Libya: Can It Become an Oil Superpower?

Qaddafi’s ouster presents openings for Big Oil, but Libya needs stability first

The messiest part of war is how it ends. Even as Libyan rebels and their supporters fired rifles in the air and poured into Green Square to celebrate the downfall of Muammar Qaddafi, the scenes at the Mujama Aleiadat hospital in Misrata, 130 miles from Tripoli, told a grimmer story. The hospital’s corridors were jammed with the wounded, including a 3-year-old boy hit in the arms and abdomen by shrapnel from a shell that also killed his 6-year-old brother in neighboring Zlitan. One of the hospital’s own, a 20-year-old medic who crewed ambulances into the front lines since the start of the war, had been killed by a sniper bullet. “Qaddafi has lost, but people are still fighting,” says Dr. Mohammed Ahmed, who was caring for the wounded boy. “I don’t know why.”

The apparent end of the dictator’s brutal, often bizarre, 42-year rule was greeted with relief not just among ordinary Libyans, but also by leaders of the NATO countries who had launched a hastily arranged anti-Qaddafi military campaign that’s now lasted more than six months. The work of stabilizing post-Qaddafi Libya will take a lot longer than that. Basic services like water and electricity are barely functioning, and the country’s physical infrastructure is in ruins. The rebels, a coalition including longtime Qaddafi opponents and former regime figures, say they intend to establish a democracy, though Libya has neither a political party nor a constitution. Even Mustafa Abdel Jalil, head of the rebels’ National Transitional Council (NTC), warned on Aug. 22 that governing in the post-Qaddafi era will “not be a bed of roses.”

What Libya does have going for it, of course, is oil. With 47 billion barrels of reserves, the 74th-largest economy by gross domestic product possesses 3.4 percent of the world’s known supply. In normal times, oil and gas account for 95 percent of exports and 80 percent of government revenues. The civil war has sent production plummeting, from 1.6 million barrels a day in 2010 to 60,000 recently.

The emergence of a new set of leaders has already set oil companies hustling to grab a stake of a hugely lucrative market. Their prospects, as much as those of the Libyan people, depend on how quickly a group of disputatious opposition figures with no experience governing together can bring order to a devastated nation. “You can’t divorce the political transition from how fast oil is going to come online,” says Edward P. Djerejian, director of the James A. Baker III Institute for Public Policy at Rice University in Houston and a former U.S. ambassador to Israel and Syria. “They have to move together; there has to be a strong sense of political stability.”

History says Libya is not a good bet to become an oil superpower anytime soon. Three decades after the Iranian revolution in 1979, production there has yet to be completely restored. Iraq needed four years to equal its output before the 2003 U.S. invasion, and the ex-Soviet Union countries required as much as a decade. “Libya is not as extreme a case as Iran, but it is not going to be easy,” says Peter Hutton, an analyst at RBC Capital Markets in London.

For centuries Libya has been divided along geographic and tribal lines with a weak central government in the middle. Over the last four decades, Qaddafi was the government, reserving all important decisions, including on key oil concessions, for himself. His talent as a global attention-hog may have been unique, but as a ruler he hewed to the dictator’s playbook: dispensing patronage to his loyalists, creating a cult of personality, and brutally persecuting his enemies. His sins against his citizens may dwarf his sins against the state, but he undermined the machinery of government and commerce at every chance. “Here is a country where the grand leader by design gutted all institutions of governance,” says Robert Danin, a senior fellow for the Middle East and Africa at the Council on Foreign Relations in Washington. “When he leaves, there goes the state.”

The rebellion against Qaddafi has followed some of the traditional fault lines in the country. Benghazi, the rebel capital, is the main city of the Cyrenaica region, heartland of the Sanusi monarchy, which Qaddafi overthrew in 1969. He lavished patronage on Tripoli and areas inhabited by loyal tribes in the center of the country, much to the resentment of Benghazians. It’s no accident that the Benghazi region was the first to rise up against the regime, but it’s unclear how much support the NTC commands beyond Benghazi. The fighters who raced into Tripoli on Aug. 21 were mostly local militias from the west only loosely affiliated with the Benghazi leadership in the east. “Rebel groups and militias will be hesitant to relinquish power in their respective regions,” says Ben Cahill, an analyst at PFC Energy in Washington.

You can already glimpse the chaos in the rebel-held city of Misrata, east of Tripoli, which saw some of the bitterest fighting. Money is running out, and banks refuse to issue more than a fraction of the cash citizens have on account. Shelves on the few supermarkets are empty, and the fatigue of war is exacerbated by the August heat, power cuts that disable air conditioners, and the arrival of Ramadan, during which observant Muslims abstain from food, water, and smoking during daylight hours.

On Aug. 21, as rebel fighters converged on Tripoli, Misrata remained under siege. At one point it was rocked by a heavy boom: the sound of a Scud rocket being destroyed in the air, apparently by a U.S. missile, seconds before it hit the city. Locals believe the Scud, the latest of three destroyed in similar fashion, was fired from Sirte, Qaddafi’s birthplace.

Qaddafi’s refusal to go quietly raises the possibility that Libya could see a lasting insurgency like the one that plagued Iraq after Saddam Hussein’s overthrow. Divisions among the rebels may also grow once Qaddafi—the epicenter of their loathing—is dead or departed. And yet for all of its shortcomings, the NTC has functioned surprisingly well. The rebels have gained international recognition and aid not only from the likes of the U.S., Britain, and France, but also from Arab states such as Qatar, the United Arab Emirates, and Kuwait. “Everyone says they are inexperienced, but they have managed Benghazi and the areas they’ve conquered quite well,” says Oliver Miles, a former British ambassador to Libya.

The U.S. and the international community will have continued leverage over whatever government emerges in the form of Libya’s $165 billion in frozen assets worldwide, as well as control over the sanctions that need lifting before the country can start selling its oil. Libya analysts are encouraged by the emergence of local councils, which have taken over management of traffic and other responsibilities following the disintegration of the regime. David L. Goldwyn, head of Washington consulting firm Goldwyn Global Strategies and a former U.S. State Dept. special envoy, says governments and organizations will be able to channel aid through these councils. “That’s the beginning of a civil society that Qaddafi tried to destroy,” says Ronald Bruce St John, a consultant and author of Libya: From Colony to Independence. “It will be difficult and contentious, but we will see a Libyan form of democracy develop.”

The starting gun on resuming oil production can’t be fired until there’s a recognized, central government in place able to make decisions on how to pay for repairs and cooperate with partners. Security must be established, too, so that the foreign contractors who are so vital to Libya’s oil industry feel safe to return.

The oil and gas are likely to come back in spurts. Gas, much of which is produced by Italy’s Eni, is expected to recover first, followed by oil. Wood Mackenzie, a consulting firm based in Edinburgh, estimates that it will be three years before Libya is back producing at its pre-war capacity. Because Libya will need most of the early oil it produces domestically, “it is going to be several months before oil is exported,” says David Kirsch, also an analyst at PFC Energy. “That will limit its market impact.”

Rice University’s Djerejian says international oil companies could play a beneficial role in the transitional process because they “have very strong interests” in seeing Libya rejoin the world. Some of the companies with major investments in Libya, including Eni and Marathon Oil of the U.S., had already been reaching out to the rebels in anticipation of Qaddafi’s fall. Other producers in Libya include Occidental Petroleum, ConocoPhillips, and Hess, while ExxonMobil, BP, and Royal Dutch Shell all have major exploration deals.

The change of government means that new oil players could secure rights to Libya’s reserves of light, low-sulphur crude. “Anytime you have a major change like this and have a reappraisal of your approach to the oil sector both the terms and the composition is going to be subject to review and potential changes,” says PFC Energy’s Kirsch. Given that any change in existing contracts would undoubtedly lead to waves of litigation and slow output, it’s hardly in the interest of the rebels or the oil companies to start over from scratch.

That won’t be much solace to Eni, which as recently as 2010 banked on Libya for about 13 percent of its $142 billion in annual revenues. Eni is said to be particularly worried about losing ground to France’s Total because Nicolas Sarkozy, the French President, has been so forceful in backing the onslaught against Qaddafi. “Sarkozy invested a lot in this venture, and now he needs to show his voters France will get something out of it, so that’s where Eni’s concerns come in,” says Nicolo Sartori, an energy and defense analyst at Rome’s Institute for International Affairs. “I don’t think anyone will touch old contracts because international law protects them, but new ones are up for grabs.”

Getting the oil pumping again won’t be easy. While government and rebel troops appear to have avoided massive damage to oil installations, ports, pipelines, and other infrastructure have been hit; desert work camps have been looted of cars and computers; and the fighting isn’t over. Eni’s head of exploration and production, Claudio Descalzi, estimates that the company’s gas operations, which supply 10 percent of Italy’s gas through a pipeline under the Mediterranean, could be brought back in two to three months while restoring oil production might require a year.

Newer oil fields in the areas called Murzuk and the Pelagian Shelf Basin in the west are likely to come on first, figures analyst Ross Cassidy of Wood Mackenzie, because they are more modern. Fields in the oil heartland, the Sirte Basin, will be harder to restart. Their oil is waxy and will clog pipelines when it’s not flowing. Cassidy says that under ideal conditions, Libya could produce 3 million barrels per day by the end of the decade. “The oil is there in the ground,” he says. “It’s a question of having the right conditions above ground that will allow investment.”

What Libya needs, and what the companies hope for, is a fiscal regime that encourages high-risk exploration and enhanced recovery—a production method that uses measures such as injecting gas into wells to increase the yield on old fields. Enhanced recovery is the quickest route to new oil production, but it costs more per barrel. Bindra Thusu, a research associate at University College London and longtime consultant to the Libyan industry, favors a split of 70 percent of revenue for the government and 30 percent for oil companies, as opposed to the current 90-10 ratio. Since Libya opened up in the last decade, the results of oil exploration have disappointed international companies. There have been four bid rounds but very few finds, and some companies, such as Australia’s Woodside, have packed their bags. “If they are going to attract investment they are going to need to be creative,” says consultant Goldwyn.

Many analysts say a substantial amount of Libyan oil could return within a year of the end of fighting. That would ease concerns about a supply crunch—good news for global consumers. “Having 500,000 to 600,000 barrels per day coming back from Libya next summer would make a difference,” says Daniel Sternoff, senior managing director for emerging markets and energy at Medley Global Advisors in New York. “Having that in the spare capacity column is going to be useful.”

For Libyans, the fall of Qaddafi offers as many reasons for hope as anxiety. For the first time in more than a generation, the Libyan people have a chance to determine for themselves how they will be governed. But the lack of jobs and educational opportunities, which helped trigger not only the Libyan uprising but also the restiveness across the Arab world, are challenges that can’t be remedied overnight. Patience, even more than oil, is the resource Libya and its new leaders will need most.

— With assistance by Alessandra Migliaccio, Caroline Alexander, David Wethe, and Grant Smith

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