http://online.wsj.com/article/SB10001424052702303877604577383932684721676.html

May 4, 2012

For Big Oil, the Libya Opening That Wasn't

By BENOIT FAUCON

Some big oil companies hoped regime change in Libya, and a sense of political opening elsewhere in the Middle East and North Africa, would bring relief in some of the tough terms they had agreed to in partnership deals with national oil companies.

That hasn't happened.

As Libya's Moammar Gadhafi fell last year with the help of the West and an interim regime took the reins, the hope among some oil companies was that they would receive new tax breaks and a better share of fields' output in current and future deals.

But the interim government in Libya, as well as administrations elsewhere, largely plan to keep the same tough terms in place for most conventional fields, as governments are mindful not to appear to be selling out their countries' crown jewels.

New opportunities lie mostly in so-called unconventional projects, which are especially expensive or require advanced technology to develop. Higher oil prices are needed for such projects to pay off, making them riskier and less profitable than those available to national oil companies.

For such projects in Libya, investment conditions "can be improved," Libya's Oil Minister Abdulrahman Benyezza said in a recent interview.

For decades, many European companies had enjoyed deals that granted them half of the high-quality oil produced in Libyan fields. Some major oil companies hoped the country would open further to investment after sanctions from Washington were lifted in 2004 and U.S. giants re-entered the North African nation.

But in the years that followed, the Gadhafi regime renegotiated the companies' share of oil from each field to as low as 12%, from about 50%. Libya's state-owned National Oil Co. continues to get the bulk of the barrels produced in joint-ventures with oil majors.

Just after the fall of the regime, several foreign oil companies expressed hopes of better terms on existing deals or attractive ones for future contracts. Among the incumbents that expressed hopes in Libyan expansion were France's Total SA and Royal Dutch Shell PLC.

"We see Libya as a great opportunity under the new government," Sara Akbar, chief executive of privately owned Kuwait Energy Co., said in an interview in November. "Under Gadhafi, it was off the radar screen" because of its "very harsh" terms, said Mrs. Akbar, whose company doesn't have a licence in Libya.

Others took a more cautious approach. 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 at the time. "That's for the new leadership to consider."

Libya's oil officials say they will maintain the predetermined levels of payouts for existing contracts, which cover conventional oil production and exploration. The officials say no new deals will be signed before elections scheduled for June.

Even then, any changes to the current investment framework would be acceptable only in unproven areas such as deep offshore, or in unconventional oil and gas projects, said Tamim Osman, an adviser to the country's largest state-owned producing operation, Arabian Gulf Oil Co.

Libya's National Oil Co., Mr. Osman added, might look for a foreign partner to develop southeast Libya's Kufra basin, where hydrocarbons are thought be trapped in thick, porous sandstone formations. In such cases, producing nations depend on the private companies for new technology and know-how.

"Anybody who is trying the unproven, high-risk areas should be given improved terms," Mr. Osman said. "But in areas where oil has already been discovered, there is no such need."

In spite of some hopes to the contrary, that leaves international oil companies looking largely at high-risk, high-cost leftovers.

"I don't think it's nice to see that IOCs only get called [by state companies] on unconventional" projects, Total's Chief Executive Christophe de Margerie said on the side of a Kuwait conference in March. "Conventional is kept for national oil companies. If we could have a little mix, it could be better for us."

The dynamic is similar in Algeria, which sharply boosted its social spending in jobs and housing to avert the sort of turmoil faced by its neighbors. The North Africa nation will keep existing conventional oil contracts--which are considered severe, though less so than in Libya--unchanged.

Algerian authorities are considering tax incentives for foreign oil companies, but mostly for difficult terrains such as offshore and risky onshore acreage, according to energy minister Youcef Yousfi. These include large swaths of shale--which has proven a game changer in the U.S. with huge discoveries of oil and gas.

After barring majors from a giant project of conventional oil in the 1990s, Kuwait is also in talks with Total and Exxon Mobil Corp. to develop its heavy oil--a thick, hard-to-extract type of oil. Most of Kuwait's conventional and easy-to-pump oil projects aren't open for discussion.

Whereas conventional oil production in the Middle East needs prices of $5 to $25 a barrel to break even, unconventional assets typically need $50 to $113 a barrel, according to the International Energy Agency. Most producing countries figure they can keep pumping without new foreign help, but want assistance to develop more ambitious projects that can prevent long-term output decline.

The IEA warned last year that, if the Middle East and North Africa don't invest enough in oil and gas reserves, oil prices could rocket to $150 a barrel. Among the factors that could push prices to that level, the agency cited "constraints on inward investment as a result of stronger resource nationalism, particularly in regimes seeking to pre-empt popular uprisings."

The region is generally "extremely difficult to get access" to but political turmoil is "making investment more complex and politically risky" and therefore expensive, said Peter Hutton, London-based analyst at Canadian-owned broker RBC Capital Markets LLC.

Write to Benoit Faucon at benoit.faucon@dowjones.com