LIBYA - Libyan Pipeline Gas Exports To Italy Exceed Contracted Volume.

Libya, Africa's fourth-largest natural gas producer, increased gas exports to Italy by 20% of contracted volumes this winter because of higher demand and prices. The state-owned National Oil Corp. (NOC) in March 2007 said Libya exported 1,000 MCF/day of gas through Greenstream, an 11 BCM/year sub-sea pipeline to Sicily. NOC's Website cited Fu'ad Krekshi, the chairman of ENI North Africa BV, a 50-50 JV between NOC and ENI of Italy which owns and operates Greenstream. This has been sending gas to Italy since October 2004.

Italy, Europe's third-largest gas market, is seeking to increase imports of this clean fuel from Africa and the Caspian Sea region to reduce dependence on gas supplies from Russia. Russian deliveries to Italy dropped in early 2006, when Gazprom temporarily halted supplies to Ukraine because of a gas-price dispute. Most Russian gas to Europe is sent by pipelines through Ukraine.

Krekshi in March said on NOC's Website ENI North Africa BV then was in the process of changing its name to Mellitah Gas. Libya's government has demanded that companies operating in the North African state take Libyan names to reflect Libyan ownership. Libya holds Africa's largest crude oil reserves. Libya's gas reserves of 52 TCF are the fourth-largest in Africa, after Nigeria, Algeria and Egypt.

Libya produces about 12,000 MCM/year of gas, of which 8,000 MCM/year (about 800 MCF/day) have been contracted to Italy - with pumping to Sicily in the past winter having averaged 1,000 MCF/day. Less than 1 BCM/year are liquefied and shipped to Spain on LNG tankers and the rest is consumed locally. Libya is the fourth-largest producer of gas in Africa behind Algeria, Egypt and Nigeria.

Total production from the Western Libya Gas Project (WLGP), a 50-50 JV of NOC and ENI, in 2006 hit its plateau level of 1,150 MCF/day of gas and 100,000 b/d of liquid hydrocarbons. WLGP supplies 1,000 MCF/day of gas to Libya's al-Ruweis power plant. It will provide gas for the el-Harsha and West Tripoli power plants once the Mellitah-Tripoli gasline has been built. Libya is hoping to free up for export the oil which is currently flared in its power plants, replacing it with gas.

The Italian energy group ENI - whose E&P arm Agip has developed the gas fields which feed Greenstream and is a 50% partner in this and the WLGP - has been buying between 1,200-2,000 MCM/year extra on top of the pipeline's planned 8,000 MCM/year flow to the Sicilian coastal town of Gela.

Work on a 275-km, 2 BCM/y pipeline from Mellitah to Gabe in Tunis began in late 2005, following an agreement on this announced on July 17 in that year. The pipeline costing about $200m and should be completed this year. 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 in early 2005 had offered to auction the extra gas to European majors in June of that year 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 (a unit of ENI North Africa BV), the 50-50 Agip/NOC JV in charge of the WLGP and Greenstream, on Feb. 9, 2000 signed a 24-year 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 (GdF) with 2 BCM/y. 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/y. All three contracts have the take-or-pay (ToP) clause.

Apart from the 10 BCM/y gas stream planned, the whole WLGP completed in 2005 is also producing 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 EU 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. 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 gas pipeline built under the Mediterranean to Sardinia. The $2 bn line running from Algeria's eastern terminal Skikda is to be operational in 2009. It will later be extended to supply France and Germany (see survey of Algeria in gmt7AlgerGasExprtFeb12-07).

Greenstream, a 32-inch pipeline, runs 540 km from an 11,000 MCM/year onshore gas treatment plant at Mellitah, 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 Mellitah 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 Mellitah, 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: Greenstream has made Libya an important source of gas to Italy and a part of Central Europe, as Edison is marketing 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, 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.

Other Italian P/L Proposals: ENI in recent years proposed linking the reserves of both Egypt and Libya to Italy by pipeline. This would require a bigger investment and longer time. The political leadership in Tripoli no longer favours this option. Yet an agreement to link Libya's national gas grid with that of Egypt was reached in 2001 between the two governments. Previous deals to the same effect had been shelved by both sides.

Another proposal is a pipeline from Egypt and Libya to Tunisia and Algeria, with sections already built. ENI has suggested that from Algeria, the gasline would plug into the pipe to Morocco and Spain. From Spain this would link up with other European markets. ENI has promoted this as part of its "Levante Project" consisting of a loop of pipelines circling the Mediterranean to link Middle East and North African (MENA) gas to Europe via Turkey in the east and North African gas to Europe through Spain in the west. It is thought that a multinational loop, with several EU and Arab countries involved as shareholders, would boost the security of gas pipelines from Algeria, so that even if the country falls under Islamic rule the new regime would not dare disrupt such a project.