrying Algerian gas to the Italian mainland. The mooted new Gazprom-owned pipeline would also be likely to deliver to Italy, on the basis of geography and of Gazprom's links with Eni – but, given Russia's bold ambitions in the European gas market, a longer route to a more westerly landfall is always possible.
Increasing export capacity
There are already plans for an increase in the capacity of GreenStream, which was brought into service in October 2004 with a design capacity of 8.0bn cm/y – although Eni says it carried 8.85bn cm last year. Capacity is to be raised to 11.0bn cm/y in stages over the years to 2012, the company says – but, with a diameter of 32 inches, the line could carry considerably more than this. Sources of gas for GreenStream are the Wafa field, onshore in the west of the country, and the Bahr Essalam field, offshore from Mellitah, the pipeline's southern terminal.
Libya's authorities are also looking to LNG for an increase in export capacity. The country's existing LNG plant at Marsa el-Brega, built by ExxonMobil in 1971 but subsequently abandoned to NOC in the difficult years, is to be refurbished and improved by Shell, as part of the May 2005 agreement under which it returned to the country. Although Marsa el-Brega once produced 3.6bn cm/y, the facility has not been capable of delivering more than about 0.8bn cm/y for decades, and the only terminal at which its unusual-specification LNG can be received is Enagás' terminal at Barcelona, Spain. Bids for the renovation work are due to be submitted in October.
Shell plans subsequently to raise Marsa el-Brega's capacity to 4.5bn cm/y, although this depends on it finding the necessary feed gas in its five Sirte basin blocks, awarded in 2005. After a long initial exploration and seismic programme, drilling started on the first well in March. Shell also has plans for a new LNG facility, if sufficient gas is found, for which Ras Lanuf has recently replaced Marsa el-Brega as the company's preferred location.
Meanwhile, Eni is planning its own LNG facility. In October 2007, when it converted its existing upstream contracts to Libya's latest Exploration and Production Sharing 4 (Epsa-4) terms, the firm said it would spend $28bn on gas and oil projects over 10 years. The gas plans call for doubling the capacity of the Mellitah export hub to 16.0bn cm/y, with 3.0bn cm/y of the increase providing the gas for the GreenStream expansion and 5.0bn cm/y being earmarked for the LNG plant. The location is likely to be Mellitah and the gas will be sourced from the NC41 licence, off Mellitah, in which the Bahr Essalam field lies.
Also eyeing LNG is BP, which returned to the country in May last year with, in chief executive Tony Hayward's words, "BP's single biggest exploration commitment". Plant locations could be Marsa el-Brega or Ras Lanuf for gas discovered in the firm's offshore Sirte basin licence, or Mellitah for gas found in its onshore Ghadames basin blocks. BP says it plans to start seismic work soon.
As far as the Libyan authorities are concerned, there is room for all of these plans. NOC acknowledges that the country's gas resources are underdeveloped and the blocks offered in the fourth licensing round were chosen specifically for their gas potential. Questioned in an interview earlier this year about the large number of possible LNG projects, NOC chairman Shokri Ghanem said: "We hope to have as many LNG plants as possible".
But it could take some time to develop them. The companies having signed-up to large long-term exploration agreements have been launching new-province exploration campaigns, running through aerial surveys and multi-crew 2-D and 3-D seismic surveys. Shell says it had to detect and clear second world-war mines and other ordnance, to give safe access for seismic crews in its 20,000 square km onshore Sirte licence.
Expenditures called for by the agreements renewed on Epsa-4 terms are very large – most recently, for example, Repsol YPF and partners agreed plans estimated to cost over $2bn, to be matched by $2bn from NOC, for fields in the NC115 and NC186 licences. Epsa-4 contract terms are also much less favourable than the terms they replace. Repsol YPF, for example, agreed to a production entitlement of 13% for NC115 and 12% for NC186, while Petro-Canada said it will receive 12% and Occidental said it will receive either 10% or 12%, depending on the field.
However, the production operators have the security of having had their contracts renewed for up to 30 years, depending on the expiry dates of existing contracts. They also have expectations of large increases in output as a result of oilfield redevelopments and the application of improved oil-recovery technology, which Libya has lacked in the past. Occidental said it expects to triple its 100,000 b/d output, while Petro-Canada is looking to double its 100,000 b/d output from existing fields. The government's target is for oil production to increase from 1.75m b/d to 3.0m b/d in 2012 (see Figure 4).
Downstream, progress towards rehabilitating the country's refining capacity has been slow. In common with the oilfields, the refineries have been starved of investment and lack modern technology, with the result that much of their output of transport fuels does not meet European and US specifications. There are plans to refurbish the two largest refineries – the 220,000 b/d Ras Lanuf and the 120,000 b/d Zawiya – and there are also early stage plans for one or more new refineries.
In January, NOC signed an agreement calling for $2bn of investment over five years at the Ras Lanuf refinery, initially for refurbishment and later for an expansion and the addition of a conversion unit to improve the yield. NOC's 50:50 partner in the venture is Star Consortium, made up of Star Petro Energy and TransAsia Gas – both affiliates of Dubai's Al Ghurair, a property and industrial group. There was no news at the time of writing of the work planned at Ras Lanuf – where there was a fire in August, starting in a crude storage tank during maintenance work.
NOC plans to apply the same 50:50 formula to the modernisation of the Zawiya refinery, which is due to have its capacity doubled after initial rehabilitation work. In April, NOC said three possible partners had been shortlisted. According to refining sources, the main construction companies have not been keen on taking on a joint-venture role at a time when they have full orderbooks for payment-on-completion work.