When President Bush lifted many of the U.S. sanctions against Libya in April, he opened the country to investment by American energy companies after a two-decade absence. Hopes are high that Libya will prove to be a prolific exploration target, but some observers caution that a production spike in Libya is not assured. Shortly after sanctions were lifted, Tarek M. Hassan-Beck, planning and information technology director for the Libya National Oil Co. (LNOC), gave a briefing at the Offshore Technology Conference in Houston. He gave a glimpse into plans for Libya's upcoming licensing round, in which American companies are free to participate. Two offshore and six onshore blocks were to be open for bid later this year. No firm date has been announced. Many changes have been made to the country's energy sector in preparation for the bid round. First, Libya was carved into blocks similar to the grids used in the U.S. Gulf of Mexico and North Sea. The country's seven basins-both onshore and offshore-are now divided into 250 evenly sized blocks. Tripoli also recently revised the terms of its exploration and production sharing agreement, reinstated its energy ministry and named a new head of the national oil company. What size prize? Libya has proved reserves of 38 billion barrels of oil and 54 trillion cubic feet (Tcf) of gas, Hassan-Beck said. Others say there could be more. "Since only about 25% of Libya's surface area has been explored to date, mainly using older-generation equipment and techniques, most experts agree that Libya's actual gas reserves are perhaps 70 to 100 Tcf," reports law firm Chadbourne and Parke LLP. First oil was discovered in 1959. Libya now produces 1.3 million barrels a day under its OPEC quota, but has capacity to produce 1.8 million barrels. It wants to boost capacity to 2 million by 2007 and hopes that OPEC will support such an increase. Italy, Germany, Spain and France are major customers. Some observers believe any meaningful increase in Libya's reserves and production will be challenging. "While there is little doubt that U.S. oil companies will look seriously at a broader Libyan opening, a flood of E&P capital into the Libyan upstream is far from assured," say analysts at PFC Energy, a Washington-based consulting firm. For one thing, there are legitimate concerns over the size of the prize, according to PFC, because field-size discoveries in the Sirte and Ghadames basins during the past five years have been modest. A May report by Raymond James E&P analyst Wayne Andrews spelled out that firm's restrained view. "Not to spoil the party, but as far as the eye can see, we believe there will be no meaningful increase in Libyan oil production," Andrews said. "While increased investment will certainly lead to some production growth, for at least the next three to five years it is likely to be quite modest. In other words, we do not see Libya as the panacea for the world's long-term oil needs." Libyan oil output actually rose 20% between 1986, when U.S. sanctions were imposed, and 1992, when United Nations sanctions were imposed, according to Raymond James. Production declined slightly between 1992 and 1993 but has stayed essentially constant since then. "What's even more telling is that since 1999, when U.N. sanctions were suspended-allowing investment by non-U.S. oil companies-there has been no significant output growth." In other words, it is a myth that U.S. and U.N. sanctions are solely responsible for stagnant Libyan oil production, Andrews said. In fact, Libyan production peaked at 3.3 million barrels a day in 1970, long before any sanctions were imposed. It then fell to as low as 1.5 million in 1975 before partly rebounding to 2.1 million in 1979. "This decline had nothing to do with sanctions," Andrews added. "Rather, it was related to the Qadhafi regime's less-than-attractive policies towards foreign investment." He noted that since 1970, discoveries in Libya have been much smaller than in the 1959-1970 period. Libya's two largest discoveries date back more than 40 years. In the report, Andrews quotes one geologist who estimates about 75% of Libya's current proved reserves had been found by 1969. "This does not mean there is no room for major discoveries in the future, but it does strongly suggest that in Libya-much like the rest of the world-reserve growth potential is not nearly as robust as it had been earlier." New bid terms The 2004 bid round will take place under a new framework for exploration and production sharing agreements (EPSA) called EPSA IV that will promote public, competitive bids. Chris Strong, an attorney in the Dubai office of law firm Vinson & Elkins, told an energy forum in Houston this spring that EPSA IV is similar to EPSA III, but it addresses some controversial issues. Under EPSA III, international oil companies operated under the supervision of a management committee that decided all major issues relevant to operations, including work programs and budgets. It was made up of two representatives from LNOC and one from the international oil company or licensee. Issues were decided by majority vote, meaning the Libyans could effectively control the licensee's plans. But in EPSA IV, unanimous voting will be required on all issues facing the management committee, Strong said. Libya made several internal changes to prepare for an aggressive oil and gas sector opening, according to PFC Energy. First, it appointed Abdullah al-Badri chairman of LNOC. He had been Libya's oil minister from 1998 to 2000, but moved to the executive General People's Committee where he served as deputy secretary. He briefly served as OPEC secretary general in 1994 and has tremendous oil sector experience, PFC noted. Second, the oil ministry was reinstituted in March to provide a visible point of contact for international oil companies. (Libyan leader Col. Muammar Qadhafi had dissolved the oil ministry in March 2000 in a sweeping decentralization of the executive branch.) In March, Shell Libya Petroleum Development BV signed a heads of agreement to establish a long-term partnership with Libya in the upstream business. The emphasis will be on exploration onshore and on developing additional LNG export capacity. Shell said it plans to continue negotiating on specific projects during the rest of this year. The Royal Dutch/Shell group of companies was active in Libya from the 1950s until 1974, and it also conducted exploration in the late 1980s. While many American companies are investigating first-time investments in Libya, four veterans-Occidental Petroleum, Marathon Oil, ConocoPhillips and Amerada Hess-are poised to reclaim assets they were forced to leave under standstill agreements after the onset of U.S. sanctions in 1986. They first discovered oil in Libya in the 1960s. "Quiet discussions around these assets have been ongoing for a number of years, but the 'heavy lifting' issues-decline rates, capex equalization, etc.-are now being fully addressed," PFC reports. Fiscal terms will be one of the keys to determining the return of these four companies, Petrie Parkman & Co. analyst Steve Enger says. U.S. companies previously did business in Libya under fixed-margin contracts with little financial risk, but low returns-net margins were reportedly on the order of $1 to $2 per barrel of oil produced, he said. "The U.S. companies are clearly targeting returns that are competitive with worldwide opportunities for capital investment and commensurate with the risks." Occidental operated in Libya through a joint venture consisting of LNOC, 51%; Oxy, 36.75%; and Austria's OMV, 12.25%. Production from the venture's Sirte Basin fields was nearly 660,000 barrels a day in 1970, declining to about 155,000 in 1985-86 and 85,000 at present, Enger reported. Oxy wrote off 217 million barrels in net reserves in 1986 and gave up about 45,000 barrels a day of net production from two concessions and one E&P sharing agreement. The company held interests in other nonproducing E&P sharing agreements as well. Occidental chairman Ray Irani met with Libyan leader Moammar al Qadhafi in March and the company has re-opened an office in Tripoli. The Oasis Group was owned 59.17% by Libya, 16.33% each by Conoco and Marathon, and 8.17% by Amerada Hess. Oasis produced 850,000 barrels a day by the late 1970s from seven major oilfields in the Sirte Basin, Enger said. By the time the Americans had to leave in 1986, production had fallen by about half, to 400,000 barrels a day. It has since fallen to an estimated 250,000 a day. Though output at these fields has declined, Enger is optimistic they can be turned around. "Production from the fields in question has declined since 1986 as the inevitable consequence of the low levels of capital invested in the interim," he said. "But in our view, the application of modern technologies and renewed spending could increase output quickly, and exploration using modern geoscience techniques provides significant upside." In Enger's opinion, exploration in Libya appears very prospective, "particularly given that a dozen fields with ultimate recoverable reserves in excess of 1 billion barrels were discovered without the aid of modern seismic techniques, even before recent successes by European firms." Only about 25% of the country's area is under license, providing ample opportunity for new exploration, he said. Although Libya represents a new opportunity for U.S. companies, European and Canadian firms have been involved in the Sirte Basin for several years. Shell, Total, OMV, Petro-Canada and Husky Oil operate there, but ENI is the most active producer, accounting for 16% of Libya's production. Repsol YPF is also active, and it is planning a field trip to Libya this November for its analysts and investors, according to Commerzbank Securities. Repsol is the first foreign contractor to produce liquefied natural gas (LNG) in Libya, and it has exploration acreage as well. Libya's single LNG liquefaction plant has been woefully underutilized for many years and thus has room to take additional gas production Libya is not virgin territory as a high percentage of its reserve base is now developed, but potential for production growth remains high, says PFC. "If we step back and consider global supply it is our assessment that, excluding OPEC and the FSU countries, global production capacity is likely to remain relatively flat, as it has been for the last few years," says Michael Rodgers, senior director for PFC Energy. "But Libya is one of six OPEC countries that clearly has the potential to ramp up production in order to handle whatever growing demand might be placed on OPEC. There is an expected increase already planned through the development of fields held by already active foreign operators." It is reasonable to expect bureaucratic delays and manpower limitations within the LNOC that will limit the speed at which new licenses can be awarded, PFC cautions.