A SUCCESS?: ENI'S DEAL WITH LIBYA'S NATIONAL OIL

UNCLAS SECTION 01 OF 02 TRIPOLI 000912

SIPDIS

SIPDIS

E.O. 12958: N/A
TAGS: BTIO ECON EINV EPET ENRG PREL LY
SUBJECT: A SUCCESS?: ENI'S DEAL WITH LIBYA'S NATIONAL OIL
CORPORATION


1. Summary: Italian energy firm Eni has struck a major deal
with Libya's National Oil Corporation that will significantly
extend its concession contracts and launch an ambitious series
of exploration and development activities. While trumpeted by
Eni as a success, the deal carries serious negatives for the
company, and may pave the way for the imposition of similar, not
altogether positive arrangements with other foreign oil and gas
concession holders. End Summary.


2. Leading Italian energy firm Eni announced a 25-year
extension to its oil and gas contracts with Libya's National Oil
Corporation (NOC) October 16. Press reports indicate that some
of Eni's most important oil and gas concessions were to expire
over the next two years; the new agreement extends all of its
concessions until 2042 and 2047, respectively. Eni will invest
$14 billion in related infrastructure (a total matched by the
NOC for a total of $28 billion). Eni will also expend at least
$800 million for additional exploration activities, a sum
approaching the mammoth $900 million exploration plan unveiled
following British Petroleum's May 2007 deal with the NOC. Eni
and NOC will also reportedly embark on a limited program of
enhanced oil recovery (EOR) in some of Eni's existing fields.


3. The new deal paves the way for a potential doubling of
Libya's gas exporting capacity to 16 billion cubic meters (BCM).
Eni is Libya's partner for the "Greenstream" gas pipeline,
which runs from the Libyan coast to Sicily and which handles its
extant gas export capacity. The new contract envisages
expanding Greenstream's capacity to 11 billion BCM and
constructing a new liquefied-natural-gas (LNG) plant at the
Mellita gas export hub with a capacity of BCM a year.

STEEP HIDDEN COSTS


4. While cast in most press accounts as a triumph for the
Italian firm, the deal also carries substantial costs. Eni
officials are reportedly far from enthralled with the new
arrangements. The terms of the new agreement take Eni out of a
true concession agreement, under which they derived a relatively
healthy margin on the product that they lifted (exported) from
Libya, and into a production sharing agreement. Under its
previous terms, Eni was responsible for tax and royalties on
lifted product, but was compensated by the NOC for substantial
portions of its exploration and development costs, including
well-drilling. Under the new arrangements, which are governed
by the general terms of the current round of Exploration and
Production Sharing (EPSA IV) agreements, Eni is responsible for
all of these costs. Eni thus has a lower cost recovery factor
in line with recent concession "winners" (who have won with bids
as low as 7%). The result is that the NOC takes a larger cut of
produced oil and Eni books a lower quantity of reserves,
negatively affecting the company's share price. On top of this,
Eni will reportedly pay a $1 billion bonus to NOC as part of the
deal, and has agreed to retire an outstanding $500 million debt
to the NOC by year's end.

A WORRYING SIGN OF THINGS TO COME?


5. Representatives of international oil companies (IOCs)
operating in Libya have expressed grave doubts about the Eni
deal. One executive described it as "scary," adding that it
raised serious questions about NOC adherence to the sanctity of
existing contracts. Post has learned that the NOC has
approached several IOCs, including TOTAL (France),Wintershall
(German) and Repsol (Spain),to explore renegotiating the terms
of their current operations. There is widespread worry among
the IOCs that the NOC may expand this effort and open
discussions with other concession holders in an effort to
extract more favorable terms. The use of the EPSA IV bidding
round model of production sharing agreements would most damage
companies operating under concession agreements, such as
Wintershall. Those agreements were concluded during the
sanctions period, when low spot market prices and Libya's
limited options resulted in the granting of more favorable
terms. The IOCs that have been approached about renegotiating
are irked that the NOC is coming after them now, particularly
since their companies took substantial risks to do business in
Libya when UN sanctions were in place.


6. Comment: Post's contacts have expressed acute annoyance with
Eni for conceding to the NOC's initiative, particularly given
the company's past record of similar behavior. Contacts point
to Eni's agreement on a $150 million "social development

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package" with the NOC in September 2006 as another example of
the firm's having given in to pressure from the NOC. With Eni's
new deal on the books, the NOC will now have greater leverage to
force other companies to conclude similar agreements. At the
same time, the quality of parcels offered under the auspices of
Libya's latest EPSA rounds has been increasingly marginal in
economic terms. The confluence of increasingly difficult
hydrocarbon reservoirs and an increasingly avaricious NOC could
curb further interest by major IOCs in new EPSA agreements,
leading to greater participation by smaller, less capable
operators in Libya's oil and gas sector. End comment.
MILAM