Following more than six months of armed conflict in the North African country of Libya, on 16 September 2011, the UN recognized the National Transitional Council (NTC) as the legal representative of Libya and also lifted some of the arms embargo, assets freeze and no-fly zone that had been imposed by the Council earlier this year. However, the civil war is not over and NTC’s troops are still fighting to gain control over pockets of territory controlled by forces loyal to Muammar Qaddafi.

Nevertheless, the main questions asked by foreign oil and gas companies are how long the oil disruption will last and when the production will get back to normal. 

Libya is one of the major oil producers in Africa and a committed member of OPEC. Oil reserves are the largest in Africa and the ninth largest in the world with 41.5 billion barrels. Libyan crude output slumped to 60,000 barrels a day in July 2011 from 1.7 million barrels in January 2011 (according to the International Energy Agency). Libya’s output is relatively small at two percent (2%) or less of global production but the oil is of high quality and the loss of that supply had raised fears that oil prices would rise and thereby weaken an already limping global economy.

Resuming production

On 11 September 2011, NTC announced a resumption of production and Libyan companies had already restarted output in some areas though the scale has necessarily been limited by the chaos of recent months and a lack of access to overseas markets amid fears for the safety of ships and crews. Dr. Nuri Balrwin, Chairman of the National Oil Corporation (NOC) said that the first stage is the stage of evaluation, especially as some fields are mined. He expects to start production from the fields of Sarir and Misla within weeks and offshore production soon thereafter. According to Dr. Nuri, Libya can produce 1,000,000 barrels per day within months and the production of 1.5 million barrels per day within 15 months.

OPEC’s Secretary General Abdullah al-Badri, who was also the Libyan energy minister from 1990 to 2000 and headed the NOC until 2006 said production in fields in central Libya could be back to pre-war levels in 15 months, while other areas might take longer. Some Libyan oil fields have recently restarted production but it remains unclear when they will return to pre-war levels of about 1.6 million barrels per day. The OPEC has also recognised the NTC as Libya’s representative.

Saudi Arabia and other OPEC members agreed during the summer to pump more to make up for the lost supply. They are expected to gradually withdraw the additional output as Libya returns to normal production levels with the next year or so.

Assessing damages

Regarding the downstream sector, Libyan oil officials confirmed that operations resumed recently at 120,000 barrel a day in the Zawiyah refinery near Tripoli. The plant is processing 30,000 barrels a day and according to them, will reach full capacity in six to eight weeks as they are still waiting for the operational field to supply the refinery with crude. Ras Lanuf refinery is in a good condition. However, Es Sider, one of the largest refineries, is heavily damaged.

Oil officials are discovering that some of their oil terminals have fared worse than oil fields. Libya has six main terminals: Mellitah, Es Sider, Ras Lanuf and Marsa el Brega in a central coastal strip; and Zueitina near Bengazi and Marsa el Hariga near Tobruk. As explained previously, it appears that Es Sider and Marsa el Brega are badly damaged so the fields to supply them will be the last to restart. The others appear to have survived the war, with some minor damage. Libyan oil officials hope to bypass some terminals by redirecting pipelines but that will require both time and equipment the country lacks at the moment. Some other damage such as underground damage is important and will need to be assessed. Oil wells need constant maintenance, particularly the submerged electrical pumps. Some mature Libyan oil fields such as those of the Sirte basin, which accounts for two-thirds of the country’s output require water or natural gas injection to maintain pressure in the reservoir. Therefore the true extent of the war damage will only be clear once crews open the taps and check whether oil flows or not.

Return of IOCs

Eni said on 26 September 2011 that it had restarted oil production in some of its Libyan oil wells, the first time it has done so since foreign companies exited the country as a result of the turmoil that followed the public uprising earlier this year. Eni’s joint venture with NOC (Mellitah Oil and Gas) has brought 15 wells back online in Abu-Attifel (about 185 miles south of Bengazi). Abu-Attifel was the first giant oil field discovery by Eni in the 1960s. Eni was the first foreign company to sign an agreement with the then-rebels to restart the Greenstream pipeline (which can carry approximately 10 billion cubic meters of natural gas per year and which has not been operational since late February).

Eni is the largest foreign player in the Libyan oil industry and this move marks an important step toward the stabilization of the country’s economy. Before Libya’s public uprising in February 2011 morphed into a large-scale civil war, Eni was producing 273,000 barrels of oil equivalent per day in Libya.

Total also said that it was resuming production from Al-Jurf offshore platform. However, on 26 September 2011, Repsol had not yet started production and does not have guidance on when it could resume. No Repsol employees had been sent to its facilities but the company is using Libyans and contractors to assess its infrastructure there. Harouge Oil Operations (JV between NOC and PetroCanada) will also begin pumping from the Amal field in  a “few weeks” and is expecting to reach its full output level of 100,000 barrels a day by year’s end, the company’s chairman said. Austria's OMV will likely send small technical teams back into Libya shortly to inspect its facilities and hopes to have oil production back to pre-war levels within 18 months, the company's Chief Executive said on 22 September 2011, underlining the eagerness of the large energy corporations to safeguard footholds in the war-ravaged country's rich energy market.

Furthermore, other considerations should be taken into account by foreign companies. Fighting continues in some areas and security remains an issue for foreign workers. Another problem is that over the months, cars, trucks, power generators, pumps and other equipment have been looted and equipment are now either damaged or missing. Therefore there will be additional costs to replace equipment to be borne by companies.

Toward a new oil and gas regime?

Previous Law-Nows examined the test of force majeure applied under Libyan law and the additional questions raised by the imposition of international sanctions. Sanctions have now been lifted and the question is: will the NOC respect pre-existing contractual obligations?

Most foreign companies operate under Exploration and Production Sharing Agreements (EPSA). The most recent version of EPSA is known as EPSA-IV and they do not convey any ownership right over oil and gas resources to the international oil companies (“IOCs”). The IOC undertakes to finance and carry out at its own risk an exploration program and eventually develop the resources if a commercial discovery occurs. The production will be split between the IOC and the NOC in a pre-determined manner that allows cost to be recovered and some profit to be made. Generally, the NOC carries about 50% of the cost but takes 80-90% of the oil and gas production revenues, while the IOC must recover capital and operating cost and eventually make a profit from the remaining share in production, which is less than 20%. The NTC indicated that it intends to honour the terms of the agreements that have already been signed.

However, it also said that its foreign allies during the war would have priority for future deals with the country and warned that some existing contracts would be subject to review for corruption.  However, the NTC also stressed that new contracts to produce oil and gas in Libya will not be awarded as political favours, but will be given to companies on merit after an open bid process.

Libya's new leaders are preparing a draft proposal to give more power to the oil ministry and carving up the NOC's responsibilities, according to Mustafa el-Huni, a member of the NTC with responsibility for oil. “The ministry should make policy. The NOC is a commercial entity, while the ministry is a political (one) and should be involved in international participation and putting policies in place”. This would be a change from the system under Gaddafi where the NOC handled both the daily operations of the oil sector and represented Libya on the world stage at OPEC meetings. The NTC also said that more freedom would be given to subsidiaries such as the Arabian Gulf Oil Company (Agoco) under the new plan. Agoco has gained increasing independence this year and has acted like a de facto oil company as international sanctions have prevented dealings with the NOC. Agoco has handled both the sale of crude oil and imports of refined products after receiving a U.S. sanctions exemption.

There are also plans to split the NOC into three parts to separate oil production and exploration, or upstream, from oil refining or downstream activities. “This model is old and many countries, especially in the Gulf, have split the upstream and downstream elements. This will focus attention on the different activities” said el-Huni. A third branch would handle renewable energy projects like solar power to help Libya to catch up with other North African countries such as Algeria and Morocco.

The NTC's top priorities for upstream would be to prepare for a new exploration round and to eke out more production from existing fields in a move that would increase output significantly from the pre-war level of 1.6 million barrels per day.

Conclusion

Oil production will not bring major financial advantage to the Libyan people unless the oil is exported to international markets. Libyan oil officials said that they are expecting to export gas to Europe by the end of November. The absence of Libyan oil has impacted mostly the European market which traditionally takes about 90% of exports.

Getting Libya’s oil flowing again is of crucial importance for the global economy and also for the country’s recovery, stability and prosperity.

However the real issue is not only in the country's capacity in producing larger quantities of oil and gas but in how the Libyan people would develop mechanisms for the efficient and effective use of petroleum proceeds towards the development and prosperity of their country.