October 10, 2008 / 1:02 PM / 10 years ago

Doubts cloud outlook for Libyan oil bonanza

RABAT (Reuters) - Majors oil companies are pouring money into Libya, home to Africa’s biggest petroleum reserves, but it is unclear whether the desert country can achieve its goal of almost doubling output within four years.

Tripoli wants to increase output to 3 million barrels of crude oil per day by about 2012 from 1.7 million now, raising extra revenues to help rebuild infrastructure that is crumbling after years of sanctions.

Libya’s peak oil output was around 3.3 million bopd in the late 1960s but analysts said that, with output at mature fields declining, it might be hard to push production above 2 million.

Much of the planned increase relies on enhanced oil recovery — raising output at existing fields — and the proportion of water to oil being produced at some of those fields is extremely high, a consultant to Libya’s oil industry said.

“Fields towards the end of their life are very difficult to handle,” said the consultant, who asked not to be named.

“You get unrealistically optimistic claims as to what may be achievable when most engineers know it’s just not economically feasible.”

Industry consultants remain upbeat, saying there are plenty of oil reserves to be discovered in Libya and some existing fields could double or triple output once firms like Royal Dutch Shell (RDSa.L) and BP (BP.L) roll out new extraction technology.

Oilfields discovered in past decades but not considered economic at the time have become viable prospects thanks to technology improvements and today’s high oil prices.

“I believe (3 million bpd) is a realistic target but the question is whether it’s a realistic timeframe,” said Craig McMahon of Wood MacKenzie.

“Early exploration campaigns have not been particularly successful ... but there’s a lot of exploration still to come and we expect some significant discoveries going forward.”

Much attention is on BP, which returned to Libya last year after a 30-year break, and has begun exploration work in a large onshore and offshore zone in a high-risk, high-reward operation.

The venture is searching for gas but may also find oil, and is viewed by some as Libya’s best hope of a major new discovery.

PROFIT OUTLOOK

Even if Libya reaches its output target, questions remain over whether companies can make big money under the current production sharing conditions.

Three oil and one gas exploration license rounds since sanctions ended raised eyebrows in the industry for the small shares of production awarded to foreign oil companies.

The tenders reflected the value placed on unexplored acreage given tight energy demand and a desire by some foreign state oil firms to get access to new energy reserves whatever the cost.

“Libya is still attractive as a place to go for reserves although it remains to be seen whether it’s good to go for profitable reserves, particularly as the oil price is now coming back,” said Keith Myers, an analyst at Richmond Energy Partners.

Industry watchers say Libya’s tough but consistent negotiating stance helped deliver impressive deals that ensure the country gets the most from its natural resources.

Given the tight terms, the pressure is on to find good quality oil in large quantities.

It is still early days but Germany’s RWE (RWEG.DE) and Canadian energy exploration firm Verenex VNX.TO have announced a series of promising finds.

Verenex said in August its Libyan properties could contain about 1.6 billion barrels of oil equivalent.

PIPELINES, RIGS

Even if output goals are attained, pipeline infrastructure has to be upgraded to export the oil, especially from fields in western Libya where analysts say production is held back by pipeline constraints.

Industry watchers said the Libyan government wanted to make investment in pipelines or refineries a condition for access to energy reserves in negotiations with companies including Russia’s Gazprom (GAZP.MM).

“The difficulty is persuading people to come and build the nuts and bolts infrastructure,” said John Hamilton of industry newsletter Africa Energy. “There are an awful lot of infrastructure projects going on in Libya at the moment and that’s created huge resource constraints.”

Enhanced oil recovery (EOR) at producing fields is essential to a quick ramp-up of Libyan energy output but the pace of investment deals has been slow, with the government apparently unsure whether to hold development rounds using competitive bidding or strike bilateral deals with companies.

Open tenders might be complex to arrange as technical requirements for EOR vary widely from field to field. Bilateral deals might be less transparent and leave oil companies more exposed to slow decision making by Libyan officials, notably in the National Oil Corporation (NOC).

“NOC doesn’t have at its topmost level a great number of people who companies can deal with,” said Hamilton of Africa Energy. “And Libya being Libya, everything has to go through NOC even if you are working with a subsidiary.”

Editing by Anthony Barker

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