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Albania

Capital Tirana
Time Zone CET (GMT+1)
Country Code 355
Mobile Codes 66,67,68,69
ccTLD .al
Currency Lek (1EUR = 138ALL)
Land Area 28,748 sq km
Population 2.98 million
Language Albanian
Major Religion Sunni and Bektashi Islam, Roman Catholic and Orthodox Christianity

Albania Oil Industry Enjoys Revival, but Investor-Government Relations Remain a Question

February 5, 2012

Balkanalysis.com Editor’s Note: recent tales of tattooed and muscle-bound Western oil workers laboring in coastal oil fields, while expressionless men in dark suits and sunglasses stand watch for trespassers, only piques existing interest in Albania’s revitalized energy sector and goings-on there. In the following Balkanalysis.com special report – which discusses the major players involved, legal issues and technical data  –  readers get an inside view into an important emerging trend with regional implications for economy and possibly political life.

By Vlad Popovici and Chris Deliso

With additional contribution from Ioannis Michaletos in Athens and Stavros Markos in Tirana

The last few years has seen considerable foreign investment in Albania’s oil sector, a trend that is increasing and that involves not only onshore, but also offshore and refinery investment. Much of what is happening in this lucrative industry remains opaque, however, and issues such as privatization practices have been politicized.

The fossil fuels industry has a long history in Albania, where bitumen was mined in Roman times. Modern oil extraction started in the 1930s and, despite that Albania never became a global oil producer, reached production levels by the 1970s that made the country one of the main Balkan oil producers for a time.

However, plagued by inefficient management and obsolete technologies, Albania’s oil production declined and was on the brink of extinction in the post-independence 1990s transition period. However, in the last seven or eight years, the Albanian oil sector has been revived by foreign oil and gas companies looking to invest. While the major deals are involving onshore oil, other foreign investors have recently entered the game for offshore finds, though decisions are being delayed as the players consider proposed EU regulations which would have an impact on offshore drilling.

Albania is thus now looking at the prospect of becoming once again self-sufficient over the next 3-5 years, by eliminating the need for oil imports. And it could even find a new vocation as a small regional oil exporter, though this is not yet a done deal. Further, international watchdogs and investors are on the lookout for any signs of corruption or problematic dealings with governmental authorities, something that in the Balkans is a chronic issue.

From Boom to Bust

During Roman times, the region near Vlore in southern Albania was the center of significant bitumen extraction activity. Modern oil exploration and extraction started during World War I and, in 1928-1929, significant oil fields were discovered. These were the Kuçova field and part of what is now known as the Patos-Marinza field; today this is one of the largest onshore oilfields in Europe.

Mussolini was tempted by Albania’s oil resources and the refinery in Cerrik, near Elbasan in the south, was built during the Italian occupation in WWII. After the war, the Soviet Union also became interested in Albania’s oil resources, and developed a dominant role in the country’s oil sector.

Following the severance of diplomatic and commercial ties with the Soviet Union by dictator Enver Hoxha, China took the lead in the country’s oil sector and supported Albanian efforts- achieving a peak production of almost 43,000 barrels per day (bpd) or 2.2 million tonnes per year. This production level was enough to cover domestic consumption needs, and freed up some crude volumes for export.

However, in 1978 Albania broke off diplomatic relations with China too, and local oil production entered into a seemingly terminal decline. In the 1980s, the petroleum and bitumen sector was still employing 10% of the Albanian workforce, but its share of the national industrial production declined from 8.1% in 1980 to 5% in 1985, and even less than that at the end of the decade.

Oil sector growth was restricted by factors like obsolete technology that reduced oil field production yields, a lack of exploration to replace produced reserves, a lack of investment in extraction equipment and a very limited and aging transportation and refining infrastructure.

By 1990, oil production was down to 23,500 bpd (or 1.2 million tonnes/year).The breaking down of the Communist regime and its ‘central-planning’ economic system at the beginning of the 1990s worsened the oil sector’s problems. It was being run on autopilot by the national oil company (known as the DPNG until 1992 and Albpetrol after that), and oil production from the existing and aging low-recovery yield wells reached less than 9,500 bpd (or 475,000 tonnes/year) in 1994 [PDF]. No bottom was in sight and the entire Albanian oil sector seemed on the brink of extinction.

Factors: Known Reserves, Unknown Reserves, and the Difference for Investment

So far, Albania has not seen any investment from the oil majors. Rather, the players involved are small companies, some appearing to have been set up specifically for operations there.

To some extent, this is how the oil and gas industry works. Oil and gas supermajors, such as ExxonMobile, Royal Dutch Shell and BP tend to be on the lookout for those smaller companies that have already found oil and gas reserves, to renew their own oil and gas reserves.

For their own exploration activities, the supermajors usually focus on established production regions, where, even if they drill a new well, discovery chances are higher than in an unknown region where proven reserves are limited or non-existent. Thus regions like West Africa, the North Sea and the Gulf of Mexico take precedent over newcomers like Albania, Greenland, Suriname/French Guyana and the Falklands.

These unexplored new regions thus become niche markets for small players. Since the risks are huge, they have to focus their efforts, and usually on only one region. In fact, many small players disappear because they drill three or four wells, that turn out to be dry. Of course, if they hit pay dirt, the result is different.

The strategy of many of these companies, not unlike that of internet start-ups, is actually thus to find oil and gas and then be acquired by a major. This is the next step once a new production region is opened; the oil majors and supermajors will arrive in a second wave. In a recent example from the Balkans, in Romania’s Black Sea, Sterling Resources and other “small fish” spent almost two decades doing the groundwork, and now ExxonMobil is currently drilling offshore, with Petrom (OMV).

In the case of Albania, it is not yet clear whether the majors will arrive, which is not necessarily a bad thing, so long as those who participate abide by the law and pay their dues to the state.

Auspicious Developments: the Petroleum Law and PSC Definitions

On the legislative side, however, things have started to change for the better. They process actually began in the mid-1990s; in 1993, a Petroleum Law was adopted and amended in 1994 (and yet again in 2008) to create a legal framework for the exploration and extraction of hydrocarbons in Albania.

According to the Petroleum Law, the Albanian state, which owns all the oil and gas reserves in the country and is represented by the National Agency of Natural Resources (AKBN) can enter into Production Sharing Contracts (PSC) with state or private companies. These PSCs give exclusive rights to the state’s partner to explore and produce oil and gas in a defined perimeter for 25 years (five additional years can be added to the PSC if the partnership is successful).

According to the law, the first five years (or up to seven, in specific cases) of the PSC can be dedicated only to exploration, and minimum exploration and production investment requirements can be included in a PSC. After the operating partner deducts its exploration and production costs from the oil revenue, the remaining revenue is split between the partner and the Albanian state. The law states that the revenue split should be separately negotiated for each PSC and the state’s part can be paid either as a monetary royalty or in crude oil. The operating partner also pays corporate income tax, but does not pay any custom duties for the equipment imported for exploration and production.

Several licensing rounds were held for both onshore and offshore perimeters during the 1990s and many companies, from small independents to oil and gas majors got involved and performed a lot of preliminary survey work. An Albanian study from 1995 concluded that the approaches that had the largest potential of increasing the oil and gas production in Albania were existing field rehabilitation, enhanced oil recovery and more onshore and offshore exploration. Although the stage was set from the legislative point of view and many companies have shown initial interest, Albania was still waiting for a first mover to start production in the country beside the state-owned Albpetrol.

Bankers Petroleum: Leading the Onshore Revival

After this legal framework had been set to enable foreign corporations to explore, the breakout came in 2004. In that year, Bankers Petroleum, a small Canadian independent oil and gas company, signed a PSC with AKBN for the Patos-Marinza and Kuçova fields in central Albania. These fields are close to the Adriatic coast and to the city of Fier.

Bankers moved quickly to start production in Albania. This was mainly done by taking over existing production, shutting down wells and rehabilitating them to re-start or increase production. The company’s commitment here was rewarded by the rapid and large-scale increase of its Albanian average oil production, from around 600 bpd in 2004 to more than 13,000 bpd (equaling 665,000 tonnes/year) in 2011.

The company invested more than $450 million between 2007 and 2011 for the Patos-Marinza production development alone; in addition, it started re-developing the Kuçova field in 2011, while also improving the processing, storage and transportation infrastructure. This includes new treatment facilities, a new pipeline from Fier to Vlora and other necessary infrastructure.

Impressive Results and Ambitious Expansion Plans for Bankers

The most impressive result to date of the company’s foray into Albania is probably the exploration campaign that exponentially increased the Patos-Marinza reserve size. Here, the original oil in place increased from 2 billion barrels (bbl) in 2006 to 7.5 billion barrels in 2010, turning the field into one of the biggest, if not the biggest onshore oil fields in Europe. The proven reserves, along with the probable (those most likely to be extracted) ones have also increased, from 100 million bbl in 2006 to 227 million bbl by the end of 2010.

For 2012, the company announced in December 2011 [PDF] a capital investment budget of $215 million, expected to be fully financed with funds generated from the existing production. In March 2011, Bankers took over Albpetrol’s remaining interest in the Patos-Marinza field and plans to increase production here by 30%  in 2012, to an average of around 17,000 bpd. It will also start a ramp-up in production at the Kuçova field through enhanced oil recovery; here, it has set a production target of 2,250 bpd for 2015. Bankers Petroleum also plans to continue exploration in these fields, as well as in the Block F, a 750 square km block contiguous to the Patos-Marinza field, and a prospective site for natural gas and oil.

The long-term development strategy of Bankers Petroleum follows the conclusions of the above-mentioned Albanian report: reactivation of existing wells, enhanced oil recovery (through waterflood and modern thermal techniques) and increasing reserves through modern exploration techniques (especially horizontal well drilling).

Another Foreign Producer: Stream Oil and Gas

Bankers Petroleum is not, however, the only new producer in Albania. Stream Oil and Gas, another small Canadian oil and gas company, has signed a PSC with AKBN for three other aging producing fields: Cakran-Mollaj, Gorisht-Kocul and Ballsh-Hekal. These lie south of the Patos-Marinza field, near the city of Ballsh. The PSC also cover the small producing Delvina gas field. The company has increased its production during 2011 from under 2,000 bpd to 4,000 bpd, and plans to reach an average of about 15,000 bpd (more than 765,000 tonnes/year) in 2015.

Albanian oil production has more than doubled since 2004 and – thanks to Bankers Petroleum, Stream Oil and Gas and Albpetrol as main producers – had returned to the 1990 levels of 21-22,000 bpd (1-1.2 million tonnes/year) by the end of 2011. And this seems to be just the beginning. Domestic oil production already covers an increasing share of total Albanian consumption- estimated at around 30-35,000 bpd (1.5-1.8 million tonnes/year).

Despite Legislation Uncertainties, San Leon Energy, Beach Energy and Emanuelle Adriatic Look into Offshore Development

The companies investing in Albania thus far have been focused mostly onshore, but there are signs that offshore developers are on their way- as with the former, they tend to be small entities. The already high-risk gamble of energy research in Europe is complicated further there by proposed EU regulations on offshore oil and gas exploration and production. These regulations and the rationale behind them have been proposed but not yet approved, and are discussed in more detail in the Ballkanalysis.com e-book, 2011 Balkan Year in Review.

If the regulation is approved, it would mean a stricter offshore regime and increased compliance costs for companies. All of the players are currently in wait-and-see mode. This is another factor that drives up the risk for investors and that therefore might account for the lack of development in Albania’s offshore oil resources thus far.

However, two foreign companies have now gotten into the act. The first, Dublin-based San Leon Energy PLC, made news recently by announcing that it has identified “several large oil and gas prospects” on its 4,208 sq km offshore license near Durres. It has isolated “several large structural oil and gas prospects and is revealing large stratigraphic potential,” Oil and Gas Journal reported on January 17, 2012.

“The possibility of using seismic amplitudes to greatly reduce exploratory risk further demonstrates the high potential of offshore Albania,” the report added, noting that San Leon “is interviewing potential partners and plans to drill the first of two exploratory wells in late 2012 or 2013.” Unlike the onshore investors, San Leon has a larger portfolio, working in seven countries including the US and the Netherlands.

According to company data, the license it received from the Albanian government in February 2011 gives it a 75% share. The remaining 25% interest is held by another company, Beach Energy Limited of Australia. The latter “has agreed to pay 50% of the costs, rather than their 25% working interest requirement, for the upcoming 3D seismic programme,” states San Leon’s website. This is to be “in exchange for an option which, if exercised, will allow [Beach Energy] to hold a 50% working interest in the licence going forward.”

The second offshore player in Albania today, Cyprus-registered Emanuelle Adriatic Energy Ltd is actually a subsidiary of a large and diversified Israeli holding company, Israel Land Development Company. It was awarded the PSC for offshore blocks in 5,070 square kilometers of Albanian waters, an area that has not seen much activity yet. The companies that have offshore blocks will wait to assess the impact of the EU’s new proposed offshore oil and gas EU regulations for their costs and operations.

The agreement with the Israeli company was signed on January 15, 2012 and, according to Globe’s, “will state that Emanuelle Adriatic Energy’s rights to operate in the offshore blocks, and to carry out the work plan that will be agreed for seven years, and will include milestones that the company will have to meet after three and a half years, and after a further two and a half years.”

The capital investment by the Israeli company for this project reportedly amounts to $730 million. The company’s stock rose slightly after the deal was announced, and there have been rumors that Turkey is unhappy about it and the spreading of Israeli interests here. Thus it is not impossible that we will see further conflict over the contract on an internal political level.

It will be interesting to see whether Albanian offshore activity can catch up in the future with onshore activity. The main difference, however, is that investors know there is oil onshore, and any new entrant can thus start either by enhancing production at existing Albpetrol wells, or by rehabilitating closed wells. This makes onshore Albania a more mature production region, whereas offshore Albania has never experienced oil or gas extraction. Thus at present the offshore sector is in the much earlier discovery stage, which anywhere in the world is characterized by high risk and high stakes.

Refinery and Technical Issues

ARMO, the former state-owned refining company, was privatized in 2008 (the Albanian state still owns 15% of the company). ARMO has a refinery in Ballsh (1 million tonnes/year capacity) and another in Fier (0.5 million tonnes/year capacity).

In 2011, ARMO signed agreements with both Bankers Petroleum and Stream Oil and Gas for crude oil supply. Although the third Albanian refinery in Cerrik near Elbasan has been shut down for at least 10 years, the government in 2011 announced that it intends to privatize it as well. However, this dilapidated refinery was built during World War II, and investors do not seem keen to invest in refining capacities in Europe.

Technically speaking, Albanian oil is heavy, requiring more processing than light oil, and it is therefore being sold at a discount compared to lighter oils in Europe; its pricing is based on the Brent oil price, and the 2011 price levels were 60-75% of the Brent price [PDF]. However, Albanian crude can be refined, and in addition to the Albanian refineries, this is being done by Spanish, Italian and Greek refineries along the Mediterranean coast. Albanian heavy oil is currently being exported by small tankers to these countries.

The government’s goal of refurbishing ARMO’s capacity was indicated again on January 31, 2012. Switzerland-based Foster Wheeler AG, a global engineering and construction contractor and power equipment supplier, announced then that it has been awarded a contract for a feasibility study, according to Business Wire.

A subsidiary of its Global Engineering and Construction Group will undertake the study for the modernization of ARMO’s Ballst and Fier refineries. The study is being done in line with ARMO’s goal of restoring production “to the original design capacity and produce transportation fuels in line with current European Union regulations. The press release announced that the study is expected to be completed by mid-2012.

New Outside Interest: Outlooks for Future Investment

The success of Bankers Petroleum and Stream Oil and Gas in reviving Albania’s moribund oil sector have attracted other small and medium-sized oil and gas companies that hope to become producers in the country in the near future.

The most probable near-term new producer is Petromanas Energy. Petromanas holds three PSCs with the Albanian government. Under the terms of the PSCs, Petromanas has a 100% working interest in six onshore blocks (Blocks A, B, D, plus E 2 and 3) that comprise more than 5,600 square km across Albania’s Berati thrust belt, and that also include the 2001 Shpiragu-1 light oil discovery in Block 2.

An independent study from 2009 estimated the undiscovered reserves of these blocks at 3 billion bbl of oil, and 84 billion cubic meters of gas (Albania’s current gas production is marginal, and is being used for power generation). Petromanas is now finalizing discussions with potential joint ventures partners before launching the development of its concessions in Albania. A drilling rig has already been leased for work in the country during 2012.

An Albanian Broadcasting Company report of September 28, 2011 mentioned the deal. In a bilateral meeting, Besjan Pesha, Executive Director of the National Agency of Natural Resources, praised Petromanas, and noted that its work could “revolutionize” the industry in Albania. The company’s representative, Malfor Nuri in turn praised Pesha and the Agency for their cooperation.

A Controversial Privatization: The Case of Albpetrol

The 100% privatization of Albpetrol, approved on December 16, 2011 by parliament, could further increase Albanian oil production, if successfully finalized with a strategic partner that has the resources and know-how for oilfield rehabilitation, enhanced oil recovery and exploration of new areas.

In 2010, Albpetrol’s assets were valued by a company executive at almost $500 million. This figure included not only production assets, but also pipelines, storage tanks, buildings, and so on. However, a recent media report put the annual oil production of Albpetrol at 135,000 tonnes/year (about 2,600 bpd).

This privatization by the Berisha government was criticized by the opposition. The government noted that payment for Albpetrol would be made in cash. While it raised some eyebrows it is not that unusual (clearly, any government in the world would prefer to get cash rather than future investment promises). This news added to the controversy over the privatization in local media, though.

Further, concerns linger concerning the company’s real value. While Albpetrol was valued by its manager in 2010 at $500 million, as mentioned above, we believe it unlikely that an investor would pay more than half of that amount for the company. It will be interesting to follow the unfolding of the proposed privatization during 2012 and see which investor(s) might be interested.

Sky Petroleum’s PSC Cancellation

It has not all been smooth sailing for foreign investors in Albania’s oil sector, however. In June 2010 a small Texas-based outfit, Sky Petroleum, became the fourth foreign oil and gas company to sign a PSC with the Albanian government. However, Sky’s PSC was unilaterally cancelled by AKBN in November 2011. The company believes that the PSC should be reinstated, and in December 2011 it thus proceeded with arbitration against the Albanian Ministry of Economy, Trade and Energy and AKBN. Sky Petroleum is seeking monetary damages of $1 billion from the Albanian government if the PSC is not reinstated. Yet since the blocks lost by the Texans are onshore, where the EU has no involvement, the Albanian government can do whatever it pleases.

By any standard, this was a significant PSC cancellation. The license affected covered 17% of Albania’s total area. It would have given the Texas company exclusive rights to three exploration blocks totaling approximately 5,000 square km: blocks 4 and 5 in the south at the Greek border and the Dumre block close to the Patos-Marinza field. Previous work on the blocks had identified 10 prospects or exploration leads covering approximately 435 sq km, believed to contain up to 900 million barrels of oil equivalent of recoverable hydrocarbons.

Although AKBN stated that Sky Petroleum did not comply with some of the PSC requirements and missed a deadline for presenting a bank loan guarantee, the company believes it is in compliance, and that the deadline was missed because of the multiple top management changes at AKBN during 2010-11, which made it impossible for the company to obtain a meeting with AKBN in order to present the required bank documents. Some industry analysts have speculated that political preferences, outside competition, or even corruption could be the cause of the PSC unilateral cancellation.

Seeking to get further clarification on the matter, Balkanalysis.com contacted Sky Petroleum. In an e-mail response, Corporate VP Michael D. Noonan stated that “unfortunately due to the sensitive and confidential nature of the arbitration process we are unable to comment about the current situation in Albania.”

However, Mr Noonan did note that Sky Petroleum has “prepared and filed several United States of America – Securities and Exchange Commission (‘SEC’) filings on SEC Form–8K regarding this and other matters.” For further information on current news releases, SEC filings, analyst reports, and other corporate materials he refers the public to data on the Sky Petroleum website.

In the end, whatever may be lurking behind the case, Sky Petroleum’s experience shows that frictions can still occur between authorities and foreign investors in Albania, notwithstanding the relatively stable oil industry legal framework.

Public Perception and Criticism of Government and Investors- Justified or Not?

Aspects of the oil rush, including research, investors and the way that successive governments have handled both, have for years been discussed and debated in Albania. Criticisms have been made sometimes according to political motives, as well as on technical and scientific grounds in some cases.

An example of the latter was Albanian geologist Dr Telo Velaj’s recent interview for Gazeta Telegaf on January 5, 2012. He stated that past governments did not hold foreign exploration processes to a high enough scientific level, leading to incorrect estimations that in turn led investors to pull out, thinking that the country was not profitable. He added that the Albanian state bore “a great deal of responsibility… by not exercising proper control.”

From the scientific point of view, Velaj compared the Albanian Adriatic geology to that of Italy, where relatively large hydrocarbon deposits have been found. For this reason, Velaj suggested Italy’s ENI as an experienced prospective partner with the right knowledge for the Albanian situation.

Such views show that parts of the Albanian public is not satisfied with the way the country’s resources are managed and that the government could better communicate the details and rationale of PSCs signed with foreign investors, as well as their long-term energy sector strategy. The tax and royalty structure should be explained to the public and the benefits for the Albanian Treasury should be better quantified.

However, public suspicions over perceived disparities in profit splits (one is given in the Gazeta Telegraf interview) are often not warranted, or are based on misunderstandings. Companies – foreign or local – that have PSCs signed with the Albanian government pay a 10% royalty from their total revenues to AKBN. In cases where they took over previously producing wells from Albpetrol, those companies pay an additional pre-existing production royalty to Albpetrol.

In the case of Bankers Petroleum, according to the January 2012 investor presentation (.PDF) on the company’s website, the total royalty expected to be paid in 2012 is close to 17%, and will be between 14.8% and 16.2% for every year from 2013 to 2016. Beside the royalty, all oil and gas companies pay a 50% tax on their profits. It has to be understood that Albania is competing with numerous other countries, many of them with a much more developed oil and gas sector, in attracting capital to explore and produce its hydrocarbon resources.

Therefore, the tradeoff is between a prohibitive government take (royalty plus tax in this case) that will discourage any oil and gas company from investing in Albania (thus leaving it with terminally declining production), and a government take that allows foreign and local companies to make money by investing in the Albanian oil and gas sector, thus increasing local production and tax revenues.

Finally, the predominant presence of small oil and gas companies is normal in the early stages of the development of a new production region, and should not be a major concern if their activity is properly monitored by the government, and if their agreements with the government (PSCs) are transparent and well managed.

One reason for public criticism and fears, here as elsewhere in the Balkans, might have to do with mentality- a conviction that business agreements are done behind closed doors, and rife with hidden clauses. Although this might be well the case in some cases, from what can be seen in Albania’s case, corruption might occur rather as consulting fees paid to get a PSC or so. Once it is in place, the PSCs seem to be very transparent in practice.

In addition, public concerns about small investors having little oil and gas experience are also often misplaced. The fact that a company is brand new, and only seems to invest in Albania (for example), does not necessarily mean anything bad. Canada, Australia, the US and other countries have provided many examples of serial mining and energy entrepreneurs who, after having created a company and selling it for billions to a major mining or oil company, create another one focused on a specific emerging producer, with the same goal.

Thus, the people behind the companies are very important. Albania (and all Balkan countries) should not discourage small and medium-sized companies from investing- indeed, it is also much easier to negotiate a favorable agreement with a smaller company than with one of the supermajors.

A Short Delay Likely for Aspiring New Producers

At this moment, Balkanalysis.com does not foresee any other significant oil or gas producer in Albania before 2015. Although several offshore blocks have been awarded, as has been discussed, no significant exploration activity has taken place yet.

In October 2011, the European Union proposed a new Regulation for offshore oil and gas exploration and production activities. Initial feedback from the offshore operators indicates that the proposed regulation would create additional compliance costs. The regulation would apply to Albania as well, as a Contracting Party of the Energy Community. These additional costs, as well as the absence of any offshore oil and gas infrastructure and industry experience in Albania, will probably block any significant oil and gas offshore activities for the next several years.

Adding Up the Numbers: Oil Production and Future Scenarios

Overall, a positive assessment can be reached even from a conservative estimate, excluding any other potential players still to be named. In a likely scenario, increased oil production from Bankers Petroleum, Stream Oil and Gas, plus initial production from Petromanas and constant production from Albpetrol (or, the company that will buy Albpetrol), sees Albanian oil production reaching around 45-50,000 bpd in 2015 (2.3-2.5 million tonnes/year).

This figure amounts to more production than at anytime since 1974- when Albania reached peak production, allowing the country to cover all its domestic consumption and export the balance (5-10,000 bpd or 255-510,000 tonnes/year).

By comparison, no other country in the Balkans currently has any relevant oil production other than Romania and Turkey. According to EIA, Romania still produces around 90,000 bpd (4.6 million tonnes/year), but its production has fallen into steep decline, while Turkey still produces only around 45,000 bpd (2.3 million tonnes/year).

Therefore, becoming an oil exporter – even a small one – will give Albania some political leverage in the Balkans as well, further to some other energy transit projects that would involve Albania, especially the natural gas pipelines such as the Trans-Adriatic Pipeline or South Stream.

During 2011, oil production alone probably added $400-450 million to the Albanian economy, representing almost 4% of the country’s GDP. If the Brent oil prices stay around 90 USD/barrel for the next 3-5 years, this increased oil production in Albania will contribute about $1 billion – or between 7 and 8% of GDP – to the country’s economy by 2015.

If the domestic oil refining activities and all the construction activities linked to the oil sector (such as new pipelines, expanded export terminals and roads) are factored in, the cumulative contribution to the GDP can be pegged even higher. Increasing oil production in Albania might impact the country’s standing, the regional power structure, economic development and possibly the success or failure of proposed energy projects elsewhere.

Oil export from Albania to Italy could reduce the need for the long-promised AMBO pipeline. Greece might become more interested in having a small but stable supply of oil from Albania, now that the Burgas-Alexandroupoli oil pipeline is defunct and the country has to divert its oil import sources away from Iran for the foreseeable future, due to the international embargo against that country.

The alternative for Greece would be to turn to other plans, such as increased domestic exploration, which unfortunately requires money not available now, or else, participation in Cyprus/Israel offshore endeavors (which has tense political implications with Turkey). The prospect of having its northwestern neighbor become dominant in energy affairs does not sit well with Athens. At the same time, as stated above, the Turkish State Oil Company (TPAO) is reportedly unhappy about the Israeli offshore investment, and could try to make a case for itself behind the scenes.

Conclusions: Beneficial Development Possible, if Reforms Continue

A clean and smooth development of the hydrocarbon extraction and processing sector in Albania presents both a challenge and a huge opportunity for the country. The oil and gas regulatory framework must remain stable and free from any political interference- though the latter in particular is always challenging, given traditional Balkan power and patronage structures.

A successful privatization of Albpetrol – if this is indeed launched and finalized – will be an important test for the authorities. The government’s strong and continuous commitment to the development of the oil and gas sector is critical, as is transparency.

In 2009, Albania became a member of the Extractive Industries Transparency Initiative (EITI), a global initiative that works towards increasing the transparency and accountability of the extractive industries, including oil and gas. EITI’s reports from 2009 and 2011 show that the Albanian oil and gas industry relations with the government are generally considered to be open and transparent.

Howevcr, the possibility of fuzzy financial reporting is also suggested, specifically in the case of the cooperation of foreign investors and the government during today’s oil industry revival. Reported oil production royalties are provided in the first report on Albania (.PDF) published by EITI, in 2009. This report was crafted soon after the country became a member of EITI.

One of the things that the report looks at is whether the royalties and other amounts declared by oil and gas companies as having been paid to Albpetrol or the Albanian government in fact match the amounts reported by the Albanian government. The numbers given in the report (referring to the year 2009) reveal that a generous $600,000 was missing from the government’s reporting. In the oil industry, this is not a huge amount and could be a reporting error. On the other hand, one cannot exclude the possibility of corruption in the involved government agencies. It will be interesting to follow the future EITI country reports to see if such discrepancies persist.

Appendix: Companies, Entities and Notable Figures

The following information is based on, and refers to, official data and the official websites of some of the entities mentioned in the current article. The references are provided in order of their appearance in the text. This information accurately represents the data listed on the websites in question at the time of this article’s publication; please note that this will not be updated to take note of any changes that may occur in future.

National Agency of Natural Resources (AKBN)

Based in/location: Albania

Executive Director: Besjan Pesha

Activities: Governmental oversight of the renewable energy, hydrocarbons, mining and hydroenergy sectors

Ministry of Economy, Trade and Energy

Based in/location: Albania

Minister: Nasip Naço

Activities: Governmental ministry overseeing the economic sphere, including energy sector

Bankers Petroleum

Based in/location: Canada

Other Major Projects: None

Board of Directors: Robert Cross (Chairman); Abdel F. Badwi; Ian McMurtrie;

Gen Wesley Clark (ret.); John Zaozirny; Eric Brown; Phillip R. Knoll; Jonathan Harris

Albpetrol

Based in/location: Albania

Activities: State oil company

General Manager: Ferdinand Murati (as of August 2011)

Stream Oil and Gas

Based in/location: Canada

Other Major Projects: None

Board of Directors: Sotiris Kapotas (Chairman); Marlowe Allison; Ian Barron; Leslie Goodman; James Hodgson; George Mortakis-Martakis

San Leon Energy PLC

Based in/location: Ireland

Other Major Projects: Oil and Gas activities in the USA, Poland, Ireland, Italy, Morocco and Holland

Board of Directors: Oisín Fanning (Chairman); Philip Thompson; Paul Sullivan;  John Buggenhagen; Raymond King; Jeremy Boak; (Thomas) Daniel Martin Jr

Beach Energy Limited

Based in/location: Australia

Other Major Projects: Drilling and Production in Australia, Egypt and the US

Board of Directors: Robert Michael Kennedy (Chairman); Reginald George Nelson; Franco Giacomo Moretti; Glenn Stuart Davis; Neville Foster Alley; Belinda Robinson

Israel Land Development Energy (ILDC)

Based in/location: Israel

Other Major Projects: Holding Company for Real Estate, Media, Outdoor Advertising, Hotels and Utilities and Energy

Controlling Shareholders/Board of Directors: Jackob Nimrodi (Honorary President); Ofer Nimrodi (CEO); Shlomo Maoz (Chairman of the Board); Eliyahu Cohen; Ron Weissberg; David Schwartz; Smadar Nimrodi-Rinot; Ravit Nimrodi; Menashe Arnon; Chen Lavon

Note: ILDC Controls Emanuelle Adriatic Energy Ltd (incorporated in Cyprus). This subsidiary runs ILDC’s Albania operations, and in fact all of its energy projects.

Albanian Refining & Marketing of Oil (ARMO)

Based in/location: Albania

Activities: National Refining Company (Privatized)

Director: Rezart Taci

Petromanas Energy

Based in/location: Canada

Other Major Projects: None

Board of Directors: Verne Johnson (Chairman); Heinz Juergen Klaus Scholz; Jeffrey Scott; Gerard Protti; H. Werner Ladwein; Peter-Mark Vogel; Gordon Keep; Glenn McNamara (Director and CEO)

Sky Petroleum

Based in/location: Texas, USA

Other Major Projects: Mubarek Field (UAE offshore)

Board of Directors: Karim Jobanputra (Chairman): Robert P. Curt: Michael D. Noonan; Oliver J. Whittle

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