May 31, 2013
ISTANBUL, Turkey — On May 23-24, 2013, the International Research Networks (I.R.N.), a leading business intelligence group, organized the 2nd New Libya Oil & Gas Forum 2013. This two-day summit, which was held in Istanbul, Turkey, brought together many stakeholders — with a large participation of members of the National Oil Corporation (N.O.C.) of Libya — interested into the development of the country's energy sector especially after the changes ushered in by the regime change occurred during 2011.
Last March, the energy sector, after an almost complete stop during the civil war, was able to climb back to 1.4 million barrels a day (MMBL) of oil or approximately 90 percent of the prewar production level — data by the International Energy Agency (I.E.A.). Currently, the production should be around 1.5 MMBL of oil (May 2013). Notwithstanding the occurrence of violent incidents, which are sadly a persistent feature of the energy sector (often armed militias invade oil fields, and local people, who demand jobs, block energy facilities, not to mention the Mellitah gas installation's incident that last March temporarily halted trans-Mediterranean exports to Europe), the production recovery has been reached thanks to a concerted effort between the N.O.C. and the major foreign energy companies working in the country.
Libya has been part of the energy landscape since 1956 when two American oil companies got a concession covering about 14 million acres. Three years later, in 1959, Esso Libya discovered the Zletin oil field. Then, in 1961, after the completion of the 167-kilometer pipeline connecting the oil fields located in the interior to the Mediterranean Sea, the country became an oil exporter. And already in 1969, the year when Col. Muammar Gaddafi deposed in a military coup King Idris, Libya was able to have a production of 3 MMBL per day. Gaddafi's years (with their nationalizations) saw a decline in the oil production, especially after the mid-1980s. Indeed, this decline was due to contractual stiffening and the enforcement of the U.S./U.N. sanctions. Only in recent years (from 2006 onwards) the production has hovered around 1.7 MMBL per day. The Libyan participants to the forum confirmed that Tripoli was now deeply focused on the complete restoration and amelioration of its oil and gas production, which accounts for 90 percent of the government revenue and for 60 percent of Libya's G.D.P. In Istanbul, the N.O.C. chairman, Nuri Berruien stressed the point that the downstream sector needed to be modernized immediately.
What, instead, emerged as the most interesting point of the two-day event was the shale gas chapter, which was covered by three speakers: Dr. Daniel Clark-Lowes of Nubian Consulting Ltd.; Dr. Nuri Ben Hmeda, professor at University of Tripoli, Libya and Mustafa Rahooma with the N.O.C.
It's a matter of fact that we could be at the beginning of the golden age of gas as the I.E.A. underlined in June 2011 with its report "Are We Entering a Golden Age of Gas?". Of the fossil fuels, natural gas will probably be the only one in the future to increase its share within the global energy mix. This gas growth is linked to at least four factors:
- energy demand growth in China and in Asia in general (demand side),
- possible reduction in the utilization of coal-fired power plants and of nuclear power as well (demand side),
- displacement of some oil products in transportation in favor of gas (demand side) and
- the boom of unconventional gas at competitive prices and the growing role of L.N.G. (supply side).
Shale gas resources are widely present across much of North Africa. The majority of shale gas is concentrated in Algeria (9th position in the ranking of the countries with shale gas reserves, according to the U.S. Energy Information Administration (E.I.A.) in 2011), Libya (8th position) and Tunisia (25th position).
Libya's shale gas reserves are located in two basins: the Ghadames Basin (Tannezuft and Frasnian formations) straddling between Algeria, Libya and Tunisia, and the Sirte Basin (Sirt-Rachmat and Etel formations), which is located entirely within Libya's borders.
According to estimates by the E.I.A.:
Algeria has 231 trillion cubic feet (TCF) of technically recoverable shale gas resources with 159 TCF of proven reserves,
Libya has 290 TCF of technically recoverable shale gas resources with 54.7 TCF of proven reserves, and
Tunisia has 18 TCF of technically recoverable shale gas resources with 2.3 TCF of proven reserves.
The map below provides a basic understanding of the world's distribution of shale gas basins. The values are expressed in cubic meter (1 cubic meter is equal to 35.3 cubic feet).
Between the three countries, Algeria is the one proceeding faster. At this regard, Parliament approved amendments to the hydrocarbons law with the specific goal of luring investors with reference to unconventional exploration. The idea was to lower petroleum taxes and to offer foreign majors a rate of return from 10 percent to 25 percent.
But interest towards shale gas is emerging strongly also in Libya. "Gas has never been a priority for us, but it is now. We may have some of the most important shale gas deposits in the world," said during a North Africa Gas Summit held in Vienna last year Mr. Berruien. It's true that in general the whole gas sector — including also the conventional side — is relatively undeveloped in Libya. In fact, in Libya gas has historically been neglected by all the exploration companies.
The following comparison chart taken from Dr. Nuri Ben Hmeda's presentation at the Istanbul forum well shows the differences between conventional and shale gas.
|Source: Dr. Nuri K. Ben Hmeda — Shale Gas Resources in Libya (May 2013)|
Starting from the assumption that shale gas is a commercial commodity, that if extracted within a certain cost threshold in relation to the price of gas on the international markets (we have always to remember that according to the geographical location the final price is different: for instance in Asia — with Japan and South Korea as buyers — 1 million British thermal unit (MMBtu) of gas is more expensive than in North America or in Europe) may generate profits, it's important to underline the issues to be considered before giving the green light to shale gas development in Libya.
There are at least four major issues:
1) The environmental impact — This point was touched upon extensively in Istanbul. The impact of shale drilling (1500 wells to 3000 wells to produce 2 billion standard cubic feet per day (BBCF/d) against 40 wells to 60 wells to produce 2 BBCF/d for conventional gas) on water supplies causes a lot of concern. According to data released last year by Halliburton, a U.S. oilfield services company, a shale well may require up to 5 million gallons of water. This quantity is equal to 50 percent of the water consumed per day in a major city. Water protection and management are already relevant issues in Libya, especially for rural communities and their agribusinesses. At the same time, there is fear about potential groundwater contamination, waste-water disposal and the possible causal relation with seismic activity.
This problem is real because Libya is one of the driest countries in the world with only the narrow coastal region (less than 5 percent of the whole country) getting more than 100 millimeters of rain per year. There are two important aquifers in the country: the Sandstone Aquifer System, under the eastern part of the Sahara Desert straddling between Libya, Chad, Sudan and Egypt; and the North-Western Sahara Aquifer System, which straddles between Algeria, Libya and Tunisia. If we compare the map of the shale gas reserves and the map of the aquifers we do notice quite substantial an overlapping between the Sirte Basin and the Sandstone Aquifer System and between the Ghadames Basin and the North-Western Sahara Aquifer System.
The Economist (March 2011)|
2) The cost of extraction — Extracting shale gas is a costly operation and requires advanced technologies, which not all the energy companies have. Until recently, there has been no convenience in shale gas, and with market prices below $8.5 per MMBtu the extraction was totally uneconomical. According to I.H.S. CERA, a provider of global market and economic information, shale gas may now be produced at cheaper costs than in the past. And the predictability of shale gas wells, combined with the growing experience in how to reduce the time and cost of drilling and fracking wells, means that currently many firms are claiming to be able to produce shale gas at a marginal cost of less than $4 per MMBtu, as in the U.S. Barnett Shale did George Mitchell in 2009 when he started the 'fracking revolution'. Of course, later the gas has to be sold at a value higher than $4 per MMBtu.
At the same time, it must be considered — as it was well explained in Istanbul by Dr. Daniel Clark-Lowes of Nubian Consulting Ltd — that in Libya energy companies never considered the importance of gas, which still today remains consistently both undeveloped and undiscovered (the E.P.S.A. IV 'gas round' helped only partially redress the balance). In fact, "Out of circa 90 gas discoveries country-wide (non-associated gas and gas cap fields), there are circa 70 that are undeveloped" said Dr. Clark-Lowes. And taking into account current gas prices, the advancement of technology and infrastructure (especially new gas pipelines) a good part of these discoveries are now commercially viable. "Some are recently discovered and are being assessed for commerciality, e.g., the very significant Hess discovery offshore Sirt, A54/1" added Dr. Clark-Lowes. In other words, shale gas will be relevant in Libya, but there is still plenty of associated and non-associated gas, both undeveloped and yet-to-be discovered. And the decision between conventional and unconventional gas shall be primarily based onto economic considerations.
3) The existence of markets where to sell the gas (domestic and international markets) — If Libya decides to develop shale gas it will be of paramount importance to understand where to sell it. Internally, there is a constant trend in the country (but it's more correct to say in all the North Africa's countries) toward an increase of domestic gas consumption. Roughly speaking up to 2010 (data from E.I.A., see the chart below) one-third (growing) of the gas production had been directed towards internal energy requirements and two-thirds had been exported.
According to the geographical location of Libya, European countries should be Libya's preferred serviced countries (in April 2013 the price of 1 MMBtu was in Europe $12.88, well higher the previously mentioned $4 extraction cost). Up to now, with conventional gas, the lion's share of the gas was exported via pipeline to Italy (ENI's Greenstream Pipeline) to Europe with small volumes also shipped in the form of L.N.G. to Spain. With reference to shale gas both options are still viable in the long run. It's difficult to imagine different customers than the Europeans, who have to diversify their gas supplies from Russia. But as usual, the real determiner of some possible new deals between Libya and the European countries will always be the price charged by Tripoli. Surely, Qatar and Australia (the latter from 2014 onward) are better positioned than Libya to provide gas to Asian countries. And it is' important to underline that China has the biggest world's reserve of shale gas with 1,275 TCF, and it could try to develop them in the future. North America has plenty of gas, while in Africa there are huge infrastructural problems.
4) A contractual framework more in line with shale gas production: E.P.S.A. IV contracts need to be revised — The fiscal terms typically on offer in Libya could be a barrier. In fact, standard production sharing agreements (P.S.A.s) designed for conventional exploration need to be revised. The N.O.C. is planning to "modify the 1955 Petroleum Law and [the] regulations to adopt and to allow for the exploration and exploitation of the unconventional 'shale gas' resources at attractive contractual and fiscal terms" affirmed Mr. Rahooma of the N.O.C. Moreover, there still some uncertainties around the contracts signed in Gaddafi's era.
Under the classic P.S.A.s, I.O.C.s are obliged to conduct seismic surveys and to drill at least one exploration well over a certain time frame. These terms when linked to unconventional exploration do not work well. In fact, shale gas requires much more capital expenditures given all the geological tests and the big number of exploratory wells to be drilled. The cost-recovery demands of the I.O.C.s are always the difficult point in their negotiations with governments because companies want contract terms that permit them to recoup the initial investments. Algeria could be a model to follow. It has a new hydrocarbons law and companies there will be paying taxes on profits and not on revenues while exploration risk will be shared with the government. All these observations point to the fact that the Exploration and Production Sharing Agreements IV (E.P.S.A. IV) which Libya has started to offer since 2005 are not in line with shale gas operations. Under E.P.S.A. IV the winners are mainly determined based on how large is the share of production that I.O.C. is willing to offer to the N.O.C. The fourth round of bidding in December 2007 (12 gas areas on offer) saw a scarce participation on the I.O.C.s side.
Summing up, Libya has to evaluate its shale gas reserves while at the same it does not have to expect to start the development of these wells any time soon. As ExxonMobil's Mr. Jeff Farr told the Italy-Kuwait Association (IKA) in Istanbul "Libya has for the moment just to know its shale gas potential".