First Libyan Gas Licensing Round Awards Shell and Three National Gas Companies

Results

The first results of Libya's fourth licensing round—the first ever focused on gas-prone acreage—were revealed yesterday, with only four areas being awarded out of a total of 12 areas open for, and receiving, bidding. The fate of a further two areas is supposed to be evaluated during the coming week, as the bids they had attracted were yet to be opened due to the bidder being a lone company despite Libya's National Oil Corporation (NOC) expressing a preference for bidding by consortia. These two areas may join the remaining six areas in being retendered at a later date, or awarded through a bilateral deal.

Royal Dutch Shell secured Area 89 in the Sirte Basin, consisting of Blocks 1 and 3, reportedly for offering NOC a signatory bonus of US$93 million and an 85% production share from the 1,790-sq.-km exploration area. Poland's PGNiG secured Blocks 1 and 2 in Area 113 in the Murzuq Basin, with no news yet of the size of its signatory bonus offer or the share of production offered to NOC.

Algeria's Sonatrach secured the largest area awarded, winning the 6,934-sq.km Area 95-96, consisting of Block 2-1, 2, and 4 in the prolific Ghadames basin—of which Sonatrach already has extensive experience, as the basin stretches across the Libyan-Algerian border. Sonatrach offered an 87% production share to NOC and has already made public its partners on the exploration and production contract: Indian Oil Company (IOC) and Oil India Ltd (OIL). Sonatrach was reported by Agence France-Presse (AFP) to have outbid Gaz de France (GdF), the United Kingdom's BG Group, PGNiG, and Germany's RWE in securing the area.

Russia's Gazprom secured the 3,936-sq.-km Area 64, consisting of three blocks also situated in the Ghadames Basin. Reportedly outbidding GdF, Japan's Inpex, Russia's LUKoil, BG Group and PGNiG, it managed to secure access to the acreage by offering NOC a high 90% production share.

Notable Absences

The list of prequalified operators and partners was a long one, a virtual who's who of international oil and gas business. Supermajors such as BP and ExxonMobil, as well as old and well-established Libya players such as the United States's Occidental, Austria's OMV, and Italy's Eni, have recently entered into bilateral oil and gas deals with NOC, either prolonging old production-sharing agreements (PSAs) and opening up for new exploration in their acreage, or securing entry into new exploration tracts altogether. Their absence from yesterday's awards is thereby not so surprising, given Libya's interest in having a diversified producer and explorer base for its hydrocarbons sector.

More noteworthy absences include such players as France's GdF, which was reported to have bid on several areas. Having identified Libya as one of its main future growth areas, the company seemed ready to take on large investments in the country, but might not have considered it possible to offer NOC production shares as high as the 87-90% shares put forward by Gazprom and Sonatrach. Libya's veteran leader Muammar Qadhafi is due in France on a state visit next week, which will signal yet another large step in his political rehabilitation efforts for Libya's international ties. The fact that GdF was not awarded any acreage in this round immediately led to speculation about the leader himself offering the state-owned French entity acreage under a bilateral deal between NOC and GdF during the visit. While not beyond the realms of possibility, the rather lengthy time-frames involved in these negotiations would still mean that GdF would begin exploration much later than the current winners. It is most likely, however, that GdF's offer simply failed to fully take into account the fierce competition, especially over acreage in the prolific Ghadames basin, and the willingness of some companies to accept very low margins in exchange for a strategic foothold.

Several other IOCs from Europe, the United States, and Asia were thought to have a good chance to winning acreage in this round, but with several exploration areas still not having been awarded, there appear to be more chances opening up in the future, although they look increasingly expensive.

Strategic Implications

Libya seems to have opted to signal a wider and closer co-operation with other main suppliers of gas to Europe. Awarding the majority of the acreage in this round to Algeria's and Russia's gas giants, Sonatrach and Gazprom, cannot avoid being interpreted as something of a statement of intent to increase policy and co-operation between the actors. While it has been carefully balanced by also awarding acreage to a national gas company from Poland—a European Union (EU) consumer state—as well as to Shell, a leading integrated major, this particular interpretation will not be lost on a Europe increasingly preoccupied with energy security and finding its heavy reliance on Russia and Algeria for gas problematic. The risk is that if co-operation of some sort follows these moves for greater interconnection, Libya will be mentioned in the same category of countries wielding uncomfortable power over the EU to which Russia and Algeria currently belong.

Outlook and Implications

Libya still has not awarded most of the acreage offered under the fourth licensing round. This does not appear to be because a lack of interested parties and bidders, but rather an outcome brought about by the fact that most bids look unattractive alongside such high production-share margins offered by Sonatrach and Gazprom. Offering margins of 87-90% to Libya's NOC looks as though they put their strategic interest for a foothold in the country over their commercial interest, pushing prices up and making most other bids look unattractive. This might become a future problem for Libya, as increasingly it is becoming a very expensive and low-margin country for new entrants—this trend has been escalating with every licensing round launched over the last few years.

Strategically, the result of the fourth licensing round to a certain degree reflects the politicised outlook of the ruling class in Libya. With the absolute majority of Libya's gas always going to Europe because of its proximity, Libya needs to capitalise politically on this and cement a new position deriving a maximum of political clout from its gas exports vis-à-vis the EU. This does not have to be completely negative for Europe, as the gas supply agreements (particularly since much of the gas will be transported via pipeline) create greater political interdependency rather than supporting autonomous positions. However, knowing that, it will be in Libya's interest to strengthen its individual position vis-à-vis its clients as much as possible, perhaps by piping increasing amounts of Libyan gas across Algeria in the future (with the help of Sonatrach) or building new pipelines with participation from Gazprom. While gas is not an easy commodity around which to create cartels, further co-operation between Russia, Libya, and Algeria over European gas would no doubt cause serious jitters among European policy and security planners.

Related Articles

Libya: 5 September 2007: Over 50 Companies Pre-Qualify in Libya's First Gas Exploration Licensing Round

Libya: 17 August 2007: Strong International Interest Reported for First Libyan Gas Round; Fears Aired over Lack of Infrastructure

Libya: 16 August 2007: Stamp Duty of 2% Launched on Investments, 15% Domestic Gas Price Discount Offered, as Libya Clarifies Licensing Conditions

Libya: 9 July 2007: Gas Licensing Round Launched in Libya

Libya: 31 May 2007: Further Plans and Details Emerge from BP's Libya Deal

Libya: 30 May 2007: BP Announces US$900-mil. Gas Exploration Comeback to Libya