Petroleum Development Opportunities in Libya after the Arab Spring
Blog contributed by Jay Park, a partner at Norton Rose, and a contributing author of “Oil Contracts- How to read and understand them”.
The echoes of the Arab Spring still resound in Libya. At an oil conference I attended in Tripoli in late September, Libyan speakers began their presentations by honouring those who had been involved in the revolution. “I want to thank them for permitting me to be here today so I can speak my mind,” said one of the representatives of Libya’s National Oil Company (NOC).
While there, I met with a leading senior Libyan oil & gas lawyer I had worked with in my previous five missions to Libya. He had been active in the revolution from its first day. My lawyer friend says that the revolution is not over. There is much yet to be decided.
What does all this mean for petroleum exploration and development in Libya? This was discussed at length at the oil conference. NOC and international oil companies (IOCs) spoke of the many petroleum opportunities that exist in Libya and remain unexplored and undeveloped. There is evident interest on the part of NOC to see these developed, and there is pent-up demand on the part of IOCs to pursue them. The question is then, when will Libyan interest in seeing exploration and development marry up with a contracting process that will permit IOCs to do so. The short answer is, not this year; there are a number of actions that Libya needs to undertake before new development can occur.
Understanding the petroleum exploration and development opportunities in Libya and the reason for the delays in pursuing them requires a grasp of the key governing petroleum agreement used in Libya, recognizing the steps that Libya needs to take to create its petroleum regime, and the hurdles it faces in doing so.
The Character of Libya’s EPSA and its Impact on Development
Libya has used a unique form of production sharing contract to govern the relationship between NOC and IOCs. The Exploration and Production Sharing Agreement (EPSA) has been used in Libya for decades; the most recent version (called EPSA IV) used since 2005 is special because its terms combined with the process by which it was awarded in a series of public international bid rounds led IOCs to bid very aggressive fiscal terms. EPSA IV combines a production sharing contract with a 50% participation right by NOC, creating a hybrid of a PSC and a joint venture. As a result of the highly competitive bid rounds, EPSA IV results in a ‘government take’ in excess of 90% for the government of Libya. This is among the toughest terms in the world for exploration areas.
The consequence of this is that only large discoveries are economic for an IOC to develop under EPSA IV terms. As a result, many areas that were explored did not result in commercial discoveries under EPSA IV’s tough terms. This does not mean that there were no discoveries; but what was discovered simply didn’t meet the high hurdle rate established by EPSA IV for a commercially viable project.
This recent exploration history, combined with a list of past discoveries that remain undeveloped, have resulted in Libya having a significant number of discovered but undeveloped reservoirs. These are projects just waiting for an IOC to undertake development drilling and the construction of the related infrastructure facilities such as pipelines, processing and port facilities.
However, Libya does not have a type of petroleum contract that is suited for such a project. Its only tool is EPSA IV. What is needed is a new type of contract. The potential for creation of a “Development Production Sharing Contract” or DPSA has been rumoured in Libya for many years. So what is holding it back?
The Status of Libya’s Petroleum Regime
A ‘petroleum regime’ is the set of rules that governs the relationship between a state and IOCs conducting petroleum operations in that state. It comprises the constitution, the petroleum law, the petroleum regulations and the petroleum contract.
Libya lacks a current constitution. If it were to adopt its previous constitution from 1951, Libyans would discover that it is silent about petroleum, because it was not known to exist in Libya at that time. The revolution and Libya’s new government situation require the creation of a new constitution. A constitutional assembly is to meet soon to create one. Hopefully it will include modern petroleum provisions. One of the interesting issues is whether Libya will be a unitary state or a federal state under this new constitution, and if it is a federal state, whether the federal government or regional governments will have jurisdiction over petroleum activities.
Once a constitution is in place, a new government elected and the jurisdiction over petroleum is established, then a petroleum law can be enacted. Libya’s current petroleum law was enacted in 1955, and last amended in the 1980s. It is one of the world’s oldest active petroleum laws. Moreover, it is very out-of-date: it contemplates the use of concessions, which Libya has not awarded for decades.
Vintage wine is favoured by connaisseurs; vintage cars are collected by car buffs; but vintage petroleum laws belong in the dustbin. Libya needs to create a modern petroleum law. Once a petroleum law is in place, the power of the government to create and award petroleum contracts will be clarified, and the initiatives that Libya wants to pursue can be realised.
The Size of the Prize
Libya’s petroleum resources include significant discovered but undeveloped reserves. Iraq found itself in a similar position after the regime of Saddam Hussein was deposed; it has now embarked on one of the greatest petroleum development initiatives in the history of the world, with petroleum production projected to escalate from 3 mmbbl/day to 6 mmbbl/day or more, possibly even as high as 12 mmbbl/day. This has been initiated by means of the award of petroleum contracts by the government of Iraq to more than fifty international oil companies. This is driving the most active petroleum development and infrastructure construction projects in the world today. The International Energy Agency recently reported that this could lead to over $5 trillion in GDP growth for Iraq.
Libya’s discovered but undeveloped reservoirs are not as prolific as in Iraq. However, the opportunity exists for Libya to follow the example of Iraq by taking a similar approach to development. In order to do so, it needs to create a suitable and attractive petroleum regime, and embark on a petroleum contract award process that will seize these petroleum opportunities and harness them for the benefit of Libyans.
[An edited version of this article first appeared in Infrastructure Journal, www.ijonline.com]