Optimistic outlook : Libyan oil

Petroleum Review

The medium-term outlook for Libya’s oil and gas sector is optimistic, but war damage repairs are needed, write Paul Cochrane in Beirut and Amelia Smith in London.

The new authorities in Libya are bullish about the future of oil production and the role of international oil companies (IOCs) in the rebuilding of the country, now the Gaddafi regime has been destroyed.

However, analysts warn there will be significant delays until war-damaged infrastructure is back online and the new government is able to make concrete decisions about the future of the sector. ‘I don’t think the interim authorities are in a position to sign major agreements in the oil and gas sector or that they need to,’ Dr Hakim Darbouche of the Oxford Institute for Energy Studies recently commented. ‘I don’t think it’s in their interest to do so given that they have pledged to reinstate constitutional order in 2013 and the main focus until then will be on the restoration of pre-conflict production and the reconstruction of infrastructure more generally.’

Indeed, IOCs are expected to renegotiate terms and contracts struck under the former government. A good example is BP, which suspended a $1bn exploration programme in December 2010, but which will be optimistic about its prospects given the UK’s involvement in helping the rebellion succeed against Colonel Gaddafi.

Edward Oakden, Sectors Group Managing Director of the UK Trade and Investment Agency, said at a London conference (‘Libya, The Future 2’*) in November that British and French military support for the revolution would boost opportunities to ‘maximise the commercial return from the enormous reconstruction that’s going to be taking place in Libya’. The UK previously commanded just 2.5% of Libya’s foreign trade, he added, ‘so there is a great deal more that we could be doing’.

However, while military support for the rebels was provided by NATO, it is not a given that members of the coalition will be rewarded with preferential oil contracts or that any of the IOCs present in Libya before the war broke out will lose out. ‘The rebels’ initial pledge to reward NATO coalition members with lucrative contracts seems to have been diluted since the end of hostilities,’ noted Darbouche. ‘If a transparent, competitive system for awarding contracts is put in place in the future – as seems to have been promised by the new authorities – then in theory there shouldn’t be any “losers and gainers”. Decisions would be based on objective criteria and the more competitive and able IOCs would win.’

Oakden warned that much of Libya’s energy infrastructure was dysfunctional and would have to be rebuilt, and that it was ‘important to expect a degree of uncertainty... a lack of clarity over the next year or so... as life starts to go back to normal’. He added that IOCs were ‘warmly welcome’ in Libya and that due to the destruction caused by the Gaddafi regime and the rebellion, help was required across all sectors.

Another speaker at the conference, Tarek Alwan, Managing Director of SOC Libya, a London-based consultancy helping international companies enter the Libyan market, stressed the value of Libya’s 46bn barrels of oil and its 54tn cm of gas. Describing the pre-war state of the country, Alwan explained

that Libya was producing 1.8mn b/d, ‘a considerably good amount of oil’. He went on to point out that approximately 60% to 70% of the country remains unexplored and that concessions could yield major hydrocarbon discoveries.

Production picking up

During the conflict, oil production plummeted, falling by up to 90% and reaching as low as 20,000 b/d in August 2011. Gaddafi’s forces sabotaged two major oil fields and associated infrastructure, while some 40,000 mines were laid in the area of the port city of Brega, according to official figures from the

National Transitional Council (NTC) that is now running Libya. Full estimates of damage to infrastructure have not been fully carried out, but Interim Oil Minister Ali Tarhouni has estimated the war left 10% to 15% of Libya’s oil infrastructure damaged. ‘I haven’t seen any reliable figures yet, but I presume we’re talking billions of dollars if not tens of billions,’ noted Darbouche.

However, it does not appear that the country’s 40 major oil and gas fields experienced any significant long-term damage as both sides were confident that they would control the country post-war.

Indeed, Alwan noted that, as of November 2011, Libya was already ‘surprisingly’ producing 600,000 b/d, while Tarhouni told the press in late November that output would ‘easily exceed 700,000 b/d’ by the end of the year.

Gas exports, too, have been picking up. In the second week of October 2011, natural gas exports restarted through the 9bn cm Greenstream pipeline to Italy. Throughput was expected to be around 2bn cm by the close of 2011, reaching 5.7bn cm in 2012 and surpassing pre-conflict levels by 2013. Some 8bn cm/y of gas is contracted from Libya to Italy, with Italian energy giant Eni as the primary off-taker.

Security concerns

Alwan also stressed the need for a return of IOCs to Libya. ‘We need five or six IOCs to come back... expats are really required at this stage,’ he told Petroleum Review. However, for that to happen, security will need to assured. Guma al-Gamaty, the former UK coordinator for the NTC, had warned at an earlier ‘Libya, The Future’ conference in September that businesses should avoid bringing private security personnel to the country and ‘alienating’ Libyans. IOCs have been demanding the right to have their own private security companies if they are to return, while the Libyan National Oil Corporation already has its own security forces in place.

Furthermore, an oil official in the NTC recently spoke of a plan to establish a 5,000-strong force to protect oil and gas infrastructure.

Via a live video-conference to Tripoli, Sami Zaptia, Managing Director of consultancy Know Libya, told delegates at the London event that the need for security precautions had been exaggerated in the media – a view shared by UK- based private security company Inkerman Group consultant Jamie Painter. He described the security situation as ‘blown out of proportion’, adding ‘there’s no reason at all why you can’t move around quite freely’.

Although warning of the dangers of road travel, lack of emergency services and weaponry being carried by boys as young as 14 years old who were untrained and unsupervised, he told the audience ‘the security situation is certainly one I’d consider going back and doing business in, taking basic safety precautions’.

Nonetheless, security concerns linger, with reports of up to 20,000 surface to air missiles having gone missing during the conflict. ‘Security remains and will remain an issue for as long as militias are controlling the main urban centres in the country,’ said Darbouche. ‘But since the fighting ended, there haven’t been any major security related incidents around the main producing areas in the desert.’

Away from security, Zaptia warned that there was a risk some mature oil fields in Libya where operations had ceased during the rebellion, might not return to production. Meanwhile, energy consultant Wood Mackenzie has forecast a gradual return to the pre- conflict oil production level of 1.6mn b/d by mid-2014, while the interim government has stated that production will reach 1.3mn b/d by 1Q2012 and 1.5mn b/d by 2H2012.

In the medium to long term, a target set by the former Libyan government of output reaching 3.5mn b/d by 2020 could still be on track. ‘If the government in Tripoli maintains that target and puts in place the right policies to achieve it, then I don’t see why it cannot be reached. The reserves are certainly there,’ concluded Darbouche.  puts in place the right policies to achieve it, then I don’t see why it cannot be reached. The reserves are certainly there,’ said Darbouche.ched. The reserves are certainly there,’ concluded Darbouche.