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Outside View: Libya's oil prospects

By Reema Ali
UPI Outside View Commentator
Distributed by United Press International (UPI), March 9, 2005

Washington, DC, Mar. 9 (UPI) -- Libya's potential as an energy market has blossomed since economic sanctions were lifted, and in January alone, the country awarded licenses for 15 blocks of oil acreage under its Exploration and Production Sharing formula. More licenses are expected to be issued this year.

Certainly, the oil industry has fared better than other sectors during the time Libya's economy was cut off from global markets. Like other oil producing countries, Libya nationalized its oil companies in the 1970s, but it stopped short of full nationalization. In a declared attempt to obtain more control over its oil production, Libya moved in the 1970s towards Participation Agreements. Under these agreements, the newly established National Oil Corporation became a majority partner of the foreign oil company in return for an agreed compensation to the foreign oil company for the nationalized share. NOC financed all operations and was subject to the tax and royalty at the same percentage as its participation.

In 1974, NOC began to move towards the Exploration and Production Sharing Agreements (EPSA). Under these agreements the foreign oil company received a fixed percentage of the output from the fields involved, negotiated on a case by case basis. EPSA I was the model used in 1974 and EPSA II was used in 1980s, EPSA III was used in early 1990s, and EPSA IV is the current model.

Since 1988 these agreements have been more favorable to the foreign oil company. From a Libyan perspective these agreements may not have been the best formula for Libya. Each one of these models was an attempt to cure some of the problems that arose from the prior model or dictated by the general conditions or both.

In 2000, the Ministry of Energy was abolished and NOC became fully in charge of the oil sector. This was done so as to centralize the process, streamline it and make it more transparent. However due to the sanctions and the general conditions of the oil market, these agreements have continued to favor the foreign oil company.

The EPSA contracts evolved in piece meal rather than a concerted effort to develop an oil strategy for the country. The lack of transparency of the process through which these contracts were awarded further aggravated the situation. NOC's participation in the capital expenditure had a negative impact on it economically and had caused its resources to be diverted away from its original objectives. Above all, the substitution of NOC participation for the state royalty and tax created the impression of two disinterested parties sharing the wealth of a third.

The first round of licensing had to proceed in a timely manner for a variety of reasons least of which is Libya's credibility, so the EPSA IV the formula had to be used.

The question of the day in Libya is how best to exercise its sovereign rights over its oil resources at the same time bring in the desired foreign investments and expertise.

This raises two issues. What is the formula that would best serve Libya's national interests? And equally significant is which Libyan agency would be best suited to have jurisdiction over these decisions?
Many in Libya would say that NOC should not be the agency in charge and EPSA IV should not be the model used.

Historically, oil minister took the lead in recommending oil policies. After nationalization and during the sanctions era NOC was for some time the main or sole player. Recently, the General People's Conference the highest political organ in the country reinstated the Ministry of Energy, presumably reactivating the old laws relating to the jurisdictions of these agencies. This however, is not confirmed nor are the current laws necessarily going to remain unchanged. Libya has been studying draft Oil legislation and is embarking on an overhaul of its administrative agencies. Moreover the relationship between the parliamentary General Peoples Conference and the cabinet-like General Peoples Committee was the subject of a great deal of debate in January of this year at this year's session of the General Peoples Conference.

Under EPSA IV, winners are determined largely based on how high a share of production a company is willing to offer NOC. In other words, whichever companies offer NOC the greatest share of profits will most likely win under EPSA IV. The foreign oil company initially bears 100% of costs for a minimum of 5 years, while NOC retains exclusive ownership. Management is assigned to a committee comprised of two NOC representatives and one from the outside investor; 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.

EPSA IV is a complex formula that builds on the previous models under which significant components were left to negotiations. Some in Libya would say the EPSA IV formula is significant in increasing the Enhanced Recovery Rate, others view it as a convoluted formula that no one understands and does not fulfill the national aspiration.

Some changes are thus likely to take place and the method with which the first round was done is not necessarily how things would proceed. This it would seem is still an open issue. What is certain is that the political risks of investing in Libya have significantly subsided and this would have a profound impact on the next round of negotiations.

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(Reema Ali is the co-managing partner of the law firm of Legwell, Ali & Partners. She specializes in Middle Eastern laws, and is currently in charge of the firm's Libya practice in Washington DC. She may be contacted at .)

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