Libyan Oil 2012: Prospects and Implications

Wednesday, 15 February 2012

Background

Libyan oil production has defied expectations and has already regained pre-revolution levels. While the nation’s “black gold” will provide much-needed revenue for the war-ravaged economy and infrastructure, considerable issues and challenges remain. These considerations should feature prominently as Libya enters the next stage in its post-revolution transition. Fundamentally, institutional reform is required, although doubts remain over the current governments’ ability and conviction to achieve large-scale reform. For Libya to maximise its oil potential and, hence, it’s economic potential, the state must, as a matter of some urgency, develop initiatives to foster commercial confidence, within a stable environment bounded by strong regulatory and legal frameworks.

Comment

In early February, the Organization of the Petroleum Exporting Countries (OPEC) published its monthly report. While January’s report warned that demand was likely to be negatively impacted by European debt fears and uncertain US economic growth, the news was more positive from Libya. Since the end of the Libyan revolution and the death of Colonel Gaddafi in late 2011, Libyan oil output has been recovering. Citing secondary sources, the report stated that Libyan oil production in January had risen to 30.9 million barrels a day, a production level not reached since October 2008. 

Libya’s rapid resumption of production ostensibly bodes well for the country. As demonstrated in Angola at the end of the civil war in 2002, oil revenues offer a vital way to fund reconstruction efforts. Correspondingly, in the Middle East, Iraq has benefited from exploiting its large oil reserves after the fall of Saddam Hussein in 2003, to fund infrastructure development and investment in rebuilding projects. Importantly, the economic opportunities created by oil, often have a positive correlation with security and stability. This relationship is likely to be a motivating consideration for Libya’s interim National Transitional Council (NTC), which currently sustains a loose control over the country. 

Libya is endowed with the world’s eighth-largest oil reserves. Libyan crude oil has the additional benefit of a low-sulphur ratio, reducing refinery costs. An increase to Libyan production comes at an opportune time, with the European Union’s embargo on Iranian oil and potential disruption in Nigeria, Syria and Yemen.  It is vitally important that nascent developments in Libya’s oil sector are harnessed to foster resilience, and strengthen the country against post-regime change vulnerabilities. For this to occur, solutions must be found for existing, as well as emerging, challenges within Libya’s business environment, regulatory frameworks and the nation’s security situation.

Although the damage to Libya’s hydrocarbon infrastructure during the 2011 conflict was severe, the sector escaped initial projections of large-scale destruction. The NTC has been quick to capitalise on production, as they seek to resuscitate Libya’s destroyed economy. This will be an arduous task; oil revenues may exaggerate or hide economic trends. According to the IMF, Libya’s economic indicators are extremely poor; the nation’s Gross Domestic Product (GDP) has contracted by sixty per cent since early-2011. Similarly, the Libyan dinar has fallen twenty per cent on the black market. Unemployment unofficially reached twenty-six per cent prior to the uprising; in post-Gaddafi Libya, this statistic is likely to be significantly higher. Libya’s foreign assets were unfrozen in late-2011. So far, however, they have not been reabsorbed into the local economy, creating a significant shortage of liquidity. To counter this, withdrawals from banks have been capped, creating distrust of the financial system. Such developments provide an insight into the systemic socio-economic issues facing the NTC, and provide potential catalysts for social unrest, which would further disrupt oil production.

Various trade missions have engaged the NTC, although few countries have confirmed long-term commitments to Libya. Concerns over the nation’s business environment remain, largely as a result of the continuing economic and stability issues. Equally, doubts remain over the authority and limitations of the NTC’s mandate to make long-term policy commitments and decisions. This has resulted in hesitation from foreign companies for placing tenders for larger, more resource and time-intensive projects, effectively limiting Libyan growth. Further uncertainty has been created by the NTC’s comments in providing competitive advantage to companies from countries that supported the rebel movement. ENI of Italy, Repsol YPF of Spain, Total of France, BP of Britain, and Austria’s OMV, were among the largest producers in pre-conflict Libya, and feature as those most likely to benefit under the NTC’s rule. Chinese, Russian and Brazilian companies, whose governments were more reserved in support of the NATO-led campaign, will potentially experience hurdles in attempts to secure future projects.

Libya, like many former dictatorships, suffers from endemic corruption and a cumbersome bureaucracy. This has translated to poor regulatory frameworks, likely to create challenges for potential investors in the Libyan hydrocarbon sector. British risk advisory group, Maplecroft, predicts that the NTC, in an effort to ‘retain a semblance of legitimacy’, will tackle ‘emotive issues’, including the corruption in old oil contracts. Potentially, this may expose investors and pre-Gaddafi contracts to renegotiation or even annulment. New commercial codes and labour laws may further undermine investment, by creating legal and operational disruptions.

The security situation in Libya remains tense. Late-January’s attack by pro-Gaddafi forces in Bani Walid, highlighted the fact that Libya remains in a period of transition. The revolutionary euphoria of militia brigades is quickly disappearing; these heavily armed groups now undermine NTC claims for control over Libya. The government must adopt strategies to disarm and integrate the militia groups into the political process, and create a security infrastructure to foster much needed legitimacy and control.

A successful post-Gaddafi Libya could provide the model for post-revolutionary nations throughout Africa and the Middle East, challenging ideas on the “resource curse”. While oil provides much needed revenue, future Libyan prosperity will equally rely on developing a supportive business environment, a robust regulatory architecture and a stable security situation. Failure by the NTC to capitalise on the opportunities created by oil revenue during this seminal transition period would be severe. The results of such a failure could spread far beyond Libya, and result in the state becoming a security liability for Africa, the Middle East and Europe.

Liam McHugh

Manager

Northern Australia & Energy Security Research Programmes

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