Over the past 18 months, Tripoli has introduced two major reforms that fundamentally affect the way foreign firms do business with Libya’s state-dominated oil and gas sector.
In 2006, the government took the landmark decision to close down two overseas agencies that until then had been responsible for the procurement of goods and services on behalf of the state-controlled hydrocarbons sector. Following the decision, international companies wishing to sell goods and services to Tripoli’s oil and gas sector now have to deal directly with National Oil Corporation (NOC) and the country’s other state-owned oil companies.
The two agencies – Mediterranean Oil Services Company (Medoil), based in Dusseldorf, Germany, and the London-based Umm al-Jawaby Oil Service Company – were set up in the 1980s to facilitate the relationship between Tripoli and its international partners during two decades of international sanctions that largely prevented direct contact.
Between them, they handled 86 per cent of procurement deals in the oil and gas sector, according to British Arab Commercial Bank. In July 2007, they stopped taking on new business, and are expected to shut down completely by the end of 2008, once they have fulfilled their commitments.
The second major change was the introduction, also in 2006, of a law stipulating that international companies wanting to operate a branch in Libya must form a joint venture with a local partner. Applicable across several sectors including oil and gas, the legislation – Law 443 – limits the share a foreign company can have in any Libya-based branch to 65 per cent, with a local partner holding at least 35 per cent. Entrants to the market are already subject to the regulations. For incumbents, any new contracts will have to be in line with Law 443.
The scale of the oil and gas sector in Libya means that the changes will have a broad impact. Since the lifting of UN and US sanctions on Libya in 2003 and 2004 respectively, there has been a huge increase in international interest in the North African state. Three licensing rounds for upstream oil and gas acreage have attracted more than 40 international companies to take concessions in the country, and a fourth licensing round is under way.
All international operators in the upstream oil and gas sector are obliged to form joint ventures with NOC, and their procurement processes are subject to the same rules as oil companies that are wholly owned by the Libyan state. International companies wishing to provide goods and services to any of these firms will, therefore, have to do so without the intermediation of Medoil and Umm al-Jawaby. And if they want to set up branches in the country, they will be subject to Law 443.
Libya’s oil wealth gives goods and services providers every incentive to comply with the legislative changes. In 2007, Tripoli earned $40bn in hydrocarbons revenues, and assuming that oil prices do not unexpectedly collapse, there will be plenty more to come. In 2008, the procurement budget for Libya’s oil sector is expected to be worth at least $2.5bn, equivalent to more than 30 per cent of the total cost of imports into Tripoli.
There are two key reasons for the regulatory changes. The first is circumstantial: the end of international sanctions means there is no longer the necessity for overseas agencies to mediate between Tripoli and its foreign partners.
The second motivator is Tripoli’s desire to encourage local companies to play a greater part in the country’s economy.
“People think that Libya’s reform initiative is aimed just at attracting foreign direct investment [FDI],” says Adrian Creed, a partner at London-based law firm Trowers & Hamlins. “This is important, but equally important is the need to kick-start the Libyan private sector.”
This will not be an easy process. The country is still hugely state-dominated, with private companies often operating in either the black or grey economies.
“Most of the Libyan private sector still exists in the shadows,” says Creed. “Tripoli wants to bring it out to create more visible opportunities for employment and to generate greater taxation revenues for the state.”
The requirement under Law 443 that foreign companies setting up in Libya engage a local joint venture partner is a clear way of promoting the local economy. “We want to domicile as many businesses as possible in Libya,” says Ahmed Aoun, former head of projects at NOC. “We are also stipulating that the deputy manager of the Libya-based branch must be Libyan.”
Another regulation, the Agency Law of 2004, stipulates that any foreign company wishing to sell directly to the Libyan market must employ the services of a local agent. This will now apply to companies that used to sell goods and services to Libya’s oil sector via Medoil and Umm al-Jawaby. “Foreigners wishing to sell to the local market must employ a local representative,” says Abdulmajid Mayet, head of Tripoli-based law firm Mayet & Associates. “They cannot sell directly.”
There are still exceptional cases where direct selling takes place, but Tripoli has made it clear that companies that hire an agent will be in a much stronger position than their competitors. “We recommend hiring a representative in Libya because business will be done there from now on,” says one senior procurement executive at Arabian Gulf Oil Company, Libya’s largest oil-producing joint venture. “If you do not have a local representative, it will be hard for you to get your name on the suppliers’ list.”
Tripoli hopes that the stimulus of a more active partnership between foreign companies and locals will encourage wider economic growth. “The system will create more jobs,” says Aoun. “The greater responsibilities of the local partners will encourage the opening of new offices, and representatives of foreign companies will have to go to Tripoli, creating jobs for taxi drivers and hotel owners. The increasing frequency of visits will generally enhance the economy.”
There are practical benefits too. “It will be easier and better to deal with the [local] private sector in doing business with Libya,” says Ibrahim Hafez, chairman of the Libya Business Council. “Local businessmen will take on the burden of local problems and responsibilities. It is a good step for locals and foreign businesses.”
Some foreign firms will find the period of adjustment to the regulations difficult. Some businessmen have complained of the difficulty of finding a local joint venture partner, or of seeing eye to eye once they have found them. And there is concern that a world without Medoil and Umm al-Jawaby, with whom many businesses have had a relationship over many years, will not be as effective or efficient.
“Trust is what it is all about,” says Rollo Greenfield, chief operating officer of British Arab Commercial Bank. “Umm al-Jawaby was trusted. It had an established protocol for more than 20 years. From both sides [of the transaction] there was some control. While before, payment on small transactions was made within 30 days, now it may take a little longer. The parties will have to come to a working arrangement of what is acceptable once things settle down.”
“The government had a system that everybody was happy with and it is ruining it,” says another senior Tripoli-based banker. “I don’t think the system will have the positive economic impact that it thinks it will.”
Others are more positive. “It is not difficult to find local partners,” says the head of a UK-based oilfield equipment supply company. “There are good-quality established firms in Tripoli and Benghazi.”
“Law 443 is a fairer way for foreign companies to come into the country and operate in the Libyan oil and gas sector,” says Richard Bowley, general manager of the Tripoli branch of UK-based Denholm Oilfield Services. “It will help to drive revenue through the local economy. Medoil and Umm al-Jawaby were only really necessary during sanctions. Now anyone can procure anything from anyone, anywhere.”
Teething problems are inevitable. An amendment to Law 443 increasing the minimum number of local shareholders in the Libyan branch of a foreign company from four to 100 is causing problems. And such has been the uproar against another amendment stipulating that the local branch of a foreign company must have an Arabic name that Tripoli has convened a meeting to address the issue.
“There will be problems,” says Aoun. “But it is a learning process. The regulations are changing as we go. If there are problems that discourage foreign business, we will correct them.”
The legal complexities of the system, coupled with an administration in Tripoli that has a reputation for being cumbersome and bureaucratic, means firms will have to work hard to adapt to the changing rules. “If you have good lawyers, good notaries and good advice, there is no problem,” says Bowley. “But if you don’t, you will find it difficult.”
If international firms are to benefit from Libya’s opportunities, they must accept that they too have a responsibility to make the new system work. “Those who work hardest will gain most,” says Greenfield. “They will have to get to know the market. It may be more difficult, but the opportunities are there for the taking.”
In 2008, the procurement budget for Libya’s oil sector is expected to be worth at least $2.5bn.