BP Talks with Libya on Giant Gas Acreage Falter -Officials

LONDON Mar 09, 2007 (Dow Jones Newswires)

BP PLC (BP) risks seeing a clutch of potentially lucrative gas blocks slip from its grasp during protracted negotiations with Libya because the terms it seeks are too aggressive, according to officials involved in the talks.

As the country's autocratic leader Moammar Gadhafi rails against international oil companies for stealing its resources, BP is struggling to convince Libyan officials and policy makers that the stakes it wants in gas blocks in the onshore Sirte and Ghadames basins are reasonable.

The U.K. energy giant has been negotiating with Libyan officials for close to two years on developing a number of concessions in the hydrocarbon-rich North African state.

"The economics BP are offering are simply not attractive for us," a senior Libyan oil official familiar with the talks said.

Gadhafi's son, Saif al-Islam, said recently the talks centered on the "largest gas field in the history of gas exploration", according to a report by the Middle East Economic Digest.

BP is also hoping to get its hands on some of the oil that it may discover in the course of gas exploration and drilling.

Senior executives have met in Tripoli in recent days in a bid to prevent the talks from collapsing.

However, senior Libyan officials told Dow Jones Newswires this week that negotiations have reached a critical stage and that BP's attempt to lay claim to some 35% of the projects' production, with the remainder in the hands of the government, is far too much.

Another Libyan official said: "If I were BP, I would just stick to gas exploration for now and leave aside oil interests until later."

Talks between both sides are continuing but industry sources say reaching a compromise won't be easy.

"No-one is giving up," Shokri Ghanem, who heads Libya's National Oil Company, told Dow Jones Newswires.

But there isn't a shortage of oil companies interested in Libya, he added, "so we are encouraging talks with as many as possible."

BP spokesmen wouldn't comment on the details of BP's offer and said it hoped for a successful resolution.

Getting Left Behind?

BP is eager to gain access to new hydrocarbon reserves and rebuild its image among investors as a well-run and successful business after a torrid two years.

Success in Libya, however, is far from assured for the company, which has seen its reputation tarnished by investigations into the safety of its North American operations, scandals surrounding the trading of fuel products, and questions over its production outlook.

In Libya, BP is trying to catch up with rivals Royal Dutch Shell Group (RSDB.LN) and Exxon Mobil Corp. (XOM).

It is clear why. The country is estimated by the International Energy Agency to have more than 100 billion barrels of oil reserves and 40% of Africa's reserves.

It has ambitious plans to nearly double its oil output within a decade to 3 million barrels a day, from 1.7 million barrels a day currently.

Gas output is forecast by the agency to more than quadruple from 12 billion cubic meters in 2010 to 57 billion cubic meters two decades later.

Three years ago Shell signed an agreement with Libya to develop its gas industry and upgrade its Marsa el Brega liquefied natural gas terminal. Drilling for gas is due to start in the second half of this year.

Late last year Exxon Mobil snapped up a 22% stake in a massive offshore oil concession in the country's latest bidding round.

Taiwan's state-run oil refiner CPC Corp. Thursday became the latest company to say it would strike a deal.

Exxon Mobil's Chief Executive Rex Tillerson said Wednesday he'd met last month with Gadhafi to discuss gaining more access to Libya's vast oil fields.

During that meeting, Tillerson explained to the Libyan leader that his company can execute any project at a lower cost, higher profit and greater reliability than its competitors.

Competition from Chinese and Russian companies in Libya's last bidding round helped pin the average production allocation companies won from the 10 licenses on offer to around 14%, with China Petroleum Corp. (SNP) accepting less than 8%.

Libyan sources say the country's cabinet is therefore likely to balk at BP's attempt to negotiate around 35% for itself.

Libya's "Ghanem is now in a very difficult position" with the cabinet, "as other companies have set a precedent with their willingness to take a smaller share in projects", a senior official said.

That "is not really a comparison as BP is primarily pushing for gas development", a U.K.-based industry source responded.

The company "understandably wants a bigger slice of the deal and have the know-how to develop Libya's gas business," he said.

He added: "Bilateral discussions are more attractive for oil majors generally. In the bid rounds people are bidding in harsh terms and are willing to cut margins just to get access to acreage."

BP's talks are unlikely to be helped by recent rhetoric from Libya's leader.

In comments most likely aimed at a domestic audience, Gadhafi was reported as saying: "You must watch out for colonial forces which spy on us and aim to steal our riches."

He indicated that "American and Western oil firms, which take no more than a 20%" share of production are reversing this image.

Western executives have been flocking to Tripoli since April 2004 after Washington lifted nearly 20 years of sanctions.

But oil firms complain that business talks are typically mired in bureaucracy and squabbling between reform-minded officials and conservatives.

Copyright (c) 2007 Dow Jones & Company, Inc.