Can oil restore Libya's fortunes: Libya's new rulers struggle to rebuild an oil industry battered by the civil war that ended Muammar Gaddafi's 32-year rule, but the threat of further violence could sabotage these efforts and with them any prospect of an early national recovery.
Libya, finally unshackled from Colonel Muammar Gaddafi's brutal regime, is struggling to restore its battered oil industry after more than 40 years of decline and an eight-month civil war. Some fields, refineries and terminals were extensively damaged in the conflict that seesawed across the battle-scarred deserts of Tripolitania and Cyrenaica.
Getting production back, even to the pre-war level of 1.6 million barrels per day, is essential if stability is to be restored. Libya relies on oil revenue for about 80% of its gross domestic product.
But the tangled tribal politics at play and the fragmentation of the rebel groups that make up the victorious National Transitional Council (NTC), a fractious alliance of militias with widely differing, and often opposing, agendas, is causing fears that the shooting is not yet over.
As the NTC forces splinter into squabbling ideological, ethnic and tribal factions, the prospect of a new wave of violence, or even another civil war between the rival militia victors, looms ominously.
There are disturbing signs of deep divisions within the NTC, even between factions that came together to get rid of Gaddafi. Tribal rivalries remain deep rooted and have been exacerbated by the recent bloodshed.
There is a deep divide between Tripoli in the west, where Gaddafi ruled with an iron hand, and Benghazi in the east, long an Islamist stronghold that seethed with anti-Gaddafi militancy throughout his rule.
A growing bitterness is apparent in the western and central sectors of the country against the NTC, where rebel militias have wreaked bloody retribution in areas that supported Gaddafi.
The biggest hurdle is one of unity now that the common goal of overthrowing Gaddafi has been achieved and the fighting has stopped, analysts agree.
Many armed groups feel they deserve a reward for their sacrifices during the war, and the NTC is not a strong enough single authority to bring them all to bear. It must now struggle to satisfy everyone. At stake is not just political power but also the anticipated oil revenues that will come to those able to establish a presence in the centralised power structure.
On top of that, the country remains awash with weapons, many plundered by various groups from Gaddafi's richly stocked arsenals around the country.
There is also a significant risk that remnants of Gaddafi's forces could wage a guerrilla campaign of sabotage against the oil industry and other vital economic sectors and even limited violence could impede the recovery of the oil industry, including scaring off foreign companies vital to the industry in terms of expertise and future investment because of security concerns.
Assessments on how soon the Libyans can get the oil industry up and running again vary wildly. Ross Cassidy, North Africa specialist with the Edinburgh-based Wood Mackenzie consultancy, reckons it will take three years to get back to 1.6 million b/d because of the technical and security challenges.
"They're not going to just turn production back on," he said. "Thirty-six months is an optimistic scenario."
Industry sources say that since August, when NTC forces captured the capital Tripoli in August and drove Gaddafi into the desert, the new government has pushed oil production up to 300,0oo-40o,0o0 barrels a day (b/d).
Nuri Berruien, NOC's new chairman, boasted that flows could reach the pre-war level "in 15 months." But that now seems to be highly optimistic.
Berruien says production is currently around 390,000 b/d, about one quarter of the pre-war level.
The Paris-based International Energy Agency reckons Libya could be producing 1.1 million b/d by the end of 2012, underlining the prospect of a long haul.
"From now on, every extra 100,000 barrels will be more difficult, costly and time-consuming to bring back," observed John Hamilton, lead author of African Energy's annual Libya's Energy Future report.
Hamilton stressed that a "huge amount of investment"--the French estimate at least $30 billion--"is required to recapitalise the oil fields, many of which have been looted over the past six months."
Libya has Africa's largest proven oil reserves, totalling some 46.4 billion barrels, the eighth largest in the world, concentrated mostly in the east.
But much of the country remains unexplored because of international sanctions imposed on Gaddafi's regime over the years for his support for international terrorism, or because of constant disagreements with major oil companies.
There has also been no significant deep-water drilling in the Gulf of Sirte, where there are supposedly rich pickings that could hugely boost Libyan reserves and ensure revenue into the next century.
BP suspended plans for a Sa billion exploration pro gramme in December 2010, but said it would start "sometime in 2011". Then came the civil war.
At pre-war production levels, Libya's current reserves were expected to last for 77-80 years. With Gaddafi and his corrupt regime gone, there are expectations that the new administration, whatever that might eventually be, would be more transparent and prepared to open up the industry.
International oil companies are falling over themselves to make deals with the new Libyan administration, but legal issues over old contracts and terms for new contracts have delayed things.
Britain and France, along with Italy and Russia, are hoping to get special treatment for mobilising NATO to back the Libyan rebels against Gaddafi, a key factor in their victory.
The NOC's urgent need for investment to rehabilitate and expand the oil industry will likely weigh heavily in their favour as Big Oil scrambles, and intrigues, for stakes in Libya's oil wealth.
Tripoli has denied the existence of a secret deal the French media reported had been struck in April, agreeing that French companies would control "35% of total crude oil in exchange for total and permanent support for our council".
Meanwhile, Italy's Eni is emerging as the pace setter. It has been in Libya since 1959, a decade before Gaddafi seized power, and remains the country's largest foreign investor.
Before the war, it had committed to invest $25 billion over the next decade. It was also the first to resume production after Gaddafi fell, so would appear to be the company to watch. Russia enjoys a close relationship with Eni, so its companies, including the giant Gazprom, also stand to benefit.
Rome-based Eni confirmed it had resumed production on 26 September, the first foreign company to do so. It said it was pumping 31,900 b/d from 15 wells in the large Abu Attifel field, discovered in the 1960s.
The maximum pre-war production capacity in the region, which lies 200 miles south of Benghazi, was 70,000 b/d. Eni chief executive Paolo Scaroni has said the company expects to have most of its production going again by the end of the year.
Total of France has also reported restoring production at its Al Jurf offshore well and is expected to slowly reach 40,000 b/d, the pre-war level.
Much will depend on the condition of the large Sharara and Elephant oil fields deep in the Sahara Desert 600 miles south of Tripoli, the capital on the Mediterranean coast.
These fields, operated by Repsol of Spain and Italy's Eni, could add another 400,000 b/d to national production, if they can be put on stream without too much trouble.
But their condition after months of fighting remains unclear. The Murzug region where they are located saw heavy fighting between Gaddafi's forces and rebel troops of the NTC, so damage could be extensive. The central area and the Murzug region will truly test the recovery of Libya's oil industry.
The Libyans are pumping oil from a few eastern fields operated by the state-owned Arabian Gulf Oil Company, although the production level isn't clear.
These fields include Sarir, Libya's largest, and Mesla. Together, they produced zso,000 b/d before the war. The rebels held the region during the war and damage was therefore minimal.
The Sirte Basin, a key oil zone containing some of the most mature fields that currently produce around 60% of Libya's oil, appears to be relatively stable for now. Even so, these fields are more complex than those in the western zone and could require gas or water injection to create the pressure levels needed for full production.
Henry Smith of London-based security consultancy Control Risks observes that one of the main hot-spot zones in terms of security is the Fezzan region in the southwestern Sahara.
It contains Eni's Elephant field and Repsol's Sharara with a combined capacity of 330,000 b/d, about one fifth of Libya's pre-conflict output.
The region was held by Gaddafi's loyalists until September and Smith assessed the fields were soft targets, difficult to protect against marauding Gaddafi loyalists striking from the desert wastes.
"The most significant security threats to oil assets are in the Ubari sand sea, broadly between Ghadames, Sabha and Ghat," he noted. "It's not secure and anyone who's been there will tell you it will remain difficult to police, particularly given the lack of a central security force."
BLACK GOLD AND THE CURSE OF THE REVOLUTION
Libya's oil industry was in bad shape even before the uprising against Gaddafi erupted in February.
When Gaddafi led a bloodless military coup that toppled King Idris I of the Senussi dynasty on 1 September 1969, Libya produced around 3 million b/d, almost double the total at the start of this year's conflict.
But under his quirky and murderous regime, production steadily fell over the years due to neglect, poor maintenance and international sanctions that cut off badly needed foreign investment and modern technology.
When George W. Bush invaded Iraq in March 2003 to save the world from nuclear and chemical weapons Saddam Hussein did not possess, the US Neoconservatives' plan was to use that country's oil production to pay for its reconstruction.
But instead, Iraq's oil industry came under sustained attack, often with the complicity corrupt officials and tribal chiefs and Washington had to pick up the bill.
It took eight years to restore Iraqi production to just to pre-2003 levels. And even now, Iraq is only producing, thanks to international oil companies and their advanced technology, some 2.7 million b/d.
That's 20% below the output when Saddam seized power in 1979.
Iran, Iraq's age-old enemy, went through an even worse time after Shah Mohammad Reza Pahlavi was overthrown by the Islamic revolution in January 1979. Oil production slumped from 6 million b/d to 1 million b/d.
Today, 32 years on, the Islamic Republic can still only manage an output of around 4 million b/d.
'SWEET' CRUDE IS LIBYA'S ACE IN THE HOLE
In actual production terms, Libya does not appear to be particularly vital in the global energy order, with a mere 2% of world output. But Libyan oil is a high-quality "sweet" crude that needs little refining because of its low sulphur content and is thus highly prized by Western consumers.
Libya accounts for 10-15% of the global demand for this kind of oil. The country's proximity to its main market, Europe, means lower transportation costs, adding to the value of its oil exports. It also has extremely low production costs, as little as $1 a barrel, which makes it an attractive option.
"Libya has for years punched below its potential, hampered by a lack of investment as its leader diverted funds for other causes and his personal use," according to Javier Bias, the Financial Times energy expert.
A decade of international sanctions stemming from terrorism blamed on Gaddafi's regime crippled Libya's oil industry.
"But executives and officials believe the country ... could produce much more oil in the next two decades if the new ruling class pursues the right policies," Bias observed.
THE WAY AHEAD
Libya will be able to produce up to 550,000 barrels of oil a day by the end of 2011, according to Shokri Ghanem, the country's former oil minister and head of its National Oil Company. By June, that figure could rise to about a million b/d, he told The Middle Easton the sidelines of the annual Oil & Money conference in London.
"There are certain facilities, i.e. offshore, that could come into production more easily," Ghanem said. "Wafa Gas has started producing, the easy production has ... come back."
But," he cautioned, "the picture is still unclear." Libya could require up to two years to reach its pre-war production level of about 1.6 million b/d, he suggested.
Security issues were paramount, Ghanem insisted, if the damage to fields, pipelines and terminals was to be repaired and the foreign staff of the international companies operating in the country--such as Italy's ENI, Total of France and Repsol of Spain--were to return in sufficient numbers. "Most of the companies did not yet send their expatriates in. Maybe some of them are starting to work, but most of them have not started to maintain and repair the damage." "A lot of money" was also needed to rebuild camps for the contractors and workers, replace looted spare parts and four-wheel-drive cars.
Although some industry sources have suggested that the international oil companies may seek to renegotiate their contracts to improve their earnings and to cover the added costs, Ghanem doubts that this will happen. The NOC, he said, "has followed a policy in the past few years of open bidding, which is completely transparent. Of course, [this] gave the company good conditions and good terms, and I think it will be difficult for any new government to change this policy."
A reorganisation of the oil and gas sector was also likely, he indicated, especially given current "staff unrest" in the NOC. "There is talk," he explained, "that the national company will be divided into three others." There were also a lot of "unknown factors" about what would happen in the Ministry of Oil. That meant, Ghanem concluded, that although Libya was on course to improve output dramatically over the coming months, "after reaching 700,000 b/d it will be a big challenge".