Attention turns to offshore Malta

As IOCs have ramped up their activities in the Mediterranean Sea this year, amid the announcement of a licensing round scheduled for November in Lebanon, discoveries offshore Israel and significant exploration activities offshore Cyprus, several independents, including Genel Energy and Cairn Energy, have been awarded permits to explore for oil offshore Malta.

Heritage Oil, which shares licences for Areas 2 and 7 with the Maltese government, amounting to an area over 18,000 km² some 80 km off Malta's southeast coast, has announced that these Areas are “underexplored” and hinted at the existence of deepwater prospects after analysing newly acquired 2D seismic data. Despite the Jersey-based company's intention to drill a high-impact well in this area, it is awaiting the resolution of a border dispute between Malta and Libya before it can commence drilling.

Dating back to 1974, the border dispute between Malta and Libya started when Valetta awarded Texaco four blocks that lay north of the median line between Malta and Libya. After Texaco spudded their first well in 1980, exploration activities were forced to a halt following the despatch of a gunboat by Tripoli.

The dispute was taken to the International Court of Justice (ICJ) in 1982. After considering the case for three years, it was decided that the border would lie 18' north of the median line, to account for the disparity in the length of Libya and Malta's respective coastlines. Although both sides accepted the agreement, it only applied to a narrow strip of water and so border disputes continue to this day. Area 7, in which Heritage wants to drill, lies to the east and south of the designated border, and as such, Libya considers it to be in its territory. This was reaffirmed to Heritage by the Libya National Oil Company (LNOC) in 2008, shortly after the company received the block.

While the revolution in Libya may have removed from power those who were initially involved in the border dispute in the early 1980s, as well as the head of the LNOC who communicated with Heritage in 2008, and presented new security challenges to the current administration, there is no doubt that the oil-rich North African state will respond robustly if it feels Malta is drilling within the Libyan continental shelf. The imperative to resolve this long-standing border dispute will become more acute as the new finds lure larger oil and gas players into the increasingly competitive Mediterranean operating environment.

Border dispute blocks Heritage's progress in Malta

Heritage's Area 7 is claimed by Libya and Malta

Border disputes got the attention of UBS this week, as it cuts its stock price target for Heritage Oil in a research note on Tuesday 21st June due to the continuing border dispute between Malta and Libya.

Heritage Oil, which operates Area 2 and Area 7 in the waters lying south of Malta, is contractually obliged to drill at least one well by the end of 2011, however this is looking unlikely as ownership over Area 7 continues to be disputed.

UBS's research note said “As the Libyan crisis shows little sign of abating we view it as unlikely the company can resume discussion between the two countries in the near term, and therefore assume a low probability that Heritage will drill in the next 12 months.”

The border dispute between Malta and Libya dates back to 1974, when Valetta awarded Texaco four blocks that lay north of the median line between Malta and Libya. When Texaco spudded their first well in 1980, Tripoli sent in a gunboat, and forced exploration activities to a halt.

The dispute was taken to the International Court of Justice (ICJ) in 1982 and in 1985 it was decided that the border would lie 18' north of the median line in order to take into account the disparity in length of Libya and Malta's coastlines.

While both sides accepted the agreement, it only applied to a narrow strip of water and so border disputes have continued since. Area 7 lies to the east and south of the designated border, and as such, Libya considers it to be in its territory.

Soon after Heritage received the block in 2008, Libya's then National Oil Company head, Dr Shukri Ghanem sent a letter to Heritage's CEO Tony Buckingham, informing him that Area Seven lies within the Libyan continental shelf and was under contract with the Sirte Gulf Oil Company.

The dispute has not progressed since, and with civil war in Libya continuing, it is unlikely to get much attention anytime soon. As such, UBS decided Heritage was unlikely to drill within the next year and so removed the Malta prospect from their net asset value assessment for Heritage, which resulted in a stock target price of 230p, down from 280p.

Heritage released an operational update on 20th June, in which it said, “a seismic vessel has been mobilised to start acquisition of a 1,400 kilometre 2D seismic survey in Area 7 over the large Caravaggio target. Acquisition is expected to begin within two weeks. Processing and interpretation of this date, during the second half of 2011, will help define a precise drilling location.”

Sources: Citywire, Dow Jones, Heritage Oil, the Independent, Malta Today

For more information, please see the Menas Borders website, here.