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Eye of the storm for Libyan oil industry amid political issues

Is Libya’s oil sector immune to the country’s political turmoil, asks Derek Brower

Libya's oil industry has often seemed like a beacon of calm amidst the political chaos gripping the country since Muammar Qadhafi’s fall in 2011. 

Oil output, which was shut in during the war, recovered far more quickly than many analysts predicted, reaching pre-conflict levels more than a year ago. It remains there: at the end of May, National Oil Company (NOC), the state-controlled firm, said production was just over 1.6 million barrels a day (b/d). Libya is even confident enough to have offered Egypt $1.2 billion worth of crude oil on soft credit terms.

It’s an achievement for a country that has yet to agree a post-Qadhafi constitution, suffers sporadic violence, has been through several post-regime national leaders, has seen the withdrawal of many expatriate oil workers, and is on its third oil minister since the revolution.    

The latest one, Abdelbari al-Arusi, believes his country’s industry can go still further. In April, he said Libya would enact a new oil law and hold a fresh licensing round by the end of 2013. Output capacity would rise to 1.7m b/d, he said, and Libya would need a bigger quota from Opec, too, because the most recent one, from 2008, was set at just 1.47m b/d.

Economic woes

The extra output would be useful. The IMF says Libya’s economy contracted by 62% during the war, and has not yet recovered. Boosting hydrocarbons supply would help. Oil and gas account for 60% of Libya’s GDP and 95% of its income.

But there are signs that Libya’s post-regime political chaos is catching up with the oil sector. This matters outside the country, too, because Libya’s high-quality oil has a disproportionate impact on global crude prices. Yet not only will Libya be unprepared to launch a new round according to al-Arusi’s timeframe, say Libyan industry sources, keeping production at present levels is also unlikely. Pessimism is setting in.

One problem is persistent disruption of production. Oil flows to the Zueitina export terminal, near Ajdabiya, came back on line in late May – but only after senior officials, including deputy oil minister Omar Shokmak, went to meet the protestors who a shut a valve on the pipeline to the port. There have also been similar protests in Tobruk, which handles exports from NOC-unit Agoco’s Sarrir and Misla fields; at Ras Lanuf, another export facility; in Mellitah, from where natural gas flows to Italy; and elsewhere. Al-Arusi told the Financial Times recently the disruptions had cost Libya $1bn in lost revenue.

This problem, say insiders, is getting worse. Settling the claims of locals with the power to shut down facilities now often involves large payments. The pattern of extortion could have been avoided had Libya’s authorities introduced a plan to train and employ these men, many of which are veterans of the conflict. Now it is too late. “The government has avoided using force, but at some point they may try to,” says Alex Warren, editor of The Libya Report, an online business and economic monitor. For now, the authorities are unwilling and too weak, so they pay ransoms.

Political confusion and buck-passing has also reached the oil industry. NOC now defers many decisions to the oil ministry; it, in turn, hands the final say to the prime minister’s office. It is a far cry from Shukri Ghanem, Qadhafi’s oil minister who ran Libya’s oil industry like a fiefdom. Foreign investors find it hard to figure out who is in charge. Al-Arusi has yet to establish his authority and his deputy, Shokmak, has a strong power base, says one Libyan industry figure. Problems are not resolved quickly. Unless new power units are found for the surface installations at the Sarir and Misla fields, for example, production – capacity is around 400,000 b/d – could fall by up to 60,000 b/d, says one source. Nor can anyone say where NOC will be based. A recent decision to move its headquarters from Tripoli to Benghazi is likely to be opposed, say analysts.      

As well as a new licensing round, meanwhile, Libya has also talked of increasing its reserves through enhanced oil recovery (EOR). The previous oil minister, Abdulrahman Benyezza, said the country hoped to add 10bn barrels to the existing base of 47bn within two years. But EOR will depend on foreign services companies returning to the country.

Fears about violence (and the official ban on private security), the departure of many Western diplomats (the UK was the latest to pull back non-essential staff) and the recent blockading of the ministries of finance and foreign affairs have all hampered that. That’s before anyone mentions Libya’s upstream contract terms, which are onerous. “The government hasn’t even completed the last EPSA contracts,” says one source, who pointed to BP’s recent withdrawal of more staff. It was among large investors in that signed the EPSA contracts with Ghanem.

Data shortage

In any case, without services firms, there will be no new seismic data. Without data, a new licensing round is fanciful. Without services firms to carry out well work-overs, moreover, Libya will struggle to keep its production at the lofty heights it reached so quickly after the war. Some analysts expect output to begin fading by the end of the year.

There is little end in sight of this chaos, either. The Political Isolation Law (PIL) passed by the GNC on 5 May bans from government anyone who held a senior post in the Qadhafi era. Some critics say it was a Muslim Brotherhood scheme targeting the liberal Mahmoud Jibril, a politician who led the NTC and now runs one of Libya’s political parties. But the PIL’s wide net threatens to remove scores of senior officials, including many who opposed the regime. The GNC may yet adapt the law. But, in response to the PIL, Mohammed Magarief, the GNC’s own elected head, resigned on 28 May. Another election will have to establish his replacement. Some militants want Ali Zeidan, the prime minister, to go. The law may also claim oil minister al-Arusi.

Changes could help make the situation less gloomy. International firms could be allowed to operate from Malta. The oil-installation protection force may gain more authority. Libya might just keep muddling along through its painful transition. “This is just how it will be for the next few years,” says Warren. “Libya won’t implode, but its economy won’t boom the way some people expected.”

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