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Not quite scramble time for Libyan investors after elections

Libya’s first post-Qadhafi elections had many positives. But clarity for investors is not yet among them

They passed peacefully, drew wide voter participation, and set Libya on a new, democratic path: major achievements for elections in a country that less than a year ago was fighting to topple a brutal dictator who did his best to repress civil society and democracy.

What Libya’s vote in July did not do, however, was settle bigger questions about the country’s immediate future or assure international oil companies that stability is returning. The politics has now entered a new, muddier phase. Security remains a worry. For all the talk about expanding production capacity the prospects of new drilling, vital to increase reserves, are dim. For now, the biggest challenge may simply be keeping output stable.

First, though, the positives. Far more quickly than predicted by many analysts, including the International Energy Agency, Libya has brought its oil production, now around 1.6 million barrels a day (b/d) back to pre-war levels. A strike that briefly shut in exports from the east in early July has had no lasting impact. All the country’s fields are operating again, say sources at National Oil Company (NOC).

Small production growth is likely in the short term. NOC has instructed Arabian Gulf Oil, its Benghazi-based unit that operates big fields in the east, to lift production from 370,000 b/d to 400,000 b/d. Wintershall, a German firm with assets in the east, is close to its 100,000 b/d pre-war output, and it announced plans to increase capacity by 2013 by building a new pipeline between the Nafura and Amal fields, near Ajdabiya.

Downstream operations are also ticking along nicely. The Zawiyah refinery, near Tripoli, is at capacity; smaller processing plants – Tobruk’s topping plant and the facility at Sarir, both in the east – are working. Ras Lanuf, a large downstream complex on the coast, is producing chemicals and its 220,000 b/d refinery, a crucial export plant for the European market, is close to restart. A source said it could be back on stream after Eid-al-Fitr. The Sidra terminal, in one of the regions of Libya hardest-hit by the war, is back on line, allowing oil from the Waha complex of fields, in the centre of the country, to export through its own pipes, ending reliance on alternative routes.

It all adds up to a remarkable achievement: a testament to the professionalism of NOC’s engineers and the home-grown expertise in Libya’s oil industry. Petroleum Economist was almost alone last year in predicting this swift recovery in Libyan oil output. But even we have been surprised by the speed of the output growth.

Things from now, though, will be more difficult. Plans unveiled in June by Abdurahman Benyezza, Libya’s oil minister, involve output capacity increasing to 2.2m b/d within five years. Refining capacity and petrochemicals-production capacity will also rise under these proposals, which are based on a 10 billion barrel increase in the country’s oil reserves (47.1bn barrels in 2011, according to BP).

These plans are too optimistic. For now, keeping production at 1.6m b/d will be difficult enough. Production capacity growth will require new drilling to find more oil, but none of that is happening or likely for some time. Expanding output significantly based on already producing fields risks damaging them, says Tamim Osman, a consultant who advised the National Transitional Council (NTC) on oil policy during the war. Prospects for discoveries are good across the country, and especially in the east. But finding hydrocarbons will require big commitments to the upstream from international oil companies (IOCs).

For now, that is not in the cards. Shell’s withdrawal from Libya in the spring angered the NTC, but it suggested the majors remain wary of jumping back into the country. Executives from oilfield services firms are flitting in and out of Tripoli’s five-star hotels, but they, too, remain reluctant to commit. No well workovers are under way. Enhanced oil recovery, a component of Benyezza’s plans, is not happening. Forget about production growth; the lack of service work in the fields could begin to undermine production now. Petroleum Policy Intelligence, a consultancy, said in a July note to clients that unless such work begins, output could fall by up to 100,000 b/d a year.

So getting the IOCs back to work is crucial. Politics and security, though, are making this difficult. The elections in July have not yet improved the outlook. They passed peacefully and the results bucked a trend of rising Islamist power in post-Arab Spring countries. But the complexity of the electoral system has left things confused.

The results favoured the National Forces Alliance (NFA), a coalition of dozens of parties led by Mahmoud Jibril, last year’s wartime prime minister. The NFA won 39 of 80 seats reserved in a new assembly for political parties, more than double the seats won by the Muslim Brotherhood-linked party. In some areas, such as Benghazi, the Islamists garnered just a fraction of the vote.

Some Western commentators gleefully assumed the results showed that Libyans had abandoned the Islamists and would chart a liberal course under Jibril, who won much international praise during the war last year. This isn’t the case, says Henry Smith, an analyst for Control Risks, a security firm. Electors voted mainly for personalities, not parties. Jibril’s role in the war made him popular, and Muammar Qadhafi successfully stunted the political development of Islamist groups, leaving them with little presence on the ground.

That doesn’t mean Libya has rejected Islamism, however. Unlike the secularist parties in Tunisia and Egypt, points out Alex Warren, a North Africa analyst from Frontier, an advisory firm, Jibril’s liberal alliance remains committed to Islam as the basis for Libya’s state. So as the Islamists get better organised and develop a bigger community presence, overcoming a popular deficit left by Qadhafi era, their popularity may rise. Sir Richard Dalton, a former UK ambassador to Libya and now a fellow at Chatham House, thinks Islamist parties will do much better in the next election, which could be as early as 2013.

In the meantime, much horse-trading is under way as the NFA and Brotherhood try to amass a position in the 200-seat assembly, in which 120 seats were reserved for independent candidates. Both the NFA and Brotherhood claim the allegiance of around 40 independent assembly members.

The Assembly

No one is ready to say who will command the assembly or be in its first cabinet, from which a prime minister will be appointed. Because of Jibril’s popularity, many assumed he would emerge at the head. But there is confusion about his intentions, too. He didn’t stand for election himself. Smith, who was in Libya during the election, says many NFA voters were confused not to find his name on the ballot when they entered polling stations. It is understood that he doesn’t wish to take a seat in cabinet, though he may be under pressure to do so.

Confusion also surrounds the purpose of this elected assembly. Originally it was to draft a constitution. But the NTC recently ruled that another body – to be elected by plebiscite – will do this. Already, there is disquiet: how can the NTC, a self-appointed body, now trump the mandate of the popularly elected assembly? Its members may soon decide that the NTC and its rulings have run their course.

The politics are baffling and the confusion means big decisions about Libya’s economic direction, and its oil industry, will be delayed for some time – at least a year, predicts Smith.

Yet the need for clarity and new rules is pressing. Although there has been talk of luring new investment by revising upstream contracts, considered onerous by IOCs, no one yet has the authority to do this. Benyezza’s future as oil minister is unclear: insiders rate his chances of keeping the job in the next government at 50-50. The indecisiveness of prime minister Abdurrahmin el-Keib’s government has not shrouded its ministers in popular good will. Osman says the next government may form a supreme oil and gas council to run the industry’s strategy, leaving NOC to manage the day-to-day operations. It isn’t clear what the role of the oil ministry would be.

Such confusion will stunt the enthusiasm of IOCs to return to Libya. So will the security situation, which is also complex. Incidents of violence against foreign commercial interests have been rare and the visibility of weaponry on the streets is much less than a few months ago. The post-Qadhafi tribal turmoil predicted by some analysts – and the colonel himself – has not happened.

But the risks are plenty. Some of the armed brigades that fought to liberate Libya have morphed into rackets offering protection – often from other militias - at oilfield installations. Energy infrastructure in the Ghadames basin, in the West, is under the protection of the 5,000 strong Zintan brigade, for example. In Tripoli, the same militia extracted payments from the NTC to “protect” the airport. Brigades from around Ajdabiya are guarding assets near Zueitina; and the Sirte basin, in the country’s centre, is particularly vulnerable. Some militiamen have been turning up on local oil firms’ doorsteps demanding housing, food and payment. Companies have little choice but to cooperate – but the risks for foreign firms in doing so are great, says Smith, because they may know little of their protectors’ professionalism or history.

Some of this is the by-product of the NTC’s inability to impose its authority across the country, not least in the east, where some protests have demanded greater regional autonomy, federalism, or even independence. Because it can’t draw on its own effective force to police the country, meanwhile, the Ministry of Defence has often relied on the brigades. In Misrata, there are complaints about the negative portrayal of the city’s fearsome militia, which cops much criticism for its vigilantism. Yet the city’s military council says its men are often acting on instructions from Tripoli.

That is a failure of the NTC’s communication – a target of much complaint, and something that may render the council increasingly irrelevant, especially if the assembly and its cabinet get up and running after Ramadan. Another problem remains corruption or perceptions of corruption. Western sanctions are still in place on the Libyan Investment Authority, for example, because of uncertainties about its management, says a lawyer working on the matter. “Transparency will help reduce uncertainty,” says the IMF, “spur investor confidence, and attract the much-needed skilled diaspora, foreign expertise, and investment.” But, for now, getting to that promised land is difficult.

All of this will combine to make IOCs pause before they jump back into Libya, stalling any bolder plans for new drilling to yield production and reserves growth and putting pressure on the industry’s ability to keep existing output steady.

Hopeful future

Nonetheless, the outlook need not be gloomy. The politics may be confusing in the interim, but Libyans have muddled through in the past – not least during the war last year, when the uprising defied the analysis of many foreign commentators. The political process will undoubtedly bring about consensual, coalition government, predicts Dalton, avoiding any winner-takes-all government of the kind that would create grievances. Expectations among Libyans are high and a new government will want to spread the inevitable popular frustration across the political spectrum.

There is also much pent-up capital that will arrive in the country as the politics becomes clearer. The list of UK companies that recently joined the British-Libyan Chamber of Commerce has soared in recent months, points out Dalton. “A terrific spurt of growth” is on the way, he predicts. Despite all Libya’s problems, the IMF recently forecast its economy would grow by more than 116% this year, after contracting by 60% in 2011. The country depends too heavily on oil (which accounts for 70% of GDP, 95% of exports and 90% of government revenue), but “a peaceful political transition, underpinned by good governance and the rule of law” would help it secure such economic progress.

The outlook for such rapid economic growth makes Libya a high-risk-high-reward investment. “Things will eventually settle down into a hard slog,” says Dalton, and issues that vexed economic development under Qadhafi will take time to resolve. Political stasis in the coming months probably won’t do much to reassure investors, who must remain patient: revolutions take time. But when the dust settles, Libya’s large energy reserves and proximity to markets are fundamentals that will only grow more attractive.

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