LIBYAN EPSA GAS BIDDING ROUND: INTERNATIONAL MAJORS'

C O N F I D E N T I A L SECTION 01 OF 03 TRIPOLI 001038

SIPDIS

SIPDIS

E.O. 12958: DECL: 12/13/2017
TAGS: EPET BTIO ECON EINV ENRG LY
SUBJECT: LIBYAN EPSA GAS BIDDING ROUND: INTERNATIONAL MAJORS'
INTEREST IS TEMPERED

REF: A) TRIPOLI 608, B) 06 TRIPOLI 775

CLASSIFIED BY: Chris Stevens, DCM, Embassy Tripoli, Department
of State.
REASON: 1.4 (b),(d)




1. (C) Summary: Four companies won exploration and production
rights for gas in the recently concluded fourth round of Libya's
Exploration and Production Sharing Agreement (EPSA) mechanism.
Winning bids featured low production sharing percentages for the
international oil companies (IOC's),but in a departure from
past rounds, only Shell offered a signing bonus as part of its
winning bid. The National Oil Corporation (NOC) has publicly
touted the results as being positive for Libya, but has
privately conceded disappointment that more companies did not
choose to bid. Opinions among IOC country managers in Libya
differed as to the takeaway from this round. Some argued that
the small number of bids signaled to the NOC dissatisfaction
with increasingly stringent terms and operating conditions.
Others maintained that the fact that terms for EPSA IV winners
were consistent with previous rounds has reinforced the NOC's
belief that -- despite grumbling -- IOC's remain willing to
absorb thin production sharing margins and, in some cases, pay
hefty signing bonuses to secure access and book reserves. End
summary.

THE PLAYERS ...


2. (U) As forecast in ref A, Libya's National Oil Corporation
(NOC) Organizing & Supervising Committee hosted an event
December 9 at Tripoli's al-Mahari Hotel to announce results of
recent bids for exploration and production sharing agreements
(EPSA's) for onshore and offshore parcels. The event
represented the fourth in a series of EPSA bid rounds (EPSA IV)
held since August 2004; it was the first to focus on natural
gas. According to the U.S. Energy Information Administration,
Libya has some 52 trillion cubic feet of proven gas reserves,
fourth among all African countries. A dozen parcels comprising
41 separate blocks of territory were offered for bidding and
generated 19 offers by 13 companies (from 11 different
countries) for 10 of the 12 parcels. 35 companies had been
pre-selected to bid for the contracts; only 19 chose to do so.


3. (C) Two offshore parcels comprising eight blocks only
received bids by single companies; under the terms of the EPSA,
the bids were not opened and will be examined privately by the
NOC's management committee to determine whether they will be
accepted. ExxonMobil Country Manager Phil Goss (protect) judged
that significant projected exploration costs for the offshore
areas (up to $100 million per test well) and tricky technical
requirements (water as deep as 3,000 meters) that few companies
have the ability to manage deterred most from bidding on
offshore blocks.

... THE ACTION


4. (U) Four potentially lucrative gas EPSA contracts were
awarded to Gazprom, Sonatrach, Shell and Polskie Gornictwo
Naftowe i Gazownictwo (Polski). Russia's Gazprom beat back a
competitive offer from French company Gaz de France for three
blocks (area 64) comprising 3,936 square kilometers in the
southern Ghadames basin. Despite earlier statements to the
press by a Gaz de France official that the company was "very
keen" to establish a presence in Libya, Gazprom's willingness to
take a significantly smaller percentage of eventual production
carried the day. Gazprom's commitments per its bid are: 1,500
square kilometers 2-D seismic imagery; 250 square kilometers 3-D
seismic imagery, 4 wells, no signing bonus and a 9.8% share of
gas produced. Gaz de France offered more seismic imagery and
wells, but asked for a production allocation of 16.8%. Other
bidders on area 64 were Polski, Japan's Inpex, Lukoil, British
Gas and the Pakistan Oil and Gas Company.


5. (U) Algerian parastatal Sonatrach, in assocation with Oil
India, won rights to four blocks (areas 95 and 96) comprising
6,934 square kilometers in the Ghadames area. Sonatrach's
commitments per its bid are: 2,000 square kilometers 2-D seismic
imagery, 600 square kilometers 3-D seismic imagery, 5 wells, no

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signing bonus and a 13.0% share of gas produced. Germany's RWE
submitted a strong bid that included 11 wells, but asked for a
19.0% production share. Other bidders were Gaz de France,
Polski and British Gas.


6. (U) Anglo-Dutch Shell Company won two blocks (Area 89)
comprising 1,790 square kilometers in the northern Sirte Basin.
Shell's was the only bid on the day that carried a signing
bonus, in the amount of $93 million, for the NOC. (Note: Next to
production share, signing bonuses are the most heavily-weighted
factor in a given bid. End note.) Shell's commitments per its
bid are: 0 square kilometers of 2-D seismic imagery; 740 square
kilometers of 3-D seismic imagery; 4 wells; USD 93 million
signing bonus and a 15.0% share of gas produced. Other bidders
were Sonatrach and PetroCanada.


7. (U) Polski won two blocks (area 113) in the southern Murzak
Basin with a bid that committed it to the following: 0 square
kilometers 2-D seismic imagery; 1,500 square kilometers 3-D
seismic imagery; 4 wells, no signing bonus and an 11.8% share of
gas produced. The other bidder was Gaz de France.

NOC PUBLICLY POSITIVE, PRIVATELY "A BIT DISAPPOINTED"


8. (C) Winning bid terms echoed those for the EPSA III round in
December 2006 (ref B),with low production shares weighted
heavily in the calculus for awarding points to each bid.
Publicly, the NOC is touting the favorable terms of the four
winners, with an emphasis on the high percentage of eventual
production that will go to Libya. Privately, NOC Chairman
Shukhri Ghanem told visiting Verenex Energy (Canada) CEO Jim
McFarland (protect) December 11 that he was "a bit disappointed"
that more companies had not chosen to bid. Ghanem subsequently
told executives from Algeria's parastatal Sonatrach that the
NOC, discouraged by the tempered ESPA IV bidding, will "take a
break" from organizing further EPSA bid rounds. Ghanem's
thinking, according to Sonatrach, is to allow time for
production in parcels contracted in previous rounds to kick in.
By allowing Libya's market to "settle" a bit, the NOC hopes to
whet IOCs' appetite for further contracts.

MARGINS REMAIN TIGHT


9. (C) By contrast with earlier bid rounds, which featured hefty
signing bonuses in addition to razor-thin production sharing
margins of as little as 6.8%, no company save for Shell offered
signing bonuses for EPSA IV gas contracts. BP Country Manager
Tawfiq Hussein (protect) attributed that to the increased
difficulty of realizing profitability under increasingly
stringent EPSA terms, and to the fact that "the bloom has come
off the rose a bit" with respect to the Libyan oil and gas
market. Woodside Exploration Manager Sean Guest noted that low
production sharing margins were critical in determining winning
EPSA IV bids. Stringent terms, low production shares and
lingering concerns about the difficulty of operating in Libya
(visas and expat staffing remain significant problems) have
given some pause. In addition, Libya's limited gas export
infrastructure and the lack of clarity about whether EPSA IV
winners will be able to exploit oil reserves discovered while
searching for gas tempered enthusiasm. Marathon's Country
Manager, Freddie Quintana (protect),told P/E Chief that the
EPSA IV round was "a particularly difficult one" in which to bid
because gas pricing is more complex than oil pricing and because
Libya's gas export infrastructure remains limited.

MIXED SIGNALS


10. (C) Opinions differed at a meeting of IOC country managers
December 12 as to the summary judgment of the EPSA IV round.
Some argued that the relatively limited number of bids
constituted a message to the NOC that increasingly stringent
terms and difficult operating conditions would discourage bids.
Others maintained that contract terms for bid winners were
consistent with previous bid rounds, confirming the NOC's belief
that IOC's remain willing to take thin production sharing
margins and, in Shell's case, pay hefty bonuses to gain access.



11. (C) Comment: Media reports have interpreted the EPSA IV

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round results as a sign of diminished interest by IOC's in
Libya's hydrocarbon sector in general, and in the gas end of the
business in particular; however, the four winners (Gazprom,
Sonatrach, Shell and Polski) are all major companies and proven
gas producers. Although the latest EPSA round failed to attract
as many bids as the NOC would have liked, the fact that serious
first and high-second tier companies ultimately bid and won
potentially augurs well for efficient exploitation of Libya's
gas reserves, although serious investment in gas export
infrastructure is needed. The broader message from this round
is that while IOC's are still keen to establish a presence and
book reserves, they are increasingly reluctant to pay large
signing bonuses up-front to do so. End comment.








Shell only major IOC; Polski, Gazprom, Sonatrach reflect EPSA
III results and trend towards highest bid despite quality of
operator (for EPSA rounds); GOL has recently concluded non-EPSA
contracts with BP and Exxon Mobil (reftel),and extended
contracts with Eni and PetroCanada to lend some balance to mix.
MILAM