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A BRIGHT SPOT: CANADA’S VERENEX STRIKES OIL IN LIBYA

Ref ID: 09TRIPOLI148

Date: 2/16/2009 10:26

Origin: Embassy Tripoli

Classification: CONFIDENTIAL

Destination:

Header: VZCZCXRO3461PP RUEHGA RUEHTRODE RUEHTRO #0148/01 0471026ZNY CCCCC ZZHP 161026Z FEB 09FM AMEMBASSY TRIPOLITO RUEHC/SECSTATE WASHDC PRIORITY 4488INFO RUCPDOC/DEPT OF COMMERCE WASHINGTON DCRUEHAS/AMEMBASSY ALGIERS PRIORITY 0890RUEHVT/AMEMBASSY VALLETTA PRIORITY 0376RUEHEG/AMEMBASSY CAIRO PRIORITY 1397RUEHTU/AMEMBASSY TUNIS PRIORITY 0755RUEHGA/AMCONSUL CALGARY PRIORITY 0002RUEHTRO/AMEMBASSY TRIPOLI PRIORITY 5013

Tags: ECON,EFIN,EPET,ENRG,EINV,PGOV,PREL,LY

 

C O N F I D E N T I A L SECTION 01 OF 02 TRIPOLI 000148 SIPDIS DEPT FOR NEA/MAG; COMMERCE FOR NATE MASON; ENERGY FOR GINA ERICKSON; CAIRO FOR TREASURY ATTACHE ALEX SEVERENS E.O. 12958: DECL: 1/28/2019 TAGS: ECON, EFIN, EPET, ENRG, EINV, PGOV, PREL, LY SUBJECT: A BRIGHT SPOT: CANADA’S VERENEX STRIKES OIL IN LIBYA CLASSIFIED BY: Gene Cretz, Ambassador, U.S. Embassy Tripoli, U.S. Department of State. REASON: 1.4 (b), (d)

1.(C) Summary. Four years on after the Libyan National Oil Company (NOC) held the first bidding round for new Exploration and Production Sharing Agreements (EPSA’s), results in the search for new commercially-exploitable oil and gas reserves in Libya have been mixed. Only a few companies have made significant discoveries, including Canada’s Venerex Energy. In comparison with other successful bidders in the first round (including American firm Hess and Australia’s Woodside), Verenex has enjoyed the most success in its exploration campaign thus far; it expects to start producing 50,000 barrels of oil per day in 2010. Verenex’s recent discoveries are a bright spot in an otherwise uncertain exploration landscape. Slumping oil prices, renewed pressure on international oil companies (IOCs) to contribute to the claims compensation fund and al-Qadhafi’s recent call for possible nationalization of the oil industry, many companies are debating whether they will be able to ride out this rough patch. In addition, IOCs face pressure to hire unqualified Libyans, which has hurt productivity and their bottom line (many are effectively paid to stay home). Despite the challenges, our conversations with IOC representatives suggest that there is still optimism about oil and gas opportunities in Libya, particularly for companies still involved in the exploration phase. That, together with the fact that Libya is one of the few remaining areas of the world in which greenfield discoveries could yield significant booked reserves for IOCs – still a key factor in stock valuation of IOC’s – likely mean that Libya will remain an important venue for oil and gas producers. End summary.

VERENEX STRIKES OIL

2.(C) Four years after the Libyan National Oil Company (NOC) held the first bidding round to explore for oil and gas, there have been mixed results in the search for new, commercially-exploitable oil and gas fields. Only a few companies have made discoveries, including Canada’s relatively small Venerex Energy, which struck oil in its parcel in Area 47, located about 112 miles southwest of Tripoli in the Gadhames basin. Most of the other successful bidders from EPSA bidding rounds dating from 2004 are either still in the exploration phase or have not yet discovered commercially-exploitable reserves. Verenex and its partner, Medco, share a 13.7 per cent interest in the concession; the remainder is held by the NOC. The EPSA-IV signed sets out an initial five year exploration and appraisal period, and defines the terms for development during a 25-year exploitation period of any commercial discoveries made during the initial five years.

3.(C) Verenex has drilled 19 wells in Area 47 (four appraisal and 15 exploratory wells). In November 2008, Verenex submitted a multi-field development plan to the Area 47 Management Committee, which consists of two NOC representatives and two investors’ representatives. The report recommended the project be declared commercial, with production estimated at approximately 50,000 barrels per day of oil and 50 million cubic feet per day of natural gas. Preliminary development costs, including facilities, gathering systems and pipelines are estimated at around USD 800-850 million dollars. If the Area Management Committee declares the field commercialy exploitable, a Joint Operating Company (JOC) will be established to develop it, a model already in use by the NOC with other international oil companies producing in Libya (Eni, Oxy, and Petro-Canada).

4.(C) In addition to its recent find, Verenex expected to drill an additional 12 wells in 2009, but adjustments to its budget occasioned to the oil price drop mean it will drill fewer wells than initially planned. The company has requested that the NOC extend its five year exploration and appraisal period, which will otherwise expire in March 2010, to potentially allow it to drill more test wells. Verenex’s general manager for Libya, Don Shepherd, (strictly protect), said Verenex had a good relationship with the NOC’s Exploration Department and was confident the extension would be approved. Verenex’s recent success and its comparatively small size (its total estimated value in 2007 was USD 326 million dollars worldwide) have made it an attractive candidate for acquisition. In September 2008, it announced a potential corporate sale as one of its options under a strategic review. Advancing that process, Verenex opened its proprietary information to possible buyers, with the approval of the NOC to show confidential technical data on the assets in the Area 47 to a list of 22 qualified companies. A sale decision has not been announced and it is increasingly uncertain what may happen since oil prices have slumped since Verenex’s proprietary information was released (ref A). Shepherd said the list of 22 companies interested in buying TRIPOLI 00000148 002 OF 002 Verenex was confidential, but he divulged that Petro-Canada (also operating in Libya) was not on the list.

OTHER RECENT EXPLORATION POSITIVE …

5.(C) In January, the NOC announced that three different oil discoveries were made by the American firm Hess, Canada’s Verenex, and Australia’s Woodside. Hess is the first American exploration and production company to find oil during the exploration campaign since American companies reentered Libya in 2005; it is also the first discovery made offshore in the Sirte Basin. Hess still has more exploratory work to do and will likely drill more appraisal wells before determining the magnitude of its find. Woodside’s discovery in the Ghadames area adds useful information to the preliminary evaluation of the reservoir for the company to target future exploratory drilling operations.

… BUT OPERATIONAL HEADACHES CONTINUE

6.(C) Despite optimism over his company’s recent find, Shepherd told us the operating environment in Libya remains challenging. The issue of the moment is increased pressure from the NOC on Verenex to hire unqualified Libyans. Currently, Verenex employs 24 Libyans, 8 of whom were hired at the request of the NOC. Shepherd noted that while Verenex understands the NOC is under pressure to generate more local employment, the situation is particularly difficult for companies in the exploration phase, in which there is less need for staff. Companies in the development phase (i.e., after the finds have been determined to be commercially exploitable and a JOC has been established) have more need to encumber positions and train local staff; however, that is a gradual process. In addition, graduates of Libyan technical training programs are not well-qualified (all who start the program graduate, for example) – many of the professional graduates the NOC is pressuring IOC’s to hire lack the engineering skills or basic knowledge needed to perform their jobs. (Note: At an event hosted by the CDA late last year for IOC general managers, the crowed unanimously agreed that operating conditions in Libya had gotten worse in the past two years, largely due to efforts by the NOC to identify further cost centers in the production chain from which to extract rents. End note.)

7.(C) According to Shepherd, all IOC’s receive regular visits from representatives of the General People’s Committee for Manpower, Employoment and Training (GPCMET – the MinLabor-equivalent), who are supposed to verify that the companies adhere to the quota for local hires. Some foreign companies hire local employees only to fulfill the number that the law requires, sometimes going as far as to pay them without requiring that they actually perfom any work. He noted that it is not uncommon for there are also instances of corruption, in which Ministry of Manpower representatives pressure foreign companies to hire their relatives for these “phantom” positions. In addition, the same individual may be hired by several foreign companies, receiving salaries from all of them, but not actually working at any of them.

8.(C) Comment: Verenex’s recent discoveries in Libya are a bright spot in an otherwise uncertain firmament for companies in the exploration phase. Slumping oil prices, renewed pressure on international oil companies (IOCs) to contribute to the claims compensation fund and al-Qadhafi’s recent call for possible nationalization of the oil industry are causing many companies to debate whether they will be able to ride out this rough patch. The General Manager of Occidental recently told us he has never been as pessimistic about Oxy’s operations in Libya as he is now. Much of his frustration has to do with the NOC’s inefficiency in facilitating routine exploration operations. Oxy’s exploration department is shutting down – after drilling 12 dry wells, it is keeping just one employee until the end of March to finish reports. But despite the challenges, our conversations with other IOC representatives suggest that there is still optimism about oil and gas opportunities in Libya, particularly for companies involved in the exploration phase. That, together with the fact that Libya is one of the few remaining areas of the world in which greenfield discoveries could yield significant additional booked reserves for IOCs – still a key factor in stock valuation – mean that (absent nationalization) Libya will remain an important venue for oil and gas producers. End comment. CRETZ

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