Libya's stepping stone to normality
Eni leads a return to oil exploration in Libya for the first time since the 2011 Arab Spring revolution
Eni's deal was as eye-catching as it was surprising. On 8 October, the Italian major and BP announced exploration would begin next year on huge and potentially mouth-watering blocks of Libyan real estate. Eni has taken half of BP's 85pc stake in three exploration zones.
Two of the zones—in which 15pc stakes are held by the Libyan Investment Authority, the country's sovereign wealth fund—are onshore, totalling 54,000 sq km in the south-western Ghadames Basin; the third consists of four offshore blocks stretching across the Gulf of Sirte. BP has already completed 3D seismic surveys there, reportedly indicating big oil and gas reserves.
Over the past two years, in the teeth of civil war and an Islamic State (IS) group insurgency, Mustafa Sanallah, chairman of Libya's National Oil Corporation (NOC), supervisor of the country's hydrocarbon industry, has overseen a five-fold production increase, while fending off attempts by the country's rival governments, in Tripoli and Tobruk, to grab chunks of NOC for themselves. Luring back IOCs is a key part of his policy blueprint.
But, on closer inspection, the Eni-BP deal is less than meets the eye. First, the offshore blocks will, for the moment, be ignored. The Sirte Basin comes with political as well as technical problems, not least where to build any onshore processing infrastructure. Choosing Benghazi in east Libya may antagonise the Tripoli authorities, while opting for a western site, such as Misrata, would likely annoy Tobruk.
Instead, work will begin early next year at Ghadames acreage. BP first secured the tracts in 2007 and was due to begin offshore drilling in February 2011, the same month Libya's revolution broke out. When fighting stopped, it briefly sank test bores at Ghadames before suspending work the following year as political chaos worsened. Civil war followed in 2014 and, in 2015, BP pulled the plug, writing off almost $600mn in investment.
The Ghadames basin is enticing, sitting close to the border with Algeria and its rich In Amenas gas zone. Eni—already the leading IOC in Libya producing 384,000bl/d—should also benefit from economies of scale. It already operates the nearby Wafa gasfields in its 50/50 Mellitah Oil and Gas joint venture with NOC, with pipelines running through the Ghadames blocks to the coast which could be used for offtake from new gas finds. Eni, which has not disclosed payment terms for its BP acquisition, says it plans a "fast-track delivery model to accelerate production".
But Ghadames is not for the faint hearted. Even by Libya's militia-strewn standards, the region is dangerous. IS and al-Qaida have staging posts in the area and Chadian forces frequently cross the border in pursuit of rebels. French troops guided by US drones often bomb militant convoys crossing into neighbouring Niger and the region is home to people, drug, gun and oil smugglers. Six oil workers, three Filipino and one each from Libya, Romania and South Korea, were kidnapped in July and remain missing. South Korea, exasperated at the failure of mediation, has despatched a warship and commando team to the Mediterranean vowing to free their national.
For security, Eni will rely on the political backing of Italy, a leading supporter of the Tripoli regime, the UN-backed government of national accord (GNA). Rome's new administration has continued its predecessor's policy of trying to combat migrant smuggling. It provides the GNA with coastguard training and boats, and, more controversially, supports some militias on condition they combat other armed groups who organise migrant smuggling. Italy is one of the few Western powers to maintain an embassy in Tripoli and the only foreign state to acknowledge a permanent Libya military presence, with an army base at Misrata. In short, Rome can provide the political clout to help Eni operate in Ghadames, encouraging key militias to provide security.
NOC, which is welcoming the deal, already has much about which to boast. Libya's 1.28mn bl/d production is still short of the pre-revolution 1.6mn b/d. But rising world oil prices have seen the country's hydrocarbon receipts for the first half of 2018 come in just above the $13bn achieved across 2017 as a whole.
The travails of this year's other eye-catching Libyan IOC deal-involving Total-highlights how tricky the country remains for foreign investors. In March, Total announced it had bought a 16.33pc stake held by US independent Marathon in Waha, the biggest joint-venture company in the Sirte Basin, a region home to two-thirds of Libyan production. On paper, the $450mn Total paid looked a steal, with Waha's 300,000 b/d production set to rise to 400,000 b/d by 2020 and, says Waha management, capable of hitting 600,000 b/d.
But six weeks after Total announced the purchase, the deal was abruptly blocked by the Tripoli government, with NOC saying Total and Marathon had not made the necessary consultations. This six-week hiatus before lodging its objections is one unanswered question.
Another is whether Total fell foul of Libyan internal politics. The firm often receives the same sort of governmental backing from the Elysee Palace as Eni gets from Rome-Total chief Patrick Pouyanne has previously praised the government support his company receives in a Middle East context.
But Paris backs the Tobruk-based house of representatives government, including providing special forces to bolster Tobruk's army commander, Khalifa Haftar, in his battle against Islamist militias. While the Tobruk regime controls the Sirte Basin-potentially useful given Waha's location-the internationally recognised regime in Tripoli opposes it, and, by extension, France, and may have decided to frustrate Total to frustrate Paris.
Alternatively, a Tripoli grandee may have decided, admittedly weeks after it was publicly announced, that Total's purchase price was too low and other IOCs, or Libya itself, should belatedly bid.
Secrecy clouds the future of the deal, with Total sticking by its assertion that all legal strictures were complied with, making the purchase irreversible. The major and NOC say they are in talks to resolve the issue, neither for the moment seeking international arbitration.
New investors wary
Libya's remaining 43 exploration blocks, auctioned a decade ago to a phalanx of IOCs, lie fallow. Only IOCs with existing production in Libya are staying the course, and enjoying relatively good times. Two years of continual shutdowns by workers appear over at Sharara, Libya's biggest producing field, a joint venture between NOC and Spain's Repsol. Its 300,000bl/d could soon return to a pre-revolution 400,000bl/d.
On the other side of the country, oil services firm Schlumberger is working with NOC subsidiary Agoco to boost production at its three Sarir fields, from a current 260,000bl/d to their pre-2011 425,000bl/d. Germany's Wintershall—the only IOC not part of a joint venture—has resolved a complicated political spat over the expiry of its licence for eight Sirte Basin fields, although production is down 10,000bl/d to 50,000bl/d because fighting in the summer damaged port facilities further north.
But serious IOC investment is still dependent on elusive progress in ending Libya's chaotic civil war. The UN has abandoned plans for elections due in December aimed at producing a unified government to eliminate the Tripoli-Tobruk rivalry. A peace conference hosted by Italy in Palermo in mid-November proved a damp squib, inflaming rather than soothing tensions amid Libya's myriad factions.
"Buying an existing exploration asset is one thing, but it's a totally different thing to going somewhere new," says John Hamilton, director of London-based consultancy Cross-Border Information. "Nobody is going to spend truly hundreds and hundreds of millions digging a well, and then IS or a militia comes along, and you've lost all your money."