Industry Trend Analysis - Total Investment Signals Thawing Sentiment - APR 2018
BMI View: Total's Waha acquisition is a sign of gradual improvement in investor sentiment towards Libya. However, a larger uptick in investment is unlikely until more substantive political progress is made.
Total has acquired Marathon Oil Libya for USD450mn, taking a 16.33% stake in the Waha Concession in the Sirte basin. The concession covers 3bn barrels of oil equivalent (boe) in discovered resources with substantial exploration potential. It also includes 300,000 boe/d of production, which is slated to increase to 400,000b/d in the coming two to three years, following the restart of development drilling in the area.
The acquisition is a positive sign for the Libyan oil sector. Post-Qadhafi, amid widespread conflict, companies pared down their spending and operations in the country. However, the conflict has ebbed and operating conditions have somewhat improved over recent quarters. This supported around a 100% y-o-y increase in crude and condensates production in 2017 and we forecast a further 10% gain this year.
|Recovery In Full Swing|
|Libya Oil Production Forecast, '000b/d & % chg y-o-y|
|f = BMI forecast. Source: BMI, EIA, OPEC|
Nevertheless, the security environment is still deeply fractured and the risks remain high. Various groups looking to gain leverage on the government have repeatedly targeted oil and gas infrastructure. Substantial damage has been inflicted on production facilities, storage units and pipelines and supply disruptions are a recurrent feature of the market.
We expect to see continued progress on the domestic political front, albeit gradual. Steps are being taken to pave the way for presidential and legislative elections, although the 2018 deadline is, in our view, likely to be missed. The political space is highly fragmented and consensus-building between the various factions is hard to achieve. The broader peace process remains challenging and it will be a number of years before stability can be re-established on the ground.
Until a lasting resolution to the conflict is secured, we do not expect to see any substantial uptick in investment into the Libyan oil sector. Until this point, it is likely that spending will focus on brownfield assets - such as the Waha Concession - rather than in exploration activities or greenfield developments. While security and political risks are elevated, a focus on brownfield projects reduces technical risks and lowers the overall capital costs. The entirety of the production growth factored into our 10-year forecasts is from legacy producing assets.