Libya Launches Second Exploration Tender
The contract areas being auctioned include three in the Cyrenaica basin, four in the Ghadames basin, six in the Sirt basin (Libya’s most prolific basin), six in the Murzuq basin, two in the Kufra basin and five offshore in the Mediterranean. The blocks and contract areas being offered are described in more detail in Table 1.
This is the second competitive tender organized by the National Oil Company, or NOC, under its new model exploration and production sharing agreement called “EPSA-4.” In launching this new licensing round, the NOC is keen to capitalize on the success of its first EPSA-4 licensing round that was concluded on January 29, 2005.
First Round Results
There was keen interest in the first round, with 63 international companies from six continents submitting bids. The round attracted the most interest from US oil companies who had been barred by US sanctions from investing in Libya for more than 18 years. US oil companies won, or were in consortia that won, 13 of the 15 exploration areas.
The first round has been widely praised for its transparency. The bids from each bidder were opened in front of representatives from all bidders and were broadcast live on Libyan television. After all the bids for an exploration area were announced, the winning bidder was immediately declared.
The winning bids for the first licensing round are shown in Table 2. The company that bid the lowest production allocation, or “X factor”, was declared the winner. The X factor is the percentage of oil production allocated for the recovery of the international oil company’s costs and for the profit split. The international oil company will receive a percentage of production equal to the X factor until its costs are recovered. Thereafter, the oil company’s share of excess production or “profit oil” is determined in accordance with the following formula: the amount of profit oil multiplied by the “base factor” multiplied by the “A factor.” The base factor is expressed as a percentage and can vary with the average daily production of oil. In the first round, the base factor for oil produced from onshore blocks declines as the average daily production exceeds certain levels, but the base factor for oil produced from offshore blocks, and gas produced from all blocks, is set at a constant 100%. The A factor is also expressed as a percentage and varies with the ratio (commonly known in the oil industry as the “R factor”) of cumulative revenues received by the international oil company to its cumulative capital and operating costs. As the R factor increases, the A factor decreases in a manner predetermined for each contract area.
The total in signature bonuses for all 15 contract areas was approximately $133 million, with an average of about $8.8 million per contract area. The amount bid for the signature bonus was a secondary bidding parameter used to break a tie for lowest X factor, but in the first round there were no ties. It was possible to win a tender for an exploration despite having a low signature bonus bid. For example, the consortium of India Oil and Oil India was able to win the tender for Area 86 even though it bid zero for the signature bonus.
Most winning bids for the X factor were between 15% and 20%, with one winning bid as low 12.4%.The average winning X factor was about 19.5%. As the X factor just determines the amount of oil available for purposes of cost recovery and the profit split, it understates the take of the NOC and the Libyan government. Since the NOC is entitled to share in profit oil, it has been estimated that the actual share of production of the NOC and the Libyan government in the first licensing round is closer to 88% and, in the case of Area 54, may be as high as 92.8%. These are considered very good results for Libya. However, these aggressive terms could make it difficult to make a commercial discovery of less than 500,000 barrels of oil equivalent for some of the first round EPSA-4 licenses.
The total work commitment for the 15 contract areas included in the first licensing round was about $298.7 million, or about $20 million per contract area. However, most analysts believe that the winners are likely to spend much more on exploration.
Tender Rules for Next Round
The tender rules for the second licensing round are similar to those of the first round. Under the tender rules for the second round, 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 must be submitted to the NOC by June 4, 2005. Applicants who pre-qualified in the first round or who are currently operating in Libya are exempted from the qualification requirement. The NOC has committed to inform applicants whether they have qualified by June 18, 2005.
Upon payment of the relevant data room fee, each qualified applicant is invited to visit the data room in Tripoli between June 25 and July 8, 2005. The data room fees range between $10,000 and $26,000, depending on the contract 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, a model 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 between July 15 and August 5, 2005. If the NOC accepts any clarification comments, then it will include them in a revised bid package and circulate the same to all bidders by August 18, 2005.
All bids are due in Tripoli on the morning of October 2, 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 contract 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 October 2, with the winners announced on the same day. Each winning bidder is expected to sign an exploration and production sharing agreement with the NOC by the end of November 2005. The EPSA will become effective on the date that it is approved by the Libyan General People’s Committee.
Proposed Business Deal
The commercial terms for the second EPSA-4 licensing round are similar to those of the first round.
A minimum exploration program is specified for each of the 26 contract areas. The exploration period is five years. 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 pursue 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 if it pays the NOC an amount equal to the international oil company’s share of development expenditures, plus accrued interest.
During the development phase, a joint operating company will be established by the NOC and the international oil company to act as the operator of the field. The joint operating company will be managed by a board of directors consisting of four members, with two members appointed by the NOC and two members appointed by the international oil company. The board of directors of the joint operating company will delegate certain of its authority to a separate committee, with two members of the committee appointed by the NOC and only one member appointed by the international oil company. A separate shareholders’ agreement will govern the relationship between the shareholders in the joint operating company.
Following the exploration period, the term for the development phase shall be 25 years for crude oil. If commercial production continues during the last three years before the end of the term, the international oil company may request an extension of the term “for a reasonable time” and the NOC is authorized to approve the request subject to terms and conditions to be agreed with the international oil company. The international operating company is not permitted to assign its interest in the EPSA until all seismic work has been completed and the drilling of at least 50% of the new field wildcat wells set out in the exploration program. 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. In the first licensing round, the annual budget allocated for training Libyan nationals had to be sufficient to cover 24 man-months per calendar year during the exploration period and to account for not less than 10% of the direct and indirect manpower cost during each year of the development phase. While the training commitments for the second licensing round have not yet been disclosed, they are likely to be the same or similar to those of the first round. 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, with the international oil company’s share of such costs equal to the X factor and the NOC’s share equal to the remaining balance.
As with the first licensing round, the X factor is the primary bidding parameter. In the first EPSA-4 licensing round, the X factor could not exceed either 35% or 40%, depending on the contract area. The maximum permissible percentage for the X factor has not yet been disclosed for the second licensing round. The X factor will prevail as the international oil company’s share of production until its costs are recovered. Thereafter, the oil company’s share of profit oil will be equal to the amount of profit oil multiplied by the base factor multiplied by the A factor (as discussed above). 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 that is a secondary bidding parameter. Unlike the first EPSA-4 licensing round where bidders could bid zero for the signature bonus, a minimum signature bonus will be established for each contract area.
Production bonuses are also payable by the international oil company at pre-set production levels: $1 million is payable for each commercial discovery within 60 days of the commercial production start date of such discovery; an additional $5 million is payable upon achieving a cumulative production of 100 million barrels of oil equivalent from each commercial discovery; and thereafter, $3 million is payable upon achieving each additional 30 million barrels of oil equivalent. 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 amounts.
As in the first licensing round, the X factor will be the primary selection parameter. The bidder with the lowest X factor will win the tender. In the event that the X factor for the two lowest bidders are the same, then the bidder with the highest signature bonus will be declared the winner.
Over the last few years Libya has gone from international pariah to one of the most sought after destinations for upstream oil and gas investment. With the successful conclusion of the first EPSA-4 licensing round and the recent launch of a second round, Libya is well on its way to regaining its former position as one of the world’s key petroleum producers.