After Gaddafi: Libya’s oil industry

Gaddafi is all but gone, and the National Transitional Council’s (NTC) stability team in Dubai has already begun talk of rehabilitation and reconciliation in the months and years ahead.

In Egypt and Tunisia, the underlying institutions of judiciary, bureaucracy and army have remained intact and largely unquestioned after the forced retirement of long-standing autocrats Zine El Abidine Ben Ali and Hosni Mubarak.

This is not the case in Libya, where revolutionary forces have united with NATO support to physically dismantle and humiliate the Gaddafi regime and the state apparatuses that undergirded it.

With this greater change comes greater potential for genuine democracy, and a greater risk of disorder.

Libya is also unlike its north African neighbours, in that nationalism is tempered somewhat by tribal loyalties and divisions, a fact previously exploited by Gaddafi, who came to operate a patronage economy under his version of a Jamahiriya.

The Libyan revolution has seen an outpouring of nationalism, most notably on the weekend of the 26 August when Tripolitans from working class neighbourhoods welcomed rebel soldiers from the east as liberating heroes. How long this cohesion will last once the struggles and heroics of the revolution make way to the humdrum business of cabinet appointments and transitional arrangements is anyone’s guess.

The unexplained murder in custody of the NTC’s military commander – a regime defector – after an apparent arrest by fellow rebels, remains an open sore in NTC-tribal relations. Dealings with the elders of Gaddafi’s Sirte tribe – who happen to inhabit the area in which 90% of Libya’s oil reserves are found – will remain difficult for some time.

Additionally, and in contrast to the steady campaign of international recognition that the NTC has won abroad – over 30 countries recognised their authority before the march on Tripoli – the extent to which the NTC represents the people is unclear.

However, the NTC has already shown logistical nous – albeit supported heavily by western special forces, particularly the SAS – in coordinating the uprisings within Tripoli with defections of key military brigades close to the Gaddafi regime and the rebel advance.

It is also standing by a draft transitional charter calling for the establishment of a state that promises democracy, the fair distribution of the nation’s oil wealth and protection of “inviolable” property rights.

Before the war

Whatever the political uncertainties of the next Libyan republic, oil production and export is going to be the key to the country’s reconstitution. Oil comprises over 95% of total export earnings and 25% of GDP.

Libya holds 46.4 billion barrels of oil reserves, and before the revolution produced 1.659 barrels per day, with only 270,000 bpd used domestically, making it the 17th-largest producer in the world, the third-largest producer in Africa and the holder of the continent’s largest oil reserves.

The country exported 1.55 million barrels of oil per day, which reduced to a trickle as war broke out and has now ceased entirely as the supply to refineries has ceased.
Although Libyan oil amounted to less than 2% of world demand, its loss affected prices because of its high quality and suitability for European refineries and the slim margin of spare supply in OPEC (5% before the conflict and now a quarter lower still according to Deutsche Bank).

The country’s crude is famously sweet (i.e. low in sulphur) and light, making it easy to refine through basic hydroskimming techniques such as those the country’s largest facility in Ras Lanuf.

Europe relies on Libya for oil, and Libya relies on Europe to buy it, with over 86% of exports to EU countries and Italy relying on Libya for 22% of total imports.

European refineries have been unable to swap heavy Saudi crude for Libyan crude, a significant reason why oil prices remained stubbornly high for much of the year despite Saudi’s pledge to replace Libyan lost production following OPEC’s last meeting on 8 June.

Political problems in Iran and Iraq and severe logistical challenges in the latter make the restoration of Libyan crude production the most likely candidate to restore stability and lower prices to global oil markets.

Restoring production

At the time of writing it is unclear how much of Libya’s infrastructure is under NTC control.

Reuters reports that several oil assets remain in the hands of forces loyal to Gaddafi. The southern town of Marzuq – where Spanish firm Repsol operates two 2 billion barrel production blocks – was taken from Qaddafi loyalists by Toubou tribes of south Libya and Chad.

Oil storage and pipeline facilities have been damaged in the conflict, and while initial reports are encouraging, the extent of the damage will not be known until oil fields are sufficiently secure to permit the re-entry of the foreign oil companies responsible for operating most of the country’s oil infrastructure. Mature fields are likely to have suffered damage from being rapidly abandoned.

A combination of rapid abndonment and war damage means the recover of Libya’s oil production is likely to come in two stages, with an intial burst of activity followed by a gradual slog up to pre-war levels.

The Sarir and Mesla fields to the east have a total capacity of around 250,000 barrels per day, around one sixth of Libya’s total pre-war capacity, and were operated by Repsol since the 1970s.

Rebel leaders have been urging Repsol to return to the fields after confirming attacks by Gaddafi’s forces did not damage infrastructure at either field.

In a call to investors on 28 July Repsol Chairman and CEO Antonio Brufau Niubó said “we are talking about weeks, two weeks, three weeks, four weeks maximum to start that production. Logically, you will have a ramp up, but we have all the people and all the teams ready to move into Libya once the conflict is solved. And the data we have today is that there has been no damage to the facilities.”

Abdeljalil Mayouf, information manager at Libya’s rebel-held Arabian Gulf Oil Company (AGOCO), which is operating the Sarir and Mesla fields, told Reuters the fields are ready for production and that security is the only concern. “When the security is OK we will start. Perhaps two or three weeks after the improvement in security. In three weeks maybe.”

Several sources report that, despite heavy fighting around oil facilities, much of the damage is minimal and production can begin within a few weeks of assurances that the country is secure. How long that will take is not known, though the chances of an insurgency akin to that in Iraq are low.

Back to work

Bringing oil workers back to Libya may take time, or greater rewards from employers. This is perhaps the largest challenge the economy faces, given the oil industry’s almost complete dependence on foreign managerial and engineering expertise.

Samuel Ciszuk of IHS Global Insight says that oil companies will have to “put up a united front” to ensure the supply and transport delays that some suffered earlier this year will not be repeated.

“Many of those who fled Libya earlier this year are likely facing unemployment in their home countries at the moment and will be positive, in theory, for a return to Libya, but they will require a certain level of trust in the future stability of the country in order to return.”

Timescales

Gavin de Salis, chairman of oilfield maintenance and construction firm OPS International, says that potential damage is more likely at export terminals than oilfields, and Libya’s return to pre-war production relies on incentives from the new government.

“If companies are given incentives, then they’ll be able to restore production even beyond 1.6 million barrels per day,” he told Reuters. “Companies need to get down to Libya and not wait for Libya to come to them.”

“The biggest problem is that Libyan crude is quite waxy,” says de Salis. “If a pipeline has been left inactive for a long time it might become plugged up.” Repairing waxed pipelines may take 2-3 months and will only affect some fields.

In addition, facilities in the older oilfields at Waha and Zelten were not shut down properly. Damage from the hasty exit from these fields is estimated to knock 300,000-400,000 bpd off production for at least a year.

Production from Sarir, Mesla and a few other minor fields will be enough to meet domestic demand but will not provide the NTC or their successors with the cash needed to rebuild the country.

According to the latest report from the International Energy Agency, the body representing the interests of oil consumer countries, Eni, which prior to the civil war produced 115 kb/d of crude, told shareholders in July that it would need at minimum a full year to restore production once the political situation is resolved.

Ross Cassidy from research and consulting firm Wood Mackenzie, said in a report that technical and security challenges mean it is likely to be 36 months from the end of hostilities before Libya again pumps 1.6 million barrels of crude a day.

Discussing his study released on Monday, Cassidy said Libya could probably produce about 600,000 barrels a day “relatively quickly,” but would need foreign expertise and investment to get production up to full speed.

Shokri Ghanem, the former head of the NOC who defected and fled to Tunisia in May, claimed on 22 August that Libya can return to 1 million bpd within a year, but returning to pre-conflict levels will take 2 years.

Ali Tarhouni, an economist in exile from 1973 until his appointment by the NTC as a finance and oil minister, says production can rise from a standing start to “about 500,000 to 600,000 barrels within two to three weeks,” with resumption of pre-war production “within a year or so.”

Nouri Burruien, Ghanem’s successor as the head of the National Oil Company, also believes pre-war production can be restored within a year.

Outlook

Going without a pre-conflict level of oil revenue is going to put a significant strain on whatever government emerges from the historic upheavals of the last six months.

Despite the urgency to resume production, the NTC is leery of welcoming countries who did not support the revolution to what promises to be a booming reconstruction and upstream environment.

“We don’t have a problem with western countries like Italians, French and UK companies. But we may have some political issues with Russia, China and Brazil,” Abdeljalil Mayouf, information manager at Libyan rebel oil firm AGOCO, told Reuters.

The three countries either disagreed with sanctions on the Gaddafi regime or discouraged the rebels from fighting Gaddafi’s forces, and it is now unclear whether they will win new contracts from the state.

Qatar may benefit from Russia and China’s loss, having provided banking and military assistance to the rebels. “Qatar, more than any other Arab country, was willing to put its money where its mouth was. Not only did it say it supported the rebels; it actually did. The rebels will remember this,” Shadi Hamid, director of research at the Brookings Doha Centre.

Sharing the wealth

Longer term, a future Libyan government will have to decide how best to plan, administer and invest the country’s oil wealth. The disparate and potentially antagonistic tribes within Libya will want to see the NTC deliver on article 8 of its transitional charter by guaranteeing fairer distribution of Libya’s wealth, and having fought hard are unlikely to be patient.

Depoliticising the distribution and investment of oil revenue as much as possible may be desirable.

Libya will need to invest heavily in it’s dilapidated infrastructure, which the NTC estimates could take ten years to bring up to scratch. Elections are slated after eight months of transition. The first elected government may wish to look to mature oil-rich nations for inspiration on how to manage its oil wealth.

Robin Mills, a Dubai-based energy economist, estimates Libya’s potential per capita oil revenue is $7,500, based on pre-war production and current oil prices. As with Alaska’s Permanent Fund, Libya could distribute some of the surplus export revenue to the public in the form of oil rebates or citizen’s dividends.

If combined with an otherise unsubsididised and taxpaying economy, Libyans would be encouraged to participate in national democracy with a direct interest in a sustainable and vibrant hydrocarbon sector that will need to change from the preserve of foreign experts to a major domestic employer.

The NTC will also be able to call on the Libyan Investment Authority, a sovereign wealth fund set up by Saif Al-Islam Gaddafi in 2006. The fund was established with start-up capital of $70 billion, which after making several feckless and opaque investments is thought to be currently worth $53.3 billion.

Once misappropriated funds have been located and the portfolio has been cleaned up, the LIA could be converted from a dictator’s slush fund into a pension and social care fund modeled on Norway’s Oljefondet.

Economic recovery

Libya is a hugely wealthy country: it just does not feel like one yet. Libya’s GDP per capita was $13,805 in 2010, and the state is debt-free. Yet it is hard to watch news coverage without being struck how poor the average Libyan is.

Youth unemployment, food inflation and frustration at oppression became were the underlying drivers of political change in North Africa, and will remain after the last celebratory AK-47 round reverberates in Green Square.

The first step is going to be the release of $139 billion of overseas assets. In default of budget-balancing oil exports in the short term, the NTC will need to draw on cash and investments hoarded by Gaddafi.

The process of removing sanctions is unlikely to be straightforward. While US President Barack Obama said the US will “support [the TNC] with the assets of the Qaddafi regime that were frozen earlier this year,” the US and EU are likely to want to see evidence of the new government’s commitment to human rights – and perhaps to respect for pre-existing commercial activities – beyond those on paper, before agreeing to release assets.

The Libyan central bank held $100 billion in currency reserves as late as May this year. former bank chief Omar Bin Guidara told Al-Arabiya on 23 August that it also holds $30 billion in foreign government bonds. How much is left once the Gaddafi regime is finally swept from power and the rebels gain access to the nation’s vast bank accounts, only time will tell.