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Libyan oil's fraught return to market after Qadhafi era

Oil production has resumed, but as Libya steps out of Qadhafi’s shadow, what comes next?

BUOYED by international recognition, the capture of Tripoli, and the seemingly unstoppable regime change under way, Libya’s interim government believes it can quickly increase oil production. With full pre-war levels reached within 15 months, or much sooner, the restored revenue stream may also help to win the peace.

Libya needs the money. France, the UK and other allies of the National Transitional Council (NTC) are slowly unfreezing some of the Qadhafi-era billions that the Western countries long promised to the rebels. Qatar remains a generous backer. But the flow of funds is still barely a trickle and the fledgling government is struggling to keep its economy afloat. The NTC’s leaders were in New York in mid-October for the UN General Assembly and while their legitimacy now has international backing, they need to convert it into progress on the ground.

That is proving difficult. NTC interim prime minister Mahmoud Jibril was supposed to announce a new interim government on 18 September. The deadline passed and instead of revealing who would lead Libya’s post-war recovery, Jibril and his own role was under pressure.

Conflicts out in the open

Conflicts within the anti-Qadhafi movement that were kept under wraps during the height of the war have come into the open since Tripoli’s fall. The capital itself is hardly under the NTC’s authority, say analysts, and has instead been secured by victorious anti-Qadhafi brigades from the west of the country. That partly explains why Jibril and Mustafa Abdul Jalil, the NTC’s chairman, have barely settled in.

Anti-Qadhafi leaders from Misrata, the city east of Tripoli that suffered more than any other during the war, continue to chafe at Benghazi’s leadership. Misrata has even proposed its own prime minister to replace Jibril: Abdul-Rahman Sweilhi. Some Libyans have called on Jalil, almost universally respected, to take over from Jibril. But he insists he will play no official senior role in the new government.

And other senior Benghazi-based NTC officials may also lose influence. US-educated Ali Tarhouni, who enjoyed strong support from Western governments as the NTC’s finance minister, may be forced into the back seat. One source told Petroleum Economist his replacement would likely be "technocrat" Hassan Zeghlam, a Tripoli-based laywer.

Basic threats

While the jostling for positions in the new government – which may amount to an unwieldy 30 or so ministers – continues, there are other basic threats. The war isn’t over yet. Qadhafi and many of his sons are still at large. Sabha, where the UK government believes he is hiding, Bani Walid and Sirte have not been captured and anti-Qadhafi forces have been repeatedly beaten back.

The Obeidi, the tribe of anti-Qadhafi general Abdul Fatah Younis, are upset that the NTC has not solved his murder. That was in July. The NTC leaders immediately blamed Islamist elements in the rebel movement. Either they were wrong, and Younis was assassinated for even murkier reasons, or they are correct – and have failed to deal with an Islamist threat that is worrying some analysts. Neither is a happy situation.

Money from crude exports – quickly – may help ease some of these tensions. According to one NTC source, an oil minister may be appointed imminently, perhaps before the rest of the interim government is named. Abdul-Rahman Benyezza, formerly a board member of National Oil Company (NOC), is the front-runner, although Wahid Bugaighis, who early in the war ran what the NTC planned to be a shadow NOC in Benghazi, is another candidate.

Production back on stream

Oil production is back on stream. Arabian Gulf Oil (Agoco), a unit of NOC, is pumping 150,000 barrels a day (b/d) from the Sarir and Misla fields, in Libya’s southeast, which were shut down after attacks by Qadhafi forces in April. Power-supply problems have slowed recovery from the fields, which were producing more than 400,000 b/d before the war. Output of up to 250,000 b/d is likely in the short term.

But a new booster station on the pipeline linking the fields to Tobruk’s Marsa El Hariga port, to replace one destroyed by Qadhafi forces during the war, will be operational within eight weeks of its arrival, a senior rebel oil-industry source told Petroleum Economist. That would underpin output amounting to a quarter of Libya’s pre-war total.

Some oil kept in storage during the war has been sold. Thanks to the lifting of sanctions on Libyan firms, traders now feel more confident buying cargoes. The NTC says exports of fresh crude are imminent. The limited oil offered to buyers so far has been mixed crude, leaving traders waiting for the system to clear and the good stuff to come through.

Gas production is ramping up from the Wafa fields, in the southwest. By mid-October, says Eni, it will be importing gas through the 11 billion cubic metres a year Greenstream pipeline to Sicily.

And Libyans are far more optimistic than outsiders about how quickly oil production will reach pre-war levels of 1.6 million b/d. Nuri Berruien, the new chairman of NOC, told Petroleum Economist output would hit 1 million b/d within "five to six months".

The International Energy Agency, by contrast, reckons output will be just 350,000 b/d by the end of the year. Eni, one of Libya’s largest pre-war investors, and other analysts are even less hopeful. Control Risks, a consultancy, said it could be three years before pre-war output levels are restored. "The initial obstacle will be security at remote interior fields, where weapons proliferation, militia factionalism and violence by forces loyal to Qadhafi will pose significant challenges," it said.

Of Libya’s output before the war, around 1.2 million b/d was exported, primarily to southern Europe. At a price of $100 a barrel – a plausible level once exports resume – such sales would fetch more than $3.6 billion a month. Some of that income will go towards paying state employees living in liberated cities. Many haven’t seen a dinar since March, a basic problem that has caused disquiet in some of western Libya’s war-weary regions and especially Misrata, where small protests against the NTC have already taken place.

Smaller volumes from offshore fields, such as Eni’s Bouri (43,000 b/d in 2010) are also due on stream within weeks, the source said. Output from fields such as Amal, south of Zuetina, an export terminal near Ajdabiya, should follow soon after. Dow Jones reported on 21 September that France’s Total was about to restart production from its 40,000 b/d Al Jurf field, in water close to the border with Tunisia.

Oil from southwestern fields that fed the Zawiyah refinery, west of Tripoli, until rebels cemented a valve on the pipeline – a key tactical move that helped starve the capital of fuel – may also come back on line soon. Tamim Osman, an advisor on oil matters to the NTC, said patching it up will take no more than two days.

Production from the prolific Sirte basin, in the centre of the country, which holds about 80% of Libya’s reserves, is more doubtful. Much of the exported crude flowed through Sidra, Brega and Ras Lanuf, the terminus of two crude pipelines. Sidra’s export capacity, which stood at about 450,000 b/d before the war, may have been damaged: on 30 August, a fire, caused by fighting near the terminal, was said to have demolished one of the storage tanks.

Just how badly Brega’s oil-export infrastructure was damaged won’t be known until mines have been cleared from the city. Ras Lanuf suffered, but Qadhafi’s regime was, until recently, trying to sell a cargo of crude from the port, so it retains some shipping capacity.

If regime-controlled Sirte, now the focus of rebel troops and Nato strikes, falls quickly, up to 65% of Libya’s pre-war output can be achieved within "four to six months", said Osman. Alongside Tobruk, long under rebel control, the Gulf of Sirte ports of Sidra, Brega and Ras Lanuf accounted for 825,000 b/d of pre-war exports.

Infrastructure destruction

Some analysts fear infrastructure destruction has been more severe than expected and that fields may have been damaged, or sabotaged. They also point to a recent attack by Qadhafi loyalists in Ras Lanuf, where a gunfight killed more than a dozen guards.

Libyan oilmen dismiss such talk, saying the hurdles to restarting production are shrinking by the day. One legacy of the regime’s tight foreign-investment regime was a requirement that Libyan nationals fill senior operational positions in joint-ventures with foreign companies. So the projects don’t need to wait for the foreign oil workers to return and switch on the valves.

But that may not be the case at some of the older fields, where ramping up production to pre-war levels will take longer. Output from the Waha complex, in which ConocoPhillips, Hess and Marathon partnered NOC, will need foreign technical expertise – and capital – to start up again. And Waha’s primary export route was through Sidra, so the project may also have to wait until the fire-damaged storage tank is patched up, or replaced.

Worries about security

But the state of the infrastructure may not be as big a problem as worries about security. With Qadhafi and his son, Saif al-Islam, still at large and a battle for control of Sirte taking longer than expected, the situation is still making some firms nervous.

Even if oil production can be brought on stream quickly, sustaining it in the longer term – or increasing it to the 3 million b/d mooted by some NTC figures – is another matter. That will need capital-rich foreign investment. And if deep-pocketed foreign investors are to spend their cash, they will want to feel safe.

Private security firms are already pitching for business defending more remote fields. But all it will take is one foreign oil worker to be killed for international investors to grow nervous, points out Shashank Joshi, an associate fellow at the Royal United Services Institute. That’s a prospect that increasingly troubles analysts.

The beef between Misrata’s rebels and the NTC is a worry. But even more serious a concern is the security of remote parts of the country, especially in the Qadhafi-loyalist south. Agoco’s efforts to secure Sarir and Misla involved deploying rebel forces – said to have been assisted by the Tabu tribe, whose home is close to the border with Chad.

Whether co-operative fighters can be found in the southwest, close to Algeria’s border, is less clear. A Tuareg militia in the southwest kidnapped a British journalist earlier this month – he was later released – and friction is building between tribes in Ghadames.

Indeed, Algeria’s willingness to accept Qadhafi family members fleeing Libya at the end of August has left some analysts wondering if the country will become a new refuge for defeated loyalists. (Algeria’s government said it accepted the family members on humanitarian grounds and turned down a request from the Qadhafi himself to cross into the country; and that it may soon recognise the NTC.)

Counter-insurgency

All of that presumes a swift and final victory for the NTC, with little reaction afterwards. But even that may be doubtful. Joshi said that once the war is over, the NTC could face persistent trouble from loyalists. Talk of counter-insurgency, if it comes to that, won’t do much to persuade foreign oil companies to return, he suggested, even if the NTC has pledged to honour Qadhafi-era contracts.

Such promises will mean little to the Western companies already circling Libya’s upstream. Firms from Italy, France, the UK, US, Canada, Norway, Denmark and especially Qatar already know they will enjoy good standing with the NTC – and Western firms were already present in the lion’s share of the licensed areas (see map). Qatar seems destined to take a significant role in Libya’s downstream.

But Algeria’s Sonatrach, Petrobras, Gazprom and other firms from countries that supported Qadhafi, or lobbied against the war, will need assurances. Sonatrach may keep its existing contracts, but, say some Libyan oilmen, its welcome will be grudging, at best.

Having gained access to the upstream in recent licensing rounds, there’s not much new upside for Western firms – a disappointment to conspiracy theorists who believe Nato’s campaign was a war for oil. Contracts for construction and other services, many held by Chinese firms before the war, may trigger the bigger scramble.

France in front

Nonetheless, the majors are sniffing. On 29 August, Eni signed a fuel-supply agreement with the NTC. It will be paid for the cargoes, eventually, in crude oil. Total, which produced 55,000 b/d from Libya before the war, was to join other French firms, including weapons maker EADS, on a trade mission to the NTC in late September.

An Algerian newspaper claims to have seen documents, possibly forged, showing that the NTC would hand over more than a third of Libya’s upstream to French firms. Total’s boss Christophe de Margerie pled ignorance, but admitted talks had taken place about his firm’s role.

UK firms haven’t been nearly so forthright – partly, said one diplomat, because their government has been less willing to champion their cause. "We don’t want any meetings-in-a-tent-type imagery," he said, referring to Tony Blair’s infamous trip, with BP in tow, to meet Qadhafi in his desert redoubt. Nonetheless, BP and Shell will join a UK delegation to Tripoli on 26 September, said a source.

The UK Foreign Office, which was heavily involved in directing Nato’s campaign and in cajoling other governments to back the NTC, has ceded some momentum in Libya to France and Italy, a diplomat said. Many officials who were seconded to work on Libya, helping to beef up sanctions against its ports and staunch the flow of petroleum to the regime, have already shifted their focus to Syria, he said.

But some Western officials believe the NTC will need as much help in the aftermath as during the war. "The real worry comes when the NTC disbands," said one diplomat. The delays in forming an interim government and the fuzzy timetable for elections is worrying. Turf wars for power in the new Libya could grow more severe.

Anti-corruption measures

The sheer volume of cash to be earned from Libyan oil exports will also raise the stakes. Global Witness, an advocate for transparency in the oil industry, said recently that now was the time to institute anti-corruption measures in Libya’s energy sector, before the revenue started to accumulate again.

"As seen in Iraq, the industry is vulnerable to disruption from armed elements whether their political agenda is national, or very localised," said Bill Farren-Price, chief executive of Petroleum Policy Intelligence, an oil advisory firm. A swift resumption of Libyan oil production should solve some immediate problems, but may create new ones, too.

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