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Libya's problems mount and threaten oil sector

The civil war ended the Qadhafi regime but persistent political chaos and violence is a growing threat to the country's oil sector

Gunfights and bombs were going off in Benghazi. Muammar Qadhafi's Green Army was battling for Ajdabiya, a 45-minute car ride down a highway strewn with blackened out tanks and heavy artillery, all destroyed by Nato's air power. In a room in the liberated east, Ali Tarhouni, the rebels' wartime economy minister, was telling Petroleum Economist about his plans for the country's future. Democratic Libya would need investors to help rebuild the country, he said, but oil production could rise to 3 million barrels a day, a near-doubling of the pre-war level. Already, the National Transitional Council (NTC), the fledgling rebel government, was seeking an oil minister with the stature to repair the image of Libya's energy sector, damaged by years of corruption under Shukri Ghanem, and hoped Abdalla El-Badri, the respected Libyan secretary-general of Opec, would take charge.

That was in the spring of 2011, just after Western aerial forces had stopped Qadhafi's forces at the gates of Benghazi. The revolution was only a few weeks old. Yet within a year Tarhouni's optimism seemed justified. Oil production, shut in during the war, recovered swiftly. By the autumn of 2011, in the aftermath of Qadhafi's death and the crumbling of his regime, the Corinthia and Radisson Blu hotels in Tripoli were swarming with investors and their bodyguards. The UK's then-ambassador to Tripoli told Petroleum Economist of the bounty that awaited British investors in Libya's financial services, legal and energy sectors. Capturing the mood, one British politician on a fact-finding mission to Benghazi said he wanted to give up his parliamentary seat in England and set up business in the liberated country.

After the Arab Spring

Two years on, the revolution has soured. The NTC and its liberal, Western-leaning officials like Tarhouni were replaced by the General National Congress (GNC), an elected body under the sway of members who aligned themselves with the Muslim Brotherhood after their election. Competing factions - religious fundamentalists, federalists, former regime loyalists, secularists, disgruntled but well-armed former revolutionaries - now vie for influence in the new Libya. Some, like the GNC's Islamists, want to rule the country. Others simply want cash. In Benghazi, the cradle of the uprising, persistent violence threatens a new civil war, say some sources on the ground, as federal forces line up against Islamist militias. The authorities in Tripoli have had little control over events in the populous north of the country. In the south, where even Qadhafi's security state was often powerless, the new rulers are helpless. That was clear when terrorists used a lawless corner of the southwest to cross into Algeria earlier this year to seize the In Amenas gas facility, just over the border, and murder many of its expat workers. The assailants are said to have planned their mission in Gat, close to the border, and bought their weapons in Zintan, further north. 

Demolishing the Qadhafi state and rebuilding another was never going to be easy. But as long as oil and gas kept flowing, the transitional authorities - who must devise a new constitution before holding yet more elections afterwards - could bank on income to keep an aspirational and well-armed public quiet. That was the theory. But the successes of late 2011 and 2012, when output successfully reached the pre-war level of 1.6 million b/d, are now in doubt, as violence and protestors threaten output. In mid-June, the Feel and Abu Attifel fields in Libya's southwest, both operated by the Mellitah joint venture between Italy's Eni and state company National Oil Company (NOC), succumbed to such pressure. The 75,000 b/d Abu Attifel is back on stream, after the partners settled the dispute. Feel's 100,000 b/d remains shut in.

Paying off these protestors has now become the modus operandi: a reactive tactic that could have been avoided, believe insiders in Libya's oil sector, had the NTC under prime minister Abdurrahim El-Keib, which governed - in the loosest sense of the term -- until the GNC was elected in July 2012, taken proactive steps to employ more disgruntled veterans of the civil war. Now it is too late. Sources in Libya's oil industry talk of officials from Tripoli driving to meet protestors to dole out cash, typically 500 dinars ($392) to 1,000 dinars per protestor. Beyond Mellitah, protests have affected production and exports in the key eastern oil towns of Zueitina and Tobruk; at Ras Lanuf, in the centre of the country; and in the west. The troubles have been going on for months, costing more than $1 billion in lost revenue, according to oil minister Abdelbari Al-Arusi. For a time, though, NOC was able to keep overall output steady. No longer: production in mid-June fell to beneath 1 million b/d; a loss of more than $60 million a day at present oil prices.

The oil ministry's plans to enact a new oil law, hold new licensing rounds, increase reserves by 10bn barrels to 57bn, lift output closer to 2m barrels a day, and wring a bigger output quota from Opec - all by the end of 2013 ' are dead. The auction has been delayed to 2014. Worse still, the decline in output will make the scramble to control Libya's oil facilities all the more desperate. Falling revenue from oil exports will make the central government's already-tenuous grip on power more fragile still. For an economy that all-but collapsed during the war and has not yet recovered, and which depends on oil and gas receipts for 70% of GDP and almost all its export income, Libya's descent into political chaos and violence is a disaster. "Things were much better under Shukri," says one Libyan oil industry source who played a critical role in the uprising. "I never thought I would say that."

Ending the disruptions affecting oil infrastructure is getting more difficult, too. The Petroleum Facilities Guard (PFG), a federal body created to protect energy infrastructure (Libya's NTC decided that all security would be provided domestically; most of the members are former revolutionaries), remains small and ill-disciplined. Some soldiers from Zintan who were being paid to protect the Sharara field, a 350,000 b/d asset in the southwest, attacked the Tripoli headquarters of the PFG in late June. The mutiny was put down, but the force remains under-equipped, hardly capable of giving the kind of security many international oil companies (IOCs) want before they recommit their money and people to Libya.

Those firms, which will be crucial to Libya's efforts both to maintain production capacity (doing well workovers, for example, which are not happening with any speed) and finding more oil, have taken a varied view of the dire security situation. Total has committed $130 million to explore for gas in Libya this year. Eni, despite its struggles with protestors at facilities, remains active. (Libya continues to supply gas to Italy through the Greenstream pipeline, which has also been shut down at least once because of protests). Others are not rushing back. BP, which pulled out more staff earlier this year, says it remains committed to Libya - but there is no progress on the big upstream exploration deal it signed on the back of Tony Blair's visit to Qadhafi's desert tent in 2007. Under pressure from eastern secessionists, NOC has talked of moving its headquarters to Benghazi, where dozens were killed in gunfights in June, and a city the UK and US governments advise their people to avoid. The move would also anger Tripolitanians, though the capital city is hardly safe either. After attacks against diplomats, many Western embassies have scaled back their presence. In June, gunmen opened fire on three German and one Czech national working for ABB Energy near Ajdabiya. Sources on the ground say Islamists groups may use the threat of further attacks on foreigners to pressure Libya's authorities with more chaos.

Changing landscape

When the security situation is not obviously threatening, foreign investors must contend with the confusing and fluctuating politics. There are signs of conflict not only between Libya's regions, said former French minister of defence Charles Millon in a recent assessment of Libya's politics, but also within them: regional militias competing for influence in Tripoli; different stripes of Islamists vying for power in Benghazi; and tribal rivalry in Fezzan. "All this creates an explosive situation, in which the fall of the "Guide" - colonel Qadhafi - has been a centrifugal force. Fighting for control of hydrocarbon resources is adding to animosity between the groups." Barely a third of Tripoli, he says, is under the GNC's control.

The passage in the GNC of a political isolation law, under pressure from armed Islamist militiamen who surrounded federal institutions in Tripoli, has worsened things. It threatens to purge from positions of power anyone who worked for the Qadhafi state, including many men who helped turf him out. The law has already forced out of office Muhammed Magariaf, formerly the head of the GNC. He was replaced as president in late June by Nouri Abusahmain, who was backed by Muslim Brotherhood members. But others in prime minister Ali Zeidan's government could be under threat, too. The law was primarily designed to prevent Mahmoud Jibril, the secularist political leader of the rebellion, from holding office. But AKE Intelligence, a firm of security analysts, reckons a tenth of the 200-strong GNC could be affected by the law.

Whether Libyans will accept or challenge the steady rise of the Islamists is debatable. During the war, it was difficult to find evidence of popular support for a fundamentalist agenda on Libya's streets, which was often seen as a foreign imposition. While Muslim Brotherhood-allied politicians are prominent in the GNC and Libya's government, there are rivalries among the Islamists, too. Many of the Salafists and other armed militia believe the Muslim Brotherhood politicians are too moderate and more concerned with controlling Libya's economy than imposing an Islamic state. Within groups such as Ansar Sharia, which was fingered for the murder of the US ambassador to Libya last year, there are hardcore extremists willing to cooperate with other rival militiamen sharing their aims - members of another Benghazi Islamist brigade, 17th February, may have helped in the attack on the US compound, for example, as well as in the April bombing of the French embassy in Tripoli. While the chaos across the country persists, separatist-minded eastern Libyans (in Cyrenaica), many of them angry at the Muslim Brotherhood's rise in Tripoli, continue to demand autonomy for their region.

Some Libyans especially resent the influence of Gulf money, particularly Qatar's, despite the emirate's help during the war. The gas-rich state has targeted its support at Islamists such as Adbdelhakim Belhaj, a former jihadist allegedly tortured by Western intelligence services, who is now Tripoli's governor and leader of one of the Islamist parties. Protestors recently burned a Qatari flag in Tobruk. Workers at Ras Lanuf's 200,000 b/d refinery downed tools earlier this year while demanding that UAE nationals be removed from the controlling company's board and a Qadhafi-era contract with Abu Dhabi's Al-Ghurair Group, joint owner of the facility, be revised. Suspicions of Qatar's motives abound. "It's like you asked a neighbour to come help rebuild your roof and later found him in bed with your wife," says one veteran of the rebellion, echoing the comments of Abdel Rahman Shalgam, Libya's former ambassador to the UN, who excoriated Qatar for its interference in Libya.

Red tape

For hopeful foreign energy investors, however, more mundane issues of bureaucracy are also a problem. Red tape is delaying things within the oil ministry, where decisions are shuffled between NOC, oil minister Arusi and the prime minister's office. A budding rivalry between senior NOC officials and the deputy oil minister, Omar Shakmak, is affecting operations, say some insiders. Arabian Gulf Oil, a unit of NOC based in Benghazi, has for months been unable to install new power-generation kit at its Sarir and Misla fields. Their output of around 350,000 b/d, which is piped to Tobruk, is likely to fall as a result. When they speak off the record, some Libyans closely involved with Libya's oil industry make dark accusations of rampant corruption within the sector.

The backdrop of violence remains the primary problem, however. One consultant working in the sector describes a recent encounter with senior officials from Agoco being interrupted by bearded gunmen, who forced open the door to interrupt the meeting and make fresh demands for money. Even the GNC's prime minister Zeidan has talked of negotiating with militiamen who unpinned a grenade and brandished guns at him during the meeting.

Despite these problems, including recent attacks on police stations and frequent gunfights between militia, a full descent into Iraq-style civilian strife is not inevitable. Optimists say revolutions take time. Occasional protests have turned on Islamists. Some have been turfed out of Benghazi (and some have simply gone further underground). The new chief of Libya's federal armed forces has vowed to impose his forces on the unruly mobs. Stability may depend on more bloodshed first. 

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