Much promise, little joy in Albania's long search for oil

Thu Jun 20, 2013 2:25pm IST

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* Albania bidding to fulfil century-old oil hopes

* Sector dominated by small players

* Shell-partnered drilling well could hit big

* Concerns over transparency, corruption

By Matt Robinson and Benet Koleka

BERAT, Albania, June 20 (Reuters) - In 35 years drilling for oil around the world, Leo Aubin says he's made a lot of money for a lot of people. Now the stout, moustachioed Canadian finds himself in Albania, boring a hole 6,000 metres deep for the black gold that the impoverished Balkan country has spent 100 years hunting.

"We're very confident we're going to find what we're looking for," Aubin said at his drill rig, Shpirag II, in south-central Albania.

Petromanas, the small Canadian firm Aubin works for, has picked up where a string of oil majors left off in the early 1990s, when the likes of Shell, Chevron and Occidental rushed to Albania as its borders flew open with the collapse of Communism.

They had hoped to emulate the discovery almost a century ago by Anglo-Persian Oil Company, forerunner to BP, of one of Europe's biggest onshore oilfields, Patos-Marinza.

Back then, an Anglo-Persian Oil director is said to have declared Saudi Arabia "devoid of all prospects for oil" and that the real play was in Albania.

History proved him wrong, but the quest to fulfil Albania's oil promise continues.

Occidental drilled Shpirag 1 in 2001, a short distance from Aubin's well, before heading for the exit with the other majors, scared off by Albania's breakneck and sometimes violent first dalliance with capitalism and doubts over the commercial return on its reserves of heavy oil.

Teaming up with Shell, Petromanas has pinned its hopes on the same geological profile as southern Italy, across the Adriatic, where Eni and Shell are pumping 85,000 barrels per day from the 500-million-barrel Val d'Agri field.

After investing almost $300 million, Petromanas expects to announce its exploration results by September, potentially providing a huge boost for the Albanian economy and placing the country of 3.2 million people alongside Romania in the top tier of Balkan oil producers.

GROWTH POTENTIAL

"Even if it's half of Val d'Agri, we're talking about more than doubling the current production of the country," said Glenn McNamara, chief executive officer of Petromanas.

"We know the oil's there," he told Reuters. "The risk is commercial rates. Can the reservoir deliver the rates we need to deliver a return on this investment?"

Shell's involvement reflects a revival of interest among oil and gas majors for European exploration, particularly in the likes of Poland and Ukraine.

Albanian officials say the country has around 220 million barrels of 'proven and probable' oil reserves. They also expect a big oil and gas player to 'farm in' on London-listed San Leon Energy PLC's offshore exploration of Albania's Adriatic shelf, which could yield significant gas reserves.

"Compared to well-established oil provinces, the opportunity is much less, but there is a lot of growth potential for companies willing to take risks," said Ivan Yakimov, an analyst at the Sofia-based New Europe Corporate Advisory Ltd.

"If investors come with know-how, they can scale up production and increase recovery rates," he told Reuters.

Facing a tight-run election on Sunday, the country's fiery prime minister, Sali Berisha, says Albania is on the cusp of realising its potential. "Albania should be taken seriously in terms of its oil resources," he told an energy conference in the capital Tirana last month.

Ordinary Albanians have heard it all before and yet the country remains one of the poorest in Europe, the average wage a meagre 369 euros per month before tax.

Albania stirred interest with its low royalty rates and production-sharing agreements that McNamara described as "world class", but a number of disputes over exploration licences has hurt the investment climate in a country where corruption runs rife and politics often comes down to patronage and muscle.

The government's decision to cancel an agreement with U.S.-based Sky Petroleum in late 2011 raised eyebrows, though Albania won the case when the company took it to arbitration. Last year, Canada's Empire Mining halted operations in Albania after its concession area was suddenly halved.

DISPUTES

In February, after accepting what oil sector professionals considered a vastly overvalued bid from a little-known Albanian-U.S. firm for state-owned Albpetrol, the government had to scrap it when the bidder couldn't make an initial payment.

Czech power group CEZ launched arbitration proceedings last month against Albania after the country's power regulator revoked the distribution licence of CEZ's local unit in a dispute over prices and imports.

Observers say the country's Economy, Trade and Energy Ministry, which handles mining and oil contracts, was run as a fief by the junior partner in Berisha's coalition government, the leftist Socialist Integration Movement (SIM), before the party jumped ship in April ahead of the June 23 election.

Florion Mima, a Berisha ally who took over at the ministry until the polls, told Reuters he was too busy with a mountain of paperwork that included 47 disputed mining licences to be interviewed. He did not respond to emailed questions.

Kastriot Bejtaj, an Albanian oil expert and former manager of Albpetrol, said the state's management of the sector was at best ad hoc and had left exploration rights in the hands of a number of small companies with little history in major oil discoveries or the deep pockets to invest.

"If there's a strategy, it's not clear," he complained. "We're losing time. We're losing time in exploration and production."

The problems echo those of European Union-member Poland, where foreign players interested in the country's promised shale gas riches have been unnerved by an uncertain legal and regulatory framework, red tape and environmental regulation.

Warsaw had high hopes of becoming a major source of shale gas for Europe and attracted the likes of Chevron and ExxonMobil to some of the 100 exploration licences it issued.

But Exxon, along with Canada's Talisman Energy and U.S. oil firm Marathon, quit after the country scaled down its gas reserve estimates and early drilling proved challenging.

Professor Stavri Dhima, head of the petroleum regulatory and management sector at the Ministry of Economy, Trade and Energy, denied Albania had lost time. In his ground-floor office, a mess of maps, surveys and binders, he urged patience.

"An oil explorer is like a hunter," he said. "He knows that in this region there are wild animals, but he doesn't kill one every time."

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