Financial Times: A wealth of opportunities may come at a high price

By Dino Mahtani in London
Published: September 17 2007 03:00 | Last updated: September 17 2007 03:00

Libya announced recently that it had approved more than 50 companies, including the world’s biggest multinationals, to make commercial bids to develop its gas reserves.

International oil companies are facing spiralling industry costs.

They are locked out of some of the world’s most prolific hydrocarbons deposits in the Middle East and they face a rising tide of resource nationalism elsewhere.

So the invitation to bidin the resource-rich North African country seems like a positive development.

The list of companies eyeing participation in Libya reads like a “who’s who” of the oil and gas world.

US and European supermajors such as ExxonMobil, Chevron, BP, Shell, Total and ENI are ready to bid against the likes of Russia’s Lukoil, Brazil’s Petrobras, Malaysia’s Petronas and India’s ONGC Videsh.

Repsol, the Spanish oil major, which was pushed out of its Gassi Touil gasliquefaction project in neighbouring Algeria due to anger there over rising costs and delays, will also be bidding for Libyan acreage.

Companies are turning to Libya because of its favourable geology and close proximity to European markets.

Executives see the country as an untapped opportunity because it is relatively unexplored and because they also hope to use Libyan gas to meet demand in the Americas and Asia.

Libya’s National Oil Corporation says its proven gas reserves stand at 53 trillion cubic feet, less than bigAfrican gas producers such as Nigeria, Algeria and even smaller producing Egypt.

NOC wants to expand reserves to 120,000bn cubic feet and boost production to 3.8bn cubic feet a day from 2.7bn cubic feet now.

Since Libya’s President Muammar Gaddafi began forging a rapprochement with the west in order to loosen the grip of international sanctions on Libya, oil and gas companies have seen it as one of the few frontier development opportunities left in a tightening hydrocarbons world. But the road ahead may be rocky.

“Because we are seeing the rise of resource nationalism elsewhere, Libya has become a soft target for the oil companies,” says Leila Benali, an associate director of Middle East and Africa research at CERA, the energy consultancy. “But that does not mean it is going to be easy for them.”

The two problems facing companies looking to develop gas reserves in Libya are the lack of anintegrated gas infrastructure and the likely financial terms set by Libya.

For years, Libya’s gas industry has suffered from underinvestment. Without adequate access to gas, it would be more difficult for companies to build commercially-viable liquefied natural gas export terminals and agree marketing terms.

Commercial terms for gas developments are normally lighter than for oil, to reflect the greater need for investment in gas developments.

But companies in Libya may want to push for even lighter fiscal terms to offset the infrastructure setbacks.

Libya’s last bidding round, which focused on oil, resulted in very tight fiscal terms, to the discontent of the larger companies. This demonstrated the government is not averse to taking a tough stance in the current climate of high prices.

One winning bid by a Chinese company gave it just7 per cent of future oil production.

Analysts say the most likely outcome will be for companies to get their foot in the door during the bidding rounds and then open up bilateral negotiations to smooth the deals – and the disputes.

Copyright The Financial Times Limited 2007

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