By Nabil L. Khodadad

Russian oil companies are the big winners in the latest licensing round for oil and gas rights in 14 contract areas in Libya. The contract areas are divided into a total of 41 blocks.

The contract areas auctioned in the latest round include three in the Cyrenaica basin, two in the Ghadames basin, two in the Sirt basin (Libya’s most prolific basin), two in the Murzuq basin, two in the Kufra basin and three offshore in the Mediterranean.

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

Third Round Results

There was keen interest in the third round, with 31 companies submitting bids for the contract areas on offer. Unlike the first round where US companies won, or were in consortia that won, 11 of the 15 exploration areas, or the second round where European companies won 10 of the 23 areas, only one US and only two European companies won (or were in a consortia that won) a contract area in the third round. The Russians were the big winners.

All three licensing rounds have been widely praised for their transparency. As in the first and second rounds, the bids from each bidder in the third round were opened in front of representatives from all bidders.

Libya is expecting the third licensing round to generate about $1 billion worth of exploration activity and to result in significant new discoveries.

The winning bids for the third licensing round are shown in the table. As there were one or no bids for four of the contract areas, the NOC awarded only 10 contract areas. (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 and “Asian and European Oil Companies Outbid US in Libyan Tender” in the October 2005 NewsWire.)

An important criterion for selecting a winner was the production allocation, or “X factor.” The X factor is the percentage of oil production allocated for 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.

Unlike in the first and second licensing rounds where the X factor was the primary selection criterion, the winners in the third licensing round were selected based on a formula that took into account not only the X factor, but also the amount of 2D and 3D seismic and exploration wells that the bidders committed to carry out in their work programs. The average amount of 2D and 3D seismic work committed by the winners was 4,110 kms and 1,000 kms, respectively, and the average number of wells was 3.5.

The selection formula also took into account the amount bid as a signature bonus, which in the first and second licensing rounds had been used only to break a tie. The total in signature bonuses for all 10 contract areas awarded was $88.1 million, with an average of about $8.81 million per contract area.

Comparison to Earlier Rounds

The results of the latest bidding round confirm the keen interest of international oil companies in Libya. The average winning X factor was about 20.5%. This is similar to the results of the first round where the average X factor was 19.5%, but not as favorable as the second round where the average was 13.2%. However, these are still considered excellent results for Libya. 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.

The results of the third licensing round may foreshadow the emergence of Russian companies as key players in upstream oil and gas. With many Russian oil companies harboring international ambitions, we are likely to see Russian companies compete more actively for upstream assets in North Africa, the Middle East and elsewhere.

With the successful conclusion of the first, second and third EPSA-4 licensing rounds, Libya has compiled an impressive track record and confirmed its status as one of the leading destinations for foreign investment in upstream oil and gas.