LIBYA - Libya-Italy Pipeline Gas Sold Out.

A pipeline from Libya to Sicily has been pumping 9.2 BCM/year of natural gas to the Italian market since late 2004. The line began pumping on Oct. 1. It was officially inaugurated on Oct. 7 in a ceremony attended by Libyan ruler Mu'ammar Al-Qadhafi and visiting Italian Premier Silvio Berlusconi. All the gas has been sold out under long-term contracts.

The Italian energy group ENI - whose E&P arm Agip has developed the gas fields which feed the pipeline called Greenstream and is a 50% partner in this and West Libya Gas Project (WLGP) - is buying 1.2 BCM/year extra on top of the pipeline's planned 8 BCM/year flow to the Sicilian coastal town of Gela. This is under a special contract to last up to 18 months from late 2004. WLGP's output capacity is 10 BCM/year, with 2 BCM/year allocated for the Libyan market. But Libya's state-owned NOC has not been able to take the gas for the local market and plans for a pipeline to supply most of the gas to Tunisia have been delayed.

Work on the 275-km, 2 BCM/y pipeline from Melitah to Gabe in Tunis is to begin shortly, following an agreement on this announced on July 17. The pipeline is to cost about $200m and should be completed by end-2006. ENI may have to extend the period of buying the extra gas until then. The pipeline will be run by Joint Gas, a Tunis-based JV of NOC and Tunisia's power and gas utility Steg.

NOC had initially offered to auction the extra gas to European majors in June and received fairly aggressive bids from the latter in view of a shortage in Italy. But ENI exercised its right of first refusal and had to buy the surplus. Both the planned infrastructure for the Libyan market and construction of the pipeline to supply Tunisia were delayed.

Agip Gas BV, the 50-50 Agip/NOC JV in charge of the WLGP and Greenstream, on Feb. 9, 2000 signed a 24 per annum contract to supply Edison Gas of Italy with 4 BCM/y. On Nov. 16, 1999, Agip Gas signed 24-year contract to supply Gaz de France with 2 BCM/year. In January 2000 Agip and Energia Gas, a JV between Gazprom of Russia and Italy's biggest gas utility Snam, signed a similar contract for the remaining 2 BCM/year. All three contracts have the take-or-pay (ToP) clause.

Apart from the 10 BCM/y gas stream planned, the whole WLGP to be completed this year is also to produce 60,000 b/d of crude oil, 39,000 b/d of condensates, about 15,000 b/d of propane and 13,000 b/d of butane (see Gas Market Trends 2).

The WLGP/Greestream programme forms a major part of ENI's strategy to take advantage of the proximity of North African gas reserves to feed southern Europe, where gas consumption is on the rise. This has enhanced Libya's role in supplying the energy needs of the European Union and help it emerge as a rival to neighbouring Algeria.

Yet unlike Libya, where stifling bureaucracy still hampers development of its massive energy resources, Algeria's more open approach has paid off handsomely. Despite its comparative remoteness, Algeria has been supplying gas to Italy since 1983 through the 2,500-km TransMed pipeline to Sicily. Sensing competition from Libya and Egypt, Algeria is expanding TransMed's capacity to 32 BCM/y. ENI has a stake in Transmed's final segment.

Algeria's Sonatrach, together with Italian utilities and Wintershall of Germany are having a 1,500-km natural gas pipeline built under the Mediterranean to Sardinia. The $2 bn line running from Algeria's eastern terminal Skikda is to be operational in 2008. It will later be extended to supply France and Germany (see survey of Algeria in Vol. 64, Nos. 5-8).

Greenstream, a 32-inch pipeline, run 540 km from a 10 BCM/year onshore gas treatment plant at Melitah, on Libya's northern coast, to the coastal town of Gela in Sicily. Technip Geoproduction, under a $100m contract signed on Dec. 9, 1999, has provided project management services for the whole $9 bn WLGP programme including the gasline to Sicily and the Melitah plant. It has done all the front-end engineering and designs (FEED).

The upstream WLGP consisted of developing the onshore Al-Wafa' field (520 km south-west of Tripoli on the Sahara border with Algeria), which came in 2004 with a capacity of 3 BCM/year, and the offshore reserves of Block NC41 in the Mediterranean called Bahr Essalam and of the adjacent El-Bouri oilfield.

Being off Melitah, which is located almost half-way between Al-Wafa' and Sicily, the latter two parts also came on stream in 2004 and their capacity is a little over 7 BCM/y. As in the case of Al-Wafa', their development has included a network of pipelines gathering oil and gas (see the upstream profile the WLGP in Gas Market Trends No. 2 of last week).

European Reliance On Libyan Energy: Relative to other source countries, Libya also exports small quantities of gas in liquid form to Europe. But the Greenstream pipeline has made Libya an important source of gas to Italy and a part of Central Europe, as Edison intends to market some of the Libyan gas in Slovania and Croatia. Italy, one of the main gas consumers in Europe, already relies heavily on Libyan oil (see OMT of this week).

Italy is the third largest market for gas in the European Union, next to Germany and the UK. Gas consumption in Italy is forecast to rise from 73 BCM in 2003 to 100 BCM/y by 2010, fuelled in part by a boom in gas-fired power generation. Algeria and Russia are currently top gas suppliers to the Italian market.

Libya offers Italy a cheaper alternative to its traditional gas suppliers, thanks to its closer geographical position and massive but largely under-developed reserves. With the US sanctions lifted in 2004 American companies are already investing in Libyan energy resources. Until then, the absence of US firms had a silver lining for European companies.

ENI, banking on historical ties with Libya which was once an Italian colony, was quick to reap the benefits before the US sanctions were lifted.

That the WLGP went on stream ahead of schedule was a tribute to ENI's patience in overcoming many years of bureaucratic hurdles in Libya, where few people were prepared to make key decisions lest they ran foul of Col. Qadhafi's autocratic rule. The scheme was first conceived in the early 1990s. Nothing much happened until 1999 when the Italian major clinched a landmark gas sales and marketing deal with NOC. That finally paved the way for the development of gas, oil and condensate reserves.

There are, in fact, sufficient reserves of natural gas in Libya to support an export programme for more than 20 BCM/y to Europe, as well as cover Libya's domestic requirements during the next two decades.

Italy, closest of Libya's markets, is concerned about the security of gas supplies from Algeria in the event of an Islamic takeover there, or from Russia on which it will be depending heavily in the coming decades. This is why Libya has been an attractive proposition for the Italians.

Greenstream should be expanded later in this decade to reach almost 20 BCM/y to supply Germany and other major European markets. European dependence on Algeria and Russia will be offset by increased supplies from Libya and Norway - as well as Middle East countries like Iran and Central Asia.

Recoverable reserves of natural gas in Libya have since 1993 been estimated at 45.87 TCF (1,299 BCM). They had been re-evaluated to 43 TCF in the early 1990s. Experts at NOC believe the real size of Libya's recoverable reserves could be in the range of 50-70 TCF. They would be adequate for a big export programme and for rapidly rising domestic demand.

A restructuring of Libya's petroleum sector has featured a momentous change in its investment strategy for market shares. Through Oilinvest, Libya has acquired outlets in Europe for a major part of its oil production, with the main base being in Italy (see Downstream Trends of this week).