Libya to Move on CNPC-Verenex Oil Deal

Ghadames Basin, Libya
(Click to Enlarge)

NEW YORK (THE WALL STREET JOURNAL via Dow Jones Newswires), Jul. 13, 2009

After months of delay, the Libyan government is close to deciding whether to allow the sale of a small Canadian oil exploration firm with operations in the country, resolving a drawn-out saga that has highlighted the reasons why Libya's oil sector hasn't blossomed since it reopened in 2005.

In February, Calgary-based Verenex Energy Inc. announced it would sell itself to China National Petroleum Corp. for roughly $430 million. The state-run company wants Verenex for the sizable crude reserves it has discovered in Libya.

But the deal has been waylaid for five months by the Libyan government, wreaking havoc with Verenex's operations and share price and causing the Canadian government to register its concern with Libyan authorities over its handling of the issue.

Libya says it will either allow the CNPC deal to go forward; deny it on the basis of national interests; or purchase Verenex itself, invoking a clause in Verenex's drilling contract with Libya that allows the state to take over a deal if it sees fit.

"All things are under consideration and we hope to reach a decision by August, if not before," said Shokri Ghanem, head of Libya's national oil company.

The case has underlined both the promise of Libya's big untapped proven oil reserves, the eighth-largest in the world, and the hazards of doing business in the North African country more than five years after international sanctions against it were dropped.

The reopening of Libya's state-run oil sector in 2005 to foreign oil companies promised potential profits for Libya, isolated for years by economic sanctions for its support of terrorist activity, and new supply for the world oil market.

Western oil companies, largely blocked from pumping crude in most other big petroleum countries, were keen to get access to an oil state widely viewed by analysts as underexplored.

But despite signing billions of dollars worth of drilling deals the past four years with firms like France's Total SA, Libya's state oil company in June slashed its production forecast to 2013 by nearly 25% to 2.3 million barrels a day. Some analysts say Libya, with a current production capacity of about 1.8 million barrels a day, may even miss that lower target.

Verenex's situation helps illustrate how Libya's medium-term production prospects have flopped. A big complaint is that government decision-making is often gummed up by too many departments that aren't transparent, causing it to lag behind many other oil states, such as Saudi Arabia, analysts say.

"The decision delays we see by the government are a problem for companies and hurt [oil drilling] work programs," said Susan Mance, an analyst at Wood Mackenzie. She added the delays highlight a long-term oil market concern about "above-ground" issues hampering the timely delivery of new oil supply.

In an interview, Verenex Chief Executive Jim McFarland said his company has halted all drilling in the country in recent days because of the government "unreasonably withholding" a decision on CNPC's buyout offer.

Mr. Ghanem, Libya's top oil official, declined further comment on details of the Verenex case.

Verenex and its nonoperator partner, PT Medco Energi of Indonesia, are aiming to start pumping 50,000 barrels a day of Libyan crude by 2011 and five times that amount in the next decade. The two firms have collectively sunk $311 million into their Libyan operations.

To add to the uncertainty, Libya announced in June it was investigating whether Verenex may have improperly qualified for the 2005 oil licensing round in which it was awarded operator of one oil field. The announcement sent Verenex shares tumbling more than 20% and led some analysts to downgrade the company's stock.

With the charge coming four years after the bidding round, analysts say the investigation could be a ploy to force Verenex to sell itself to the government at a discount to CNPC's offer.  

Copyright (c) 2009 Dow Jones & Company, Inc.


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