Royal Dutch Shell Plc  .com Rotating Header Image

Financial Times: North Africa: At the centre of attention

By Andrew England
Published: January 28 2008 06:10 | Last updated: January 28 2008 06:10

As concerns mount about global energy security, north African producers find themselves in a prime position and attracting much attention.

Algeria is already a big operator in the European market, providing the continent with about 13 per cent of its total gas consumption, while rapid investment in Egypt’s gas sector over the past seven years has seen that nation rise to become the world’s sixth largest liquefied natural gas (LNG) producer. Libya has been attracting renewed interest as it has opened up to international companies after years of isolation as a result of US and United Nations sanctions.

“On a global scale, north Africa is very competitive in terms of capital development costs, operating costs and its close proximity to markets, which is very attractive from a gas perspective,” says Craig McMahon, north Africa analyst at Wood Mackenzie, the energy consultants. “Geographically it’s very well placed to target European markets by LNG or pipe and even to target Atlantic and Pacific basins.”

Each country still has plenty of upside potential, experts say, with some areas of Algeria relatively under-explored and Egypt offering something for the small and medium sized oil company, as well as the majors. Both countries are seen primarily as gas plays.

Libya is regarded as widely under-explored with potential in both gas and oil sectors. The country’s National Oil Corporation says its proven gas reserves stand at 53,000 bn cu ft. This is less than Algeria, Egypt, and Nigeria but it has the continent’s largest proven oil reserves at 41.5bn barrels. “There’s a lot of talk about security of energy supplies so diversity and the size of the resources in Libya make it an attractive partner for Europe,” says Mark Hope, head of Shell’s Libya operations. “We rate Libya as a high priority.”

In December, Shell was one of four operators to secure licences at a much-anticipated first gas bidding round. However, the overall interest was significantly less than in previous rounds, which experts say is partly a reflection of the tight fiscal terms offered by the Libyans and the challenges of operating in the country.

The global shortage of rigs, manpower and other equipment, as well as rising production costs, have had an impact on operators throughout the region. But in Libya, the issues are compounded by bureaucratic problems moving equipment into the country, acquiring visas and the commercial terms being offered in a highly competitive market where some operators, particularly from Asia, are willing to accept uneconomic contracts to gain a presence in the country, analysts say.

“There are rewards in tackling difficult places such as Libya if you can overcome the challenges and if your timescale is long enough that you can stick with it,” says one analyst. “But I think for most investor-owned oil companies, you can almost certainly make easier and faster progress in Egypt today than you can in Libya.”

One international oil executive says that, as a result of the sanctions, Libya is 20 years behind the rest of the world in doing business.

He adds that having more than 40 international companies enter the market has added to shortages of skilled manpower, a problem exacerbated by the requirement to employ a quota of Libyans, in spite of the limited number of qualified personnel. But he and others say Libya is a highly attractive prospect over the longer term.

As if to prove the point, four companies operating in the country – Petro-Canada, Austria’s OMV, Occidental and Eni – have all negotiated extentions to their contracts by 25 to 30 years. In doing so, they were willing to pay $1bn bonuses and, in many cases, accept less favourable terms, according to Wood Mackenzie. Mr McMahon says the extensions allow the companies to explore fully acreage and maximise recovery factors from existing discoveries.

Egypt has also been renegotiating contracts and last year revised terms with BP and RWE Dea for the North Alexandria block, increasing the companies’ production share by 15 per cent and raising the domestic gas price.

The move seemed to be in recognition of rising costs. In Egypt, gas sold to the domestic market is capped and the inflationary pressure on equipment and resources has squeezed operators’ profits.

The challenge facing Egyptian authorities is how to best allocate gas resources as its oil reserves dwindle and the expanding economy and growing population put pressure on its energy sources. “Egypt is back on a bit of an exploration buzz at the moment and there’s a race to expand infrastructure,” Mr McMahon says.

“The big issue is that the domestic market is so big – and growing – that it could inhibit the potential for further exports, which is ultimately what the major players exploring the Mediterranean see as the main prize.”

There has also been speculation about a future licensing round for Egypt, but no date has been set.

Algeria is also expected to hold another bidding round for both oil and gas in the first half of this year.

Copyright The Financial Times Limited 2008

This website and sisters royaldutchshellgroup.com, shellnazihistory.com, royaldutchshell.website, johndonovan.website, and shellnews.net, are owned by John Donovan. There is also a Wikipedia segment.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Comment Rules

  • Please show respect to the opinions of others no matter how seemingly far-fetched.
  • Abusive, foul language, and/or divisive comments may be deleted without notice.
  • Each blog member is allowed limited comments, as displayed above the comment box.
  • Comments must be limited to the number of words displayed above the comment box.
  • Please limit one comment after any comment posted per post.