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Tom Nicholls: BP Back in Libya

BP’s $1 billion exploration deal in Libya shows that resource nationalism hasn’t closed the door on the private sector. By Tom Nicholls BP has returned to Libya after an absence of more than three decades, signing up a major, gas-focused exploration deal with the state-owned oil company, National Oil Corporation (NOC). The UK major plans to channel an eye-popping $0.9 billion into the country’s promising upstream sector over the next 7-10 years.

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Match of the day … BP CEO Tony Hawyard (middle) and BP chairman Peter Sutherland meet NOC chairman Shokri Ghanem

New chief executive Tony Hayward underlined the extent of that commitment, describing the deal as BP’s “single biggest exploration commitment”. And, like other private-sector oil companies, it is struggling to gain access to new reserves (in the case of Russia, it may even lose assets it already holds through its stake in TNK-BP). Oil rich countries are increasingly developing their resources themselves, buying in specialist help from oilfield services companies such as Schlumberger where necessary. It brings to a successful conclusion at least two and a half years of negotiating with the Libyan authorities. In a political deal (outgoing British prime minister Tony Blair attended the signing ceremony in Libya), BP and its local investment partner, state-owned Libya Investment Corporation (LIC) will explore 54,000 square kilometers of the onshore Ghadames and offshore frontier Sirt basins. The acreage is very large and, although exploration work in much of it is minimal, it thought to be highly prospective. BP sources are already talking unofficially about supplying LNG terminals. If the deal represents substantial material upside for BP, it is also significant for Libya; Tripoli has bagged a very large financial commitment to developing its oil and gas industry and, by extension, the energy-driven economy. Although BP’s provisional budget is $0.9 billion, this is likely to rise to 1.2 billion, sources say. The deal also includes a big commitment – up to $100 million — to train local people and develop technology locally. Also, BP’s cut of potential profits is modest: the production-sharing licence would give Libya’s National Oil Corporation 77.7% of production, the remaining 22.3% being split 85:15 between BP and LIC. BP is also to pay a $350 million signature bonus. It is also an encouraging sign for other large oil companies: even in this age of resource nationalism, there are still large upstream investment opportunities to be found. And, in Libya’s specific case, it seems that the likes of BP do not have to bother with the highly competitive bid rounds, in which they have struggled to compete with smaller companies, which are able to accept a smaller rate of return. Bilateral negotiation is likely to prove a more profitable way in for the supermajors.