Libya Unveils Terms for Foreign Investors

Libya Unveils Terms for Foreign Investors

June 01, 2004

Libya released the details in late April of the business deal it expects with foreign oil and gas companies that want to do business in the country. The terms are to be set out in a new model exploration production sharing agreement called “EPSA-4.”

Two weeks later, it announced that eight exploratory blocks will be offered for oil and gas exploration to qualifying investors by the end of June.

Background

Fewer than 10 years after the first commercial oil discovery in Libya at Amal and Zelten (now Nasser) in 1959, Libya was producing 3.7 million barrels of oil a day. As a result of United Nations and United States sanctions and a lack of investment, Libyan production has slipped to only about a third of that amount. In a bid to reverse this decline and to double its output to three million barrels per day, Libya is seeking to attract $30 billion of foreign investment in its upstream and downstream sectors during the next decade and is lobbying OPEC for an increase in its export quota from 1.26 million barrels a day to at least two million barrels a day by 2007.

The state-owned National Oil Company has announced that all future exploration agreements will be awarded on the basis of public competitive bids.

There have already been three generations of EPSAs, or production sharing agreements. EPSA-4 is an attempt to introduce a more investor-friendly model agreement and to incorporate some clauses drafted into a new petroleum law expected to be approved by the General People’s Congress for release this summer. The new hydrocarbons law will cover a variety of agreements, including joint ventures, production sharing agreements and service contracts. The existing hydrocarbons law was adopted in 1955 and covers only concession agreements.

Libya has remapped its landscape into about 250 blocks, each spanning one degree longitude and one degree latitude. The National Oil Company announced that a minimum exploration program will be pre-determined for each of the eight blocks and that bidding will be on a single bid basis per agreement. The blocks on offer are intended to be a representative sample of onshore and offshore blocks and include eight unexplored blocks scattered across five of Libya’s seven oil and gas basins. The blocks being auctioned include one in the western Ghadames basin (a gas-prone basin), one in the northeast Cyreaica-Botnan basin, two in the western Murzuq basin, two in the Sirte basin (Libya’s most prolific area) and two offshore in the Mediterranean.

As only 25% of Libya’s oil and gas acreage is covered by exploration licences and as most of Libya has not been explored using modern techniques, Libya offers significant unexplored potential in the view of Wood McKenzie. According to the Oil and Gas Journal, Libya represents an “underexplored, underinvested, risk-filled, yet opportunity-laden country.” Officials at the National Oil Company boast that Libya has experienced a 50% exploration success rate between 1993 and 2003 with 136 of the 270 wells drilled finding reserves.

With its proximity to Europe, high quality sweet crude oil and very low operating costs of on average $5 per barrel (and set to fall as foreign investment grows) and for some fields under $1 per barrel, Libya is attracting a lot of interest from the international oil and gas community.

Oil and gas companies such as Agip/ENI, Hellenic Petroleum, OMV, ONGC, PetroCanada, Repsol, Shell, Total, Turkish Petroleum, Wintershall, and Woodside Petroleum and are active in Libya. Agip/ENI is the most active foreign producer and accounts for about 16% of Libya’s total output.

However, US oil companies are now poised to play a big role in Libya’s oil and gas sector. As a result of President Bush’s recent decision to lift most economic sanctions against Libya, the National Oil Company anticipates keen interest in the exploration tender from US oil companies that for the first time in two decades will be allowed to do business in Libya. In addition, those US companies (such as Amerada Hess, ConocoPhillips, Marathon Oil Corporation and Occidental Petroleum Corporation) that have frozen assets in Libya are in the process of renegotiating their concessions. As evidence of the thaw in US-Libya relations, US oil companies are reopening their offices in Tripoli and the first shipment of Libyan crude oil to the US in 18 years is scheduled to load on June 3.

Business Deal

Under the new regime contemplated by EPSA-4, contracts will be awarded on the basis of competitive bidding instead of by way of closed negotiations. Under EPSA-4, foreign companies will be responsible for exploration and appraisal costs during a minimum exploration period of five years. However, any development expenditures and exploitation capital expenditures will be borne by the National Oil Company and the foreign contractor on an equal basis. Exploitation operating expenditures are also to be borne by the National Oil Company and the foreign contractor according to their primary production allocation. The development and production period will be 25 years for crude oil and associated gas and up to 30 years for non-associated gas.

Under EPSA-4, the National Oil Company will first take a predetermined share of any crude oil or gas produced. This differs from the practice of production sharing agreements used in most parts of the world where priority is given to cost recovery. The foreign contractor will then be allowed to recover its costs from the remaining balance. Any crude oil (or gas) remaining after cost recovery will be shared according to a set formula. The share of the remaining balance bidders offer to the National Oil Company will be the primary criteria for awarding contracts. In the event that two or more bidders offer the National Oil Company the same share, the bidder with the largest signing bonus will be awarded the contract.

Foreign companies will also be required to pay production bonuses upon making commercial discoveries and production bonuses upon reaching certain prescribed production levels. Bonuses are not recoverable by the foreign company from cost oil. Although foreign companies will be subject to income taxes and production royalties, such taxes and royalties will be taken out of the National Oil Company’s share of crude oil (or gas), and the National Oil Company will be responsible for procuring an official receipt from the relevant authority confirming payment of such amounts.

During the exploration period, the foreign contractor will not be able to assign its interest in the agreement to a third party unless it has completed the minimum exploration program required by EPSA-4. After the making of a commercial discovery and during the exploitation period, all assignments will be subject to a pre-emption right in favour of the National Oil Company.

Any disputes under EPSA-4 are subject to arbitration in Paris under the rules of the International Chamber of Commerce, with each party appointing one arbitrator and the third arbitrator being appointed by the International Chamber of Commerce.

EPSA-4 offers several improvements over its predecessor EPSA-3, which the National Oil Company credits with attracting over $1 billion dollars in foreign investment, primarily from European companies, since its launch in 1988. EPSA-4 includes a comprehensive gas clause that provides that natural gas discovered and produced by foreign contractors will be marketed jointly with the National Oil Company. Domestic gas sales will be indexed to international fuel prices, while gas sales to Europe will be tied to other fuels used for generating power in such region. If a market is not available, then foreign companies will not be required to appraise their gas discoveries. EPSA-4 also extends the development and production period for non-associated gas from 25 to 30 years.

An abandonment clause has been added to EPSA-4 that requires each of the foreign contractor and the National Oil Company to bear and finance 50% of all costs related to the abandonment of installations and site restoration and provides a mechanism whereby provisions for estimated abandonment and site restoration are deposited in an interest-bearing account.

EPSA-4 also gives foreign contractors more influence over decision making by the management committee. Under EPSA-3, the National Oil Company had the right to appoint two members to the management committee while the foreign contractor had the ability to appoint only one member. All decisions of the management committee were taken by simple majority. The management committee’s powers are substantial and include the right to approve work programs and budgets. EPSA-4 calls for unanimous voting and thus gives the foreign contractor the power to block decisions of the management committee, a power that it did not have under EPSA-3. EPSA-4 also provides that as soon as a commercial discovery is declared, the operatorship shall be transferred from the foreign contractor to a company jointly owned by the foreign contractor and the National Oil Company. The management of the operator will be composed of four members, with two members appointed by each party. All decisions will be by simple majority of its members.