Libya Bids Suggest High Oil Prices Here to Stay

LONDON, Oct 17, 2005 (Dow Jones Commodities News via Comtex)

As Libya gears up for its third oil licensing round next year, soaring international interest and more aggressive bidding for the acreage on offer have highlighted the confidence companies have that high oil prices are here to stay.

This comes at a time when companies feel the pressure to boost their reserves to meet the surging demand from China and globally this has pinched supplies and pushed up oil prices to record highs of more than $70 a barrel.

"There seems to be more universal participation in the second round," said Nabil Khodadad, London-based partner at Chadbourne & Parke, of the second round of licenses issued earlier this month. "It shows that there really is a lot of interest in Libya."

The huge interest also underscores the shortage of big new oil exploration and development prospects available to foreign investors in the Middle East. Unlike such fellow members of the Organization of Petroleum Exporting Countries as Saudi Arabia and Kuwait, Libya is one of the few member countries from the region that allows foreign investment in its oil sector.

"Compared to so many other oil-producing countries like Iran, Iraq, Kuwait and Saudi Arabia, Libya is politically stable and has flexible terms for companies to invest," said a Libyan oil official.

"This time companies were prepared to go all out and enter into really tough competition to get into Libya no matter what the cost," the official added.

And this was clear from the recent contract awards. Libya's second licensing round attracted bids from companies both big and small from all over the world.

But the surprise this time was that Japanese and other Asian companies topped the list of exploration and development contracts that were awarded Oct. 2 in Tripoli - an indication of the more aggressive bids this time around.

In the first round at the beginning of this year, others lost out as U.S. oil companies, or the consortia in which they played a leading role, scooped up 11 of the 15 contracts on offer.

Asian Companies Step In

The U.S. companies were so eager to get back in after years of being shut out by sanctions that they were willing to pay a higher price. However, this time around other oil companies were determined to get a piece of the pie.

"Asian countries import so much crude that security of supply is a real issue for them," said Craig McMahon, senior analyst and specialist in North Africa at oil consultancy Wood Mackenzie Ltd.

"It could be that the Japanese government encouraged their companies to be more aggressive in bidding so that they could have the supplies to offset the huge imports they need," McMahon added.

And that's more than reflected by the Japanese companies that won contracts - Nippon Oil (5001.TO), Mitsubishi Corp. (8058.TO), Japex, Inpex (1604.TO) and Teikoku - that all identified Libya as a core area for investment in the oil and gas sector.

"We've been closely watching the potential of Libya's oil and natural gas resources," Nippon Oil said in a statement.

Nippon Oil, the largest oil refiner in Japan in revenue and capacity, opened its branch office in Tripoli in September as part of an effort to expand its business in that country over and above the two projects in which they now hold stakes.

It's easy to see why they're interested.

The success and transparency of the first round coupled with oil prices trading over $60 a barrel - around $20/bbl higher than they were at the beginning of the year - makes Libya an even more attractive proposition to any company with money to invest in future production.

Its low-sulfur, sweet crude is easier to process into high-value petroleum products such as gasoline. Other pluses for Libya are its proximity to key European refining centers in the Mediterranean and its shorter tanker travel time to U.S. markets than Persian Gulf producers.

Thanks to decades of sanctions, Libya's oil sector is vastly underexplored. The country also has very competitive exploration, development and operational costs as well as being relatively safe and open to foreign investment with its use of production-sharing agreements.

Iraq is underexplored, has cheap production costs and has the huge already discovered mega-structures just waiting to be tapped. But security fears and political instability have kept most companies out. Most companies have been kept away by the lack of a legal framework, petroleum law and no clear idea of whether production-sharing agreements are going to be the model for investment. Also in question is whether there will be a government that will allow foreign inputs into its most valued sector.

Eye On The Future

Libya's north African neighbor Algeria, although keen to attract investments in its energy sector, is more of a gas play than oil. Gas requires more careful negotiation and planning as the projects are bigger, more complicated and far more costly.

Meanwhile, OPEC heavyweights Kuwait and Saudi Arabia are still closed to companies for upstream development, although Kuwait may start opening up to limited investment by the end of this year.

And the United Arab Emirates, also a big producer, already has most of its contracts in place with the world's supermajors, leaving very little room for other interested players.

Iran has the reserves, but its complicated and low-value buyback contracts have limited its appeal to investors.

In the second licensing round, the Libyan government has earned around $103 million in signing bonuses in addition to the billions to be invested.

In addition, many of the winning offers involved the company taking a share of less than 10%, compared with an average share of between 15% and 20% in the previous round.

With the winning companies' share in projects roughly halved, they have less of a stake from which to recover costs and then share out profits from the remainder.

Although some observers said they couldn't see the economic value in paying so much for such a small share, they suggested that many companies have their sights set on much bigger opportunities in the future.

"It could be that these companies are willing to take a smaller stake in this round because they're trying to win favor for the bigger prizes yet to be doled out," said one observer familiar with the Libyan rounds.

Majors ENI (E), Total (TOT), ExxonMobil (XOM) and BG (BG.LN) won stakes in the 26 areas on offer in the second round, as did key players Norsk Hydro (NHY) and Statoil (STO). Russian oil company Tatneft (TATN.RS) and Turkish Petroleum also won bids.

Libya expects international oil companies to spend more than $7 billion on exploration over the next 10 years and to be producing 3 million barrels per day by the end of the decade, around double what is currently produced.

Copyright (c) 2005 Dow Jones & Company, Inc.