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A division of the spoils: Uncertainty for Libya's energy sector

As UN-backed military action targets Qadhafi's forces, Libya's oil and gas industry faces a difficult and uncertain future

THOSE with long memories will see parallels between the uneasy aftermath of the first Gulf War in Iraq 20 years ago and events in Libya, as European and US forces enforce a no-fly zone. After receiving the go-ahead from the UN, the weekend of 19 March saw an air assault targeting Muammar Qadhafi's air defences, with co-ordinated bombing raids and missile strikes across the country.

What happens next in Libya may follow the precedent set by post-Desert Storm Iraq – the imposition of international sanctions that crippled the oil sector. Saddam Hussein's ruthless suppression in 1991 of the Marsh Arab rebellion in southern Iraq extended the life of his regime for a decade or so, but Iraq's once-vibrant oil industry was paralysed.

If, as some fear, Libya faces partition between the loyalist, pro-Qadhafi west and anti-Cyrenaica in the east, then the Western-backed safe haven created for northern Iraq's Kurds may provide a template for the North African country's future.

Amid the violence and the possibility that Libya will split, its critical hydrocarbons sector faces severe uncertainty. One danger is that Libya will experience another lost decade, coming just as it pulls itself out of the sanctions-induced paralysis that hampered development after the Lockerbie bombing of 1988.

Qadhafi's rolling back of the advance of rebel positions during March confounded those predicting the imminent end of his 42-year regime. And yet troops loyal to Qadhafi had still to pacify much of Cyrenaica by late March. The no-fly zone, backed by concerted attacks on Qadhafi's defences, suggests much of Libya will no longer answer to the colonel.

By 16 March, all oil-export terminals bar Tobruk were back under central control – the latter remaining in the hands of an affiliate of National Oil Corporation (NOC), Benghazi-based Arabian Gulf Oil (Agoco), and in the hands of the rebels. Agoco will play a key role in shaping Libya's energy future.

The balance of power

The no-fly zone has changed the balance of power substantially, and the opposition National Libyan Council (NLC) in Benghazi now stands a chance of maintaining control of eastern oil installations, including those of the strategically critical Ras Lanuf and Marsa el-Brega export terminals, both the subject of fierce clashes between pro- and anti-Qadhafi forces. Eastern oilfields such as Sarir and Mesla, with around 100,000 barrels a day (b/d) of production, will likely remain under Agoco's control. That could double if stability returns to the east.

But for international oil companies (IOCs) that have spent a decade in careful contract negotiations with Libyan officials to develop oil and gas – prompting accusations of propping up a discredited regime – the unrest will test their appetite for risk, possibly to breaking point.

"With all the unrest, it will be difficult for Libya's oil sector to normalise, not only because of potential operational risk in terms of destruction of facilities, but also because of the human resources issue"

Many IOCs were forced to engage with the Qadhafi regime to promote their interests. But with his forces' ferocious assaults on rebel positions and threats to exact a bloody retribution on the population, the colonel is again an international pariah and public attention has focused increasingly on what now seem ill-advised moves to cosy up to a discredited regime. And unless the allies military action brings a swift end to Qadhafi, another period of international sanctions targeting the oil sector is likely, meaning IOC efforts to curry favour have come to nothing.

Most IOCs operating in Libya have choked production since the uprising began in February. On 15 March, the International Energy Agency claimed all of Libya's 1.6m b/d of output had been shut in. NOC will struggle to revive production, despite assurances from its boss, Shokri Ghanem, that the anti-rebel drive had calmed the situation. By mid-March, Ghanem was urging oil company employees to return to their jobs and for tankers to load crude.

Such hopes look unrealistic. More likely, Libya's energy sector will be doomed to suffer a late-Saddam era slowdown. Three US companies in the Waha consortium, responsible for about 25% of Libyan output – ConocoPhillips, Hess and Marathon Oil – have pulled out all foreign staff and are unlikely to send them back any time soon.

"With all the unrest, it will be difficult for Libya's oil sector to normalise, not only because of potential operational risk in terms of destruction of facilities, but also because of the human resources issue," says Leila Benali, a Middle East and Africa energy expert at IHS Cera. "Expats have left, but also locals are not going to work. Were it not for that, it would be possible for NOC to maintain operations."

A tough new sanctions regime could undermine much of the progress achieved by Ghanem's NOC over the past decade. The US has blacklisted 16 state-backed companies, including NOC, and added pressure on the Qadhafi regime will deter crude buyers. "Given the sanctions being imposed, the ability to market crude and to what extent they would find a counterparty is a difficult question," says Benali.

Efforts to put a brave face on the regime's position lack credibility in the light of UN Security Council resolution 1973, which gave a legal footing to the Anglo-French-led air attack. Deputy foreign minister Khaled Kaim said on 17 March that there would be no change to existing oil contracts, but that the diplomatic positions taken by countries that voted for the resolution – including France, the US and UK – would affect future deals. But the reality is that a rump Qadhafi-led Libya would need all the help it could get to resume oil flows. Germany was the sole big Western country not to vote for Resolution 1973.

Rumours in early March that the wily NOC boss, who has long maintained an arms-length relationship with the senior Qadhafi clique, was ready to jump ship proved unfounded. But there is still time – and many precedents

A new oil embargo would also force some IOCs to abandon concessions, although Libya has experienced that before and could muddle through. NOC could take over some field operations, such as the Waha concessions – as in the mid-1980s when US companies departed. But it would struggle to maintain pre-uprising production levels.

And much will depend on Agoco and the rebels' ability to retain the assets they have claimed. The company's efforts to market oil directly to foreign buyers are part of the NLC's aim to develop rival institutional apparatus to NOC. If the UN-backed action creates an opposition enclave in the east, it is hard to see Ghanem's NOC remaining united.

Back in Tripoli, he has been keeping a low profile. Rumours in early March that the wily NOC boss, who has long maintained an arms-length relationship with the senior Qadhafi clique, was ready to jump ship proved unfounded. But there is still time – and many precedents. Fellow reformists, such as former central governor Farhat Omar Bengdara and former NOC chief Abdulhafid Zlitni have both pulled away from Qadhafi.

Oil is critical to Qadhafi's survival prospects and he cannot afford to let NOC fall into the hands of pro-regime elements with little qualification to run a modern national oil company.

Analysts aren't rushing to judgment. "Don't jump to the conclusion that NOC will be torn apart," says Benali. "Over the weeks and months, players will try to find solutions to get oil flowing. But it's still too early to tell if this would have a lasting institutional impact within NOC. The oil industry is one of the few sectors that could continue operating. Stakeholders have an interest in keeping operations going."

The Iraq precedent is a dismal one for Libyans, who have seen oil-production capacity slip from more than 3m b/d in the early 1970s, to barely half that level today. Ghanem's NOC may be able to mend some of that, but the outlook for Libya's oil sector, and consumers accustomed to buying its highly prized light, sweet crude, is not rosy.

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