Black gold rush

By Julian Rogers, Deputy Editor

The scrapping of its nuclear weapons programme and the subsequent lifting of sanctions has seen international oil companies (IOCs) clamoring for a slice of Libya’s most precious resources – oil and natural gas. Julian Rogers speaks exclusively with Dr Shokri Ghanem, Libya’s top oil official and Chairman of the country’s state-controlled major National Oil Corp. (NOC), about why his country’s energy sector is a sleeping giant.

Free of sanction, oil can be the bedrock of Libya's economy once again

“The role of the IOCs is very important ... their massive financial ability allows them to take risks with exploration”
-Dr Shokri Ghanem, President, National Oil Corp.

The “mad dog of the Middle East” was how former US President Ronald Reagan once famously described Libyan leader Col. Muammar Gaddafi. His choice of illustrate just how strained relations between the shunned North African country and the West became back in the 1980s. Shackled by crippling sanctions amid accusations of state-sponsored terrorism, Libya was outcast as a pariah state and the bedrock of its economy – the oil and gas industry – suffered the consequences as massive foreign investments dried up. But that was then and this is now; Libya has abandoned its weapons of mass destruction (WMD) programme, sanctions have been axed and Gaddafi has made efforts to normalise ties with the EU and the US. He has even welcomed western leaders to his infamous tent outside the capital Tripoli for tea and a chat.

Libya’s return from the cold of international isolation has meant that the country’s oil chiefs have had the chance to get their hands on the much-needed technology and expertise the international oil companies (IOCs) have at their disposal. For the likes of US super-majors ExxonMobil, Chevron and Occidental it has meant a ticket back into a country that provided an oil bonanza back in the 1950s and 1960s until Libya nationalised its reserves in 1970. Already since 2003 some US$10 billion in foreign investment has poured into the oil industry and extensive 2D and 3D seismic surveys have been undertaken.

With its high oil quality, cheap extraction costs (as low as US1$ a barrel in some places) and the fact that vast swathes of the country are still unexplored (just 25-30% is covered by exploration agreements), it’s not difficult to see why Libya’s hydrocarbons are a coveted prize for foreign investors. It also occupies a strategic proximity to lucrative European markets – a position that gives it the upper hand over rival producers in the Middle East. In fact, this is something Dr Shokri Ghanem is very keen to encourage.

“The role of the IOCs is very important so we are inviting them because of their massive financial ability which allows them to take risks with exploration,” he tells O&G at the headquarters of Libya’s government-controlled National Oil Corp. near Tripoli’s international airport. “We also need them for their technology, good management practices and capital.” These agreements will help to unlock untapped fields that the country boasts. Indeed, Libya has Africa’s largest proven oil and gas reserves and is ninth on the world league table.

Officially, 41.5 billion barrels of crude exist but this is probably well short of the true figure lying beneath Libya’s dusty terrain. About 80 percent of Libya’s reserves are located in the Sirte Basin, an area that accounts for 90% of the country’s oil output. But despite being blessed with an abundance of hydrocarbons, it still languishes in third spot behind Nigeria and Angola on the continent’s league table of producers. This could all change, however, if ambitious targets to lift production to over three million barrels per day (bpd) by 2013 becomes a reality. Output currently stands at just over 1.8 million bpd, up from 1.3 million in 2003.

Despite raised eyebrows as to whether these goals can be achieved, Ghanem is quick to highlight his country’s production pedigree when the issue is broached. “We are very close to two million barrels at the moment but three million barrels is not a far-fetched goal because back in 1970 we used to produce 3.7 million a day,” the 68-year-old asserts. “It later dropped because of political embargos and lack of investment and this made it very difficult for us to get access to technology and investment.” Ghanem’s reference to the past revisits a boom period for Libyan oil, bankrolled by an abundant supply of US dollars in exploration projects. The global recession and subsequent embargoes brought an abrupt end to the party and sent daily output spiralling into decline.

Nevertheless, Ghanem is buoyant about his county’s potential and waxes lyrical when quizzed on the subject: “There is much opportunity here because so many areas have not been explored and there are so many discovered fields that have not been exploited. Mature fields, too, need EOR (enhanced oil recovery) and IOR (improved oil recovery) and we have a lot of small fields that were discovered back in the 60s, 70s and 80s. However, they were not commercial back then because they were either too far from the coast or too far from the pipeline or the price of oil was not high enough to make the fields economically viable.”

Question marks

While Libya’s enormous potential is attracting the IOCs like a magnet, they do have to contend with lengthy delays and fight through bureaucratic red tape in order to take their place in the country’s energy sector. And not everyone is as optimistic as Ghanem when it comes to the country’s target to lift production to three million bpd; Samuel Ciszuk, Chief Middle East Analyst for Global Insight, is one such sceptic. “When the target was first published it wasn’t that unrealistic but it would have meant beating the problems that have been plaguing Libya for a very long time – the slow-moving, opaque nature to organisations,” he says. Although the NOC is not very transparent, by Libyan standards it is still probably the most well-organised and quick-footed institution in the country that still takes a long time to make decisions. You could wait ages just to get the clearance for a road or landing strip near a facility, for instance.”

Despite Libya’s “very top-heavy, decision-making structure”, as Ciszuk describes it, there have been some major agreements signed in the past 18 months. Perhaps the most significant has been the historic US$1.25 billion deal with BP in 2007 – the largest single award of acreage in the country. The UK giant has recently begun a huge seismic acquisition survey in the Gulf of Sirte as it looks to exploit the undeveloped offshore resources there. Ghanem, who signed the deal with BP CEO Tony Hayward in Tripoli, is credited as being instrumental in the opening up of the energy sector to foreign investment when he served as the country’s Prime Minister between 2003 and 2006. Getting the overseas energy companies here has been his mission.
“Since the lifting of the embargo we have invited IOCs to participate in transparent bidding rounds,” Ghanem notes. “Hundreds of companies applied and 40 new ones came to the country (under production sharing agreements or PSAs) for a massive work programme to be spent on exploration. We think this will lead to not only an increase in production, but reserves too.” The IOCs that offered NOC the greatest share of their profits from exploration work were the ones most likely to be awarded licences. Under the terms of the PSAs, the foreign firms take on all of the costs and NOC retains ownership of the oilfields. “Some of them have already discovered oil and some are drilling. We have re-negotiated the contracts of the companies working here, improved the terms of the agreements and allowed them to do more work in the areas assigned to them.”

Libya has already welcomed an international mix of companies, all on a hunt for the country’s cornucopia of hydrocarbons. “By opening the door we now have companies from all parts of the world entering Libya – American, European, Asian, Russian and Brazilian,” Ghanem explains. “We even have companies from mainland China and Taiwan working here. In fact, all of the big and medium-sized companies are very much interested because they know there is a great potential in Libya.” This battle for a slice of the pie has nudged up costs being incurred by the IOCs, says Ciszuk. “The very competitive climate between the IOCs bidding for acreage has pushed up the government’s take and lowered the rates of return, which makes it not a cheap place to work and investments come at a high price.”

The largest foreign firm operating in the country is Italy’s Eni which has earmarked US$14 billion of investment over the next 10 years for oil and gas projects. Eni was the first company to discover Libya’s Elephant field, which now churns our 150,000 bpd. Libya itself has expressed an interest in taking a stake in Eni, making it the company’s largest stakeholder after the Italian government. But that’s not all; media reports have surfaced recently that NOC will join forces with an IOC in the next decade, which would be a huge coup for whoever lands the deal.

NOC, which produces about 50% of Libya’s oil along with its smaller subsidiary companies, earned almost US$40 billion in oil revenues in 2007. It’s an industry that props up the Gaddafi regime and provides practically all of the country’s exports earnings, thought to be as much as 95%. With such a reliance upon oil and gas it’s not difficult to see how much US and UN sanctions hurt the country. “The sanctions were damaging, especially technology wise,” suggests Ciszuk. “This lack of technology has been one of the main impediments to reaching the three million barrels a day target. The PSAs with the big players in 2007 and 2008 require a high level of investment in infrastructure and technology because Libya has been over-reliant on elephant fields in a climate of under-investment.”

With all this talk about oil it’s easy to forget the country’s natural gas potential; it’s enormous, with estimates banded about that as much as 100 trillion cubic feet (TCF) may exist. The official figure stands at around 51 (TCF). The country already exports almost eight billion cubic metres of natural gas a year through pipelines to Europe, thanks in part to the US$6.6 billion, 370-mile underwater ‘Greenstream’ gas pipeline to Italy that opened in 2004. And gas exports to Europe are set to rise over the next few years following a number of discoveries recently. Libya is also revamping its infrastructure to export liquefied natural gas (LNG) all over the globe. “The world demand for gas is increasing, and politics plays a part in that,” says Ghanem. “There is a great interest in Libya to increase our gas production. Similar to the oil, the potential is big. A lot of money is earmarked for gas exploration here and in the coming years this country will be far more important in terms of gas production than it is now.” Libya is looking to use natural gas more for power generation domestically which will free up more of the oil to be exported.

Volatility

But whether discussing oil or gas there is no getting away from the impact that volatile commodity prices are having on the industry lately. These are uncertain times for Libya and fellow producers following a rollercoaster ride for crude prices – spiking at US$148 a barrel last July before nose-diving to US$35 a barrel as the global economy slipped into recession. Some analysts are predicting that if China suffers a recession oil could tumble further to just US$25 a barrel. Either way, sustained low prices could mean the plug being pulled on projects in the Middle East, including Libya, warns Ghanem. “Many developments in many countries will be scrapped because people will be afraid that they will not be able to pay for the costs they are incurring. These prices create an atmosphere of uncertainty and many companies will be thinking twice before committing huge investments.” Ghanem says there is plenty of opportunity out there but it means more investment. “And more capital means that oil prices have to be higher,” he asserts. Given today’s  economic concerns he says that the national oil companies (NOCs) are bound to be hesitant, too.  

But while prices have plummeted, the costs of exploring and producing oil and gas have not followed a similar path. Technology, materials and labour costs remain high. “The price of oil goes up so the cost of production goes up,” Ghanem remarks. “When the price goes down, production costs don’t follow suit. Then we have the problem of non-availability of trained staff, not only in Libya but all over the world; we are employing foreigners here but the costs are increasing.”

The oil and gas companies find themselves gambling on whether or not they will see a good return on a development that could take 10 years or more before the first hydrocarbons are extracted. This lack of investment could send prices back up because the oil firms will not be able to meet a future rise in demand. “That will lead to a price shock in two or three years,” Ghanem says.  

OPEC, which pumps more than 40% of the world’s output, slashed production by two million barrels last month (December) in a bid to kick-start a rise in crude prices. This appeared to have little effect but prices have climbed slightly in recent weeks on the back of OPEC’s announced reduction and tensions over Israel’s military offensive in Gaza. The production slash was a move that Ghanem had been calling for in the public arena since prices fell. OPEC cut production three months ago but this had little impact on the market and since the latest cut Libya has been calling for even further cuts.

When crude prices went through the roof consumers were asking how investors speculating on the energy futures markets could have such an influence on a crucial commodity like oil. It seemed that the fundamentals of supply and demand were irrelevant as prices surged. Of course, a weak US dollar and geopolitical tensions in oil hot spots played a role too. “It is not just the fundamentals that decide the price of oil, but rather the paper markets,” Ghanem notes.

“More than 15 times the physical oil traded is traded on paper oil – a virtual market that is not real. The instability in the futures markets creates a lot of fluctuations.” He also argues that because speculators have the power to create seismic shifts in prices, the oil futures markets need additional regulations. “As well as the speculators there are many factors affecting the price,” says Ghanem, “You have geopolitics, instability in the Middle East and the situation in Iraq and with Iran, the financial crisis, the weather and so on. It’s not just supply and demand anymore and with these factors the picture of the situation becomes a mosaic, which makes it difficult to predict the behaviour of the market.”

As well as speculation, Ghanem also freely admits that he worries about conflicts in the Middle East and the potential consequences of the distinctly frosty relationship between the US and Iran. “The Middle East is the most important area in the world for supplying oil and gas so it should be treated as if it is a holy land and handled with care. Wars and conflicts should be left away from here because you are playing with fire. The region could be engulfed and conflicts could spill over and ignite other countries and parts of the world.” Libya’s top oilman has also made no secret of the fact that he believes the ‘Peak Oil’ scenario is imminent. So does he still feel that the world’s fuel gauge is lurching towards the dreaded ‘E’? “Yes, I believe that the days the cheap oil are over,” he announces defiantly, “because the costs are getting higher and no one will produce low cost energy. Peak oil is looming but now there is a period of adjustment because of the quick increase in price and the crash in the financial markets and the price of oil. Once the financial crisis settles down we will see another increase in crude prices.”

After speaking with Ghanem and assessing the situation there is no denying Libya’s potential. The true figure for oil reserves is based on a lot of guess work with some insiders suggesting it could be as much as 120 billion barrels, putting it ahead of Iraq’s official 115 billion barrels. Whatever the true assessment is, however, Libya can’t get to where it wants to be in terms of oil and gas production without the help and investment of the IOCs. It’s going to be an interesting few years ahead for Libya so watch this space.

Factoid

Libya’s oil industry accounts for:
95% of export earnings
54% of GDP
60% of public sector wages

Libya’s top oil chief

Dr Shokri Ghanem has been Chairman of National Oil Corporation since 2006 and is Libya’s official representative at OPEC. US-educated, he was appointed the country’s Prime Minister in 2003 but was removed in 2006 after controversial attempts at free market reform. He has previously served at the Ministry of Economy as Deputy Director of Foreign Trade and various roles within the Ministry of Petroleum. Ghanem was also the Chief Economist and Director of Energy Studies at the Arab Development Institute in Tripoli, Libya. He is married with three daughters and a son.