Foreign oil companies operating in Libya warned this week that current contracts could deter new investment, even though the fall of Col. Moammar Gadhafi has been sometimes perceived as paving the way for a new oil rush in the country holding Africa’s largest oil reserves.
Libya’s deputy oil minister says the country would show flexibility once new contracts are tendered but existing agreements won’t be changed.
Contractual terms “determine what investment you are going to get,” said Martin Bachmann, an exploration and production executive director at Germany’s Wintershall Holding GmbH. “That’s for the new leadership to consider.”
But in an interview with Dow Jones Newswires, Omar Shakmak, a deputy to interim oil and gas minister Ali Tarhouni, ruled out any change to current deals. “We will honor our contracts,” he said. But “it is not our intention to make any changes to existing contracts.”
However, Shakmak didn’t rule out new terms for future licenses, which won’t be proposed before elections, due within eight months.
“For a new contract, it could be revised” from what was practiced under the previous regime, he said. “There could be more flexibility to protect the rights of both parties,” referring to foreign oil companies and the government.
The remarks are part of an emerging debate in the Libyan oil industry as attention slowly turns from resuming production to attracting fresh cash after decades of underinvestment.
“There will arrive a point where there is a new phase of development” for each given acreage, Wintershall’s Bachmann told Dow Jones Newswires on the sidelines of the Oil Council conference.
The contractual terms “are horrible” said Sara Akbar, chief executive of Kuwait Energy Co., who is considering bidding for Libyan acreage when new licenses are tendered.
Back in 2009, most foreign oil companies, including Wintershall AG, were forced to revise existing deals and cut stakes from 50% to as low as 12%.
The renegotiation was designed to align old contracts with the terms of new oil and gas rights granted in 2005. But a string of awardees from these recent licenses, such as Chevron, exited after finding the combination of harsh contracts and disappointing exploration results wasn’t worth staying.
Experts concur Libya’s oil and gas framework makes for a tough environment. Henry Smith, an analyst at consultancy Control Risks, says that in the last years of Gadhafi’s regime, “the screw was tightened for some oil companies.”
But Control Risks’ Smith warned the government may have little room to maneuver in sweetening the terms of licenses. After toppling Gadhafi, “they would look like they are handing out the country’s resources,” he said. “That would go down badly on the street.”
So in the new Libya, oil investors appear headed for a showdown. “Unless Libya changes its contracts,” its oil potential won’t be fulfilled, said Jon Ferrier, a business development vice president at Maersk Oil and Gas.
The Danish company is studying the possibility of entering the country. But Ferrier said that in such a global market companies are always able to invest elsewhere, citing a current boom in Iraqi Kurdistan.
