Petrocan's Libyan dream

COMMENT: Note that in Libya, Petro-Canada is agreeable to terms that "may seem steep" - it pays 50% of the development costs for only 12% of the profit, considerable up-front costs, AND it shares the play with Libya's national oil company, AND political stability and certainty in Libya ain't quite the same as Alberta.

For the legacy in those resources? For the people in these jurisdictions? Well, gee, we don't want to upset the companies, do we? Don't want to lose the golden goose.

NORVAL SCOTT
Globe and Mail
December 14, 2007

CALGARY — Petro-Canada already once had a dream of creating a huge business empire in North Africa, in which it would supply energy to Europe after developing vast natural gas projects in Algeria and Tunisia. What happened?

It went up in smoke; Petrocan and Algeria couldn't come to terms over the proposed developments and the company's interest in the countries dwindled. Now the company hopes its second time in North Africa works out better.

Mind you, Petrocan is not running back to Algeria any time soon. From being a major player in the country in the late 1990s, Petrocan now has no production left there, and the firm shut down its Tunisian office last year.

Instead, Petrocan's dream has been shifted one country to the east, to Libya, and all of a sudden it's become reality. This week, the company said it is to ramp up output in the country after successfully arranging new development terms, now intending to spend $3.5-billion (U.S.) on existing fields in the Sirte basin. The investment is expected to double Petrocan's Libyan production by 2014 to 100,000 barrels a day.

“We've been looking at this for some time, and it's a very logical spot for us to be in,” says Petrocan chief executive officer Ron Brenneman, who signed the deal in Tripoli this week. “[Libya] is recognized as one of the most prospective regions in the world. It has huge potential.”

The Gadhafi factor

However, investors haven't always been convinced that the country could deliver on its promise. After the 2001 attack on New York's World Trade Center, Libya was perceived as a risky investment destination for firms; leader Moammar Gadhafi was linked to international terrorism in the 1980s and 1990s and the U.S. only lifted economic sanctions against the country in 2004, although Libya's international standing was improving after the country made conciliatory steps to the West in the late 1990s.

Nevertheless, Petrocan's stock sold off immediately after its acquisition of Germany's Veba Oil & Gas GmbH in 2002 for $3.2-billion (Canadian), the deal in which Petrocan accumulated most of its current Libyan holdings.

The deal was curiously timed, not only due to Petrocan's travails elsewhere in North Africa, but also because other Canadian firms were fleeing the region in droves. PanCanadian Petroleum, the company that became EnCana Corp., was withdrawing from Libya in 2002 in order to concentrate on North America, while Talisman Energy sold up its holdings in Sudan that same year after a hugely controversial dispute over the extent of its involvement in that country's civil conflict.

While Mr. Gadhafi's history may still cast a shadow over some perceptions of Libya, energy companies have found the country an infinitely more stable investment destination than, say, Venezuela, where oil firms have essentially seen their contracts ripped up.

Petrocan itself hasn't encountered any regulatory or governmental difficulties in Libya, which has never been anything but professional to deal with, Mr. Brenneman says. “The national oil company is a very sophisticated organization that's very business-like in its approach,” he said. “We've had a very good working relationship with them – it's a wonderful place to do business.”

Better timing

A more significant problem for Petrocan that stymied development until now was that it wasn't certain of its position in Libya. The rights to develop oil at the fields it bought from Veba were set to expire in 2015, at which time they would revert to Libyan control.

While the clause is a normal one in oil and gas contracts, – as it forces companies to develop the leases acquired from countries, instead of just sitting on the acreage – the relatively close deadline made it difficult for Petrocan to consider ramping up its Libyan plans, as it wasn't sure if any large-scale investment would be worthwhile.

“As you get closer and closer to that date, the time to recover your investment starts to run out, and we weren't prepared to put a lot of capital in if we didn't have that time,” Mr. Brenneman said.

The problem was recognized both by Petrocan and the Libyan National Oil Co. (NOC), which was also keen to renegotiate its contracts with oil companies operating in Libya so it could benefit more from higher prices. Consequently, Petrocan came to a deal under which it will now receive 12 per cent of the profit from its Libyan production, while paying 50 per cent of the development costs.

Barrels ‘to die for'

Petrocan and NOC will jointly invest $7-billion in developing existing fields, while Petrocan will pay a $1-billion signature bonus in three stages, as well as $460-million over the next seven years to explore new opportunities in Sirte. While the price may seem steep, it extends Petrocan's rights to the Sirte fields, effectively securing the company's position in Libya for the next 30 years.

“Now we've got lots of time to exploit these resources, recover our capital and generate good returns,” Mr. Brenneman said.

Petrocan has had a long wait to get the certainty in North Africa that it's needed to start developing a major project. However, the reason that the company has been so patient is clear; Sirte is seen as being one of the most prospective oil blocks in the world. Of the last nine wells Petrocan has drilled in the region, its had seven successes – a high strike rate in the oil exploration game.

“This is a large, large field that will be producing for some length of time,” Mr. Brenneman said. “If you ask anyone who's in the international oil business, they'll tell you that the Sirte basin is to die for.”