As the civil war in Libya rolls on, Muammar Qaddafi’s position is becoming increasingly precarious. Yet so far, the rebels have not been able to take full advantage of the support provided by Western air strikes on government forces and infrastructure. Lacking basic training and coherence as a fighting force, the rebels are also unable to buy the equipment and weaponry needed to remove the Libyan leader.

There might be some firms that don’t want to come back. Libya was a frustrating place to operate before

Ross Cassidy, Wood Mackenzie

Oil and gas exports account for 70 per cent of Libya’s revenues and effective control of the hydrocarbons infrastructure is vital to winning the armed conflict. The country produced nearly 1.69 million barrels a day (b/d) of crude in January, according to the Paris-based International Energy Agency (IEA).

Energy resources in Libya

The bulk of Libya’s oil fields are located in the huge Sirte basin, west of the city of Bengazi, where the rebel-led transitional government is headquartered. With transport infrastructure to the export and refining hubs of Marsa el-Brega, Ras Lanuf and Sidra, the rebels are well positioned to exploit the hydrocarbon wealth to their advantage.

A smaller number of fields have been developed in the Al-Hamra and Al-Murzuk areas in the southwest of Libya. These connect to the coastal refining hubs west of Tripoli, placing them in Qaddafi’s sphere of influence.

In reality, neither Tripoli nor the rebels can claim effective control over the oil infrastructure. Most facilities have been lying dormant since the armed conflict forced international oil companies to exit the country. The IEA estimates that production has plunged to less than 200,000 b/d.

Production facilities in remote desert locations are vulnerable to attacks. Rebel attempts to restart pumping in some of the fields resulted in reprisals by pro-Qaddafi forces. “While there is any conflict, it is unlikely that any significant, if any, production will occur because facilities are vulnerable to attack,” says Ross Cassidy, analyst at UK energy consultancy Wood Mackenzie. The inability to restart oil production erodes the effectiveness of the sanctions imposed on Qaddafi’s regime for the rebels. Both the US and the EU have blacklisted Libya’s 14 state-owned oil companies and their joint ventures. Financial transactions with these entities are now prohibited.  The provisional government under the National Transitional Council is able to receive payments under a system worked out by Doha-run Qatar Petroleum (QP).

Another obstacle to oil exports are the high insurance rates for tankers that sail into a conflict zone. And even if the rebels manage to get crude out of the country, they are faced with a jittery market. “Buyers are extremely nervous to be caught up in the sanctions,” says Cassidy.

Both sides are also struggling to cope with the absence of a functioning refining sector.

Before the conflict began, Libya consumed approximately 270,000 b/d of refined petroleum fuels, diesel and gasoline. Four of the country’s refineries are short. The fifth, the Qaddafi-controlled Zawiyah facility, is operating only partially.

With production and refining at a standstill, the rebel government sought funding from the international community. It is seeking about $3.5bn to cover budgetary requirements for the next six months and purchase armoured cars, helicopters and weaponry to protect oil infrastructure from attacks.

Abandoned and neglected, the oil production and refining facilities are falling into disrepair. There are no reliable reports about the state of these facilities, but observers say the terminal cities of Marsa el-Brega and Ras Lanuf are likely to have suffered more than remote production sites, as they have been exposed to the fighting.

Restoring oil production in Libya

The return of international oil companies (IOCs) to Libya will be crucial to any attempt to repair facilities and resume production. This in turn hinges on the removal of Qaddafi, as the conflict is unlikely to end without his departure.

Restoring production is not going to be an easy task. Wood Mackenzie estimates that it will take two to three years for production to reach pre-conflict levels. The pace of recovery will vary depending of the maturity of the fields. In the Sirte basin, production relies on enhanced oil recovery (EOR) techniques involving water and gas injection, and initially production might only resume at half the capacity. At less mature fields, production might resume at 70-80 per cent of peak capacity.

The IEA is equally pessimistic about a quick recovery for the sector, predicting that production will not return to full capacity until 2015. Libya’s oil industry is highly dependent on support from foreign companies, many of whom will be guarded against a rapid return to the country. Furthermore, much of the crude produced is waxy, which increases likelihood of lasting damage to hastily shut down facilities. IOCs, faced with the additional costs of repairing the infrastructure, might also insist on a renegotiation of contracts that they have long considered unfair.

Despite safety concerns, the majority of foreign companies will be keen to return to the country. “IOCs remain committed to returning to Libya in the long-term. The country is an attractive petroleum province, offering large volumes of undeveloped reserves, and significant exploration potential,” says Cassidy.

“Some of them, [Italy’s] Eni in particular, have a long history there and a major investment programme in the country. It’s a significant part of their global portfolio.”

Improved terms for international oil companies

Cassidy says IOCs will not be pressing for more favourable terms initially, but might seek compensation for increased costs at a later stage.

Restoring production might be a relatively uncomplicated task to achieve, but the post-war leadership will be preoccupied with building up state institutions and unable to focus on the oil and gas sector.

Major energy projects in the past have required significant investment from the government. Given the shortfalls resulting from the civil war, big cash injections are unlikely for some time.

One major project that is likely to be delayed is the $900m-plus exploration and production agreement signed with the UK’s BP in 2007. BP had planned to start explore around 54,000 square kilometres of the onshore Ghadames and offshore frontier Sirte basins, drilling 17 exploration wells with its local partner Libya Investment Corporation this year.

“Unfortunately, it is very hard to see what kind of movement will take over Libya in the future, and what the chances are of them sticking together in some sort of unity,” says Samuel Ciszuk, senior energy analyst at US-based IHS Global Insight. “It might be a very challenging time for companies.”

Another potential pitfall might be a populist backlash against foreign companies. IOCs, already subject to unfavourable terms under the Qaddafi regime, might find themselves confronted with an equally rigid successor looking to drive an even harder bargain.

“You are dealing with a population that has been indoctrinated with a very resource nationalistic rhetoric. That creates a lot of built-in problems for any future reform process,” says Ciszuk.

Post-war scenario for oil deals in Libya

The post-war conditions might persuade some of the companies operating in Libya prior to the conflict not to return.

“There might be some firms that don’t want to come back. Libya was a frustrating place to operate before [the war],” says Cassidy. “The contracts are among the least attractive in fiscal terms globally. With the upheaval and uncertainty in the country, other destinations may offer a more balanced risk and reward profile.”

Those who are not able to resist the lure of Libya’s oil wealth will be under no illusion that a new beginning does not spell the end of old problems.