Libya Update

Libya Update

October 01, 2004

By Nabil Khodadad

Two important developments in the last few weeks should accelerate foreign investment in the Libyan oil and gas sector.

One is the lifting on September 20 of the remaining US trade sanctions against Libya.  The United States released more than $1.3 billion in blocked Libyan assets and opened the door to air service between the US and Libya.  The other development is the National Oil Company of Libya — called “NOC”— formally kicked off its long-awaited bidding round for exploration properties on September 5 and 14.

Libya is the only major oil producing country — apart from Iraq — that has the capacity to double its crude oil production over the next decade.  This makes it a prime target for foreign investment.  It has vast exploration potential, an ideal location on the doorstep of Europe and easy access to the United States, high-quality low-sulphur crude oil and low operating costs of $1 to $5/bbl.

US Sanctions

The United States began easing trade sanctions against Libya in early 2004.  On February 26, it lifted a travel ban on US nationals visiting Libya.  On April 23, President Bush lifted other sanctions against Libya under the International Emergency Powers Act of 1996 and terminated the Iran-Libya Sanctions Act of 1996 with respect to Libya.  The Iran-Libya Sanctions Act had authorized the president to penalize foreign companies making investments of more than $40 million a year that “directly and significantly” contribute to enhancement of Libya’s petroleum resources.

On September 20, President Bush lifted a few remaining trade sanctions against Libya under the International Emergency Powers Act by unfreezing more than $1.3 billion of blocked Libyan assets and permitting US carriers to resume air service to Libya.  The following day, Continental Airlines applied for permission to fly from Houston to Tripoli via Amsterdam.

Libya still remains on a list of state sponsors of terrorism maintained by the US Department of State.  Nations on this list are barred from receiving arms-related exports of US origin or US economic assistance.  Libya is still awaiting the delivery of eight C-130 Hercules aircraft which it purchased in the 1970s.  Those aircraft have been parked on a runway at Dobbins Air Reserve Base in Marietta, Georgia for more than two decades.  While Libya remains on the list of state sponsors of terrorism, the US government is also barred from supporting loan requests by Libya to international financial institutions such as the World Bank, International Finance Corporation and International Monetary Fund.

Many observers believe that the removal of Libya from the list of state sponsors of terrorism is imminent.  Once Libya is removed from this list, then the United States is expected to restore full diplomatic relations with Libya.  Already the United States has opened a US liaison office in Tripoli as a first step toward the resumption of diplomatic relations.  As a sign of the continuing thaw in US-Libyan relations, the US secretary of state, Colin Powell, recently met with his Libyan counterpart, which was the first time a US secretary of state and a Libyan foreign minister had met in more than three decades.

Bidding Round

Libya formally announced its new explorations bidding round on August 16.  This is the first opportunity for US companies to invest in Libya in more than 18 years.  In September, Libya gave technical presentations to potential bidders in Tripoli and London where it disclosed in more detail the rules, schedule and terms for the new bidding round.  The terms are similar to the tentative terms previously announced by Libya in May 2004.  These terms are described in an article in the June 2003 Newswire.  However, the new terms revealed at the technical presentations are more detailed and in some ways represent an improvement over the terms previously announced.  For example, the bidding round will now cover 15 exploration areas (10 onshore areas and 5 offshore areas) instead of only the eight areas that Libya had previously announced.

Tender Schedule

Under the tender rules, potential bidders must pre-qualify by submitting an application letter, audited financial statements for the last three years, activity reports for the last three years and copies of their constituent documents.  These documents had to be submitted to the NOC by September 28, 2004.  Applicants currently operating in Libya are exempted from the qualification requirement.  The NOC has committed to inform applicants whether they have qualified by October 19, 2004.

Upon payment of the relevant data room fee, each qualified applicant is invited to visit the data room in Tripoli between October 20 and 29, 2004.  The data room fees range between $12,510 and $129,565, depending on the exploration area.  In the data room, each applicant will receive instructions and bidding procedures, technical data prepared by the NOC with respect to the relevant blocks (on a dvd), a model exploration and production sharing agreement (known as EPSA-4), a form of commitment letter, and a form of bid guaranty.

Applicants will have an opportunity to seek clarification of any terms in the proposed tender at meetings they can schedule with the NOC during the weeks of November 6 to 11 and November 21 to 25.  If the NOC accepts any clarification comments, it will include them in a revised bid package and circulate the same to all bidders by December 12, 2004.

All bids are due in Tripoli on the morning of January 10, 2005, together with a bid guaranty issued in the form of an irrevocable letter of credit issued by the Libyan Arab Bank.  The stated amount of the letter of credit must be equal to 10% of the minimum exploration program set out in the tender rules for the exploration area.  It is permissible for companies to bid as a consortium as long as they give the NOC notice at least three weeks prior to the date that the bids are due.  In order to ensure the transparency of the bidding process, all bids will be publicly opened on January 10, with the winner announced on the same day.  The winning bidder is expected to sign an exploration and production sharing agreement with the NOC by the end of January 2005.  The EPSA will become effective on the date that it is approved by the Libyan General People’s Committee.

Commercial Terms

A minimum exploration program will be specified for each of the 15 exploration areas.  During the exploration phase, a management committee consisting of two members appointed by the NOC and two members appointed by the international oil company will be established.  In order for a discovery to be declared commercial, all members of the management committee must declare the discovery commercial.  If the management committee members appointed by the international oil company do not approve the subsequent development of the discovery, but the management committee members appointed by the NOC do, then the NOC has the right to purse the development of the field at its sole cost and risk.  However, the international oil company has the right to rejoin in the development of the discovery within one year of the NOC’s implementation of the development of the field.

During the development phase, a joint operating company will be established to act as the operator of the field.  An operating joint committee will be established to manage the joint operating company with two members appointed by the NOC and one member appointed by the international oil company.  A shareholders’ agreement will govern the relationship between the shareholders in the joint operating company.  Based on various statements made by the NOC to the press, it appears that most, if not all, decisions of the operating joint committee must be by unanimous vote.

Following the exploration period, the term for the development phase shall be 25 years for crude oil and 30 years for the production of non-associated gas.  The international operating company is not permitted to assign its interest in the EPSA until all seismic work has been completed and at least 50% of the wells have been drilled. The NOC has a pre-emption right with respect to any assignment by the international oil company.

During the exploration phase, the international oil company will be responsible for all exploration and appraisal costs, as well as training expenses for Libyan nationals.  During the exploitation phase, all development costs (including those relating to pipelines, abandonment and site restoration) will be shared equally between the NOC and the international oil company.  All operating costs shall be shared according to the “primary production allocation.”

The “primary production allocation” will be determined by multiplying the “M factor”— a bidding parameter in the form of a constant multiplier equal to or less than 1 — by the primary production allocation to the international oil company that the NOC has pre-determined for each exploration area.  The primary production allocation will prevail until the international oil company’s costs are recovered.  Thereafter, the oil company’s share of “excess production” will be determined by reference to the ratio of its cumulative revenues to its cumulative costs, and the average daily production levels.  Pricing of crude oil for cost recovery purposes will be determined by reference to the weighted monthly average of the market price for crude oil realized by the NOC.

The international oil company is required to pay a signing bonus equal to a signing bonus multiplier known as the “B factor” times a pre-determined amount for each exploration area.  The B factor is a secondary bidding parameter.  Production bonuses are also payable by the international oil company at pre-set production levels.  Neither the signing bonus nor the production bonuses are recoverable from cost oil.  The international oil company is also subject to tax on its net income and to royalties.  However, the NOC is responsible for discharging these taxes and royalties and for procuring a receipt from the government confirming payment of the taxes.

The M factor will be the primary selection factor.  The bidder with the lowest M factor will win the tender.  In the event that the M factors for the two highest bidders are the same, then the bidder with the highest B factor will be declared the winner.