Global Insight Perspective | |
Significance | ExxonMobil has plunged further into Libya, taking up four offshore exploration blocks in the Sirte Basin's Area 21 in a direct deal with the country, ranging from deepwater to ultra deep, in a five-year exploration programme. |
Implications | Exxon joins players like Shell, BP and Eni in securing unilaterally negotiated deals outside Libya's competitive licensing rounds. Amid its bullish outlook there are, however, increasing reports that IOCs that have entered Libya in the recent years see little improvement in the political system's predictability, efficiency, and in its vast and opaque bureaucracy. |
Outlook | Although Libya still remains very under-explored—it holds a potential rivalled by few other countries and is situated very close to the European markets—the lack of successful bureaucratic reform and competitively driven-up entry costs in frontier areas are dampening some of the initial enthusiasm. |
Enter Exxon
ExxonMobil has signed a direct exploration and production-sharing agreement (EPSA) with Libya's National Oil Corporation (NOC), taking on four offshore blocks in the Sirte Basin, approximately 110 miles off the Libyan coast. The acreage secured is comprised of the four blocks in Contract Area 21, totalling 2.5 million acres with water depth ranging from around 5,400 feet to ultra-deep areas exceeding 8,700 feet.
ExxonMobil has paid an unspecified amount to the NOC in a signatory bonus and has undertaken to set up a training programme to upgrade the skills of NOC's employees, as well as to provide support to additional education programmes in the country. As part of Exxon's EPSA agreement, the U.S. supermajor has committed to an extensive seismic programme consisting of collecting a minimum of 4,000 square kilometres of 2D seismic and 2,000 square kilometres of 3D seismic, and the drilling of one deepwater exploration well.
Exxon's agreement comes as Libya's ongoing gas exploration licensing round is drawing to a close and follows on intensive, and for Libya not that lengthy, negotiations taken up as the United States dropped its accusation of Libya sponsoring terrorism less then two years ago and an audience of ExxonMobil chief executive officer (CEO) Rex Tillerson with Libyan leader Muammar al-Qadhafi, less then one year ago.
Bullish Prospects
"We are pleased that we have reached an agreement with National Oil Corporation of Libya in Contract Area 21 as we believe this to be one of the most prospective unlicensed areas in the Libyan offshore," said Phil Goss, president and general manager of ExxonMobil Libya Limited. "We expect to realize substantial technical, operational and cost reduction synergies with ExxonMobil deepwater exploration efforts in the adjacent Contract Area 20," Goss said in a press release.
Exxon has already established a presence in Libya, picking up acreage in the country both in the 2005 second licensing round under the EPSA-IV rules and in the latest third round in early 2007. Yesterday's press release noted that the company has recently completed an Environmental Impact Assessment and a 2D seismic acquisition in its Contract Area 44 offshore in the Cyrenaica Basin, as well as just having commenced a seismic collection programme on its Contract Area 20 offshore Sirte Basin area, adjacent to its newly secured Area 21. A statement from Libya's NOC said that Exxon's commitments under the deal revealed yesterday are valued at US$310 million.
Not All Enthusiasm
ExxonMobil's signing exploration deal comes just months after Libya's unilaterally negotiated mammoth deal with U.K. supermajor BP, which followed up on its grand entry to Libya by announcing plans to get exploration work under way quickly. Although the company remains optimistic about the prospects of the onshore and offshore acreage it secured, its efforts to make a quick start seem to have been frustrated, with ratification of the deal still not complete around half a year later, although its has passed through the seemly relevant institutions, African Energy reports. As the US$900-million deal has been ratified by the ostensibly powerful Council for Oil and Gas Affairs (COGA) and then approved by the General People's Committee (the Cabinet), the deal appears to have become stuck in the final stage of the approval process, as it is to be entered into the records, which would be assumed to be a formality.
Likewise, many IOCs complain of the lack of promised success in cutting red tape and making government processes more transparent, something badly needed in a country with a swelling bureaucracy, with many, not seldom competing, institutions coupled by a highly personalised and concentrated real power, often moving outside the obvious institutional structures and frameworks. Indeed IOCs often find themselves having to use the rich fauna of rumours in the Libyan capital, Tripoli, to navigate the policies and know who to consult at what times. African Energy reports that recent rumours indicate that the delay in ratification of BP's deal is due to Libya wanting to secure the return to the country of convicted Lockerbie bomber Abdelbaset Ali Mohammed al-Megrahi to finish his prison sentence there instead of in Scotland, where he currently remains incarcerated. Other rumours underlining the opaque nature of Libyan political processes include the current General Secretary of COGA and Prime Minister Baghdadi al-Mahmoudi having fallen out of favour with the leadership and being due for replacement, as well as the ostensibly powerful COGA consisting of members who do not know for sure whether they have been appointed to the body or not.
Future Dilemmas
Libya's NOC has, in this climate of unclear structures and chains of command, established itself as a professional and straightforward organisation, successfully overseeing several transparent licensing rounds and conducting credible negotiations with IOCs. However, as more and more of the EPSA agreements awarded in frontline areas over the past years are moving from exploration to development and production, the inevitable spread of projects from being solely managed by the small but efficient NOC to involving issues under the auspices of other ministries, like non-hydrocarbon transport infrastructure, visa and travel issues for international key personnel as well as the tie-in to industrial downstream projects, are starting to reveal Libya's failure to deliver on its commitment to shake up its decision-making processes and increase transparency. As delays are mounting, costs are spiralling as companies wait for minor project permits, something that is hitting small IOCs in high-risk frontier areas specifically high, as their entry costs, especially in the last licensing round, ended up being quite substantial.
Outlook and Implications
ExxonMobil has become the last in a chain of majors and supermajors to take on acreage by entering into unilateral deals with Libya, outside of the licensing rounds. The deal enables Libya to get deepwater and ultra deepwater exploration under way through an experienced player with a large financial muscle, who can handle the risk and lead the way on that particular frontier. Exxon has earlier said that it is looking to Libya for providing a significant amount of its future African growth and it has clearly been able to secure what it believes to be a high potential area.
Libya needs to start making extensive reforms of its political system, its institutions and its bureaucracy, however, as unclear chains of command and impenetrable decision making will raise development costs because of their slowness. With high signature bonuses for frontier areas already paid in the highly competitive licensing rounds, the margins of many mid-sized and small IOCs will be increasingly squeezed if the political and administrative risk cannot be managed, ultimately scaring future potential investors off. Libya has vast potential, but has to deliver a workable and credible business climate, where companies do not have to fear being held hostage over international political issues, otherwise it will never be able to reach the full potential either output-wise or revenue-wise.
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