INSIGHT: Libya's return to oil production, refining will take time

29 August 2011 12:40  [Source: ICIS news]

By Peter Salisbury

LONDON (ICIS)--Libya’s National Transitional Council (NTC), the body which has become the country’s de facto government, will push to return oil production and refining as soon as possible but it could be some time before there is a significant impact on international energy or petrochemicals markets.

The NTC, which was set up to lead the revolution against the regime of Libyan leader Muammar Gaddafi, said on 25 August that it was relocating from the country’s second city, Benghazi, to Tripoli as it assumed increasing control over the capital.

As the NTC consolidated its power, energy markets became increasingly mindful of the fact that Libya could soon start pumping, and exporting, oil.

Libya produced an average of 1.67m bbl/day of oil in 2010, according to the UK’s BP, but output has ground to a halt since the country’s civil war broke out in February this year.

Analysts saw the loss of Libyan output as a contributing factor in $100-plus oil prices in Europe in 2011, with the continent a key export destination for the country’s easily refined light, sweet crude.

The European benchmark crude contract, Brent, was trading at $109.65/bbl for October on Friday 26 August, having fluctuated throughout that week on the back of conflicting reports on the progress of the NTC’s rebel army.

Petrochemicals producers, traders and buyers have all described the continued high price of crude oil as being a key driver behind recent high prices in petrochemical markets.

High prices for end products are eroding end-user demand for many commodities, market participants say, a particular concern given fears over the state of the global economy.

The NTC is likely to focus on restoring output as quickly as possible in order to fill its coffers. But recent statements by council members have been wildly optimistic, says Samuel Ciszuk, senior Middle East and North Africa analyst at IHS Global Insight.

The NTC will honour all lawful contracts made under Gaddafi’s rule, the NTC’s minister for reconstruction Ahmed Jehani said in a Reuters interview, describing oil production contracts as “sacrosanct”.

In another interview, the council’s official in charge of oil, Ali Tarhouni, said that he hoped to see oil production restored to around 500,000-600,000 bbl/day within two-to-three weeks before ramping output back up to 2010 levels.

However, given damage to pipelines and export infrastructure and the effect of quickly shutting down oil output, restoring it could take a considerable amount of time, Ciszuk says, particularly if violence continues to flare up around key oil fields and export routes.

“This will take a long time,” he explained. “An optimistic scenario would be 300,000-400,000 bbl/day within three to four months.”

The NTC’s current position of power does not necessarily mean that the country will stabilise in coming weeks or even months, Ciszuk added.

The NTC says it is keen to retain technocrats from Gaddafi’s regime, learning from the mistakes made in Iraq where most former state employees were purged from the country’s bureaucracy following the ousting of former leader Saddam Hussein in 2003.

But rivalries could still flare up in the near future, destabilising governance and development in the country.

“They might not keep top people like Shokri Ghanem [former prime minister, oil minister and head of state energy firm National Oil Corporation] in place, but they want to keep as many people in place as possible,” Ciszuk said. “But will there be purges afterwards? If we start to see more than 3-5 people go, then chances are that the gloves will be off.”

Stability will be key to encouraging future investment in the country, he said, and any petrochemicals firms looking at Libya would do well to approach the new government with caution, given the country’s reputation for slow pace of development and tough contract terms.

Many analysts expected Libyan development to boom following the lifting of economic sanctions by the US and UN in 2004, but tough contracts, corruption, and heavy red tape put many firms off.

The country was seen as a major potential petrochemicals producer, and ramped up its production of oil, refined products and gas following the lifting of sanctions. Yet only two downstream projects got off the ground.

In 2007, Dow Chemical and state energy firm National Oil Corporation announced they had formed a 50:50 joint venture to expand and operate the company’s biggest petrochemical production complex, at Ras Lanuf on the Gulf of Sirte.

In 2009, Norwegian fertilizers producer Yara International became a 50% partner in Libyan Norwegian Fertilizer Company (Lifeco), along with National Oil Corporation and the Libyan Investment Authority, each with a 25% stake in the firm. Lifeco took over the operation and development of the country’s only fertilizer plant, at Marsa El Brega, also on the Gulf of Sirte.

A Dow spokeswoman said on Friday last week that the company had put the $2.5bn-3bn Ras Lanuf project on hold during the financial crisis of 2008-2009, while a Yara spokesman said that it was monitoring the situation in the country but believed it could be “months” before staff returned to work in Libya.

The US’s Fluor, which was working on plans for a $54bn (€78bn) redevelopment of the Gulf of Sirte under an “Energy Cities masterplan”, said it was not engaged in any work in the country, and that it was waiting to see how and when things stabilise.

($1 = €0.69)

By: Peter Salisbury
+44 20 8652 3214

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