Gazprom Eyes European Gas Market with Libya Offer

Libyan Opportunities

Russian gas giant Gazprom caused raised eyebrows this week when its chief executive, Alexei Miller, told the Financial Times that it was eyeing the possibility of buying all of Libya's future gas increment, together with a share of the country's planned oil production (see Libya: 10 July 2008: Gazprom Offers to Buy Libya's Gas, Oil, and LNG Exports; Offers Lure of Refining Investment). Libya, which is seen as a growing core supplier of oil and gas to Europe, has re-entered the international community in the past few years—following decades of isolation and sanctions—and has offered large amounts of prolific acreage to IOCs via several licensing rounds, as well as bilateral deals. Gazprom's proposal, therefore, runs the risk of striking a particularly sensitive chord among Libya's mainly European oil and gas importers, as Libya—especially in the continued absence of hydrocarbon growth opportunities in Iran and Iraq—has become a focal point of Europe's hopes to secure additional, non-Russian, oil and gas imports.

A large number of IOCs are now invested in Libya, with oil majors such as Shell and BP also pursuing integrated exploration and production (E&P) deals with planned gas liquefaction components (see Libya: 24 May 2006: Shell Hopes to Accelerate Libya Gas Deal and Libya: 30 May 2007: BP Announces US$900-mil. Gas Exploration Comeback to Libya). Gazprom's expressed interest in future Libyan LNG volumes is, in this sense, particularly intriguing, as the future LNG output in Libya is expected to come from either BP, Shell, or possibly Eni- and ExxonMobil-led ventures.

Libya currently exports 1.7 million b/d of crude, but plans call for its National Oil Corporation (NOC) to raise exports to 2 million b/d already before the end of this year—although attempts to achieve this in earlier years have repeatedly failed. Libya's gas output in 2007 stood at around 950 bcm, but the country's only current gas export projects consist of the ancient Marsa El Brega LNG plant's 1 bcm/y output and Eni's Green Stream Pipeline, which has an export capacity of around 8 bcm/y. Libyan gas reserves are estimated at 52.6 tcf, although it is widely believed that large-scale exploration should lift reserves to between 70 tcf and 100 tcf, explaining the international interest for investment in Libya and the opportunity sensed by several majors to pursue integrated LNG deals.

Gazprom Moving on Several Fronts

The high-level Gazprom delegation led by Miller seems to have been courting the Libyans on several levels. While the offer to buy the country's future gas and oil production increments seems to signal Gazprom's interesting in entering a close partnership and/or co-operation agreement with Libya's NOC, Gazprom also offered to enter into joint ventures (JVs) with the NOC over downstream refining projects, an area where Libya has struggled to gain investments given domestic market price caps, large upgrade needs, and unattractive incentives being offered. The Russian gas monopoly also said it had entered into discussions—which it said was at Libya's behest—to study the possibility of a new gas pipeline connecting Libya to Europe.

Apart from talks directly with Libya's NOC, Gazprom has been in advanced talks with leading Libyan player Eni to farm into its Libyan acreage in exchange for Eni access to Russian E&P blocks. With Italy's Eni having emerged as one of Gazprom's closest IOC partners, the Italian company's strong position in Libya and its operation of the only current gas pipeline connecting Libya and Europe was enough to trigger concern in Europe, which is looking to import more gas from North Africa, the Middle East, and the Caspian region in an effort to reduce growing dependence on Russian gas imports (see Libya: 11 April 2008: Gazprom and Eni Agree to Work Together in Libya and Libya: 18 April 2008: Eni Might Offer Gazprom Stake in Libya's Elephant Field).

Furthermore, reports by Russia's RIA Novosti news agency yesterday also indicated that Gazprom was in talks to acquire Libyan E&P licences held by Ukraine's state-owned Naftogaz Ukrainy. Naftogaz has struggled to honour its investment commitments for four exploration blocks secured in the 2004 licensing round, having managed to invest only US$16 million in exploration, as opposed to the US$57.5 million that was initially envisioned. Selling the licences to Gazprom would be a way for Naftogaz to escape a forced relinquishment of the acreage, as NOC might be prone to agree to Gazprom's entry, given its current political clout. However, NOC has otherwise been known to frequently oppose licence transfers and farm-ins, preferring to decide for itself which company should operate or invest, and where.

Outlook and Implications

Gazprom's interest in Libya is clearly strategic—so much as the Russian gas monopoly's geographically widespread focus on expansion internationally can be deemed "strategic", given planned or committed investments in such diverse locales as South America, Vietnam, Nigeria, Turkmenistan, and Canada, among others. Libya's return to the international community, as well as its emergence as a potential new source of gas supplies—in particular—for Europe, puts the North African country in a position to erode some of Gazprom's 25% share of the European gas market, especially in southern Europe. That in itself appears to give the Russian firm sufficient motivation to court Libya, offering investments that would give Gazprom a role in Libya's future gas production and therefore a say in its gas exports.

This would give Gazprom, which says it is not interested in forming a "Gas OPEC" but is merely looking to bring gas-exporting countries together to improve co-ordination and strategies, the ability to sideline—or at least influence—Libya as a competitor to Russia for gas supplies into the European market. Gazprom has recently made a similar offer to Azerbaijan, suggesting it would buy all of the country's growing gas output—at market prices, no less—in a "co-operation" agreement between producers that would, effectively, allow Gazprom to buy out a nascent competitor (as well as undermine the Nabucco pipeline, which could compete with Gazprom's own South Stream pipeline project, see Azerbaijan: 3 June 2008:In Tactical Move, Gazprom Offers to Buy Azeri Gas at Market Prices).

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