The energy industry's Mediterranean love affair
Eni's purchase of First Calgary Petroleums is another sign of the sector's plans for Algeria and Libya. And the competition is heating up
ERIC REGULY // Globe and Mail
September 9, 2008
ROME — Algeria and Libya have gone from no-go countries to the hottest of the oil and gas hot spots in only a few years.
After a spate of recent deals, more evidence of the new love affair with the two Mediterranean countries came yesterday when Italian energy giant Eni SpA agreed to buy Toronto-listed First Calgary Petroleums Ltd., which owns a natural gas field in Algeria, for about $923-million.
For Eni, acquiring First Calgary means the Italian firm is snapping up huge reserves in a country where it already operates, all at a price that has come down considerably. First Calgary's stock price has dropped from $24.90 a share in 2005 to below $4 yesterday, in part because of a lack of progress in developing its MLE field near the Libyan border, the company's main holding.
With First Calgary's reserves estimated to contain 190 million barrels of oil equivalent of proved and probable gas, Eni's offer of $3.60 a share means the company is effectively paying less than $5 for every barrel, an ultralow price to pay for future production.
Algeria and Libya are among the last great hopes for the energy industry as it struggles to offset waning reserves and production in mature fields, such as the North Sea. They have rising production, vast unexplored tracts of land and a hunger for foreign investment, if only on their own strict and demanding terms.
The bad news: The competition for exploration and production licences and contracts in Algeria and Libya is heating up, with some Western governments offering to spend billions to lock up energy wealth for their national oil and gas champions.
The Italians covet Algerian gas. Their alternative is to buy it from Russia. Eni already has substantial oil and gas operations in Algeria, currently producing around 90,000 barrels of oil equivalent a day.
Until recently, Algeria and Libya were off limits to foreign oil and gas companies. Algeria was torn by a civil war that didn't sputter out until 2001, when peace accords were signed. Economic sanctions against Libya were not lifted until 2003, after Libyan Leader Moammar Gadhafi agreed to pay reparations concerning the 1988 bombing of Pan Am Flight 103 over Scotland, and abandon plans to develop nuclear weapons.
Italy last month pledged to pay Libya $5-billion (U.S.) in compensation for the abuses and deaths during three decades of colonial rule, which ended in 1943. The move was widely seen as an energy-driven diplomatic deal to guarantee Italian energy and pipeline companies, notably Eni, which is partly owned by the Italian state, long-term access to the Libya's oil and gas developments.
Sensing the region would become the next frontier for conventional oil and gas, Petro-Canada became an early mover when it acquired the international assets of Germany's Veba Oil and Gas for $3.2-billion (Canadian) in 2002. Among Veba's prizes were a number of oil and gas exploration and production concessions in Libya.
Through a joint venture with National Oil Corp. of Libya (NOC), Petrocan has become one of the country's biggest producers, with output of 100,000 barrels a day, a figure it expects to double in five years.
Petrocan spokesman Tom Carney said the Libyan experience has been fruitful, even if negotiations with NOC have sometimes been difficult; the country is forcing foreign oil companies to give up a greater share of the profits from producing fields. "Libya is second only to the oil sands in the size of the opportunity and the capital investment," he said.
Petrocan and NOC are busy hammering out the details of new exploration and production-sharing agreements that will be valid for 30 years and involve a joint investment of $7-billion (U.S.). About $500-million is to be spent on exploration.
Calgary-based Venerex Energy has also had a successful exploration program in Libya, although it has not produced any oil. The company, which owns a 50-per-cent stake in a Libyan property that could one day produce 92,500 barrels of oil a day, announced yesterday it is exploring its "strategic alternatives," meaning takeover offers are welcome.
Algeria has remained a tougher market for foreign oil companies. A recent surge in violence has rattled all foreign investors there. Canadian engineering company SNC-Lavalin lost 12 Algerian workers in August, when the workers' bus was attacked by terrorists.
Algeria, like Libya, is also demanding a greater share of the profits from oil and gas developments. In general, the companies are paying more for less equity in the projects. One big project went spectacularly wrong. Last year, Sonatrach, the Libyan state energy company, had a falling out with two Spanish energy giants, Repsol YPF SA and Gas Natural, on a massive liquefied natural gas (LNG) development. Sonatrach dumped its partners. The Spanish duo claimed the failed venture cost them hundreds of millions of dollars.
But Algeria's oil and gas reserves and potential are so rich that big energy players cannot ignore the country. Norway's StatoilHydro, Britain's BP, France's Total and OMV of Austria are among the heavyweights eager to expand in Algeria, which is already the world's fourth-biggest LNG producer and controls 20 per cent of the European gas market.
Algeria's newest arrival is Russia's giant Gazprom. Gazprom recently opened an office in Algeria, but has yet to strike a significant deal. Not long ago, the Kremlin agreed to write off $4.7-billion of Algeria's Cold War-era debt in exchange for a deal to sell Algeria weapons. Can an oil and gas deal be far behind?
With files from Norval Scott
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