Royal Dutch Shell Group .com

The Daily Telegraph: Shell fills its boots in the desert sun


Christopher Hope (Filed: 27/03/2004)


For Malcolm Brinded, Shell's head of exploration and production, it was a moment to savour. For the first time in many weeks, he was not concerned with the level of Shell's commercially exploitable oil and gas reserves. 


Instead, he was doing what he joined the company to do - clinching a deal to look for oil in a place where there is the real possibility of big finds. Brinded was in Libya to sign a "heads of agreement" to look for oil and gas there.


Shell also agreed a $200m deal with Libya's state-owned oil and gas company - described, with due protocol, in Shell's press release as the "National Oil Corporation of the Great Socialist People's Libyan Arab Jamahiriya" - to build a liquefied natural gas terminal.


It was a rare slice of good fortune for the Anglo-Dutch giant, and a welcome distraction from its management problems. Tony Blair's visit to Libya was the first by a British prime minister since Winston Churchill's. The timing gives Shell much to be grateful for.


The last few months' fire-fighting, following the 20pc cut in its proven reserves, could be set aside for a while, as an army of reporters pestered the party for news about Shell's plans to exploit its new-found freedom. While Blair and Colonel Muammar Gaddafi were shaking hands in a tent, Brinded was across Tripoli sounding statesmanlike.


"I look forward to our co-operation becoming a cornerstone in a renewed trade relationship between the UK and Libya," he told the assembled hordes. "Today's landmark agreements provide a roadmap for future developments, which would involve Shell contributing to the efforts to enhance the country's production capabilities."


It would have been considered poor form to say Shell had stolen a march on BP, but that's the way it looked. A BP spokesman said it had "no plans" to look for oil or gas in Libya, and "no claim" on its interests there, even though they were nationalised in 1971.


Oil companies have to get used to this sort of thing, which is why Libya's foreign minister, Mohamed Abderrhmane Chalgam, is confident that all the majors will not be far behind. He claims to have 180 contracts, worth an estimated $30 billion, to hand out. "We want to rehabilitate our oilfields and upgrade our facilities. Shell is very important, but it is open to competition," he said.


Others are already there. Italy's Eni, Spain's Repsol and France's Total never went away, and Eni has $6 billion sunk into the Western Desert gas export pipeline linking Libya with Italy, due to open next year.


However, Shell is one of the world's top three players, with on-off involvement in Libya stretching back to 1956. It finally pulled out in July 1991.


Libya is hoping that the deal will be the signal for US oil and gas majors to invest there. They are certainly interested. Occidental, which has a history of dialogue with countries where others do not dare to tread, opened an office in Tripoli earlier this month. Its president has held talks with Libya's foreign minister.


The "Oasis" group of three other US oil companies - Amerada Hess, Conoco and Marathon - is also keen to return. The group's rights to some fields were suspended when the US imposed sanctions on Libya in 1986. The rights expire next year, but some compromise is surely possible.


Tony Mills, vice-president of global consulting at Wood MacKenzie, says: "It augurs well for Libya in the future. They are hoping that some of the major US companies will come back."


Until the late 1960s, Libya supplied a quarter of Europe's crude oil, and appears to have more reserves than any other African country - 36 billion barrels compared with Nigeria's 25 billion, Algeria's 11 billion and Angola's 5 billion. There is gas, too - 40 trillion cu.ft., compared with Algeria's 65 trillion and Egypt's 60 trillion.


It will take time to step up production, so we should not bet on a flood of oil or a dramatic impact on the price of oil, which currently refuses to dip below $30 a barrel. Libya is a member of the Organisation of Petroleum Exporting Countries, so it is bound by the quotas on which Opec member countries agree. The country can argue that it should be allowed to sell more, since two decades of sanctions have had their inevitable impact on its infrastructure, both to support oil extraction and to allow development of the rest of the economy. In addition, the technology of exploration and production has improved vastly since 1986.


Manouchehr Takin, an analyst at the London-based Centre for Global Energy Studies, says: "Because of the sanctions of the US and the UN, special equipment for the fields was considered not to be important. They could not replace all the equipment."


As a result Libya's average production output is still low - 1.4m barrels of oil per day in 2003 compared with Nigeria's 2.21m bpd, Algeria's 1.1m bpd, and Angola's 900,000 bpd.


Takin says there will be a long lead time before production increases: "It will take four to five years before [production] can go up by a few hundred thousand barrels per day.


"You are talking about the medium to long term for the effect of opening up Libya, as far as the world market is concerned."


Business links are improving, and this should speed the process. During the sanctions era, airlines refused to fly there. Takin says: "You had to fly to Tunisia and then take a one-day bus ride to Tripoli." Now British Airways, which started direct flights in 1999, is to increase its service from four to six times a week.


Libya's re-emergence as a place to do business looks well-timed for Western oil companies concerned about dwindling reserve levels. Like Iraq last year, it shows that on occasion politicians are not deaf to the necessity of driving through geo-political change to find more oil which will keep Western economies on the road.

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