When Tripoli signed deals with two foreign partners to upgrade its petrochemicals infrastructure earlier this year, it represented a major step forward for the country. The agreements, with the US' Dow Chemicals and Norway's Yara, pave the way for the first international investment in Libyan petrochemicals since the 1990s. More-over, they lay the foundations for the first major overhaul of the country's facilities since development began in the late 1970s.

During this period, Tripoli had grand plans to develop a petrochemicals sector to rival the world's leaders. These plans failed to come to fruition. All it achieved was a fertiliser complex at Marsa el-Brega, which came on stream in the late 1970s, a small petrochemicals facility at Abu Kammash, which launched in the early 1980s, and the country's only large scale petrochemicals complex, commissioned in 1987 at Ras Lanuf.

In the intervening period, the development of Libya's plastics industry - and, indeed, any aspect of its hydrocarbons sector - was stunted by US sanctions for almost two decades, and international sanctions for more than 10 years. The sanctions, coupled with the freezing of the country's assets abroad, cost Tripoli more than $30bn, according to government estimates.

Lifting sanctions

It was not just the lack of investment capital that hit the country, but also the dearth of technology available to it. During its isolation, Libya lacked both the money and expertise to maintain its petrochemicals facilities, let alone upgrade them. New infrastructure was out of the question.

Since US sanctions were lifted in 2004, the country's hydrocarbons sector has demonstrated impressive growth potential. Inter-national oil companies committed to spending $1.2bn in the first two upstream exploration and production rounds, hosted in 2004 and 2005. A third followed in 2006. Oil production is gradually increasing, rising to about 1.7 million barrels a day (b/d) from 1.58 million b/d in 2004.

“There is a lot of hydrocarbons potential in Libya,” says Phil Layton, director at the US' Jacobs Consultancy. “As it develops reserves, opportunities for petrochemicals will multiply.”

As exploration activity gets under way, attention is gradually shifting downstream. Upgrades are planned for the ageing refineries at Azzawiya and Ras Lanuf, and an agreement has been signed with the UK/Dutch Shell Group to upgrade the world's second-oldest liquefied natural gas (LNG) plant, at Marsa el-Brega. Italy's Eni has been signed to develop an LNG terminal, and in May the UK's BP committed to investing $900m to explore foroffshore gas, which could also feed into a liquefaction plant.

Vital ingredients

With downstream energy-sector activity beginning to pick up, it is natural that Tripoli should want to move into petrochemicals. Its prolonged isolation makes it one of the world's few relatively unexplored hydrocarbons provinces and, until recently, Tripoli's focus was on oil. Gas, the vital ingredient for an ethane-based petrochemicals industry, has been neglected.

This too is changing. In the past five years, Libya's gas production capacity has nearly doubled to almost 1 trillion cubic feet a year. Some analysts estimate the country's gas reserves could be as much as twice the 53 trillion cubic feet proven to date.
In addition to the gas exploration deals signed by BP and Shell, the government is awaiting bids in December for acreage on its first gas-focused exploration round.

“The gas round could feed into the development of petrochemicals in the future,” says Layton. “As gas production increases, it is possible that Libya will have the wet gas available that it needs for the production of ethane and gas-based chemicals.”

As the price of energy rises, the cost savings that can be made by manufacturing inter-mediate products closer to the source are also increasing. While China's growing demand for plastics has underpinned the growth in Gulf petrochemicals, Libya's natural markets are Europe and the US. Not only is European gas production on the wane, but gas can be produced in Libya for just 10-15 per cent of what it costs in the US and Europe.

At the same time, demand in these markets continues to rise. Growth in European petrochemicals consumption is expected to average 3.5-4 per cent a year until 2010, exceeding projected new capacity growth in all product sectors (see table).

Driving change

Strong economic drivers, such as unemployment, are also behind the need to develop the country's downstream hydrocarbons industry. Petrochemicals development is an excellent means of creating jobs, not least because it is a driver for the growth of the manufacturing sector. Cairo, for example, expects the development of its petrochemicals sector to create 100,000 jobs.

This would be invaluable to Libya's employment market. Unemployment is officially estimated at about 13 per cent, but is much higher. Whatever the true figure, almost half of Libya's six million population are aged under 20, making unemployment one of the country's most pressing concerns.

Tripoli's focus is on the two projects to upgrade its existing facilities. Under a headline deal signed in late April, a consortium of Dow and state-owned National Oil Corporation (NOC) will overhaul the Ras Lanuf petrochemicals complex. Within days of that deal, Yara signed a similar agreement to overhaul the Marsa el-Brega ammonia/urea complex.

Joint venture agreements are on track to be signed in early 2008 to cement the existing headline agreements for the two projects. Given its years of international isolation and the chronic lack of investment in downstream infrastructure characterising the period, the recruitment of two internationally recognised companies to bring the country's existing infrastructure up to modern standards is no small achievement.

Compared with its neighbours, Algeria and Egypt, Libya's petrochemicals plans are still very much in their infancy. Algeria has also had its problems. The black decade of 1992-2002, in which almost all foreign investment was driven away by a bloody civil war, set the country back significantly. But while the process has been slow - sometimes tortuously so - progress has been made.

Two contracts, for a methanol plant and ethane cracker, were awarded in the summer as part of a petrochemicals masterplan, which includes plans for five grassroots facilities. There is a realistic possibility that at least one more deal, most likely to be for a fuel oil cracker, will be signed in the next few months.

Egypt's masterplan is one of the most ambitious in the Middle East. It involves the construction of more than 20 facilities by 2022 and will produce about 15 million tonnes a year of intermediate and final products.

Among the deals already done are joint venture agreements with Canada's Agrium for a new fertiliser plant, and with Methanex, also of Canada, for a new methanol plant. Other projects are in the feasibility stage.

In Tripoli, NOC says it is set to complete conceptual studies for new facilities by the end of the year. “We are looking at different sites and are talking to major companies about the possibility of jointly developing grassroots petrochemicals,” says a senior NOC source.

The state company is unwilling to disclose which companies are involved in the negotiations, or what products are being considered, but Dow is one of the companies at the table, according to another senior executive in Tripoli's downstream hydrocarbons sector.

Neither Dow nor Yara were prepared to comment on the status of their joint venture talks or future plans. However, having already demonstrated their willingness to work with NOC on its rehabilitation programme, they are well placed to explore the possibility of building facilities.

However, barriers to market entrants remain. It will probably be a few years before Libya can generate the kind of surplus gas supply necessary to underpin the development of a com-prehensive petrochemicals programme. “The country is not that far from having enough gas,” says Layton. “But to develop worldscale petrochemicals, facilities will still take time.”

The country's state bureaucracy restricts Tripoli's attempts to open up its economy is also a substantial barrier. State-owned Azzawiya Refinery Company, for example, has spent the past five years trying and failing to award a contract to upgrade the country's largest refinery.

“The Libyan market is still quite opaque,” says a senior executive at one potential petrochemicals investor. “Under the right conditions, we would consider investing, but we are not following the market at the moment.”

Funding development

The question of how this infrastructure will be financed also remains uncertain. In recent years, Libya has grown accustomed to funding its major projects from the vast reserves of equity accumulated from booming oil prices.

But as it seeks to upgrade a broad swathe of infrastructure ahead of the 40th anniversary of the coup that brought Colonel Gaddafi to power in 1969, those resources are being earmarked for other sectors.

As a result, NOC has decided that as far as possible it will avoid using government money to fund its downstream hydrocarbons projects. In practice, this strategy is proving more difficult to implement.

Not only is there opposition from bureaucrats and policymakers in Tripoli, who like the status quo, but foreign partners also have their own ways of working. Yara, for example, has shown a strong preference for an equity-based funding structure.

However the money is raised, the two agreements signed so far can be considered a success. But whether they can deliver the petrochemicals facilities needed in the years ahead will depend not only on whether Tripoli finds gas, but also on whether it finds the political will to turn its ambitions into reality.

TABLE: European plastics demand 2000-10 (million tonnes)