In our May 2011 newsletter we looked at the sanctions imposed against Libya by the international community, and considered the risks for Japanese companies in doing business in Libya or with Libyan counterparties.

Since that newsletter was published, the situation in Libya has changed dramatically: the ruling regime has collapsed, Colonel Gaddafi himself was killed on 20 October 2011 and a new transitional government has been set up, headed by Abdurrahim al-Keib, with a view to establishing a congress and holding elections as soon as possible.

In the light of these dramatic changes, this newsletter provides an update on the international sanctions regime, the political and economic outlook for Libya, and the opportunities for Japanese companies seeking to do business in Libya.

Libya's economic position and the lifting of sanctions

By comparison with other countries that have experienced regime-change in recent years, Libya is uniquely well-placed to reinvent and reconstruct itself. Although Libya’s economy suffered significant damage as a result of the conflict (as much as US$15 billion, according to the former Central Bank governor, Farhat Bengdara), the Libyan Central Bank and Libyan Investment Authority are said to hold some US$170 billion in assets abroad, in addition to an estimated US$20 billion remaining in Libya's domestic banking system.

Libyan assets held abroad were previously frozen by the international community, pursuant to the sanctions introduced beginning in February this year by the UN, US, EU and other countries, which froze assets held by specified Libyan entities and individuals (such as the Libyan Central Bank, Libyan Investment Authority, Libyan National Oil Company ("NOC"), as well as Colonel Gaddafi and individuals associated with him).

As the National Transitional Council ("NTC") began to establish control over the country, the international community gradually relaxed some of the sanctions and took steps to support the NTC, including by releasing frozen assets to assist with the humanitarian effort and provide the NTC with funding to pay for fuel, salaries and civilian needs. For example, in August the UN authorised the transfer to the NTC of several billion dollars of assets that had been frozen in the US and the UK, and on 16 September 2011 a vote at the United Nations recognised the NTC as the official legal authority in Libya, unfroze the assets of the NOC and Zueitina Oil Company, and permitted the Central Bank of Libya, the Libyan Foreign Bank, the Libyan Investment Authority and the Libyan Africa Investment Portfolio to purchase humanitarian aid, fuel and electricity.

The US and the EU took similar steps to assist the NTC. In the US, the Obama administration lifted most of its sanctions on 19 September 2011 (in particular, relaxing the sanctions against the NOC and permitting the release of its assets, and authorising new transactions with Libyan government entities). In the EU, the Council of the European Union announced on 10 October 2011 that it had followed the lead of the UN in removing the sanctions against Libyan entities involved in the oil & gas sector, and also removed 29 entities from the EU's own list of sanctioned entities.

However, whilst the international community has already taken significant steps to support the NTC and interim government, companies seeking to do business in Libya should bear in mind that the sanctions have not yet been lifted in their entirety, and this is not likely to happen for some weeks or months. It is therefore important to confirm, before resuming activity in the country or entering into new business with Libyan counterparties, that the activity in question does not remain prohibited or restricted, and that the proposed counterparty is not still on the list of individuals or entities subject to the UN, US or EU sanctions regimes.

Reconstruction opportunities

Although the international sanctions have made it difficult for companies to do business in Libya, following the death of Colonel Gaddafi foreign business executives have rushed to visit the country in an attempt to secure deals. It is not difficult to see why: the Gaddafi regime diverted the country's significant oil wealth to its own ends, while Libya suffered from years of underinvestment in its infrastructure and public services, which have been further damaged as a result of the recent fighting. The new Libyan government will have significant work to do to rebuild the country: indeed, it is estimated that around US$200 billion could be spent over the next 10 years on all manner of new projects, such as roads, power plants, hospitals, schools and other infrastructure.

Libya's new government will be able to draw upon the US$170 billion of assets held overseas to fund such projects. This represents a significant opportunity for foreign companies, and one that is made further attractive by the NTC's promise to leave behind the corruption that plagued the previous system, and to ensure that all new contracts are awarded to companies only after a transparent bidding process.

Libya's oil & gas industry

Libya's wealth is of course derived from its significant oil reserves. Libya is a member of OPEC and has the largest proven crude oil reserves in Africa. However, output has been significantly affected by the conflict: according to the International Energy Agency, output fell from about 1.6 million barrels per day before the revolt to a "trickle", but should recover to 600,000 barrels per day by the end of 2011 and reach pre-conflict output levels by the end of 2012.

Foreign oil and gas companies are naturally eager to resume production as quickly as possible, and the NTC sought to encourage this by announcing the resumption of oil production on 11 September 2011. However, although some operations have emerged unscathed and have quickly been brought back online (such as the offshore fields operated by ENI and TOTAL), the damage to others is still being assessed. In particular, it appears that a number of downstream facilities (such as the oil terminals at Es Sider and Marsa el Brega, and the refinery at Es Sider) are badly damaged and it may be some time before they become operational again.

In addition to ensuring that any future contracts to develop Libya's oil and gas resources are awarded on the basis of a transparent bidding process, the NTC has also suggested that the activities of the NOC should be divided into companies focusing separately on upstream activities, downstream activities and renewables, and that priority should be given to exploration and increasing Libya's output from its existing fields.

It therefore seems likely that the Libyan oil and gas industry will see significant changes over the coming months and years.

Conclusion

The new Libyan government will have a great deal of work to do in order to repair the damage caused by the recent conflict, and to move the country forward politically and economically following decades of underinvestment. Fortunately, Libya is in the unusual position of having significant assets available to it to fund this reconstruction, and there are clearly significant opportunities right now for foreign companies to win new contracts across a wide range of sectors and to assist Libya in that rebuilding process.