Libya ramps up oil production

16 January 2012

Post-conflict oil recovery is a challenging task and despite exceeding initial expectations, there are likely to be setbacks as Tripoli focuses on raising output to pre-war levels

Key fact

Prior to the civil war, NOC was seeking to raise oil production to 2.3 million barrels a day by 2013

Source: MEED

Just two years ago, oil sector sources were complaining to MEED about the disappointing results of exploration in Libya. Expectations had been running high in 2007, with international oil majors promising to invest significant sums in exploring the North African country for oil and gas. The attraction has always been clear; Libya holds the largest proven oil reserves in Africa and is well placed to serve the markets of the southern Mediterranean. Its resources largely remain untapped.

The NTC’s priority … is to restore production and exports to generate revenues for investment and rehabilitation

Their complaints turned to concern in February 2011 when the civil unrest in neighbouring Tunisia and Egypt spread to Benghazi, Libya’s second-largest city, before enveloping the rest of the country. UK oil major BP, which signed a $900m exploration and production agreement with the Libya Investment Corporation and state-owned National Oil Corporation (NOC) in 2007, was forced to suspend work preparing for onshore exploratory drilling as its contractors fled.

Offshore operations in the Sirte basin continued, but the firm evacuated drilling contractors from its onshore operations in the south western Ghadames basin as a precaution.

Oil exports halted

As the security situation deteriorated, other international oil companies, who had signed up to work in Libya, also withdrew personnel. Exports dropped off completely from an average of 1.6 million barrels a day (b/d) of oil products in January 2011. Global oil prices spiked as the violence escalated and fears grew that Libya’s sweet crude production would be shut down for some time.

The country’s crude output has recovered steadily since the conflict ended in October last year. The pace of the recovery has surpassed the often pessimistic projections of analysts and calmed the nerves of oil market investors, who have seen prices rise to more than $100 a barrel on the back of regional tensions. But post-war oil recovery is never an easy task and there are likely to be setbacks as Tripoli seeks to return to pre-conflict production levels.

Restoring oil exports, the country’s key export and the main source of government revenue, is a priority for the newly installed interim government, both for short-term needs and for longer-term development.

Production reached 840,000 b/d in late November, more than half the pre-war level, and by the turn of the year the new NOC chairman, Nuri Berruien, confirmed that output had exceeded 1 million b/d and could reach 1.6 million b/d by the middle of 2012.

Despite the steady increase in production, obstacles remain. Most of Libya’s oil fields are old and output was already stagnating before the start of the conflict. Prior to the civil war, NOC had been seeking to raise oil production to 2.3 million b/d by 2013. This is a downward revision from an earlier target of 3 million b/d.

By and large, most of the damage to Libya’s oil and gas infrastructure was fairly superficial, with most firms reporting incidences of looting and destruction of accommodation and offices, rather than significant damage to major production facilities.

But restarting production at some wells that have been offline for several months may not be easy. As they were hastily shut down by fleeing oil workers, there has been much concern that damaging waxy residue would build up in the well heads and equipment.

The issue has perhaps been overblown, according to some engineering sources, and so far Libyan producers have not suffered any significant problems of that nature. Of greater long-term concern has been the possibility of reduced field pressure at maturing fields and the implications for future enhanced oil recovery facilities.

“There could, for instance, be pressure falls or other negative reservoir management consequences, which could well make the return of the last few hundred thousand b/d of oil production much harder to attain than the first 1 million b/d achieved so far in record speed,” says one industry source.

War damage to oil terminal

Libya’s oil and gas export terminals are nearly all located along the country’s coastline. A major obstacle to boosting Libyan oil exports after the war was the damage caused at the key El-Sider oil terminal, which passed between the hands of rebel and Gaddafi loyalist forces. According to research conducted by MEED Insight, repairs started in October, with local oil service firms taking on the majority of the work. Exports from the terminal began in December, although it is expected to be a year before the facility is fully operational. The Marsa el-Brega terminal also suffered considerable damage.

Although wary of the precarious security situation, international oil companies are eager to return to Libya to restore production. Concerns over the new government’s desire to renegotiate contracts signed during the Gaddafi era now appear overstated.

New Libyan officials may well want to drive harder bargains with the oil companies, but the National Transitional Council’s (NTC) priority as an interim government is to restore production and exports to generate revenues for investment and rehabilitation. The NTC has said it will not sign any new oil and gas contracts, preferring to leave longer-term planning to any future elected government, which could be in place by the middle of 2013.

The appointment in November of Abdul-Rahman bin Yezza, a former chairman of local operations for Italian oil firm Eni, as oil & gas minister, will have eased concerns among oil company executives. He replaced Ali Tarhouni, who was installed in the NTC’s newly formed Oil & Gas Ministry in May, while the conflict was still raging.

For its part, the NTC has done its best to ease concern and clarify its position on oil contracts, after reports that it was seeking to renegotiate a contract with Eni.

Position clarified

“To avoid confusion, the intended review and audit are of the projects included in the memorandum of understanding between Eni and Libya in the field of sustainable development, and does not include oil and gas agreements signed between the parties,” said the NTC in a 2 January statement.

The clarification was necessary following an NTC press release stating that agreements signed between Eni and the government had “collapsed” and would be reviewed “in line with the interests of Libya before the completion of implementation”.

Interim Prime Minister Abdel Rahim al-Keib noted that the international oil companies had a role to play in Libya, but “the foreign companies that were operating in Libya [need] to show the Libyans that it was a partner of Libya and not of [deposed leader Muammar] Gaddafi and his regime.”

Eni signed a deal with the NTC in August to resume crude oil production in Libya. The firm has stakes in four fields and has lifted capacity to about 200,000 b/d, equivalent to 70 per cent of its pre-civil war output.

While existing contracts will be honoured, the NTC has established a committee to investigate suspected corruption in the oil sector under Gaddafi. The interim government has come under pressure from newly emboldened political forces in the country to investigate allegations of the misappropriation of funds from the sector by former officials. The committee will work outside the Oil & Gas Ministry and NOC, reporting directly to the NTC.

The government also plans to increase oil production to 2 million b/d over the next three to five years, according to Bin Yezza. With its energies focused on ramping up production, radical changes to the sector are unlikely.

But the government has already formed a new Oil & Gas Ministry and will divide control of the sector between it and NOC, which has dominated the sector since 2006. NOC accounts for about 40 per cent of production and was responsible for implementing exploration and production-sharing agreements with international oil companies, as well as field development.

Under the chairmanship of Shokri Ghanem, who was appointed in 2006, NOC was seen as more business friendly than previously and less subject to the capricious whims of the Gaddafi regime. He attempted to transform NOC into a more effective institution, modelled on state-owned but independent companies, such as Saudi Aramco.

Yet doing business in Libya remained unpredictable. Oil firms operate as joint ventures with NOC, to whom they second their staff, a model that has caused tension when targets and operating cultures have not been aligned. Ghanem was ruled out of continuing in the role, despite his good reputation in his years as NOC chairman and his defection during the uprising.

Commercial entity

NOC’s autonomy will now be reduced and it is the Oil & Gas Ministry that will be responsible for policy and planning, while NOC will act as a purely commercial entity. State-owned firms, such as Arabian Gulf Oil Company and Sirte Oil Company, are also likely to act independently of NOC.

The Gaddafi regime made minor attempts at drafting a new oil and gas law to reorganise the governance of a sector that had been somewhat of a battleground between conservatives wishing to tighten restrictions on foreign companies and reformers trying to liberalise the economy.

Given the already relatively harsh terms of exploration and production-sharing agreements and the need to attract further investment in the hydrocarbons sector, it is thought unlikely that any new administration will seek to introduce even stricter terms. Indeed, it may well be the case that future agreements will be revised to make them more attractive for new concession holders.

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