Going for a Gusher in Libya

Italy's ENI is beating out giants like BP and ExxonMobil, partly because it never left

To see what many expect to be the future of the oil industry, take a trip to the windswept coastal plains 60 miles east of Libya's capital, Tripoli. At Italian oil giant ENI's $9 billion Mellitah complex there, flaring towers rise out of the scrubland and intricate webs of pipes weave across the landscape, feeding into an undersea pipeline to Italy. Further inland, there are apartments, a soccer field, and a basketball court for Mellitah's 550 workers.

Though ENI (E) is the No. 7 international oil producer and has less than half the output of giants such as ExxonMobil or BP (BP), its operations at Mellitah and elsewhere in Libya are the envy of the industry. Unlike U.S. companies, which had to leave when Washington hit Libya with sanctions in 1986, ENI has maintained a presence there since the late 1950s. Today, ENI enjoys a commanding lead in the country, where it produces the equivalent of 600,000 barrels of oil per day, or roughly a third of Libya's output.

Since Muammar al Qaddafi settled his differences with the U.S. three years ago, Libya has become one of the last great opportunities for global oil. Although the economy is far from open, everyone is scrambling to get in. Over the past three years, Libya has held three auctions for exploration rights and has signed deals with dozens of oil and gas companies, many of which had left because of sanctions. "Libya has huge potential," says Mark Hope, Royal Dutch Shell PLC's (RDS) top official there.

RELATIVELY UNEXPLORED.the immediate attraction is Libya's 39 billion barrels in reserves. But the oil men are even more interested in what might lie undiscovered deep beneath the desert sands or in the Gulf of Sirte. After so many years of isolation, Libya remains relatively unexplored; techniques that have been developed in recent years could well turn up immense new reserves. "The next five years will define the true picture of new oil in Libya," says Bindra Thusu, an earth sciences professor at University College London who advises Libya's National Oil Corp.

How much is out there? Thusu figures a further 65 billion barrels of oil could be discovered, which would put Libya in a league with Kuwait and the United Arab Emirates in terms of reserves. Even now, Libya's oil and gas production of about 2 million barrels per day is just over half its peak output in 1970. Consultants PFC Energy predict it could rise to at least 2.4 million by 2010. Though Qaddafi still spouts anti-American invective, many say he likes working with U.S. companies. He believes "they're better at finding oil," says Bjorn Ursin-Holm, who heads Mideast operations for Netherlands-based Fugro Group, which is doing marine seismic work in Libya.

There's plenty of exploration going on already. Exxon Mobil Corp. has agreed to survey vast stretches of seabed that it won in an auction earlier this year, and CEO Rex W. Tillerson recently met with Qaddafi as part of a big push in Libya. Oasis Group, which includes Conoco Phillips (COP), Hess (HES), and Marathon Oil (MRO), paid $1.8 billion in 2005 to return to properties the group left in 1986. Shell PLC meanwhile, has inked a package that allows the company to probe for gas in the Sirte Basin, and plans to spend $100 million refurbishing a liquid natural gas plant.

While Libya has been applauded for the transparency of its auctions, they attracted so much competition that many winners wound up agreeing to unfavorable terms. Chinese Petroleum Corp., for instance, will get just 7.8% of oil output from its fields, much less than the 20% to 30% typical in Libyan auctions in the 1990s. "Some companies have used very low profitability criteria," says Philippe Malzac, managing director of Total Exploration & Production Libya (TOT).

By letting foreigners in quickly, Tripoli is hoping to build up the local oil industry to offset unemployment, which may be as high as 35%. ENI, for instance, is putting $150 million into hospitals, schools, and archaeological work, and has agreed to train 150 Libyan engineers to work at its subsidiaries worldwide. Sure, that's a lot of extra cost to stay in the game. But for both sides, Libyan oil could be a big win.