ANALYSIS: Libyan Oil after Gaddafi

After about six months of civil war in Libya, the opposition forces fighting for the overthrow of leader Muammar al-Qadhafi and his regime over the past weekend (20 21 August) appear to have made virtually irreversible gains and have flooded the capital, Tripoli, with fighters. While regime-loyal forces still appear to be holding out in parts of the city—and certainly further south-east from Tripoli in the leader’s traditional stronghold of Sirte—news that two or even three of the leader’s sons, notably among them Seif al-Islam, have been captured by the rebels, strongly suggests that the last vestiges of the regime are about to crumble.

The open and widespread international support for the rebels and the massive international isolation of the regime, on top of the open support of the NATO-led military coalition upholding a no-fly zone over Libya for the rebels, has suggested that the regime’s days have been numbered for some time, although the initially low military capabilities of the disparate rebel forces meant they were easily repelled from the regime heartland and it took them considerable time to build up the strength required to match the troops remaining loyal to Qadhafi.

With the past few days of fragmentation of the regime’s defence lines, it is, however, looking like many of the remaining troops are ready to abandon the Qadhafi family and the remaining core of the regime. The biggest question from a security perspective might perhaps be whether Qadhafi’s own clan will continue to take a position contrary to what—at least for now—is a united front, or whether a new leadership more positive to the rebel Transitional National Council (TNC) will arise as Qadhafi himself starts to be seen as a liability, even by his closest supporters.

Rebuilding the Oil Industry

Libya is virtually completely dependent on its oil export revenues, making the restart of large-scale oil production a core aim for the rebels. Two challenges stand out, however, if the virtually complete shut-in of Libyan production is to be reversed:

Repairing Damages

The good news for the oil industry so far—and for the Libyan people should reconstruction go ahead—has been the two fighting sides’ efforts to enforce as little damage as possible to oil installations, particularly when it comes to upstream facilities. Even when the regime forces attacked some of the eastern fields, from which the rebels tried to produce crude for export in April and May, efforts were taken to send sabotage teams and disable production equipment, rather than bomb oilfields with missiles or artillery and risk torching the fields, potentially creating long-term reservoir damage.

On the other hand, a lot of fighting over the past month has taken place in and around the oil export hubs of Ras Lanouf, Es Sider and Marsa el-Brega, from which most of Libya’s crude and refined products exports are shipped. While again, the fighting sides seem to have taken care not to wreak indiscriminate havoc on midstream and downstream installations, it is inconceivable that no damage has been made. Even though there are hopes that repairs to export facilities and pipelines should be relatively quick and straightforward, repairs to Libya’s refineries—particularly in Brega and Ras Lanouf—are likely to take more time, although from a government revenue perspective that is less important as oil exports will allow it to finance at least a minimum of domestic refined products imports if the domestic supply capacity is too low.

Reports in the past days from az-Zawiya to the west of Tripoli—from where the regime was sourcing its last remaining supplies of refined products—also suggest that the refinery was working until at least the last bout of fighting, with the rebels able to release stockpiles found there for general consumption by an energy-starved population. News that az-Zawiya is likely to be able to resume at least partial production of refined products is especially important as it produces much of the needed diesel and gasoline (petrol) for the greater capital region, and perhaps even more crucially, much of the fuel oil needed to power electricity plants in western Libya to supply the cities and their water desalination facilities.

As the Transitional National Council (TNC) grapples with establishing law and order in the last remaining areas of the country that are out of its control, there is already news that several of the international oil companies with assets in the country are on standby with experts to help launch repairs to pipelines, export facilities and refineries. Italy’s government has today (22 August), for instance, been quoted by Reuters as saying that a team from state-dominated Eni—Libya’s largest foreign IOC—already has flown in to rebel-controlled parts of the country to help start the recovery process.

Attracting the Workers Back

Perhaps a more challenging task over the coming months will be the need for the TNC to project a sufficiently unified front to enable oil workers to return to remote oilfields in the country’s desert and trust that there will be no new disruptions to supply chains, which could again leave workers stranded. With a significant question mark hovering over the unity of the disparate groups under the TNC banner, which would enable it to govern effectively until elections have been held, this might turn out to be a stumbling block.

Libya has always relied to a high degree on foreign expertise in its oil and gas industry, not only when it comes to the highest skilled—often Western—project planning and management personnel, but also for oil engineer and geologist positions throughout the industry, given the country’s small population and traditionally lagging educational institutions. Hence, many of its oil workers have come from Tunisia and Egypt, as well as other Arab states, and will now have to be attracted back.

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. Should the unity of the Libyan opposition to the old regime start to crumble in any way remotely similar to what happened in Iraq in 2004-05, the whole oil and gas industry recovery will risk moving forward very slowly, if at all.

Outlook and Implications

With the definitive fall of the Libyan regime now looking close, the oil and gas industry’s recovery now hinges on the TNC’s ability to unite the country and establish its authority throughout, in order for a sense of stability to prompt a return of foreign workers—mainly the large numbers from neighbouring countries who make up the bulk of Libya’s foreign expertise needs. IOCs will be ready to fly in workers with crucial skills to conduct quick repairs, with the importance of their Libyan assets to many of the companies involved there—and the so-far reported limited destruction—meaning that there is little to lose for them to bet on a quick recovery.

Hence, production from the easternmost and the south-western oil and gas fields could return to the global markets relatively quickly, while the bulk of Libya’s oil production—from the Sirte Basin—will take longer, given the need for repairs in Ras Lanouf, Es Sider and Marsa el-Brega. Should the TNC manage to instill confidence in returning oil workers, Libya could again produce—and perhaps even export—over 1-1.2 million b/d within a year’s time, although the last remaining 300,000-400,000 b/d might take much longer to bring back amid substantial fears of mature field reservoir damage from quick shut-downs and loss of pressure. Libya had struggled with significant decline rates before the war as well as an inability to push forward projects to arrest those declines, making some of the fields already vulnerable to swift negative changes.

IHS Energy will continue to monitor status of production, transport and export facilities as it is reported over the coming weeks and aims to come back with a more detailed assessment of how much crude could be expected and when, later this week.