The Oil & Gas Industry in LibyaPositioning your company for the Libyan Market

NOF Energy Seminar, Aberdeen – 11th March 2013

Ibrahim A. El Mayet

State of the Oil Industry in the New Libya

Current production is close to pre-conflict levels of 1.6 million bpd.

NOC’s statistical reports show production reached approximately 1.5 million bpd by 30th June 2012 with an average daily production of 1.45 million bpd from January to June 2012.

The industry has been effected by political instability and the wider security concerns throughout 2012 leaving international companies reluctant to recommit expat staff and resources.

With international companies slow to re-enter the market, the rapid restoration of oil production has been largely credited to Libyan engineers.

The lack of International Service Companies has caused delays to scheduled routine and non-routine maintenance which could impact on production in 2013.

The Industry is currently facing structural reforms and reviewing policy issues.

Structure of the Industry – The Ministry of Oil & Gas

A new Ministry for Oil & Gas was established by the Interim Government of the

National Transitional Council (NTC) in 2011..

Previously the NOC was responsible for both setting policy and conducting

commercial operations.

Responsibility for setting policy and conducting audits has been transferred to

the Ministry.

The Ministry of Oil & Gas is currently housed within the NOC’s Headquarters in

Tripoli and is currently in the process of recruiting staff and establishing its

operational capacity and independence under Minister Abdulbari Al Arusi.

Structure of the Industry –

The National Oil Corporation (NOC)

The Industry has historically been dominated by Libya’s State owned National

Oil Corporation (NOC).

In recent years NOC has been solely responsible for both policy and

commercial decisions exerting strong control over its subsidiaries.

IOC’s operate in Libya under the umbrella of the NOC either through a Joint

Venture partnership or through an Exploration & Production Sharing

Agreement (EPSA)

The Benghazi Question – Autonomy for the East

Since Libya’s liberation pressure has been mounting in Eastern Libya for

greater autonomy and control of resources including calls for the NOC to be

returned to Benghazi.

Historical Context –

The NOC's predecessor, the General Petroleum Company was set up in

Benghazi in April 1968 under King Idris.

This was later replaced by the NOC in November 1970

Along with several other government institutions the NOC was relocated to

Tripoli by the Gaddafi regime which had seized power a year earlier.

Benghazi is

approximately

1,000km from the

capital, Tripoli

The Benghazi Question – NOC Benghazi Branch

In June 2012 the NOC announced the opening of a new branch in Benghazi to replace the ineffectual Benghazi branch.

The plan included the creation of five departments in the fields of petro-chemicals and refining, exploration and production, human resources, administration and finance.

The new branch would have had de facto control over the oil industry in eastern Libya (home to around 80 per cent of the country’s oil fields).

This included transfer of powers over some state-owned companies to Benghazi including:

Arabian Gulf Oil Company (AGOCO) – Libya’s largest producer

Sirte Oil Company (SOC), and

Ras Lanuf Oil and Gas Processing Company

The Benghazi Question – Resolution 100 and beyond

On 4th October 2012 NOC resolution 100 was issued to establish the Benghazi branch maintaining most of the content of the June proposal but limiting some of the proposed powers.

However the resolution was in effect for less than a week before being revoked due to opposition and protests from NOC staff in Tripoli.

The suspension of the Resolution sparked counter protests in Benghazi calling for the Return of the NOC to ‘it’s natural home’.

An alternative proposal was tabled by the Ministry of Oil to split the NOC into two companies separating upstream and downstream activities.

Establishing a ‘National Corporation for Oil Refining & Petrochemicals’headquartered in Benghazi, and a ‘National Corporation for Exploration & Production’ headquartered in Tripoli

The two companies would be organised under the Ministry of Oil and each would maintain a branch in the other city.

The Benghazi Question – Likely Outcomes

This has not satisfied everyone particularly in the East where many feel that

they are being offered the less significant of the two companies.

Calls for the NOC to be returned to Benghazi continue and pressure is

increasing on the Ministry of Oil to take action on this issue.

According to Ministry sources the plans to create the two companies have

been broadly accepted and are likely to proceed.

The Security Situation in Benghazi

Despite early progress in Benghazi during the Uprising in 2011 developments in Libya’s second city has been set-back by security issues including:

high profile international incidences most notably the killing of American Ambassador Chris Stevens

attacks on British and Italian diplomatic missions

a spate of assassinations and assassination attempts against high ranking police officials and political figures.

Many of these have been attributed to extreme Islamist groups such as Ansar Al Sharia who have capitalised on the security vacuum in Eastern Libya. These groups are not representative of the majority in the East or Libya as a whole.

Currently the perception of the threat level in Benghazi and Eastern Libya is worse than the day to day reality for local residents.

Anticipation of violent protests prompted international governments to pull their nationals out of Benghazi prior to the anniversary of the start of the Libyan Uprising on 15th February. However the anniversary was marked in the large part by peaceful protests and celebrations.

Tackling the Security Situation

The Zidan Government has placed security as its top priority and is coordinating efforts between the Ministries of Defence and Interior to dismantle militias and bolster the National Army and Police force.

Initiatives launched by Interior Minister Ashour Shweil have already proved to be effective in recruiting members of the Supreme Security Council (SSC) and other militias to join the Police.

More than 28,000 have already applied to join the security forces while thousands will be sent to universities and colleges to continue their education.

Taking the approach of engaging with tribal elders and respected religious clerics has a good chance of succeeding.

These combined efforts could improve the outlook for Benghazi and Libya as a whole in 2013 – 2014.

Production Targets

No new plans have yet been issued officially by the NOC.

The NOC’s 2010 – 2014 development plan targeted production of 2.1 million bpd by 2014 to be achieved through increased drilling activity and investment to increase production at 27 producing fields.

Official sources suggest a target of 2 million bpd over the next five years, which given current constraints is still ambitious.

Some industry sources do not expect any significant movement or major projects until the election of a permanent government in 2013 – 14.

The NOC is focused on current priorities including the consolidation and increase of production to pre-conflict levels and beyond, the restructuring of the industry, reviewing and updating contracts and reviewing legal framework.

Delays to routine and non-routine maintenance in 2012, could cause production to stagnate or even fall slightly in 2013.

Pre-conflict Oil Production

Company Production (bpd) % of total output

Eni 108,000 6.4%

Wintershall 100,000 5.9%

Total 55,000 3.2%

Suncor 50,000 2.9%

Conoco Phillips 47,000 2.8%

Marathon 46,000 2.7%

Repsol 35,000 2.1%

Hess 22,000 1.3%

OMV 33,000 1.9%

Occidental 13,000 0.8%

Total 509,000 29.9%

25%

30%

45%AGOCO

Top 10 IOC's

Other

Arabian Gulf Oil Company

(AGOCO) – pre-conflict

production = 425,000 bpd

TOP 10 IOC Producers in Libya (2010)

Total Oil Production =

1.6 million bpd

The impact of protests and industrial action

Protests and Strikes had an impact on the Industry in 2012, a trend which is continuing in 2013.

Main Issues:

The East-West divide

Improved terms and conditions for local staff

Benefits for Revolutionaries – Medical treatment, financial support

For example:

November 2012 - Zawia refinery was blockade by local war-wounded revolutionaries demanding medical treatment abroad.

January 2013 – Ras Lanuf refinery remained offline for days due to strike action by workers whose demands included salaries equal to foreign workers.

March 2013 - Mellitah Oil & Gas Complex was forced to temporarily shut down operations due to fighting between rival militias from Zintan and Zwara.

Increasing Oil Production – Redevelopment and

Enhanced Oil Recovery (EOR)

The average oil recovery (RF) factor in Libya is approx. 35%.

In the industry today an RF figure of 60% is often achieved through IOR/EOR applications.

Libya’s reservoirs are suited to many IOR/EOR applications.

The NOC is targeting an additional 10% in short-medium term.

Up to date technology is needed to achieve this.

Sources at the NOC consider the redevelopment of old fields to be the most realistic opportunity for new production in the coming 12 – 18 months. There are fields which remain undeveloped and others where up to 30% has been produced and the well capped, with current economic conditions and new technology it may be possible to produce an additional 20 – 30% of these reserves. The timing will remain unclear until the new government takes office.

Exploration

Libya remains relatively underexplored only about 30% of the Country has

been allocated in exploration blocks, and even large areas of some allocated

blocks remain unexplored.

Studies of Libya’s main basins indicate that at least 300 billion barrels of oil

have been generated. Only half of that has been discovered to date.

About 58% (798,487 Km²) of the basins area (mostly of Sirte Basin) is under

exploration & production licenses.

NOC Exploration Map (2005)

Exploration Cont.

Most exploration activity has been on hold as the majority of International

operators and service companies are yet to return to Libya.

However the industry is not at a complete standstill with NOC companies and

some IOC partners continuing to work.

There is currently a high demand for drilling in Libya which is not being

sufficiently supplied.

There is a shortage of rigs as several rigs were stolen and many existing rigs

are not operational requiring maintenance, assembly and inspection.

Regional Security Concerns

Concerns over security at Libyan Oil fields were heightened following the attack on BP and Statoil’s In Amenas facility in Algeria on 16th January.

BP’s subsequent decision to postpone drilling plans in the Ghadames Basin was undoubtedly a result of this attack. BP’s Area B concession is less than 200km from In Amenas.

Concerns over security at Libya’s infamously porous borders are likely to cause other Companies to re-evaluate exploration in the region.

In the wake of the Algeria attacks, Libya’s Petroleum Facility Guard (PFG) was mobilised to provide increased security at Oil facilities in the West and South of Libya including high value assets in the Ghadames and Murzuq basins.

In January Libya, Algeria and Tunisia signed a trilateral agreement to cooperate on border security at their common borders.

BP Concessions in Libya (Area B)

Securing Libya’s Oil Facilities:

The Petroleum Facilities Guard (PFG)

The ‘Organisation for Protection of Oil Installations was established in 2012

It is part of the Ministry of Defence is responsible for protecting Libyan Oil & Gas assets.

It’s force The ‘Petroleum Facilities Guard’ (PFG) responsible for protection of all Oil facilities and assets including fields, pipelines, camps, refineries and terminals.

In 2012 over 10,000 former rebels have signed contracts adding to the existing force of approximately 2.500 making a total force of nearly 13,000.

Members of the PFG are Soldiers and receive salary from the MoD (although funds come from the NOC budget)

The Authority has 5 regional branches covering the major oil assets each with its own local commander, administration and resources.

The PFG currently has armed mobile and fixed teams deployed.

A new Petroleum law for the new Libya?

Libya’s National Petroleum Law No. 25 was enacted in April, 1955 with the first concession agreement signed the same year.

The Libyan General Petroleum Corporation (GPC) was established in 1968 which was later replaced by the National Oil Corporation (NOC) established in November 1970 under the governing legislation law 24 enacted in 1970.

In 1974 Libya started implementation of the Exploration & Production Sharing (EPSA) model starting with EPSA I in 1974,

EPSA II in 1980,

EPSA III in 1987,

and current EPSA IV in Sept. 2004.

The Ministry of Oil is currently reviewing Libya’s Petroleum laws looking towards updating the current framework to reflect recent changes in the global industry.

Downstream Development

Libya currently has 5 refineries with a combined capacity of 378,000 bpd.

According to the NOC’s 2010 – 2014 development plan a total of $11 billion

was allocated to maintain and increase capacity at refineries and develop

petrochemical infrastructure.

Refinery Capacity (bpd) Status

Zawia 120,000 Operational

Ras Lanuf 220,000 Operational

Marsa El Brega 8,000 Operational

Sahrir 10,000 Operational

Tobruk 20,000 Operational

Total 378,000

Current plans for downstream development

In January 2013 Oil Minister Abdulbari Alarusi revealed plans to establish new

petrochemical plants, including the establishment of ammonia and urea

plants in the Eastern city of Ajdabiya to feed the eastern region.

It is hoped that the plant will help to create new jobs for people in the area of

Ajdabiya and Zueitina.

Also under discussion is the expansion of Zawia port and refinery to increase

its commercial capacity.

Gas

Gas reserves are estimated at 54.7 TCF.

In January gas production reached 2.3 billion cubic feet per day.

Under existing agreements:

850 million cf is exported to Italy.

800 million cf of gas is used to supply the electricity sector, cement and

water desalination

650 million cf of gas is distributed to companies to supply oil fields and

ports with electricity.

It is estimated that 2.3 million cubic feet per day of gas is currently flared; Oil

Minister Alarusi stated that the Ministry is looking to create projects to take

advantage of these quantities.

Libyan Gas Basins

Unconventional Gas Resources

EIA indicates that Libya is ranked 8th in the world with an estimated technical

reserves of 290 TCF of shale gas.

No serious effort has been made yet to exploit this potential.

Work is being carried out by Sirte Oil Company (SOC) to evaluate some of the

country’s shale gas resources. Although additional assistance from NOC

partners will be required assess these resources.

The 2013 Budget

In 2012 the NOC requested a budget of LYD 6 billion and received a budget of LYD 3.1 billion. The majority of this has been spent on salaries, operational cost and essential maintenance for the NOC and its subsidiaries.

Libya’s 2013 budget has been provisionally set at LYD 66 billion, no breakdown has yet been released although roads, water and power generation are expected to be priorities.

The budget is currently being held up by additional reviews imposed by the General National Congress (GNC) who referred the budget to its various technical committees.

According to standard protocol the NOC should submit it budget request to the Government by the end of March, no figures have yet been announced.

Historically the NOC usually receives half of the requested budget meaning that essential maintenance projects to maintain production levels are prioritised while upgrades and new projects are deferred.

Shifting Sands:

The Legal Framework for International Companies

Since declaring liberation in October 2011 the legal framework for International Companies operating in Libya has been revised.

A number of competing resolutions were tabled before Decree 207 was adopted in July 2012.

The major game changer in 207 is the adjustment of shareholding from the previous 65%-35% in favour of the foreign partner to a 51%-49% in favour of the Libyan partner.

Decree 207 obliges companies registered prior to the adoption of 207 to change shareholding to comply with the 51%-49% structure.

However Decree 22 issued in January 2013 gives existing companies an extension on adjusting the shareholding pending a full review of the legal system which has been started by the Ministry of Economy.

Currently no time-frame has been given for the review.

Setting up in Libya

It is mandatory for International Companies to establish a local presence in

order to provide goods and services in Libya.

Currently the three available options are:

A Representative Office – conducting promotional activities and research only

A Branch Office – 100% Foreign owned (limited activities)

A Joint Stock Company – Libyan-Foreign partnership

Representative Office

A representative office gives a company a legal status in Libya allowing it to

conduct market research and promotional activities.

It cannot conduct commercial activities.

A Rep office is allowed to open a local bank account and employ local staff.

The Capital requirement for a Rep Office is LYD150,000 (approximately

£75,000).

The license lasts for 2 years and can only be renewed once.

Branch Office

100% foreign owned

The capital required is LYD250,000 (approximately £125,000)

The license lasts for 5 years and can be renewed an unlimited number of

times.

A branch office is obliged to appoint a Libyan national as either Manager or

Deputy Manager and to source materials and supplies locally where available.

Branches can only conduct a limited range of activities within certain sectors

namely, contracting and civil works, electricity, Oil, telecoms, industry,

consultancy, environmental protection, IT and health.

Activities available for a Branch Office

Within the Oil Industry the permitted activities for a branch office include:

Conducting geological surveys and reservoir studies.

Drilling and maintenance of oilfields and the installation and maintenance of oil drilling equipment and plunging pumps.

Civil Works building tanks, laying pipes and building pipelines for carrying and pumping oil and gas and conducting maintenance works.

Construction of floating maritime platforms for oil and gas exploration.

Installation and maintain oil refineries and petrochemical plants.

Maritime Logistics

Mine clearance

Joint Stock Company (JSC)

The Capital requirement for a JSC is LYD 1 million (£500,000) fully paid up.

The maximum shareholding for a foreign company is 49%, however this can be

increased to 60% with special exemption from the Ministry of Economy.

A JSC can engage in a wider range of activities than a Branch Office, however

there are some activities which are restricted and can only be conducted by

100% Libyan owned companies.

While the Ministry of Economy is conducting the legal review it is currently

possible to establish a JSC under the terms of Decree 207.

Oil & Gas Opportunities in 2013

The Key theme for 2013 – Maintenance!

Production –

Routine and non-routine maintenance, (pipeline, tank maintenance, power)

Drilling –

Maintenance, assembly and inspection of existing rigs

Mobilisation of rigs into Libya

Refineries –

Refinery maintenance, upgrade and inspection of existing refineries.

Investment and management of current refining operations.

Terminals –

Routine and Non-Routine maintenance

Overhaul and upgrade of existing facilities

How to succeed in the New Libya

Be in the Market!

Visit regularly to build and foster personal relationships, spending time face

to face with clients is essential. Don’t rely on phone and email contact.

Find the right local partners or appoint local representatives – you need to

be on the ground.

Be Patient!