IHS Global Insight Perspective | |
Significance | A new revised tender for the Marsa el-Brega rejuvenation and expansion project is reportedly being finalised by Shell and Sirte Oil Co. (SOC), with contractors hoping the project has been split into more project packages, rather than being tendered in two criticised rejuvenation and expansion parts. |
Implications | Shell's Marsa el-Brega project is part of its integrated gas exploration and liquefaction deal secured bilaterally with Libya in 2005, but has suffered from slow and unclear progress, both upstream and in its downstream segments. Libyan bureaucratic and decision-making paralysis, together with pressure from the top to raise LNG production swiftly, has stalled progress and made scope revisions tough, while Shell's upstream work still has to come up with firm reserves for the expansion to make sense. |
Outlook | The troubled Marsa el-Brega project sheds some light on Libya's problems in getting work started on mature and producing projects, both upstream and downstream, exposing the organisational problems within the structures of the National Oil Corp. (NOC) and its subsidiaries. |
A Long Story
Shell and state-owned Sirte Oil Co. (SOC) are, according to a report in weekly energy publication Upstream, nearing a new attempt to tender the first phase of the Marsa el-Brega liquefaction plant rejuvenation and expansion, amid a now-significant build-up of scepticism from potential contractors about the project's viability (see Libya: 9 July 2010: Shell, Sirte Prepare Renewed Tendering Effort at Libya's Outdated Marsa El-Brega LNG Plant and Libya: 30 January 2008: Shell Launches Tender Process for Upgrade of Libya's Mersa El Brega LNG Facility). SOC, a subsidiary of Libya's National Oil Corp. (NOC), is not believed to have wanted to change the scope of the project enough, however, leaving many contractors wondering whether this tender round too will prove ill-conceived. The US$293-million rejuvenation programme signed in 2005 as part of Shell's bilateral entry into Libya and its sign-up to significant Sirte basin acreage, is today seen as far too optimistic cost-wise, given global contractor inflation and the very decrepit state of the ageing LNG plant (see Libya: 3 May 2005: Shell Reaches the Finishing Line on Integrated Libya Gas Deal). The world's second LNG plant ever to come onstream, Marsa el-Brega's 40 years of operations without any substantial upgrade means that the facility is in dire need of modernisation and repair. Marsa el-Brega lacks the capacity to strip liquid petroleum gas (LPG) from its feedgas and therefore produces an LNG that is not compatible with global standards. Hence it can only deliver to one particular Spanish regasification train run by Enagas, removing any form of flexibility from Libya's marketing of the LNG. The first rejuvenation phase of the current 700,000-t/y production capacity would aim to rectify this, among other problems.
Shell's integrated deal has also included the objective of finding enough gas reserves to warrant the construction of a separate greenfield liquefaction facility, although additional gas reserves are also understood to be needed in order to restore the existing plant to its original nameplate production capacity of 3.2 million t/y of LNG under a US$350-million second stage of the rejuvenation and expansion project. Upstream success following a number of exploration wells has not been disclosed by Shell or SOC, although both have repeatedly described the results as "encouraging".
Managing Whose Expectations?
With Libyan long-term hopes for a greenfield LNG facility seemingly still running high—albeit possibly with the help of hoped-for gas reserves to be discovered through BP's offshore deepwater exploration programme—the pressure on Shell in the meantime has been to get the US$293-million rejuvenation project going and to start planning for the following US$350-million expansion phase. Nevertheless, a string of aborted tender attempts show that there seems to be a significant mismatch between Libyan aspirations and expectations and what the oil industry—in this particular case mainly the service companies and contractors—actually can deliver, and at what price. "We expect a revised tender in another month, possibly two months. We are waiting, but we don't know what's going to be on offer", Upstream quoted a contracting company source as saying, with another source telling the magazine that "there are lots of issues, but the central one is that they have to make up their minds what it is they want. Do they want to patch things up, do they want a new plant, do they want an upgrade?"
SOC, backed up by NOC expectations, is likely to be finding it hard to be flexible on the project scope, wanting key improvements from the phase-one rejuvenation to come onstream as soon as possible to give Libya some leeway in its LNG sales. The fate of the second phase and the possible greenfield project is more uncertain, given the opaque exploration results so far, but the state companies will probably expect the projects to go ahead very close to their 2005 pricing. This also seems to be reflected in comments by NOC chairman Shukri Ghanem earlier this year that the last tender was scrapped because contractor quotes came in at about double its forecasts.
Contractors are hoping that the tender this time around will be split up into many smaller contract packages, in order to remove some of the massive uncertainty regarding the structural integrity of the plant, although risks with project delays and bureaucratic red tape are still likely to result in companies demanding a price premium, especially given the project delivery and delay problems throughout Libya's downstream sector over the past decade. Nevertheless, should the tender go ahead, it is likely that the last tender's front-runners, Italy's Bonatti and U.K.-listed Petrofac would be the main contenders, with Upstream also reporting that Greece's Consolidated Contractors Co. (CCC) is showing the deal considerable interest.
Outlook and Implications
The failure of NOC and its subsidiaries to demonstrate flexibility on the project despite several setbacks is telling of Libya's wider problem in getting rejuvenation projects—both upstream and downstream—under way. An IHS Global Insight Special Report early this year made the case that the lack of progress on Libya's massive-potential enhanced oil recovery (EOR) projects at its large mature fields, for instance, was mainly a result of organisational and structural issues permeating the state oil industry (see Libya: 12 February 2010: Back to Square One—Who Controls Libya's Hydrocarbons?). A constantly changing top-level structure, involving the repeated abolition and re-introduction of an Oil Ministry, or oil-sector regulatory bodies, has been interspersed with periods where the NOC acts as the regulator and main operator at the same time, as well as the policymaking body. Further down in the bureaucracy, however, inflexibility and decision-making paralysis have become permanent, given the micromanaging of the sector from the highest levels in what always has been a very top-heavy organisation.
Hence, from the start of its return to the international fold and the shedding of UN sanctions against it, Libya found it much easier to negotiate exploration deals and see progress being made since, in those, fewer details need to be hammered out as long as a framework model contract exists. On upstream or downstream rejuvenation and redevelopment projects, however, a very different level of detail is needed, as well as a level of flexibility to adapt the project budgets, scopes, and costs as the more complex projects begin (see Libya: 8 October 2010: Saipem Awarded Key Overdue FEED for Waha's NC-98, North Gialo in Libya and Libya: 11 September 2009: NOC Lures IOCs with Large EOR Programme, Waha Oil Evaluates FEED Bids in Libya). Given the fear of taking independent initiative and decisions that permeates the state oil sector's middle- and low-level management, it is not strange that standstill, rather than development, remains the norm everywhere where a business-as-usual approach is not possible. Cutting that red tape and changing the organisational culture will not be easy, and is a work that has not even begun, especially since the same problem can be said to affect virtually all sectors of the vast Libyan state infrastructure. It will be interesting to observe what changes to the scope of the Marsa el-Brega project emerge in the forthcoming tender and to see if Shell has been able to manage and change SOC's—and NOC's—expectations somewhat, during this long period of repeated delays and limited progress.