Chevron and Total Continue Investing in the K.R.G. A Brief Analysis of Baghdad's T.S.C.s vs. Erbil's P.S.C.s.

Friday, June 28, 2013

BEIRUT, Lebanon — Production sharing contracts (P.S.C.s) between international oil companies (I.O.C.s) and the Kurdistan Regional Government (K.R.G.) continue to be signed notwithstanding the opposition of Iraq's central government, which instead signs only technical service contracts (T.S.C.s). Baghdad affirms that it alone has the right to negotiate and sign energy deals for the whole Iraqi territory, the K.R.G. included. Since U.S. ExxonMobil entered the K.R.G.'s energy sector in October 2011 — at that time the company acquired six exploration blocks — other major I.O.C.s have been investing in the semi-autonomous Kurdish region. Presently, there are in Iraqi Kurdistan around fifty international energy companies (among them four big names: U.S. ExxonMobil and Chevron, France's Total and Russia's Gazprom), which together have invested more or less $20 billion.

CHEVRON'S AND TOTAL'S RECENT ACTIVITIES IN THE K.R.G.

Approximately ten days ago Chevron and Total respectively announced that they had increased their activities in the K.R.G. In specific, on Monday, June 17, through a statement issued from Erbil, Chevron announced that it had signed an exploration deal — the third with Kurdish authorities — in relation to the Qara Dagh field. This block is located in the southern part of the K.R.G. and totals about 860 square kilometers (or 332 square miles). "Chevron will acquire an interest in and operatorship of the Qara Dagh block production sharing contract from the Kurdistan regional government," the company said in the statement. The U.S. company was awarded the exploration deal last January, while, in July  2012, it had already acquired from India's Reliance Industries Ltd. an 80 percent stake in two blocks two (called Rovi and Sarta, with the related operational control) located north of the city of Erbil.

Almost in the same days, Total expanded its presence in the K.R.G. In fact, having purchased an 80 percent stake in the Baranan block (with the K.R.G. owning the remaining 20 percent), south of the city of Suleimaniya, Total now has four assets in the country. This block (a.k.a. K9) had been previously held by the Canadian oil and gas company Talisman Energy until it decided to hand over the acreage last year. In 2012, the French company purchased a 35 percent stake in the Harir and Safen exploration blocks in the Erbil-controlled territory, while at the same time it owns a minority interest in the Taza exploration block in the Kurdish province of Suleimaniya.

In dealing with Baghdad, the position of Chevron and that of Total in are different. In fact, if on the one side, the American company does not have any energy stake in central and southern Iraq, on the other side, the French company owns a stake in the Halfaya oil field in southern Iraq. In this regard, since last year Baghdad has warned Total requesting that it cancel or freeze its contracts with Erbil unless it wants to be forced to relinquish the Iraqi asset. Up to now, the company has continued to operate in the K.R.G. and in Iraq. The only measure implemented by Baghdad has been banning the two companies from future contracts in Iraq. Then, two events have changed the picture. First, last March Total was preselected with six other companies with reference to a call for bids in an oilfield in Nassiriya, in southern Iraq and second, still in March, ExxonMobil  announced its intention of increasing its investment in its West-Qurna-1 oilfield (a $50 billion investment) located in southern Iraq. From this two events, it's possible to understand that Baghdad does not have the upper hand. Indeed, it goes by itself that replacing big companies of the likes of  Total or ExxonMobil it's not an easy task. 

WHY INTERNATIONAL OIL COMPANIES ARE CHOOSING THE K.R.G. INSTEAD OF IRAQ?

In order to understand what is happening in Iraq and the K.R.G. at the level of energy deals, the real question to be answered is: Why are I.O.C.s all flocking to the K.R.G.? 

     

There are three main reasons for the I.O.C.s interest in Iraqi Kurdistan:

A) The presence of abundant energy reserves — Current Kurdish data speak about 45 billion barrels of oil, i.e., one-third of Iraq's proven reserves (proven reserves are those with a 90 percent certainty of being produced at current prices with current commercial terms and government consent, known in the industry also as 1P) which are estimated at 150 billion barrels. In other words, quantitatively (not qualitatively because Erbil has heavier oil) the K.R.G. could be another Libya. In addition to oil, the K.R.G. has from 3 to 6 trillion cubic meters (TCF) of potential gas reserves, as recently underlined in London by the minister of natural resources of the K.R.G., Ashti Hawrami, at the Iraq Petroleum Conference 2013 organized by C.W.C., a company specialized in the dissemination of the energy and infrastructure knowledge.  

The Minister of Natural Resources of the K.R.G., Ashti Hawrami

 

I.O.C.s invest where there are energy resources and — especially considering the supermajors — they are accustomed to investing in so-called difficult countries and harsh environments. For instance, Lebanon — a troubled country whose recent history has always been entangled with Syria's (in the latter country there is an ongoing civil war, if not something more because of the external actors, which are involved in the warring operations within and outside the country. Up to know, there have been only sporadic spillovers of Syria's civil war into Lebanon) has recently been able to attract for the prequalification phase of its offshore gas exploration contracts forty-six I.O.C.s.   
    

B) Security and a safe business environment — The K.R.G. with no doubt offers now more security and a safer business environment (for instance: a modern and open investment law and a progressive hydrocarbons (oil and gas) law for the Kurdistan Region) than those present in Iraq. Moreover, during the last years Erbil has been able to implement progressive economic policies and to increase its government transparency. "The K.R.G. also remains committed to the criteria and goals of the Extractive Industries Transparency Initiative (E.I.T.I.) and last year submitted a full report on production and revenues", said Dr. Hawrami still at the Iraq Petroleum Conference 2013.

On the other hand, Iraq is a volatile and unstable country, where the Shia-led government had struggled to restore order until an increase of U.S. troops in late 2007 was able to push insurgents and militia out of the cities and provinces that they were trying to conquer. The row with the K.R.G. about the disputed territory, and in specific about the destiny of the ethnically mixed city of Kirkuk (around 1,000,000 inhabitants, although the figures are disputed, the population should consist of one-third Turkmen, one-third Kurds and one-third Arabs) with its hydrocarbon riches (the city sits on the second largest oil field in Iraq), has continually threatened to derail the peace progress. As a result, insurgents in Iraq continue using violence in order to undermine the government. And according to the United Nations (U.N.), May 2013, when more than 1,000 people were violently killed, has been the deadliest month since the sectarian slaughter of 2006-07.   

  

C) The K.R.G.'s P.S.C.s are more attractive for I.O.C.s than Iraq's T.S.C.s — Let's now examine the two different typologies of energy contracts used respectively in Iraq and the K.R.G. 

C1) Baghdad's T.S.C.s — Since 2008, Iraq's Ministry of Oil has tried to redevelop its energy reserves by bringing in the country top-notch foreign technology. And it has done so through a series of technical service contracts (T.S.C.s) in four bidding rounds (these service contracts have taken also other names like Development and Production Service Contracts or Exploration and Production Service Contracts, but the basic assumptions are quite similar). In practice, with T.S.C.s, I.O.C.s get only a small contribution per barrel while Iraq has full control and ownership of the resources. The companies have no right to lift, market or book reserves, plus they bear all the capital expenditures and financial risks.

Contracts linked to the first three bidding rounds, held in 2009, 2009 and 2010, had for the I.O.C.s an economic return that was not as high as expected and later some of  the companies tried to renegotiate or to cancel the contracts. In fact, the fees per barrel were as low as $1.15 to as high as $7.50. Plus, the fees were additionally reduced by a 25 percent fully carried state participation and by a 35 percent income tax. In the end, the government take in some cases was as high as 99 percent. Moreover, the barrel per fee was reduced by up to 70 percent as the R factor increased from 0.0 to 2.0 (the R factor is a sliding scale that employs a ratio of two numbers to determine a rate. In the oil and gas business the most common R factor is obtained dividing cumulative revenues by cumulative costs). For instance, ExxonMobil from the assigned supergiant West Qurna-1 (which is now producing about 500,000 barrels per day) earns $1.9 per barrel. The profit for the company is substantially fair, but the problem is the produced quantity. In fact, to recoup 30 to 35 percent of its initial investment it should produce 2 million barrels per day, which is not doable now. Plus, as an additional hurdle, the companies that signed these contracts have become entangled with bureaucratic hurdles. 

Summing up, the first three licensing rounds obtained mixed results for Iraq. According to some commentators, the first one was initially a failure with only the supergiant Rumaila oil field (17 billion barrels) awarded. Only through subsequent negotiations in the following year it was possible to award three fields that initially had not been not awarded: Zubair (4 billion barrels), Maysan (2.5 billion barrels), and West Qurna-1 (8.7 billion barrels). Through these additional negotiations it was redressed a licensing round that at the beginning had raised many questions and doubts. The second and third bidding rounds almost completely awarded their blocks even if bidding was in a certain way feeble. The only really important exception was in the second round the unsuccessful assignment of the East Baghdad oil field (8 billion barrels). But it this regard — and this supports Baghdad's decisions — it should be noted that at least with reference to the first three rounds the fields on offer were all pertaining to discovered areas (some of these were supergiant fields with more than five billion barrels of oil reserves). And this meant that the risk for the companies was very low.

 

The fourth bidding round (oil and gas) was held in 2012 and it was a complete failure. In fact, the dissatisfaction of I.O.C.s with the terms proposed by Iraq was well shown last year when this fourth energy auction ended with very few foreign investors bidding for the blocks. The result was just 3 blocks awarded out of 12 on offer (and 8 blocks did not even receive any bid).  

Why such a negative result? If the previous three licensing rounds had offered rights to immediately start production raising output at large- or medium-sized sites with proven reserves, the fourth round instead involved areas with undetermined levels of hydrocarbons. Besides, in the fourth round there was a new formula to calculate the fee per barrel. In practice, IOCs would have been paid the fee per barrel on the remaining production after having deducted costs (for instance, if total production was 1 million barrels and the contractor had spent $300,000 on a subcontractor, it would later receive payment only for the remaining production, i.e., 700,000 barrels). In the coming months Iraq will organize the fifth licensing round for oil exploration (ten blocks). It appears now that probably Baghdad will ease its contractual terms in order to lure consistently I.O.C.s and avoid another failure. 
  

C2) Erbil's P.S.C.s — In Iraqi Kurdistan the oil and gas contractual terms are quite different. Today's contracts date back to the compromises included in Iraq's Constitution of 2005. In specific, Erbil asserts that the Constitution gives it full authority to sign P.S.C.s with reference to future oil and gas fields (these are fields not yet discovered when the Constitution was signed eight years ago), shared authority  for the existing fields, and the right to export hydrocarbons produced within the K.R.G. borders. On the other side, Baghdad has a completely different view: All fields (existing and future) are supervised at the central level, the government retains the right to approve or reject any future P.S.C. and Baghdad must have full control over oil and gas exports. In order to try to overcome this impasse and given the long-dated incapacity of legislating the much needed Federal Oil and Gas Law, the K.R.G. in 2007 passed the Oil and Gas Law of the Kurdistan Region. Since then the K.R.G. has entered into P.S.C.s with I.O.C.s. Baghdad has immediately considered these contracts completely illegal and has refused to pay the K.R.G. the full value of the oil produced in Iraqi Kurdistan. Baghdad has been paying as a reimbursement only part of the cost oil to the I.O.C.s working in Iraqi Kurdistan. 

Following this move Erbil has not had the economic resources to pay the I.O.C.s  and has retaliated halting production from the K.R.G. It's important to know that based on their share of the Iraqi population, the K.R.G. is supposed to get 17 percent of national revenue. When last March 7, 2013, the federal government passed the 2013 Budget Law the agreed-upon allocation for the K.R.G. was $3 billion short of what Erbil expected. And the direct consequence of this federal law was the K.R.G. "Law of identifying and obtaining financial dues to the Kurdistan Region — Iraq from federal revenue", a.k.a. the Financial Rights Law of April 2013. The aim of the law was to create a mechanism for the assessment of the amount Baghdad owed to Erbil and, especially, and for the definition, within the framework of Iraq's Constitution, of a remedy if the central government did not pay. This remedy meant direct exports of oil and gas produced in Iraqi Kurdistan. Currently, the K.R.G. Ministry of Finance affirms Baghdad's debt is as high as $20 billion of which $4 billion belongs to the I.O.C.s operating in the K.R.G.      

   

With P.S.C.s a contractor in general carries out all the investments and performs management implementing all the technical and operating services under the control of a state agency (many times a national oil company (N.O.C.)). Here the big difference with service agreements is that a contractor receives a share of production to recover its costs (cost oil). Subsequently, the I.O.C. will split the remaining production (profit oil) with the government to get its profits. Summing up, in a P.S.C.  the overall economic rent consists in general of five components:

1) Bonus (government share),

2) Royalty (government share),

3) Government's Profit Oil (government share),

4) Taxes (government share) and

5) Contractor's Profit Oil (contractor share)           

If it's true that the majority of the economic rent goes to the hosting government, it's also true that the contractor has the possibility of recovering all its costs (Exploration Costs, Development Costs and Operating Costs). In fact, Article 25.3 of the K.R.G. P.S.C.s format says that:

Subject to the provisions of this Contract, from the First Production in the Contract Area, the CONTRACTOR shall at all times be entitled to recover all Petroleum Costs incurred under this Contract, of up to [ ] percent ([ ]%) of Available Crude Oil ...

Plus, at the same time, in addition to recovering its costs, the contractor is entitled to obtain profit Oil. In fact, Article 26.2 of KRG's PSC says that:

From First Production and as and when Petroleum is being produced, the CONTRACTOR shall be entitled to take a percentage share of Profit Crude Oil and/or Profit Natural Gas, in consideration for its investment in the Petroleum Operations, which percentage share shall be determined in accordance with Article 26.5.

Why the K.R.G. is proposing P.S.C.s. is another good point to be raised. The reason is both based on economic and political assumptions. Erbil believes that economically speaking it has to develop its own economic agenda. Being linked to Baghdad means proceeding with a very slow pace and with unreliable economic gains postponed to future times. Iraq does remain now in dire conditions with huge security problems associated to a sectarian civil war that continues up to today and does not seem to abase. With reference to the energy sector, a national hydrocarbons law to date has not been passed and Iraq's bidding rounds, based on T.S.C.s, have been quite a failure. Moreover, Turkey is very interested into Erbil's energy riches and could be the customer permitting the K.R.G. to export its oil and gas. In other words, P.S.C.s with a more balanced revenue sharing mechanism, could be the right tool for developing in a fast manner a sector that until a few years ago (2006) had been practically nonexistent.  I.O.C.s have flocked to the K.R.G. without many doubts. If improved economic conditions will permit Erbil to create an independent state is another thing. But surely in Erbil many officials do not have positive ideas about Iraq's future. "Iraq is going to hell. If we cannot live together we must talk about something else. We Kurds are not part of the conflict between Shia and Sunnis. But if there is a fire in the house next door, it will burn you too in the end. And there is no fireman" said in an interview Fuad Hussein, an adviser to the president of the K.R.G., Massoud Barzani.         

CONCLUSION

To conclude our analysis of these two types of oil and gas contracts it should be underlined that there is no energy ontract that can really fit all the working possibilities. In fact, every contract suits different economic conditions, and it's important to strike a fair balance between I.O.C.s and the hosting state. A T.S.C. could be an acceptable contract when companies have to work in an environment where there are proved reserves and/or where the real activity is just related to a previously exploited field (for instance, a redevelopment activity). In this regard, Iraq's first three licensing rounds (and also the contracts related to fields not awarded with the first licensing round, which only later were awarded through private negotiations — see for instance West Qurna-1) have very tight conditions, but with the right amount of produced barrels (permitting a company to recoup its incurred costs) could well be profitable for the involved I.O.C.s. Things of course change if we consider areas with unproved reserves. In such a case, it's clear that contractual terms have to change if a government wants to avoid a bidding failure as Iraq's fourth oil and gas licensing round. 

Shall Libya Develop Its Unconventional Gas Reserves? Some Preliminary Considerations

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. 

 



Source: The Economist (March 2011)



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.

 

Source: 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".