Kalpesh Ramwari, senior consultant at Contax partners, asks whether political stability can ensure that Libya reaches the output potential it enjoyed in the 1960s
Holding around 3% of the world’s proven oil reserves, and with conservative estimates indicating that only around 25% of its oil fields have been explored, Libya has always had the potential to be one of the largest oil and gas exploration markets in the world.
With oil exports accounting for c.97% of the country’s total exports, its geographic position on the Mediterranean could have proven to be a gold mine for the country. however, decades of sanctions, poor infrastructure and a high level of corruption endemic to the Gaddafi regime has left the country producing only 1.8 million bpd in the pre-revolutionary days, as compared to 3.0 million bpd in the early 1960s.
Libya also accounts for around 1% of the global gas reserves, with official estimates from 2010 suggesting 50 trillion cubic feet (tcf), however, the sector is highly underdeveloped with very little exploration activity having been conducted in the last decade.
The National Oil Company, realising the importance of the sector to the future success of the country, has detailed ambitious plans to increase oil production to 2.3m bpd by 2013 and 3m bpd in the next couple of years.
While some of these plans seem ambitious, given the history of production volumes in the country, significant focus will be placed on enhanced oil recovery (EOR) rather than the more capital intensive exploration activity.
Project Landscape
Since the lifting of international sanctions on the Libyan oil sector in 2004, Libya has seen very little project activity, with completed and planned projects between 2005 and 2015 totalling $13.1 billion.
Staggeringly, total investment within the country represents less than 1% of the total investment within the GCC during the same time period. Project awards between 2012 and 2015 represent 72% of the total awards between 2005 and 2011 (Figure 1).
Historically, the oil & gas and power sectors accounted for the vast bulk (c.86%) of capital investment in Libya. However, the sectors in current are construction and oil and gas and refining, which together represent c.96% of all announced awards between 2012 and 2015 (Figure 2, opposite).
Contax Partners believes that the total amount of announced awards is relatively conservative, given that the transitional government does not plan to award any projects before the results of the full parliamentary elections next year.
We also do not expect a major spike in oil and gas related investments, given the call to revisit and re-negotiate all major awards made post-2005 due to concerns over poor deals struck and corruption.
Reports to us indicate that IOCs have already decided to cancel exploration licenses in protest at the growing investigations and renegotiations of contracts, and do not plan to return to the country in the near future.
Other major oil corporations are also revisiting their licensing agreements and conducting their feasibility studies in order to assess their long term plans in the country.
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Libya and Iraq
It would not be a farfetched to compare Iraq in 2002 and the current state of the Libyan economy. Both countries have witnessed long-ruling dictators and a bloody war. Both have economies which are almost entirely dependent on oil.
With over 95% of both countries’ foreign income dependent on oil exports, the future of the nations have been heavily tied to the developments within the sector.
While Iraq has successfully managed to grow production and attract most of the major foreign companies within the oil and gas and related sectors to set up shop in Iraq, much effort will have to be made by Libya to generate similar results.
Speculation is running high on which country will be the largest beneficiary of the Libyan oil sector post a stable government, a reflection of the relative attitudes of different countries to the civil war. No major announcement has been made by the transitional government.
Libya has favoured European companies, especially Italian ones (Eni represents c.12% of Libya’s oil production), a reflection of close, and unequal, historical relations. Other European and Asian companies such as UK based BP and China based CNPC and Sinopec are also interested in taking a share of the Libyan oil concessions.
BP has made the single largest commitment (US$ 900m) in oil exploration activities within the country. China is currently holding high level negotiations about future awards in the country. Its investment of US$ 18bn in infrastructure related projects and its position as the largest player within the multi-sector EPC market could potentially tip the scale in its favour.
Obstacles ahead
Firstly, the historically high levels of corruption and low transparency that dominated transactions within the sector, in addition to the unpredictable behaviour and demands of the Gaddafi regime, have made international companies wary of long term investments within the country. In 2010, Libya ranked 146 out of 178 on Transparency International’s Index, a similar position to Iraq.
However, Iraq is now one of the few countries in the region that has signed the Extraction Industries Transparency Initiative to assure the global community of fair dealing and a “just” contract award processes. In order to attract companies such as Shell – whcih has quit work in the country for the time being – Chevron and Oxy to return to Libya, the new government will need to take similar strong measures to assure IOCs of fair processes.
Secondly, there is still a risk of armed militia and pro Gadaffi loyalists disrupting any progress that may be made post the elections. Armed conflict and continual bombings have proved to be a major hindrance to the growth of the Iraqi economy during the rebuilding phase. There is a risk of lesser but similar occurrences in Libya, given that the country has not experienced the true sense of democracy for a long time.
While there is no clear answer to combat the threat of armed conflict, the new government will need to give security utmost priority in order to assure the global community of the safety of conducting business in the country.
Thirdly, current infrastructure needs improvements to support the oil sector. Key infrastructure nodes were heavily damaged in the armed conflict. If project activity were to increase, much emphasis needs to be made towards the infrastructure sector, especially roads leading to oil fields and ports.
While historically, the government has not given infrastructure its due share, the future government will be expected to improve the various associated sectors if it needs to provide the means to power a future government’s ambitions for the Libyan economy.
Contax Partners believes that Libya is an interesting mid-to-long term opportunity, though not a strong short term capex candidate.
About The Author
Kalpesh Ramwari is a senior consultant at Contax Partners. To further discuss how the Business Advisory Team can help you understand the project landscape, the potential realisation rates and likelihood to proceed tiers for your projects, the full set of opportunities open to you and the best strategy/approach to ensure the opportunities are successfully secured, please contact Ann-Marie Carbery Antoun: AnnMarie.Carbery@contaxpartners.com.
