Petro-Canada Signs 30-Year Pact with Libya, Committing to US$7 bil. in Shared Investments

Costs…

Petro-Canada, as Global Insight predicted, has indeed become the latest IOC to renegotiate its contracts to match Libya's latest exploration and production-sharing agreement (EPSA)-IV standard. In doing so it has renewed its soon-to-expire framework and gained access to major new opportunities both in exploration—centred on the Sirte Basin—and in taking on redevelopment projects in mature, already-producing Libyan oilfields (see Libya: 29 November 2007: PetroCanada Next in Line for Libyan Contract Renegotiation). To get access to these opportunities it is paying a US$1-billion signatory bonus—in three instalments—as well as agreeing to give the country's National Oil Corp. (NOC) a larger production share of 88%, much in line with the standard for other companies committing to further exploration and production (E&P) investment in the country.

The main differences between Petro-Canada's old contractual framework and its working under the new EPSA-IV are not only a lowered share of production, but also lower taxes. The framework switch involves changing from low initial royalty costs and higher taxes later, to higher up-front payments, but significantly lower payments later on (see Libya: 17 October 2007: Eni Commits to Further Libyan LNG and Pipeline Investments, Signing Long-Term Framework Agreement with NOC and Libya: 27 November 2007: Oxy, OMV Sign New Libyan Framework Agreement, Lowering Production Share, But Enhancing Growth Prospects). Although this situation results in Libya getting a bigger share of the oil and gas produced, it allows the companies to reduce the percentage of "cost oil", as well as strengthening the margin of every barrel produced in the long run by alleviating the tax cost.

…and Opportunities

Petro-Canada will participate in a shared redevelopment project of large mature fields in the Sirte Basin, adding investments of US$3.5 billion to NOC's commitment of the same amount, with a view to raising net production from the fields to 100,000 b/d within five to seven years—thus doubling Petro-Canada's net production in the country. Although mature, the fields are deemed to be of long-life calibre, showing only moderate declines in production, according to diverse statements by the Canadian oil company.

Petro-Canada will also take on exploration tracts in the Sirte Basin, committing US$460 million to a seismic and drilling programme running over seven years. The Sirte Basin is one of Libya's most prolific basins, showing high prospectivity. It has attracted a growing interest among majors such as BP and Shell, the latter of which on Sunday (9 December) was reported to have secured further Sirte acreage in Libya's recent fourth licensing round.

Outlook and Implications

Petro-Canada has followed other major actors in Libya in converting to the new framework, securing large new opportunities and bringing about a refocusing of its global strategy. The Canadian IOC had not previously regarded Libya as a central area to its operations, with a continued high exposure to its Alberta operations in Canada and gas production in Syria. This deal now lifts Libya to a position of "major growth project", according to Petro-Canada spokeswoman Michelle Harries.

For Libya, this continues a trend of converting its old contract structure into the latest EPSA-IV framework, securing the state higher earnings at a time of high hydrocarbon prices. Many of Libya's old production-sharing agreements (PSAs) stem from times of much lower oil prices and international isolation of the North African country—which during much of the 1980s and 1990s was an international pariah in the eyes of the United States and Europe. This led its oil and gas industry to suffer greatly from underinvestment and technology shortages under different sanctions regimes. Those companies that remained in Libya, or joined as the international climate became more positive, could receive very favourable contractual arrangements in order to kick-start Libyan hydrocarbons development and invest in large-scale exploration. The latest EPSA-IV framework brings Libyan conditions into line with much of the rest of the major oil producers in the region, as Libya today is regarded as a safe and relatively stable energy supplier, mainly to Europe due to its proximity.

Nevertheless, red tape and an impenetrable and sometimes impulsive political structure, as well as underdeveloped infrastructure and logistics possibilities are problems that are adding considerable costs to operations in the country. They may well take some of the lustre off Libyan business opportunities for IOCs, especially those that do not obtain more favourable terms for prospecting virgin frontier acreage with higher risks.

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