The last land grab
The eagerly awaited Libyan licensing round – the first since sanctions were removed – took place as planned at the end of January. Libya's National Oil Corporation (NOC) is justifiably pleased with the results. Exceeding even NOC's expectations, Epsa-4 drew some viciously competitive bids from a large number of oil firms, including the biggest names in the energy business. The level of competition ensured NOC will do well financially from any future production, with foreign oil companies prepared to promise away such high proportions of future output to secure exploration rights that many observers were left wondering if they expect to make any money. And the round raised some $133m in signature bonuses.
More importantly, this was an event of symbolic importance. It is a big step in the government's attempts to revive and restructure Libya's pear-shaped economy by accelerating development of its most important resource – hydrocarbons. The exploration-permitting system, such as it functioned under sanctions, was criticised in the past for excessive bureaucracy and being slow to make licence awards. NOC was keen to send a signal that it could organise a transparent licensing round briskly and efficiently – a goal it achieved.
There was symbolism on the side of the companies that bought licences. Occidental Petroleum (Oxy) was the most successful participant. The generous terms it offered NOC reflected its determination, after years of exclusion because of sanctions, to make a decisive return to the country that launched it onto the international stage in the 1960s. By a similar token, Australia's Woodside Energy has pinned its hopes for growth on Africa and is determined not to miss opportunities, especially in the continent's outstanding oil and gas play.
A range of investment opportunities
Eyebrows were raised because no supermajor and no European firm picked up acreage. This does not matter. The winning companies, Oxy and Woodside being the outstanding examples, have the financial resources and technical expertise to do a first-class job. Also, European firms – which already have substantial positions in Libya – and the supermajors will figure in future rounds. And there is a wide range of investment opportunities outside the realm of exploration. BP exploration chief Tony Hayward told Petroleum Economist last month that dialogue with NOC – which senior sources in the state-owned company say concern a multi-billion-dollar integrated gas project – is proving "constructive". Shell is discussing similarly large investments. ExxonMobil, ConocoPhillips, ChevronTexaco, Marathon Oil, Woodside, Occidental, Statoil and Total are also interested in investing in other parts of the energy sector.
Questions were also raised about whether Oxy's aggressive bidding may erode the profitability of projects to sub-economic levels. But a savvy player like Oxy (an old hand in Libya) is unlikely to have overbid. The assumptions required to formulate bids – firms must take views on future oil-price movements, the future value of acreage and on how many further opportunities they might have to gain access to such highly prospective acreage – vary widely from company to company.
Indeed, the outcome of Epsa-4 reflects the reality of petroleum exploration in the world today. Libya has big reserves of good-quality oil; low production costs; it is close to markets; exploration density is low; and little acreage has been explored using modern techniques. Inevitably, given the dwindling opportunities elsewhere, a country with those characteristics is likely to draw competitive bids.
That is a point made by PFC Energy's Jerry Kepes: with attractive upstream opportunities so limited, competition for acreage has intensified, forcing down upstream returns generally. "That presents international oil companies with a dilemma," says Kepes – invest and accept lower returns or hold out for higher returns and miss out. Oxy, for one, seems to have made up its mind on how to tackle that dilemma, paring down its own putative returns in exchange for what Kepes calls the "last land grab".
Meanwhile, the losers will probably not have to wait long for another stab. While economic reforms being championed by prime minister Shukri Ghanem have run into stiff resistance from conservative politicians, NOC's rapid progress in opening up the economy's vital sector is an encouraging sign. NOC is promising more licensing opportunities soon and its plans are unlikely to be disrupted.
There is, however, a huge amount to be done: basic structures, such as a robust regulatory environment for banking, must be put in place; the visa-allocation process, while improving, remains slow; basic transport infrastructure is deficient; the telecommunications system needs modernising; obsolete local laws continue to hamper business development; and credit-card payments are virtually impossible. Unemployment, meanwhile, is in the region of 30% and major training and education programmes must be put in place.
Washington needs to act too. Sanctions have been lifted, but restrictions remain on, for instance, the equipment that can be brought into Libya from the US. And while bilateral relations have improved enormously, there is, in the view of some experts, including Menas Associates' Charles Gurdon, a small risk that Muammar Qadhafi could reverse the reform process if Libya is not rewarded for the actions that have brought it back into the international fold. "If there is no end to Libya remaining on [the US] State Department's list of state sponsors of terrorism, Qadhafi could stop making concessions and revert to the status quo anti. I don't think he will do so in the near future, but it is possible," says Gurdon.
That and other factors mean Libya continues to suffer from a reasonably high level of political and economic risk. Insurer and risk-management firm Aon rates Libya medium-high risk – the second-highest level on a scale of one to five (Iraq, Afghanistan and Pakistan being on the highest level and Chile on the lowest).
Political and economic stability is, of course, essential for continued, stable investment, but assessments of Libya risk should become more benign fairly quickly, as the country re-establishes its track record for reliability. Aon says insurers are "very encouraged" by recent policy improvements and stronger relations with the US. In addition, to Tripoli's credit, it did not cancel contracts with US firms that were suspended because of sanctions and has renegotiated them. Personal safety, meanwhile, is not regarded as a problem. Violence within the country, including against foreigners, is virtually non-existent. As one oil executive puts it: "Our biggest health and safety concern is the roads."
Pursuing such a dramatic programme of modernisation is a tall order, all the more because reformers face a certain amount of popular and political opposition – and the argument of those opposed to change tends to be strengthened by the ephemeral soothing effect of high oil prices. But relying on high oil revenues to mask deeper problems would be papering over the cracks. Financial and economic reform, the removal of barriers to trade and an influx of foreign capital, technology and skills will result in a rapid and dramatic improvement of the country's wealth and standards of living. More than that, Libya could become a symbol of successful co-operation between the West and the Arab world – all the more remarkable given the state of relations only a few years ago. Expatriate Libyans have sensed the change is permanent and are starting to repatriate money – surely a sign that things will continue to improve.