Global Insight Perspective | |
Significance | U.S. oil producer Oxy and Austria's OMV have renewed the contracts within their joint consortium by signing a new 30-year framework agreement, renewing the permits under Libya's current standard EPSA-IV contractual framework agreement. |
Implications | Oxy and OMV follow other long-time players in Libya, most notably Eni, which has secured continued presence and production from existing assets by renewing its licences under the EPSA-IV. While the new terms are harsher, the tax effect is somewhat lower, strengthening the margins of those barrels produced as the companies’ shares of production. |
Outlook | Oxy and OMV secure further growth opportunities in exchange for a lower production share, a US$1-billion signature bonus, and a US$2.5-billion investment commitment, in what amounts to greatly strengthened Libyan terms. |
Overstaying the Welcome
The Occidental and OMV consortium—which started up in 1985 when Austria's OMV acquired a 25% stake in U.S. independent Oxy's Libyan production assets—has agreed to renew its expiring contracts mainly in the central Libyan Sirte basin, under Libya's current contractual EPSA-IV standard. In signing the new contracts with Libya's National Oil Corp. (NOC), the companies agreed to invest US$2.5 billion (split 75:25 between Oxy and OMV) over the next five years in expansion and exploration activities, with NOC matching that amount, resulting in a US$5-billion investment programme in the consortium's acreage. The investment programme is intended to lift production at the consortium's fields from the current rate of around 100,000 barrels per day (b/d) to 300,000 b/d. The companies will reach the raised production by implementing enhanced oil recovery (EOR) techniques on the mature assets, as well as enlarging the current production facilities and exploring for further attached reservoirs in the fields, some of which are over 40 years old. The consortium will also embark on further exploration in the area and has now secured a presence in Libya for the coming 30 years.
Paying for the Privilege
The price the consortium will pay for the growth opportunity is—apart from the US$1-billion signature bonus—a significantly lowered production share from its oilfields. The new EPSA-IV standard production-share size will, depending on the field, stand at 10-12% of overall production, down from up to 20% on some of Oxy's oldest assets. While this will make the profitability of the production lower, bringing Oxy's net production in Libya down from around 20,000 b/d to 7,500-9,000 b/d, it safeguards that remaining share and prolongs the consortium's existence in the country, which, after all, is better then withdrawing. The growth options are tempting, especially given Libya's proximity to the European markets and its very high prospectivity.
Quid Pro Quo
Not everything is gloomy with the new deals, however, as the companies' new EPSA-IV regulated production share will be calculated post-tax and royalties, meaning that the net production received by the companies in itself will come with a substantially higher profit margin. Also, with the producing fields being the result of ancient investments that were recouped long ago, the lowered production share will not hurt the fields’ profitability as much as would otherwise be the case.
Outlook and Implications
While there are many reason's to sing Libya's praises as an underexplored country with a high prospectivity rate, the current financial conditions for investment in its hydrocarbon sector are not at the lower end of the list of energy producing countries. For companies already present in Libya, especially for those with large old assets for which initial investments have been recouped, there is no reason not to continue in Libya and even to grow the operations with further investment and exploration; however, for smaller players wanting to enter Libya in frontier areas, the risk-reward ratio might no longer be sufficiently favourable.
With oil prices sky-high at the moment, Libya does not have to worry about this marginal group of companies, as enough IOCs of the size of Oxy, OMV and even large-scale players like Eni, BP, and ExxonMobil are queuing up for participation in the country's hydrocarbons business. Should the economic climate change in the future, this might, however, become a problem, especially in those areas where prospectivity has not lived up to expectations.
Libya is more or less treading the path taken by many other oil producing nations amid record-high oil prices and a scramble by IOCs to explore and invest in new production. Resource nationalism is pressuring the margins of the IOCs in favour of NOCs and government coffers and a country like Libya, closely situated to large energy markets, with a high grade of political stability and comparatively low costs of production, can now afford not to provide the best terms on the market. In a different economic climate, features like a slow moving and opaque bureaucracy, excessive red tape, impulsive policy changes and a highly politicised decision-making process could all, taken together, damage the country's ability to attract investment.
Additional Reading:
Libya: 21 November 2007: ExxonMobil Secures Four Sirte Basin Blocks in Unilateral Libyan Deal
Libya: 17 October 2007: Eni Commits to Further Libyan LNG and Pipeline Investments, Signing Long-Term Framework Agreement with NOC
Libya: 05 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: 20 July 2007: Red Tape, Lack of Skills Delaying Libyan Ramp-Up, Says ConocoPhillips' CEO
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