BP Snares Huge Libyan Gas Fields

The deal rewards a long-term effort by the British oil giant, and highlights the rising importance of North Africa as an investment target

by Stanley Reed

At a time when the major oil companies are struggling to gain access to good new exploration acreage, Libya is one of the few countries making it easier. On May 29, during a farewell visit to Col. Muammar Qaddafi by British Prime Minister Tony Blair, BP (BP) signed a major gas deal with the Libyan National Oil Company. The agreement, which will likely involve at least $2 billion in investment according to BP, covers three huge, largely unexplored tracts.

Qaddafi may be rewarding BP for Britain's crucial role in bringing Libya in from the cold in the last few years. And for its part, BP is one of many businesses coming around to the view that North Africa, which not long ago was dotted with pariahs and basket cases, is becoming an increasingly attractive place to invest (see BusinessWeek.com, 3/14/07, "Libya is Open for Business").

The vast swath of countries across the southern edge of the Mediterranean have rich oil and gas reserves and even boast some advantages over the oil-rich Arab states surrounding the Persian Gulf. For one thing, North Africa is much closer to the major markets of Western Europe—one reason why Dow Chemical (DOW) recently took a 25% stake in a Libyan petrochemical complex at Ras Lanouf. North Africa also has a large and fast-growing consumer market of about 170 million people. "If you look at the way the North African economies are growing, we think the area is very exciting," says Earl Shipp, Dow's president for basic chemicals.

The Big Pay-Off

BP badly wanted to return to Libya, where rival Royal Dutch Shell (RDS) already has locked up a big gas exploration package and ExxonMobil (XOM) is also splashing out major funds. The negotiations included at least three visits by former chief executive officer John Browne (see BusinessWeek.com, 3/15/07, "Going for a Gusher in Libya").

BP has not been a big player in the recent highly competitive Libyan auctions of exploration acreage, preferring to focus on a bilateral deal. Now it looks as if the strategy has paid off. BP has won what Libya specialists say are two very promising blocks in the west of the country. Called North and South Ghadames, they resemble the geology of neighboring Algeria, where BP is a big, knowledgeable player. The North Ghadames block alone is the size of Kuwait.

The third block, which compares in size to Belgium, is as much as 180 miles (290 km) offshore and in water over a mile deep. But what has the industry salivating is the location of the tract offshore of the Sirt Basin, a productive region where most Libyan oil has been found. The deep water acreage is considered high risk and will be expensive to drill and develop, but BP says the geology under the seabed resembles that of the North Sea—another area it knows well. "BP did a good job by taking two good blocks and one risky one," says Bindra Thusu, a geology professor at University College London with extensive experience in the Libyan oil industry.

Offsetting Russian Disappointment

Craig McMahon, an analyst at Edinburgh-based energy consultants Wood Mackenzie, thinks that among the three blocks the offshore Sirt Basin tract has the most potential for huge finds. The area has never really been explored except for a sprinkling of wells. "It remains frontier, but it is an enviable position because all indications are that the play extends offshore," McMahon says.

Such prospects will help offset a potential disappointment in Russia, where BP's Russia subsidiary TNK-BP looks increasingly likely to lose the Kovytka gas fields in East Siberia.