Legal Improvements Brighten North Africa Production Outlook

Natural Gas Outlook [26637 bytes]

North Africa's three main oil producing countries soon will reap benefits of past moves by their goverments to encourage investment by international companies.

Production of crude oil and natural gas in Algeria, Egypt, and Libya is ready to increase from suppressed levels of the recent past, says International Energy Agency, Paris. The gains are possible despite political risks, total reserves accounting for only 4% of the world's crude reserves, and oil prices well below levels of the 1980s, when the countries' flow rates peaked.

The reason: Producing oil in North Africa is profitable.

In a recent study entitled North Africa Oil and Gas, IEA attributes the bright production outlook to improvements that the countries' governments have made in the past decade to hydrocarbon laws and the fiscal terms they offer international investors.

According to announced plans, the three countries' combined capacity to produce crude oil will rise 18% by 2000 to 3.65 million b/d (Fig. 1 [35871 bytes]). And a further gain of 700,000 b/d is possible.

IEA expects production capacity for natural gas to increase 50% from its 1995 level by 2000 to a combined 139.4 billion cu m/year.

Production capacities

Of the announced 550,000 b/d gain in total capacity to produce crude oil, Algeria accounts for the largest increase. Its capacity is to jump 25% to 1 million b/d by 2000, according to IEA (Table 1 [30457 bytes]).

Exploration and development under recently completed contracts might carry Algeria's capacity by 2000 to as much as 1.5 million b/d, the agency notes. Similarly, application of 3D seismic technology might push Libya's capacity to a level higher than the one projected.

Capacity to produce natural gas liquids will increase 34% to 842,000 b/d in 2000. Algeria, which produces 83% of the three countries' total NGL, will account for 65% of the growth.

During 1991-95, average NGL production of the three countries was 623,000 b/d.

Total capacity to produce liquid hydrocarbons in Algeria, Egypt, and Libya thus will increase 21% to 4.49 million b/d by 2000. Algeria will account for 44% of the growth, Libya about 36%, and Egypt 20%, IEA says.

Algeria will provide the largest increase in the capacity to produce natural gas among the three countries, providing a gain of 34.5 billion cu m/year. Development of gas fields in Libya might increase the total by 8-10 billion cu m/year, IEA says.

Algeria's record

Improvements in the Algerian investment climate began in 1986, according to the IEA study, when changes to the hydrocarbon law made participation structures more flexible than they had been before (Fig. 2 [29345 bytes]).

The new law allowed foreign companies to operate in joint ventures with the state oil company and under service and production sharing contracts. Since nationalization of the oil industry in 1970-71, non-Algerian companies had been forced to work as minority-interest partners of the government and to bear most of the costs of exploration.

Revision of the hydrocarbon law in 1986 came after declines in oil and gas prices slashed drilling (Fig. 3 [28126 bytes]). Response to the changes was slight.

In 1991, the Algerian Parliament amended the law to provide incentives that had been missing. Among other things, the amendments allowed foreign companies to hold equity interests in production, treated natural gas the same as oil, removed the government monopoly on transportation, and allowed international arbitration of disputes.

Algeria's contracts now last 4 years for exploration and 12 years for production and have royalties of 12.25-20% and income tax rates of 65-85%. They do not have an exploration bonus and do provide for depreciation. The government takes an automatic interest.

IEA describes effects of the 1991 changes as dramatic, citing a Petroconsultants estimate that oil discoveries in Algeria totaled 1.1 billion bbl in 1994, most in the world. Gas discoveries that year totaled 65 billion cu m, second highest in the world.

Algeria has plans to increase hydrocarbon reserves and production capacity of oil and NGL, improve operating efficiency of the oil industry, and develop strategic alliances with international oil companies.

Natural gas goals include expansion of production and export capacities and reduction of flaring. Export capacity could reach 82.6 billion cu m/year by 2000 if the Trans-Mediterranean pipeline is expanded to its full potential of 30 billion cu m/year, capacity of the new Maghreb-Europe pipeline reaches its potential of 18.5 billion cu m/year, and LNG export capacity grows to 34.1 billion cu m/year in an expansion and upgrade program begun in 1990.

Last June state-owned Sonatrach created three subsidiaries in the areas of refining and chemicals, hydrocarbon services, and industrial facility construction and maintenance. IEA notes that the move may have been part of a reorganization announced in 1993.

Improvements in Egypt

Recent improvements in Egypt's terms for foreign operators have generally evolved from a natural gas squeeze during the late 1970s and early 1980s. With demand rising rapidly, Egyptian General Petroleum Corp. (EGPC) sought to increase gas development and began by granting limited gas rights to foreign companies. Previously, it claimed all gas discovered.

A more extensive "gas rights" amendment took effect in all exploration and production agreements after 1985, putting gas on a production sharing basis similar to that of oil and setting the price at 85% of the price of medium-sulfur fuel oil.

In 1993, EGPC and a Shell unit reached an agreement for development of Western Desert gas reserves tying the gas price to Suez Blend crude. The move added to activity gains resulting from the earlier moves (Fig. 5 [28748 bytes]).

Egypt in 1994 made all aspects of its exploration and production agreements negotiable. Agreements now usually have signature and production bonuses, royalties of 10%, cost recovery of 40% of production, and a profit split with the government share at 65-85%.

Production sharing agreements first appeared in Egypt in 1973. Foreign companies, operating under joint ventures allowed under legislation of 1953, then converted to production sharing (Fig. 4 [36866 bytes]) and were obliged to assume associated risks.

The recently improved terms for natural gas have shifted the exploratory drilling emphasis toward gas in the Western Desert and Nile Delta. Much oil drilling is developmental as companies try to slow declines in old fields.

IEA says the government's priorities are to attract foreign capital for oil exploration and to encourage private Egyptian companies with the needed capital and technology to participate in the oil industry. To this end, the government has improved terms for development of small and marginal oil fields, especially in the Western Desert and in the Mediterranean.

The government encourages consumption of gas in place of oil, hoping to reduce domestic use of oil by 300,000 b/d. It is switching oil-fired electric power stations to natural gas and is basing new power facilities on gas.

In mid-1996, the government announced a program to convert a portion of the country's vehicle fleet from gasoline to compressed natural gas. IEA says sales of CNG increased to 65,350 l. in May 1996 from 4,585 l. in January.

The government also plans to export gas. Outlet options include pipelines to Israel, Turkey, or western Europe as well as LNG. The country could serve as a hub for pipelines from other producing countries in the region.

Libya's swings

IEA says recent changes to Libya's exploration and production sharing agreements (EPSAs) have put the country's prospects on equal footing with others in the world (Fig. 6 [31642 bytes]).

After nationalizing oil companies beginning in 1972, Libya converted all concessions to EPSAs and held a second round of acreage offerings under the structure in 1979. Unsatisfied with lacklustre response to EPSAs I and II, the government improved terms under EPSA III in the early 1990s.

IEA says that by the end of 1994 Libya had signed a total of 12 EPSA III agreemements covering 29 exploration blocks, most of them in the Sirte basin. It says effects of the changes have been obscured by the U.S. government's request that oil companies leave Libya in 1986 and by international sanctions. Recent drilling activity has reflected changes in oil prices and the effects of the sanctions (Fig. 7 [30222 bytes]).

Before it nationalized the oil industry, Libya structured concessions to keep any one foreign company from becoming dominant and to encourage acreage holders to develop and produce reserves quickly after discovery.

In the 1960s the government amended the petroleum law enacted in 1955 in ways that raised the government take. In 1968 it abolished concessions and required that foreign companies work as partners with a new state oil company.

After the Libyan revolution of 1969, the government raised the official export oil price and increased taxes.

Mainly because of international sanctions, Libya didn't meet a target set in 1990 to raise crude oil production capacity to 2 million b/d by 1994. National Oil Corp. now hopes to slow the erosion of capacity and add 200,000-250,000 b/d by 2000.

IEA says Libya's development plans will be shaped by the maturity of its producing fields, large undeveloped gas reserves, and partial isolation resulting from the sanctions. It notes that the country has "considerable" undeveloped potential for oil reserves.

In an effort to increase gas exports, the government is modifying the Marsa El Brega liquefaction plant to produce LNG with normal heating value. The plant was designed to liquefy LPG along with methane, so the LNG requires special regasification facilities. Libyan LNG now goes only to Spain. The modifications will enable exports to rise to 4.5 billion cu m/year.