LIBYA - Libya's Oil Refining & Petrochemical Sectors.

The government has allocated about $10 bn for a programme to upgrade and expand Libya's oil refining and petrochemicals sectors. But actual costs could exceed such a budget, as project costs worldwide have gone up rapidly in recent years. The state-owned National Oil Corp (NOC) has entered a joint venture with Dow Chemical of the US to operate and expand its Ras Lanuf petrochemicals complex.

Libya has a total refining capacity of 348,000 b/d. But their throughput has been limited to about 320,000 b/d, with 275,000 b/d reserved for the domestic market and 45,000 b/d of petroleum products being exported by NOC.

MEED on June 8 said Tripoli's plans for a major upgrade of the 220,000 b/d Ras Lanuf refinery, expected to cost about $2,000m, may be significantly scaled down. It quoted a "source close to the project" as saying: "It is unlikely that NOC will carry out the full upgrade at this stage. It is more likely to confine the work to the desulphurisation and dewaxing of the existing facility".

NOC has been evaluating investment proposals for the project submitted by a number of international companies. Meanwhile, repeated efforts to tender an engineering, procurement and construction (EPC) contract to upgrade Libya's second largest refinery, a 120,000 b/d facility at az-Zawiya, have been abandoned, with the project expected to be re-tendered as a joint venture partnership with NOC.

While Tripoli is focused on upgrading existing refining infrastructure, there are also plans to build new facilities. Tamoil Africa, an affiliate of NOC, plans to build a $8 bn refinery near Mellita. There is speculation that Occidental Petroleum (Oxy) of the US is planning a refinery in the same area.

The landmark EPSA signed by NOC and BP on May 29, 2007, marked the return of the oil giant to Libya after an absence of more than 30 years. Not only is the deal the largest in BP's history, but it also signifies a major and much-needed boost to Libya's upstream and downstream sectors. BP will initially invest $900m exploring 54,000 sq km in the Ghadames basin and offshore Sirte (see gmt1LibGeo-Jul2-07). And depending on the success of its gas exploration, BP has plans for a $25 bn development programme which could result in the construction of up to four LNG export trains.

The inclusion of a downstream element in the E&P deal demonstrates a policy turning point in the recent history of NOC. Since the removal of international sanctions in 2004, Tripoli has focused its efforts on boosting upstream activity, conducting three successful EPSA bidding rounds in quick succession.

BP's commitment to downstream development and the announcement of two joint ventures with Dow Chemical and Yara International of Norway suggest NOC has recognised the need to have a strategy to get its petrochemicals and refining industries in order. MEED on June 8 quoted a NOC executive as saying: "We are moving in that direction. For the past few years, we have been working on the principles for setting up a downstream industry".

In April, it appeared that drawn-out negotiations between NOC and Dow Chemical had finally been concluded successfully. The companies confirmed they would enter into a partnership to operate and expand the Ras Lanuf petrochemicals complex. Based on naphtha cracking, the plant produces 330,000 tons/year of ethylene, 170,000 t/y of propylene, 130,000 t/y of mixed C4s and 325,000 t/y of pyrolysis gasoline.

Following the refurbishment and expansion of the existing facilities, a new ethane cracker and polyethylene and polypropylene plants will be added. At a later stage, additional hydrocarbons, plastics and chemical production facilities based on natural gas will also be built.

The second JV was announced a few days later. Under the agreement, Yara will upgrade and expand the ammonia and urea plants at Marsa el-Brega on the Mediterranean coast. The plants produce 700,000 t/y of ammonia and 900,000 t/y of urea. About 150,000 tons of ammonia are available for sale and Yara will be responsible for marketing the plant's products for export. But not everyone is optimistic.

Libya has often shown that the signing of an agreement does not guarantee a project will go ahead according to plan. MEED on June 8 quoted "an executive at a European engineering company" as saying: "It is near, but it is not 100 per cent there. The decision can be changed every minute".

A deal with Shell highlights the difficulties international investors continue to face in Libya. In May 2005, Shell signed a long-term gas exploration and development agreement. The arrangement gave Shell exploration and development rights in five blocks in the Sirte basin, in return for a commitment from the company to upgrade the LNG plant at Marsa el-Brega. Depending on the quantity of gas it finds, Shell may also build a new LNG terminal. It has already been allocated a site near Ras Lanuf for the facility.

Progress is slow, however, and the initial rejuvenation phase of the Marsa el-Brega revamp has not begun. Shell says it has shortlisted bidders for the project, but the prequalified companies are still waiting to hear whether they have been successful.

JVs with foreign investors feature significantly in NOC's plans. MEED on June 8 quoted "Omar Gazal, general manager of oil & gas downstream processing at NOC", as saying: "NOC's current policy is to deliver these developments through joint ventures with international companies active in downstream industries". MEED quoted "an industry analyst" as saying: "Libya will need outside help if it wants to make progress on its ambitious plans. It needs the direction, money and technology. It does not have the expertise. The Western Libya gas project was not as complicated as a refinery and there were 18,000 people in three countries working on it".

The partnership approach is already being applied to the country's refineries. Uhde of Germany and an Indian team of Engineers India and Punj Lloyd have submitted bids for the rehabilitation of the az-Zawiya refinery. MEED said NOC was in the final stages of evaluating investment proposals from foreign companies. The outcome was due to be announced by end-June.

While a JV requires at least 35% Libyan ownership, it is the foreign investor who is expected to take on the full cost of a project. MEED quoted "an industry analyst" as saying: "This is what keeps most people out. It is a lot more palatable for the NOC to give investors [a share of the] production, but they only get a small portion. This stretches the pay-out period".

NOC has been prioritising the upgrade of its existing petrochemicals plants and refineries, with plans to build new facilities at a later stage. MEED quoted Gaza as saying: "Our existing facilities are well maintained, operating efficiently and are in good conditions. However, we are planning to expand them so that they meet the economics and technical needs of today's market".

Libya's inability to produce unleaded gasoline and low-sulphur fuel oil puts it at a distinct disadvantage when it comes to exporting its products. It has to sell all its surplus products into Africa because that market does not require higher-specification fuels. MEED quoted an industry analyst as saying: "The equipment functions properly, but produces the wrong product".

The massive overhaul of NOC's downstream sector will not be cheap and observers say delaying the process has increased costs. Estimates are as high as $14 bn. MEED quoted the analyst as saying of NOC: "It should have done the projects five years ago. Its timing is awful. It will have trouble getting technology and people - everything is squeezed at the moment".

In addition to market conditions, Libya's status as a country in flux has the potential to deter foreign investment. Ongoing legal and banking reforms may leave investors feeling uncertain about the Libyan market. MEED quoted an engineering company executive as saying: "Everything has to be stabilised first".

NOC has recently commissioned a team of LG Chem of South Korea and the UK office of the Jacobs Consultancy of the US to examine the feasibility of a major new petrochemicals complex at Mellita. The consortium will advise Tripoli on the most effective way to exploit its hydrocarbons, in particular its gas assets. MEED on June 8 quoted "a senior source at NOC" as saying: "At this stage we are just looking at possibilities. We do not know whether we will be going ahead with a project". But MEED quoted "a source close to the project" as saying: "The prospects [for the project] are encouraging. Libya probably has the greatest untapped potential in Africa. Its crude [oil] is high quality and there is likely to be a lot of gas once exploration is accelerated. It is one of the last genuine frontiers".

A consortium of Jacobs and HSBC has been advising Algerian state energy company Sonatrach on the development of a series of world-scale petrochemicals facilities, but is understood to have withdrawn from the project.