Libya 620,000 Barrels Short Seeking First Islamic Loan

Libya, holder of Africa’s largest crude reserves, is weighing its first bank loans as the OPEC member seeks financing to more than double refining and expand chemical production, in projects forecast to cost $60 billion.

Islamic debt is one option being considered, Mohamed Alloub, chairman of the state-run Libyan Petroleum Institute, said in a Sept. 18 interview. While loans for a petrochemical venture between Saudi Arabian Oil Co. and Dow Chemical Co. will cost as much as 185 basis points over Libor, or 2.3 percent at yesterday’s rate, Giyas Gokkent of National Bank of Abu Dhabi PJSC said Libya may have to pay more than 6 percent.

Libya, bigger in size than the U.S. state of Alaska, is seeking to boost refining capacity to 1 million barrels a day from 380,000 barrels to meet growing domestic fuel demand. Its oil output tumbled in the last year by two-thirds from levels produced before the 2011 civil war that ended Muammar Qaddafi’s 42-year rule. Borrowing from foreign banks would let the government use its own funds for schools, hospitals and housing, Alloub said in the capital Tripoli.

“The government is expected to finance most of the upgrade,” he said. For the rest, “we presented several proposals to the government. One is for taking loans from local or foreign banks,” Alloub said.

Credit Rating

Libya passed a law this year to ban non-Shariah-compliant banking by 2015. The average yield on Islamic bonds, or sukuk, from borrowers in the six nations in the oil-producing Gulf Cooperation Council was 3.87 percent yesterday, according to HSBC/Nasdaq Dubai indexes. That compares with 4.57 percent on non-Islamic debt in the Middle East.

The North African nation, one of 12 members of the Organization of Petroleum Exporting Countries, is progressing toward seeking a credit rating from Standard & Poor’s, Central Bank Governor Saddek El Kaber said Sept. 18 in a separate interview in Tripoli. The government appointed a company to assist in the process, he said, without identifying it.

Libya would qualify for a rating of BBB, or S&P’s second-lowest investment grade, provided security conditions improve, National Bank of Abu Dhabi’s Chief Economist Gokkent said. The rating estimate is “very rough,” he said in a Sept. 23 e-mail.

’Good Risk’

“The Libyan economy is a good debt risk because it doesn’t have any debt, and it has a source of revenue: oil and gas,” J. Jay Park, managing partner at Calgary-based Park Energy Law, said Sept. 18 in Tripoli. “Stability is, however, a question mark.”

Under Qaddafi, Libya experienced 20 years of U.S. and international sanctions over accusations it supported terrorism, a near 10-year border conflict with Chad and recurrent tensions with Arab states including Egypt, the most populous, and Saudi Arabia, the biggest economy.

Today, even as it restores ties with neighbors and world powers, the country’s oil output has dropped to about 575,000 barrels a day from the 1.6 million barrels it pumped until February 2011. Protests by energy workers seeking better pay and management changes have crippled operations since July at most crude-production and export facilities in the eastern region, including Libya’s largest loading terminal at Es Sidr.

Curbing Imports

The state-run National Oil Corp. plans to increase capacity at refineries and build new processing plants to curb the need to import oil products and also increase exports, Alloub of the Petroleum Institute said last week. Libya imported 80 percent of its gasoline and 41 percent of its diesel in 2012, he said.

The NOC plans to boost capacity at the Ras Lanuf and Zawiya plants to 300,000 barrels a day each, from 220,000 barrels and 120,000 barrels, respectively. The company also wants to build refineries in Tobruk and Ubari with respective capacities of 300,000 and 30,000 barrels a day, Alloub said. Libya has smaller plants in Brega, Tobruk and Sarir.

“Depending on the cost of the project and the cost of money, we will decide” whether to borrow from banks, Alloub said. Any debt must be Shariah-compliant, or conform with Islam’s ban on interest, in accordance with the law approved this year, he said.

Government-owned Libyan refineries would probably pay 8 percent to 9 percent for 10-year credits, Ahmad Alanani, an analyst at London-based investment bank Exotix Partners LLP, said in an e-mail on Sept. 23.

Sadara Interest

Interest on the loan to Sadara, the Saudi Arabian chemical venture, will start at 125 basis points, or 1.25 percentage points, above the London interbank offered rate, said the banker who asked not to be identified because the information was private. The spread above Libor will rise to 155 basis points for the first five years of the venture’s operation and then to 185 basis points, the banker said.

Libya, like neighboring Morocco, Egypt and Tunisia, began developing its Islamic finance capabilities in the wake of the regional uprisings of the so-called Arab Spring, and as Shariah borrowing costs tumbled globally. The average yield on global sukuk plunged 118 basis-points in 2012, pushing borrowing costs below those for non-Islamic debt.

Borrowers in Europe, the Middle East and Africa raised $7.26 billion from 15 Islamic syndicated loans this year, less than half the $15.6 billion in 26 syndications they arranged in the same period of 2012, according to data compiled by Bloomberg.

Banks in Libya have stopped lending to consumers as they transform into Shariah-compliant entities.

“Libyan banks are unfortunately underdeveloped,” El Kaber said. “We are working on strengthening the infrastructure in order to improve our operations and products and become part of the international system.”

To contact the reporter on this story: Maher Chmaytelli in Dubai at mchmaytelli@bloomberg.net

To contact the editor responsible for this story: Stephen Voss at sev@bloomberg.net

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