Asian and European Oil Companies Outbid US in Libyan Tender

Asian and European Oil Companies Outbid US in Libyan Tender

October 01, 2005

The state-owned National Oil Company of Libya announced in early October the results of a licensing round it launched in May 2005 for oil and gas in 26 contract areas. The contract areas are divided into a total of 44 blocks.

The contract areas auctioned included 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.

This was the second competitive tender organized by the National Oil Company, or NOC, under its new model exploration and production sharing agreement called “EPSA-4.”

Second Round Results

There was keen interest in the second round, with 50 companies from six continents submitting a total of 97 bids for the contract areas on offer. In the second round, companies from Asia were particularly successful. Japanese companies such as Japex, Nippon, Teikoku, Inpex and Mitsubishi won, or were in consortia that won, six of the contract areas; the Indian state-owned ONGC and the consortium of Oil India-India Oil each won a contract area; the Indonesian state-owned Pertamina won two contract areas; and the Chinese state-owned CNPC picked up a contract area. European companies also did well, with ENI, BG, Statoil, Total and Norsk Hydro winning most of the remaining contract areas. Russian oil company Tatneft and Turkish state-owned TPAO each picked up a contract area. Unlike the first round where US companies won, or were in consortia that won, 11 of the 15 exploration areas, ExxonMobil was the only US company to win a contract area.

Both the first and second rounds have been widely praised for their transparency. As in the first round, the bids from each bidder in the second round were opened in front of representatives from all bidders and were broadcast live on Libyan television. After all the bids for a contract area were announced, the winning bidder was immediately declared.

The winning bids for the second licensing round are shown in the table. (A more detailed description of the business deal offered by the NOC in the first and second licensing rounds can be found in “Libya Launches Second Exploration Tender” in the June 2005 Newswire.)

The company (or consortium) 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. 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.

As there were no bids for three contract areas, the NOC awarded 23 contract areas.

The total in signature bonuses for all 23 contract areas awarded was $103.4 million, with an average of about $4.5 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 second round there were no ties.

Comparison with First Round

The results of the latest bidding round confirm the keen interest of international oil companies in Libya and show the aggressive bids received in the first round were not a fluke. The average winning X factor was about 13.2%.This compares very favorably to the average X factor of 19.5% in the first round. In the first round, the lowest bid was 12.4%, with most of the winning bids between 15% and 20%. In the second round, 11 out of the 23 successful bids had an X factor of less than 10%. 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. These are considered excellent results for Libya.

The results of the second licensing round may foreshadow the emergence of Japanese, Indian and Chinese companies as key players in upstream oil and gas. With soaring demand for oil and gas in China and India, and with Japan appearing to slowly recover from its prolonged economic slump, we are likely to see Asian countries and their national oil companies compete more actively for upstream assets.

The aggressive bidding in the second round also appears to confirm the market’s expectation that oil prices are likely to remain high for quite some time.

With the successful conclusion of the first and second EPSA-4 licensing rounds, Libya has confirmed its poll position as one of the leading destinations for foreign investment in upstream oil and gas.