Repsol's Return Adds To Fortune Of Oil Reserves Growth

BMI View : Repsol's exploration of its seven existing licences in Libya is a cost-effective way for the Spanish firm to boost future upstream production to add to revenue in the wake of the Argentine state's expropriation of its assets in the Repsol YPF joint venture. Repsol's move follows BP's return to exploration in Libya post-civil war. Strikes by the two major oil players in their concession areas would help raise Libya's oil reserves growth, which we currently forecast to be negative because of the deterrent to the entry of new players posed by a power vacuum and unattractive licensing terms.

Repsol will restart exploratory drilling in Libya in early 2013. According to Reuters, a spokesman remarked at the recently held North Africa Oil And Gas conference that drilling will start 'as soon as [a new drilling rig] arrives, probably early next year'.

Its eagerness to tap the riches of its Libyan assets is unsurprising. After all, the return of production to pre-civil war levels in two of its nine Libyan blocks helped Repsol report better-than-expected Q312 profits.

Substituting For Argentine Losses

The state ' s expropriation of Repsol ' s oil and gas assets in Argentina in April 2012 dealt a great blow to the Spanish player ( see our online service, April 17 2012, ' YPF Nationalisation Dashes Shale Hopes ' ). . According to our estimates for Argentina 's production in 2011 , and assuming Repsol's rights to 50% of Repsol YPF's total output, the Spanish firm would have lost about 224,827 barrels of o il equivalent per day (boe/d) in output from the expropriation ; assuming that it produced 34% and 30% of Argentina ' ' s oil and gas respectively .

Table: Estimates Of Repsol's Share Of Argentine Oil & Gas Production In 2011
Argentina Repsol YPF Repsol's Share
*estimate. Source: Repsol, EIA, BMI
Oil (b/d) 748,540 254,504 127,252
Gas* (bcm/y) 39.00 11.70 5.85
Gas* (boe/d) 650,505 195,151 97,576
Total (boe/d) 1,399,045 449,655 224,828

Investor confidence had dropped precipitously since th e Argentine takeover, reflected i n a sharp downward fall in Repsol's share price . The company has been seeking ways to make up for this lost rev enue stream, including the sale of its lucrative liquefied natural gas (LNG) assets in the Americas. Financial Director Miguel Martinez said during the company ' s Q312 presentation that it expects to finalise their sale by January 2013.

Reviving A Fall
Repsol's Share Price Performance (EUR)

Boosting upstream production from existing acreage is also a cost-effective way to increase its revenue streams without having to pay for new assets. Repsol has seven licences that it has yet to explore, distributed across west and central Libya. Three of these blocks are located in close proximity to its producing assets - whose output has since returned to pre-civil war levels - and could hold similar commercial oil and gas potential. Drilling had stopped in January 2011 due to civil unrest in the country.

Seeking Production Security
Repsol's Assets In Libya

Repsol ' s return to Libyan exploration mirrors BP 's earlier decision to resume its drilling programme in the country ( see ' BP Resumes Exploration As Above Ground Risks Undermine Potential ' , November 2 2012 ) . The re-entry by independents and oil majors alike into Libya has already been accounted for in our forecasts : we expect oil production to bounce back from an all-time low of 495,620 barrels per day (b/d) in 2011 to 1.62mn b/d in 2012 as companies restart production .

Political Instability Rocks Reserves Growth
Libyan Oil Production (LHS) & Proven Oil Reserves (RHS), 2010-2021

However, our estimates for Libya's proven oil reserves paint a different picture. We expect this to fall from 44.1bn barrels (bbl) in 2011 to 37.4bn bbl by 2021. This is because a vacuum of strong leadership and ongoing regional tensions are significant deterrents to investment from players new to the country. We had also pointed out that unfavourable contract terms could decrease upstream interest, as exemplified by Shell's retreat in May 2012 ( see 'Shell's Retreat: A Worrying Omen', May 29 2012).

Results from exploration by players such as BP and Repsol could reverse our cautious outlook on Libyan oil reserves growth. We highlight in particular that offshore Libya, which rests in the Mediterranean Sea and is home to huge hydrocarbons strikes in Israel and Cyprus, could reverse its waning reserves fortunes. Eyes will be on BP's exploration in the offshore Sirte Basin and its deepwater drilling campaign to determine the prospectivity of Libya's underexplored waters.

This article is tagged to:
Sector: Oil & Gas
Geography: Libya, Libya, Libya, Libya

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