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C O N F I D E N T I A L SECTION 01 OF 03 TRIPOLI 001038 
 
SIPDIS 
 
SIPDIS 
 
E.O. 12958: DECL:  12/13/2017 
TAGS: EPET BTIO ECON EINV ENRG LY
SUBJECT: LIBYAN EPSA GAS BIDDING ROUND: INTERNATIONAL MAJORS' 
INTEREST IS TEMPERED 
 
REF: A) TRIPOLI 608, B) 06 TRIPOLI 775 
 
CLASSIFIED BY: Chris Stevens, DCM, Embassy Tripoli, Department 
of State. 
REASON: 1.4 (b), (d) 
 
 
 
¶1. (C) Summary:  Four companies won exploration and production 
rights for gas in the recently concluded fourth round of Libya's 
Exploration and Production Sharing Agreement (EPSA) mechanism. 
Winning bids featured low production sharing percentages for the 
international oil companies (IOC's), but in a departure from 
past rounds, only Shell offered a signing bonus as part of its 
winning bid.  The National Oil Corporation (NOC) has publicly 
touted the results as being positive for Libya, but has 
privately conceded disappointment that more companies did not 
choose to bid.  Opinions among IOC country managers in Libya 
differed as to the takeaway from this round.  Some argued that 
the small number of bids signaled to the NOC dissatisfaction 
with increasingly stringent terms and operating conditions. 
Others maintained that the fact that terms for EPSA IV winners 
were consistent with previous rounds has reinforced the NOC's 
belief that -- despite grumbling -- IOC's remain willing to 
absorb thin production sharing margins and, in some cases, pay 
hefty signing bonuses to secure access and book reserves.  End 
summary. 
 
THE PLAYERS ... 
 
¶2. (U) As forecast in ref A, Libya's National Oil Corporation 
(NOC) Organizing & Supervising Committee hosted an event 
December 9 at Tripoli's al-Mahari Hotel to announce results of 
recent bids for exploration and production sharing agreements 
(EPSA's) for onshore and offshore parcels.  The event 
represented the fourth in a series of EPSA bid rounds (EPSA IV) 
held since August 2004; it was the first to focus on natural 
gas.  According to the U.S. Energy Information Administration, 
Libya has some 52 trillion cubic feet of proven gas reserves, 
fourth among all African countries.  A dozen parcels comprising 
41 separate blocks of territory were offered for bidding and 
generated 19 offers by 13 companies (from 11 different 
countries) for 10 of the 12 parcels.  35 companies had been 
pre-selected to bid for the contracts; only 19 chose to do so. 
 
¶3. (C) Two offshore parcels comprising eight blocks only 
received bids by single companies; under the terms of the EPSA, 
the bids were not opened and will be examined privately by the 
NOC's management committee to determine whether they will be 
accepted.  ExxonMobil Country Manager Phil Goss (protect) judged 
that significant projected exploration costs for the offshore 
areas (up to $100 million per test well) and tricky technical 
requirements (water as deep as 3,000 meters) that few companies 
have the ability to manage deterred most from bidding on 
offshore blocks. 
 
... THE ACTION 
 
¶4. (U) Four potentially lucrative gas EPSA contracts were 
awarded to Gazprom, Sonatrach, Shell and Polskie Gornictwo 
Naftowe i Gazownictwo (Polski).  Russia's Gazprom beat back a 
competitive offer from French company Gaz de France for three 
blocks (area 64) comprising 3,936 square kilometers in the 
southern Ghadames basin.  Despite earlier statements to the 
press by a Gaz de France official that the company was "very 
keen" to establish a presence in Libya, Gazprom's willingness to 
take a significantly smaller percentage of eventual production 
carried the day.  Gazprom's commitments per its bid are: 1,500 
square kilometers 2-D seismic imagery; 250 square kilometers 3-D 
seismic imagery, 4 wells, no signing bonus and a 9.8% share of 
gas produced.  Gaz de France offered more seismic imagery and 
wells, but asked for a production allocation of 16.8%.  Other 
bidders on area 64 were Polski, Japan's Inpex, Lukoil, British 
Gas and the Pakistan Oil and Gas Company. 
 
¶5. (U) Algerian parastatal Sonatrach, in assocation with Oil 
India, won rights to four blocks (areas 95 and 96) comprising 
6,934 square kilometers in the Ghadames area.  Sonatrach's 
commitments per its bid are: 2,000 square kilometers 2-D seismic 
imagery, 600 square kilometers 3-D seismic imagery, 5 wells, no 
 
TRIPOLI 00001038  002 OF 003 
 
 
signing bonus and a 13.0% share of gas produced.  Germany's RWE 
submitted a strong bid that included 11 wells, but asked for a 
19.0% production share.  Other bidders were Gaz de France, 
Polski and British Gas. 
 
¶6. (U) Anglo-Dutch Shell Company won two blocks (Area 89) 
comprising 1,790 square kilometers in the northern Sirte Basin. 
Shell's was the only bid on the day that carried a signing 
bonus, in the amount of $93 million, for the NOC. (Note: Next to 
production share, signing bonuses are the most heavily-weighted 
factor in a given bid.  End note.)  Shell's commitments per its 
bid are: 0 square kilometers of 2-D seismic imagery; 740 square 
kilometers of 3-D seismic imagery; 4 wells; USD 93 million 
signing bonus and a 15.0% share of gas produced.  Other bidders 
were Sonatrach and PetroCanada. 
 
¶7. (U) Polski won two blocks (area 113) in the southern Murzak 
Basin with a bid that committed it to the following: 0 square 
kilometers 2-D seismic imagery; 1,500 square kilometers 3-D 
seismic imagery; 4 wells, no signing bonus and an 11.8% share of 
gas produced.  The other bidder was Gaz de France. 
 
NOC PUBLICLY POSITIVE, PRIVATELY "A BIT DISAPPOINTED" 
 
¶8. (C) Winning bid terms echoed those for the EPSA III round in 
December 2006 (ref B), with low production shares weighted 
heavily in the calculus for awarding points to each bid. 
Publicly, the NOC is touting the favorable terms of the four 
winners, with an emphasis on the high percentage of eventual 
production that will go to Libya.  Privately, NOC Chairman 
Shukhri Ghanem told visiting Verenex Energy (Canada) CEO Jim 
McFarland (protect) December 11 that he was "a bit disappointed" 
that more companies had not chosen to bid.  Ghanem subsequently 
told executives from Algeria's parastatal Sonatrach that the 
NOC, discouraged by the tempered ESPA IV bidding, will "take a 
break" from organizing further EPSA bid rounds.  Ghanem's 
thinking, according to Sonatrach, is to allow time for 
production in parcels contracted in previous rounds to kick in. 
By allowing Libya's market to "settle" a bit, the NOC hopes to 
whet IOCs' appetite for further contracts. 
 
MARGINS REMAIN TIGHT 
 
¶9. (C) By contrast with earlier bid rounds, which featured hefty 
signing bonuses in addition to razor-thin production sharing 
margins of as little as 6.8%, no company save for Shell offered 
signing bonuses for EPSA IV gas contracts.  BP Country Manager 
Tawfiq Hussein (protect) attributed that to the increased 
difficulty of realizing profitability under increasingly 
stringent EPSA terms, and to the fact that "the bloom has come 
off the rose a bit" with respect to the Libyan oil and gas 
market.  Woodside Exploration Manager Sean Guest noted that low 
production sharing margins were critical in determining winning 
EPSA IV bids.  Stringent terms, low production shares and 
lingering concerns about the difficulty of operating in Libya 
(visas and expat staffing remain significant problems) have 
given some pause.  In addition, Libya's limited gas export 
infrastructure and the lack of clarity about whether EPSA IV 
winners will be able to exploit oil reserves discovered while 
searching for gas tempered enthusiasm.  Marathon's Country 
Manager, Freddie Quintana (protect), told P/E Chief that the 
EPSA IV round was "a particularly difficult one" in which to bid 
because gas pricing is more complex than oil pricing and because 
Libya's gas export infrastructure remains limited. 
 
MIXED SIGNALS 
 
¶10. (C) Opinions differed at a meeting of IOC country managers 
December 12 as to the summary judgment of the EPSA IV round. 
Some argued that the relatively limited number of bids 
constituted a message to the NOC that increasingly stringent 
terms and difficult operating conditions would discourage bids. 
Others maintained that contract terms for bid winners were 
consistent with previous bid rounds, confirming the NOC's belief 
that IOC's remain willing to take thin production sharing 
margins and, in Shell's case, pay hefty bonuses to gain access. 
 
 
¶11. (C) Comment: Media reports have interpreted the EPSA IV 
 
TRIPOLI 00001038  003 OF 003 
 
 
round results as a sign of diminished interest by IOC's in 
Libya's hydrocarbon sector in general, and in the gas end of the 
business in particular; however, the four winners (Gazprom, 
Sonatrach, Shell and Polski) are all major companies and proven 
gas producers.  Although the latest EPSA round failed to attract 
as many bids as the NOC would have liked, the fact that serious 
first and high-second tier companies ultimately bid and won 
potentially augurs well for efficient exploitation of Libya's 
gas reserves, although serious investment in gas export 
infrastructure is needed.  The broader message from this round 
is that while IOC's are still keen to establish a  presence and 
book reserves, they are increasingly reluctant to pay large 
signing bonuses up-front to do so.  End comment. 
 
 
 
 
 
 
 
 
Shell only major IOC; Polski, Gazprom, Sonatrach reflect EPSA 
III results and trend towards highest bid despite quality of 
operator (for EPSA rounds); GOL has recently concluded non-EPSA 
contracts with BP and Exxon Mobil (reftel), and extended 
contracts with Eni and PetroCanada to lend some balance to mix. 
MILAM