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Oil and politics – Libya’s risky business

The swift resumption and return to pre-war levels of oil production will be crucial to the success of a new Libya. A transparent oil and gas framework is vital

SINCE conflict in Libya erupted in February, oil companies with stakes in the country have faced great uncertainty over the future of its oil industry. There remain serious concerns over Libya’s production capacity and how contracts will be awarded and executed in future.

The National Transitional Council (NTC) has tried to allay fears regarding how swiftly the country can return to pre-war output of 1.6 million barrels a day (b/d) – recently claiming this is achievable within 14 months. UN Security Council sanctions banned oil exports in order to choke the flow of finance to the Qadhafi regime; while the evacuation of oil workers by foreign companies shut down the energy sector almost entirely.

Oil and cash flows

But with the former dictator deposed, the NTC must resume production and exports to restart the flow of cash and facilitate reconstruction of the war-torn nation. With 95% of Libyan revenues coming from oil and gas exports, it is vital for the country’s economic and social survival for foreign oil firms to return and oil production to resume. Italy’s Eni has already engaged in talks with the NTC to bring its existing capacity back on line, followed closely by Spain’s Repsol and France’s Total.

Opec and the International Energy Agency, however, are hesitant to accept NTC projections that Libya will reach pre-conflict output levels within a few months. Both organisations put output at 300,000 b/d and see an increase to 1.1 million b/d by the end of next year. Although Opec as an organisation has recognised the NTC, it is crucial that its member states create bilateral relations with the new regime to cement Libya’s international credibility.

Although Opec as an organisation has recognised the NTC, it is crucial that its member states create bilateral relations with the new regime to cement Libya’s international credibility

 

To bring production back on stream and encourage new exploration, the NTC has said future oil-contract awards will be based on merit, transparency and fair competition, rather than the politicised self-interests of the Qadhafi regime. The NTC has already endorsed some companies with a track record, experience and knowledge of the Libyan oil sector, such as Eni, Total and ConocoPhillips.

Far from fair and transparent

But speculation is rife that far from being fair and transparent with contract awards, the NTC will be biased towards European countries, such as the UK, Italy and France, not only because of their intervention in the conflict, but also as Libya relies so heavily on EU export markets. So far, Chinese and Russian companies have been ignored, perhaps because both delayed recognising the NTC as the legitimate governing body of Libya (Russia recognised the NTC on 1 September; while China is yet to do so).

That UK prime minister David Cameron sent trade officials to Libya during the height of the conflict shows the importance for the UK of securing contracts in the country. A Libyan oil cell was set up by the UK government to prevent Qadhafi securing fuel supplies (and revenues), while ensuring flows to the rebels. At the peak of fighting, the rebels offloaded 1 million barrels of crude to trader Vitol, which has ties to UK international-development minister Alan Duncan. Switzerland-based Vitol had been exempted from sanctions by the US Treasury to deal with Libyan entities.

The only Libyan company to escape sanctions during the conflict was Arabian Gulf Oil (Agoco) – a unit of Libya’s National Oil Corporation (NOC)

Although emergency supplies were a necessity for the rebels during the war, such actions do not lend weight to the NTC’s objective of creating oil-industry transparency in a new Libya. The NTC’s position was further damaged by reports that commodities trader Glencore has been awarded a contract to deliver refined oil products to Libya. The only Libyan company to escape sanctions during the conflict was Arabian Gulf Oil (Agoco) – a unit of Libya’s National Oil Corporation (NOC). Agoco received an exemption from the US Treasury to allow dealings with foreign entities and ensure fuel supplies to the rebels.

Following the 1 September conference for Libya in Paris, the EU lifted sanctions on Libya – most Libyan oil and gas exports make their way to Europe, predominantly Italy. Eni remained the only active foreign producer during the war, producing 10 million cubic metres a day of gas, although exports through the Greenstream pipeline to Italy were suspended – Libyan exports met 11% of the country’s demand in 2010, according to Cedigaz. Eni hopes to resume flows through Greenstream this month.

Assets unfrozen

Since 1 September, $15 billion-worth of frozen assets have been released to the NTC, raising optimism about financing the resumption of oil and gas production. But while lifting sanctions on Libya is a necessary action, the imposing parties must act carefully to ensure the entities that benefit are transparent in their operations – many, such as Central Bank of Libya and state-owned NOC, were the targets of the sanctions in the first place.

To make the oil and gas industry and regulatory regime of Libya more transparent and streamlined the disbanding of NOC has been suggested. Although it may be premature, breaking up NOC would be a viable solution to its economic strangle-hold over the Libyan oil and gas sector. The NTC has proposed splitting NOC into three companies: upstream and downstream oil activities; and a natural gas arm.

A transparent oil and gas framework in Libya, free of the corruption of the Qadhafi regime, is vital. The EU, US and Opec will be play a significant role in rebuilding Libya. But it is up to the NTC and the Libyan people to ensure their oil and gas resources are used for the benefit of a stable, democratic and prosperous new Libya.

David Hill is a partner and Kanwal Majeed a trainee solicitor in Burlingtons Legal LLP’s oil and gas team.

Tel: +44 20 7529 5420. Email: david.hill@burlingtonsllp.com

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