Libya's Oil Industry: Don't Expect a Quick Comeback

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Bob Strong / Reuters

A truck carrying Libyan rebel fighters drives toward the oil refinery in Zawiyah, Libya, on Aug. 17, 2011

With Colonel Muammar Gaddafi all but gone, Libya's prospects can be summed up in one word: oil. Far different from the revolutions in Tunisia or Egypt, or the rebellions in Yemen, Bahrain or Syria, the possibilities of Libya's new leaders either forging a new democracy or being forced to fight a lingering insurgency could depend heavily on how they kick-start the oil sector, which accounts for about 95% of Libya's earnings and which will finance virtually every penny of Libyans' public services.

How easily the oil industry can piece itself together is unclear, however. Listening to Ali Tarhouni, the Oil and Finance Minister for the rebels' National Transitional Council (NTC), it sounds simple enough. He told CNN last week that the six-month war appeared to have damaged only "about 10%" of the oil infrastructure, and also said he was astonished to discover that Gaddafi's forces had not blown up or burnt key facilities — like the oil refinery in Zawiyah, 30 miles west of Tripoli — as they faced a devastating defeat. Libya's oil production has plummeted since the revolt erupted in February to an all-time low last month of about 60,000 barrels a day. That's a trickle compared to the production of 1.6 million barrels a day last January. Tarhouni claims that gas pipelines will reopen almost immediately (good news for Italians, who import 25% of their gas from Libya), and that his country could pump about 500,000 barrels of oil a day within four months and return to prewar levels within a year.

But the rebel leaders' estimates could be wildly optimistic — not a surprise, given their wildly optimistic mood after crushing a 42-year dictatorship in just six months. The reality for oil production, say analysts, might be a lot more sobering than Tarhouni suggests. "To get back to 1.6 million barrels a day will take about three years," says Ross Cassidy, North Africa oil researcher for Wood Mackenzie, an Edinburgh-based global-energy consultancy, which recently analyzed each Libyan oil field. The new Sahara fields in Libya's remote southwest could indeed start pumping quickly. However, about two-thirds of the country's production originates from giant fields around the east-central Sirte Basin, and engineers could face major challenges there, Cassidy says, even leaving aside the fact that armed Gaddafi loyalists are still holed up in the nearly Mediterranean city of Sirte. Since most of those fields have operated since the 1960s, oil needs to be pumped continually in order to avoid pipelines being clogged up. "Some of them are decades old," he says. "In a six-month shut-in of these fields, the reservoir pressure can drop and oil facilities could get gummed up." Oil companies, including major Italian, French, U.S. and Spanish firms, all scrambled to leave Libya shortly after the fighting began in February.

On paper, Libya's potential is huge — far exceeding what Gaddafi achieved. The country has nearly 44 billion barrels of proven oil reserves, and the oil industry has badly underperformed for many years. Libya produced about 3 million barrels a day in 1970 before Gaddafi launched his "people's revolution." That dropped to about half, as years of international sanctions drove out big U.S. companies and ground down many others in slow, arcane bureaucracy. Recent exploration projects by big oil companies have proved disappointing. And there have been political headaches too. Even after Western companies returned to Libya in strength in 2004, Gaddafi frequently used his dealings with them as a way of pressuring his old enemies. As world-oil prices rocketed, Libya demanded ever greater percentages of the profits — a major gripe among oil companies, which were forced to hand over 90% of revenues to Gaddafi's regime, compared with about a 70% government share elsewhere in the region.

With the NTC overwhelmed with securing the country, defeating the last Gaddafi holdouts and hunting down the colonel himself, Tarhouni's team could delay renegotiating oil contracts for years. Take Iraq, for example: there, the government waited six years after Saddam Hussein's regime collapsed in 2003 before signing its first new oil contract. The Libyan council has said it will honor the current contracts signed with big oil companies, including deals with BP, ConocoPhillips, Marathon Oil and many others. But they also insist Libya's oil industry will work very differently once a new government is in place, and that they could open up bids to new players like China and Malaysia. "We want to do away with the shadowy, corrupt way which Gaddafi and his cronies ran the oil business," the NTC's London representative Guma el-Gamaty told al-Jazeera last week. "Contracts will be awarded on merit, not on political favors."

Given that, Western oil companies can expect no special favors, simply because their countries led NATO's Libya campaign. In Iraq, for example, Chinese energy companies signed huge contracts, despite the fact that China opposed the U.S.-led invasion that drove out Saddam. "China supported nothing, but it came in with the money and the bids," says Julian Lee, senior analyst for the Center for Global Energy Studies in London. "When it comes down to it, whatever rebel movements say in the heat of battle — when it comes down to allocating contracts in a calmer environment, it will be a hard-nosed commercial negotiation." And as much as the rebels owe Western countries their victory, they are all too aware that those same Western countries — Britain, France, and the U.S. — were deeply embroiled in intelligence sharing with Gaddafi; in Britain and the U.S. cases, they even apparently aiding in renditions of militants to Libyan torture cells. "Nobody's hands are clean," Lee says.

If Libya's new leaders make good on their promise to run a transparent oil sector, they could be one of the few oil-rich nations to do so. Oil companies' deals with governments are notoriously opaque. A new U.S. law, due to come into effect next year, will oblige oil companies for the first time to reveal the details of their contracts with foreign governments. E.U. politicians are discussing a similar law. Anticorruption campaigners believe that in Libya — like many other countries — oil contracts have often involved companies paying large signing bonuses, with little accountability. No one knows whether the money disappeared into the pockets of Gaddafi and his top aides.

The popular belief among ordinary Libyans is that it did, given the opulence that rebel fighters have discovered in numerous Gaddafi residences. "One of the lessons of the Arab Spring is the perception of people that their government has been mismanaging their funds," says Brendan O'Donnell, a Libya researcher for the London anticorruption group Global Witness, which recently revealed that billions of dollars from Libya's sovereign-wealth fund had been socked away in Western banks. "Here is an opportunity to say this new country could lead the way to a new era of economic justice." No matter how many barrels are pumped a day.