EPSA IV

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EPSA IV is the most recent model of contract used by the Libyan National Oil Corporation (NOC) to govern contracts with international oil companies (IOCs) operating in Libya. The principal difference with its predecessor, the EPSA III framework, was that winners were now determined largely based on how high a share of production a company was willing to offer the NOC. In other words, whichever companies offered the NOC the greatest share of profits would most likely win the bid under the EPSA IV.[1] A leaked US diplomatic cable from 2008 reports that Assam Ali Elmessallati, who at that time bore the title Committee Member for Investment and Joint Venture Follow-Up, was the architect of the new process.[2]

Terms and features

Exploration work under this model is funded entirely by the private sector operator or consortium, and the foreign oil companies initially bear 100 percent of costs for a minimum of five years, while the NOC retains exclusive ownership.[3] The management of the joint venture company is assigned to a committee comprising of two NOC representatives and one from the outside investor, and voting is unanimous. Other features of EPSA IV include: open competitive bidding and transparency; joint development and marketing of non-associated natural gas discoveries; standardized terms for exploration and production; and non-recoverable bonuses.[4] EPSA IV builds on the previous models under which significant components were left to negotiations.[5]

Impact on IOCs

According to a US State Department cable from 2008, under previous EPSA agreements the IOCs had enjoyed deals based on a fixed margin, thereby insulating them from fluctuations in the market price of oil by receiving a fixed price for every barrel produced. However, under the new deals the foreign companies can reap higher profits per barrel when oil prices are high.

An additional element of the new terms is that the ties between the IOCs and their local Libyan operating partners are less direct in two distinct ways. Firstly, development plans for existing fields would no longer be run through the Libyan operators but negotiated directly with the NOC which owns them. A representative from the US Embassy in Tripoli believed that this would lead to the sweeping aside of traditional resistance to new investment and technologies on the part of Libyan national companies, and to a boost in production levels. The new EPSA framework also includes a new anti-corruption measure that prevents the individual state-run operating companies from being involved in the tendering process, as deals would be agreed directly with the NOC. This new arrangement created 'Joint Project Teams', ostensibly allowing for a more streamlined decision-making process. Finally, the new EPSA agreements incorporated extensive IOC-provided training programs for Libyan nationals, which aimed to help ensure the creation of Libya's next generation of energy sector experts.

The US Embassy representative saw a shortcoming of the new contracts due to the fact that the foreign companies could no longer 'book reserves' to the same degree in the past, which carried the benefit of guaranteeing access to proven quantities of oil and gas to shareholders. Analysts have observed that this means that stock values would be evaluated differently in an environment where reserves are harder to replace. Non-Western IOCs in particular (Indian, Japanese, Chinese and others) were said by the author of the cable to be driven by a desire to book reserves in order to assure supply in their domestic market.[6]

Post-Sanctions Licensing Rounds

January 2005

The first licensing round held following the lifting of US and UN sanctions against Libya took place in January 2005. 15 areas were on offer, 163 companies registered and 13 were approved to bid. 9 onshore and 6 offshore permits were awarded. In this instance, the US firms dominated and were awarded 11 out of the 15 permits, with US-based Occidental Petroleum alone taking nine. European companies were not awarded any blocks in this round. Low production shares and large signature bonuses were characteristic of the winning bids.[7]

October 2005

The second round of EPSA bids were awarded in October 2005, with 26 areas on offer. 48 companies submitted bids, with a wider range of new entrants including Statoil, Nippon and Japex. Almost all of the blocks on this occasion were awarded to European and Asian companies.[8]

December 2006

During the third round in December 2006, there were 14 areas on offer, onshore and offshore across all main basins. 47 companies qualified to bid, 10 contracts were awarded and winning companies included Gazprom, PetroCanada, Wintershall and ExxonMobil.

At the fourth round of bidding in December 2007, the focus was entirely on gas with 12 areas on offer. 54 companies pre-qualified to bid, 34 as operators, with the bid opening seeing 13 bidders. Five of the six companies awarded licenses (Shell, Sonatrach, Occidental and RWE) were already engaged in Libya, and there was a 50 percent award rate, in contrast to the previous 3 rounds which saw a success rate of 87 percent.[9]

The winning bids during this round featured low production sharing percentages for the IOCs, but in a departure from past rounds only Shell offered a signing bonus as part of its winning bid. The NOC publicly claimed that the results had been positive for Libya, but leaked diplomatic cables revealed that they had privately conceded some disappointment that more companies did not choose to bid. Some IOC representatives considered that the limited number of bids signalled dissatisfaction with increasingly stringent terms and operating conditions, while others maintained the terms for winners were consistent with previous rounds and that IOCs remained willing to absorb thin production sharing margins and often pay substantial signing bonuses in order to secure access and book reserves.[10]

Contract renegotiations

From 2008 onwards several international oil companies, beginning with Occidental and their partner OMV in June 2008, renegotiated their contracts with the NOC to bring them in line with the EPSA IV framework. Substantial up-front signing bonuses were typical, with Oxy paying a US $1 billion signature bonus and committing to a $2.5 billion investment plan.[11] On 17 July 2008, the Libyans continued their policy of redefining contracts in line with the new rubric by renegotiating the contract for an international consortium operated by Spain's Repsol, in partnership with France's Total, Austria's OMV, and Norway's Saga Petroleum.[12]

In 2009, NOC Chairman at the time Shukri Ghanem said that he would continue to pursue the goal of converting all IOC contracts to EPSA-type agreements.[13] However, as of early 2011 there were no reports of successful contract negotiations between the NOC and the Waha Group, consisting of US oil majors Marathon, ConocoPhillips and Hess.

References

  1. Outside View: Libya's oil prospects”. Ali & Partners, retrieved 19 October 2011.
  2. Oxy's 30-year Extension In Libya And What Lies Ahead For Other Iocs”. WikiLeaks, 13 July 2008.
  3. IEA "World energy outlook 2005: Middle East and North Africa insights ”. OECD Publishing, 2005.
  4. Outside View: Libya's oil prospects”. Ali & Partners, retrieved 19 October 2011.
  5. Outside View: Libya's oil prospects”. Ali & Partners, retrieved 19 October 2011.
  6. Oxy's 30-year Extension In Libya And What Lies Ahead For Other Iocs”. WikiLeaks, 13 July 2008.
  7. Doing Business In Libya”. Deloitte, 26 June 2008.
  8. Doing Business In Libya”. Deloitte, 26 June 2008.
  9. Doing Business In Libya”. Deloitte, 26 June 2008.
  10. Libyan Epsa Gas Bidding Round: International Majors' Interest Is Tempered”. WikiLeaks, 13 December 2007.
  11. Oxy's 30-year Extension In Libya And What Lies Ahead For Other Iocs”. WikiLeaks, 13 July 2008.
  12. European Oil Companies Extend Contracts In Libya”. WikiLeaks, 23 July 2008.
  13. Shokri Ghanem Outlines Plans For Libya's National Oil Corporation”. WikiLeaks, 11 February 2010.