Libya's oil could be a curse or a blessing

The biggest challenge facing Libya’s transitional government may also be its greatest blessing: what to do with all the oil.

Libya is awash in black gold. 

With about 46 billion barrels of proven oil reserves — and much of the country still unexplored — Libya ranks as the world’s 18th largest oil producer, and the largest on the African continent.

That was before the revolution that ousted leader Muammar al-Gaddafi. Production amid the conflict has since slowed.

But as the pumps crank back to life and international companies return, the government must balance its need to get the oil back in the pipelines — and manage the expectations of a people who have waited decades to see its benefits.

Prior to the revolution, oil was being produced at a rate of 1.6 million barrels per day, or bpd. As the conflict between Gaddafi loyalists and the rebels escalated, production slowed and then ceased completely in May.

Drilling resumed in September, as the rebels gained control of Tripoli, but on a limited scale. Since then, output has steadily increased to the current rate of 550,000 bpd, according to the National Oil Company.

"We are way ahead of our own expectations, of anybody's expectations,” said Ali Tarhouni, Libya’s oil and finance minister. A former economics professor from the University of Washington, Tarhouni said he expected to pass 700,000 bpd by the end of the year. By June, he expected Libya would be producing at pre-conflict levels.

The International Energy Agency, in a report released Thursday, said that might not happen until 2013.

That may not be fast enough for Libyans, who are eager to see change under their new post-revolution government.

People have begun to anticipate rapid improvements in healthcare, education, employment opportunities. They expect that the benefits of Libya’s oil wealth will be shared among the population.

Tarhouni said fulfilling these dreams is the biggest challenge the new government is facing. Progress, he said, would be slow until Libyans can elect a permanent government. Elections are to be held in June next year.

A post-Gaddafi oil sector?

In the meantime, Tarhouni said the transitional council aims to privatize much of the oil sector, which had been run by the government under Gaddafi.

Under the former regime, heavy-handed state policies stifled private development.

Masaoud Mohamed Yousef, who has worked in oil industry management with the NOC since 1978 and is now the chairman of Mafaza Oil Technical Services, said prior to 2004, government restrictions made it impossible for all but a “handful of lucky, very well-connected people” to open private business within the oil industry.

Restrictions were relaxed somewhat in 2004, but Yousef said it took a lot of work to make a living under the old system.

Yousef said although the new government will have its concessions, most production will be handled privately.

“There is no choice for them but to change the system — otherwise these young people who made the revolution will not stand for it,” he said, adding that new polices will mean huge potential for the private sector in the future.

International companies in the game

Around 40 international companies held ongoing oil contracts with the former regime prior to the revolution. The new government has said that it will honor existing contracts, but these deals will be investigated for any suspicious clauses that may have been made with the former regime.

Currently French company Total, German owned Wintershall and the Spanish firm Repsol have resumed drilling. The Italian group ENI, the biggest pre-war investor, will resume production in oil and gas within the coming weeks.

British Petroleum looks set to become Libya’s biggest oil investor if the oil company continues with a contract negotiated with the former regime that was halted due to insecurity at the beginning of the year.

It is not yet clear if or when BP will begin production but the majority of foreign investors are aiming to start in January of next year if the security situation in Libya remains stable.

It’s no coincidence that the major oil companies are also members of NATO, which provided key military support to the rebels as they battled Gaddafi’s forces.

“Even if they don’t say it loudly of course they have the best chance for future investment,” Yousef said. “Russia and China clearly do not have an equal standing in negotiations for oil contracts with the new government,” he said.

Russia and China abstained from the UN resolution authorizing NATO intervention — allowing the vote to proceed but not offering their support for the operation.

Tarhouni said negotiations for new oil concessions are likely to be delayed until after the elections.

(Source: Global Post)

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