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What Next for Libya?

By John Daly | Fri, 21 October 2011 13:12 | 1

Libyan Colonel Gaddafi’s 42 year brutal reign is over, but the future looks murky for a country primarily known for exporting oil and terrorism.

One thing is for certain – international oil companies will be packing out flights to Tripoli to cut deals for a piece of the action.

Libya remains the wild card, with only 25 percent of the country’s oil potential territory explored. Whatever the demerits of the Gaddafi regime, it kept tight rein over its oil industry, and that, combined with international sanctions for its terrorist proclivities, largely stymied development of the country’s resources, much in the way that the development of Iran’s petrochemical sector has been largely devoid of foreign capital. After all, they did not call the 1996 U.S. legislation “the Iran-Libya Sanctions Act” (ILSA) for nothing. In  September 2006  ILSA was renamed the Iran Sanctions Act (ISA), as Gaddafi was behaving himself more, but the damage to the country’s energy infrastructure was by then deep and systemic.

The Libyan economy depends primarily upon revenues from the oil sector, which contribute about 95 percent of export earnings, 25 percent of GDP, and 80 percent of government revenue. All of this is up for grabs now.

Prior to the outbreak of conflict in February, Libya was exporting about 1.3-1.4 million barrels per day from production estimated at roughly 1.79 million barrels per day of high-quality, light crude, of which approximately a mere 280,000 barrels per day were indigenously consumed. But current production is the proverbial mere drop in the bucket. Libya has the largest proven oil reserves in Africa with 42 billion barrels of oil and over 1.3 trillion cubic meters of natural gas, according to conservative estimates.

Now that the fighting is apparently over, the issue of Libya’s oil production will swiftly move front and center in international interests.

On 19 October International Energy Agency official David Fyfe said in Paris that despite IEA official estimates that Libya could be pumping around 1 million barrels a day by the end of 2012, a fraction of its 1.79 million barrels per day output pre-military action, all estimates of Libya’s future output are a "shot in the dark" before adding that there are "many logistical, operational and security related challenges" to overcome before full production is restored. After military intervention began, by September Libyan oil output shrank to a measly 100,000 barrels per day.

While Libya’s National Transitional Council has made vague indications that it will honor current oil and natural gas contracts at present, this does not preclude the National Transitional Council from future renegotiations of the oil and gas contracts' terms, much less signing new ones.

Furthermore, until he learned how to speak diplomatese, National Transitional Council head Mustafa Abdel Jalil alluded to the fact that the National Transitional Council would assign a higher priority for reconstruction and the allocation of oil contracts to countries that supported their uprising, remarking that nations would be rewarded "according to the support" given to the insurgents – which means NATO European coalition members will have the inside track, particularly as before the fighting erupted Europe got over 85 percent of Libya's crude exports.

Under such considerations, one of the clear winners will be Italy’s Ente Nazionale Idrocarburi S.p.A., better known by the acronym ENI, which saw pre-conflict Libya accounting for 15 per cent of ENI's output.

The major losers in such a scenario will be those nations that held out against military intervention, most notably the Russian Federation and China. Since 2005 Russian state-run natural gas monopoly Gazprom invested $200 million in energy exploration in Libya even as state arms exporter Rosobornekhsport sold Gaddafi over billions in armaments before an arms embargo was imposed on Libya by the UN Security Council in March, many of which were subsequently deployed against NATO forces and Libyan rebels, a fact doubtless not lost on National Transitional Council members. Russia's state news agency ITAR-TASS estimates that Russia could lose as much as $10 billion in business if the National Transitional Council challenges the legality of the existing contracts.

China, which has a massive oily African footprint elsewhere in Sudan and Angola, received a paltry 150,000 barrels per day of Libyan oil, a mere three percent of its crude imports. On 23 August, when asked about the possibility of the National Transitional Council renegotiating contracts deputy head of the Chinese Ministry of Commerce's trade department, Wen Zhongliang blustered, “I can say in four words: They would not dare; they would not dare change any contracts.”

Aside from the oil issue, another murky situation is the future composition of Libya’s post-Gadaffi government. Last month Libya's interim leader, chairman of the National Transitional Council Mustafa Abdel Jalil, in his first public appearance in Tripoli told his audience, “We seek a state of law, prosperity and one where Sharia is the main source for legislation, and this requires many things and conditions.”

As Sharia is Islamic law and Libya’s future government will doubtless contain many Islamic elements, it is hardly likely that the country’s future administration will be willing to sign “sweetheart” deals with foreign energy firms on terms more favorable or even as favorable as those Gadaffi signed with foreign energy firms, as populist Islamic government elements will undoubtedly demand greater financial transparency than that provided by the Gadaffi administration.

But Gadaffi is dead, and so Libya and the National Transitional Council enter a brave new world with few signposts. As regards Western intervention in the turbulent oil politics of the Middle East, one is reminded of what according to Washington Post journalist Bob Woodward, U.S. Secretary of State Colin Powell told President George W. Bush in the summer of 2002 about the possible consequences of military action in Iraq in what has subsequently become known as the “Pottery Barn” Rule – “You break it, you own it.”

Brussels and Washington have an increasing amount of Middle Eastern ceramic shards to sweep up.

By. John C.K. Daly of Oilprice.com

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  • Anonymous on October 21 2011 said:
    Excellent article. Very informative.

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