ENI'S OIL AND GAS DEAL EXTENDED, OTHER COMPANIES WORRY TERMS

UNCLAS SECTION 01 OF 02 TRIPOLI 000474

SENSITIVE

DEPT FOR NEA/MAG; COMMERCE FOR NATE MASON
ENERGY FOR GINA ERIKSON

E.O. 12958: N/A
TAGS: ECON ENRG EPET PGOV LY
SUBJECT: ENI'S OIL AND GAS DEAL EXTENDED, OTHER COMPANIES WORRY TERMS
WILL SET A NEW (UNFAVORABLE) PRECEDENT

REF: 07 TRIPOLI 912


1. (SBU) Summary: Soaring oil prices are allowing Libya to press
for more stringent long-term contracts with foreign oil and gas
producers. A twenty-five year extension for Italian firm Eni
North Africa BV, which entailed a sizeable bonus payment and
dramatically reduced the company's production share, was
recently ratified after lengthy negotiations. The potential
impact of Eni's deal is significant. Local observers expect
that the National Oil Company's (NOC) success in securing very
favorable terms will embolden it to pursue renegotiation of
existing contracts with other international oil companies
(IOCs). Despite Libya's relatively unique position in terms of
unproven reserves, high quality oil and low recovery costs,
observers here expect that some IOC's facing potentially long
renegotiation periods and dramatically reduced production shares
may choose to abandon production efforts in Libya. End summary.

EPSA MODEL TIME-TESTED


2. (SBU) Libya's Exploration and Production Sharing Agreement
(EPSA) rubric has been the most widely used model for producers
in Libya since 1974. Under these agreements, international oil
companies (IOCs) receive a fixed percentage of output from the
fields involved based on the terms of their bid to explore and
develop Libyan acreage. The terms of these agreements,
particularly the share of overall production retained by
companies, have grown increasingly less favorable to IOCs.
Intense competition among foreign oil and gas companies to book
reserves in Libya, widely perceived to be one of the relatively
few places in the world with significant unproven reserves of
sweet, light crude and natural gas, has fueled the trend towards
less profitable EPSA's.


3. (SBU) As a point of comparison, the standard production
share allocation for IOCs in the latest EPSA round (EPSA IV) has
been 10-12% of overall production, down from production share
allocations of 20% or more that were typical in earlier EPSA
rounds. IOC's have accepted stiffer terms based on their high
expectations of Libya's hydrocarbon producing potential, the
comparatively low cost of oil recovery in Libya, the generally
high quality of Libyan crude, Libya's close proximity to
European markets and rapidly rising oil and gas prices.
Encouraged by the willingness of some IOC's to accept production
shares as low as 7 percent under the EPSA IV framework, the NOC
- led by former Prime Minister Shukhri Ghanem, reputedly a hard
bargainer - has been pressing all IOC's to accept further
reductions in their production share allocations to increase
Libya's take. Striking a nationalist tone, Muammar al-Qadhafi
explicitly referred in his June 11 speech on the occasion of the
"evacuation" of U.S. and British military bases in Libya to
efforts to renegotiate EPSA contracts as a manifestation of
Libya's continued resolve to resist Western imperialism.

AT LONG LAST, ENI FINALIZES ITS CONTRACT EXTENSION


4. (SBU) In October 2007, ENI agreed with the NOC to convert its
existing long-term production contracts, which were signed in
the mid-1980s under EPSA III terms, to the most recent
contractual model under EPSA-IV (reftel). That deal was
submitted to Libya's General People's Congress for approval and
ratification and was ratified on June 12. Under the new deal,
Eni reduced its production share to 12% for oil (down from 35-50
percent for its various fields) and 40% for natural gas (down
from 50 percent). The share for gas production will drop to 30%
after 2018. In exchange, the NOC extended Eni's EPSA III
contracts by 25 years, approved a 3 billion cubic meter (BCM)
expansion to the Western Libya Gas Pipeline (WLGP),and the
construction of a new 4 million tons per annum LNG facility at
Mellitah. Eni accepted less attractive fiscal terms on its
blocks (its overall portfolio has fallen by 42% due to lower
production share figures),and made a $1 billion non-recoverable
payment. Eni's licenses were converted to the EPSA IV model and
will now expire in 2042 (for oil) and 2047 (for gas).

OTHER DEALS IN THE OFFING?


5. (SBU) Several other major extensions are anticipated in the
coming months, including those involving U.S. firm Occidental

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Petroleum (along with Austrian partner OMV) and Petro-Canada.
Those agreements were signed with the NOC in late 2007, but
still require GPC ratification. It is possible the NOC will
seek further concessions in light of its deal with Eni. Spain's
Repsol and the NOC are renegotiating along the EPSA IV
contractual model. The initial deal between Repsol YPF and NOC
stipulated a 50-50 split of production; however, the NOC is now
seeking a minimum production share of 72 percent.


6. (SBU) The NOC has approached numerous other IOCs about
extensions, raising the possibility that it will reopen deals
that were only concluded a few years ago. Even the U.S. Oasis
Group (comprising Amerada-Hess, Marathon and ConocoPhillips),
which paid $1.8 billion in December 2005 to return to acreage in
Libya's Sirte Basin that it held before the suspension of
U.S.-Libyan diplomatic ties and the imposition of U.S. and UN
sanctions, may be affected. Libya's relatively modest 59.2
percent production share in that deal has generated preliminary
probing by the NOC as to whether the Oasis Group would consider
renegotiating, which it has so far successfully opposed.


7. (SBU) Comment: With ratification of its revised EPSA
contract, Eni has secured a long-term position in Libya, but at
a considerable price. Part of the calculus for Eni and other
IOC's is the expectation that oil and gas prices are likely to
remain high, making non-recoverable bonus payments and lesser
production shares tenable from the standpoint of their projects'
overall profitability. It is widely expected that the NOC will
push hard to renegotiate other extant deals and extensions that
involve reduced production shares for IOCs. Its confidence
buoyed by favorable market conditions, Libya is playing hardball
with the IOC's, sending a clear message that no deal is beyond
renegotiation, no matter how recently concluded or how favorable
the terms for the NOC. Libya and the IOC's have been here
before: a spate of renegotiations and extensions occurred in the
late-1960s and early 1970s, driven in part by the then-new
al-Qadhafi regime to demonstrate to its people that it was a
better steward of Libya's hydrocarbon resources than the Sanussi
monarchy had been. As during that period, the current penchant
for shifting the goalposts has not been well-received by the
IOCs. Despite Libya's relatively unique position in terms of
unproven reserves, high quality oil and low recovery costs,
observers here expect that some IOCs facing potentially long
renegotiation periods (and associated costs of idle personnel
and materiel) and diminished production returns may choose to
abandon altogether their production efforts in Libya. End
comment.
STEVENS