Tripoli struggles to catch up with oil production targets

12 October 2010

Disappointing oil exploration campaigns and a difficult business environment for foreign investors mean Libya will find it tough to meet its production targets

Key Libya oil fact

Tripoli aims to revive oil production to its 1970s peak of more than 3 million barrels a day by 2015

Source: MEED

Libya fills a unique space in Opec as the largest oil reserve holder in the African continent. It joined Opec in 1962, becoming the eighth member of the oil producer group, and the third to join following its inception in Baghdad two years earlier.

Libya average daily crude oil production
YearThousand barrels a day
Source: Opec 

During the 1970s, Libya was one of the biggest oil producers in the group, pumping 3.3 million barrels a day (b/d) in the early part of the decade. For a brief period in the 1960s and early 1970s, Libya produced even more oil than Saudi Arabia, Opec’s largest producer.

Reviving oil production in Libya

However, the country’s output declined rapidly. A combination of aggressive nationalisation and mismanagement, following the 1969 coup that installed Muammar Gaddafi as the country’s leader, along with Opec quotas and international sanctions caused oil production to hit a plateau of 1 million b/d in 1990.

Sanctions were first levied against the country in 1981, and in 1986, the government in Washington forced all US-registered companies out of the country. In 1992, the UN imposed further sanctions on Tripoli in response to the 1988 bombing of a Pan Am flight over the Scottish town of Lockerbie.

Following the lifting of sanctions in 2003-04, Libya held its first international oil licensing round in 30 years, inviting international oil companies (IOCs) to boost production.

Output reached more than 1.7 million barrels in 2008 before Opec quotas restricted production in 2009.

Tripoli aims to revive oil production to its 1970s peak of more than 3 million b/d by 2015, and 3.5 million b/d by 2020.

Many of those working in the country say that this goal is likely to remain a distant dream, and state energy firm National Oil Corporation (NOC) has privately told foreign investors that it sees a 2.5 million b/d target as more realistic for the 2015 deadline.

This is due in part to a series of disappointing exploration drilling campaigns undertaken by both the NOC and IOCs working in the country, and exacerbated what many industry executives see as an extremely difficult operating and business environment.

“Libya doesn’t have a good track record in getting things done,” says Samuel Ciszuk, Middle East energy analyst at US consultancy IHS Global Insight. “It is a bit of a free rider in Opec at this point, but they are not developing the capacity they need to.”

Paul Stevens, a research fellow at UK think-tank Chatham House says the sometimes erratic behaviour of the Libyan government is a key factor in making the country a difficult place to work.

In February, Libya stopped issuing visas to visitors that are part of the Schengen travel agreement, which allows people from 25 European states to travel freely between each others’ borders. The decision has been linked to the arrest of Gaddafi’s son Hannibal on charges of assault in a Swiss hotel in 1998.

“We had a number of executives coming into Libya in February, who all of a sudden couldn’t get in,” says a senior executive at an European engineering firm. “It caused major disruptions to our work out here, and the sad thing is that it didn’t even seem that unusual.”

Liyba losing oil business advantage

Such behaviour could cause great problems for Tripoli in the future, especially if Iraq rejoins the Opec’s quota system, effectively demoting Libya’s importance within the group.

“You just don’t act like that if you want to do business with big oil companies,” says Stevens.

It could make it more difficult for Libya to increase oil output and generate the revenues needed for future investments.

For now the government and the IOCs in the country remain hopeful that deepwater exploration licences awarded since 2005 will help boost output, with the UK’s BP leading the way on a $900m drilling campaign in the Gulf of Sirte.

However, the Deepwater Horizon crisis at the Macondo field in the US’ Gulf of Mexico operated by BP has made many industry insiders cynical over how major IOCs will move ahead with similar projects in the country, given existing operational difficulties.

To its credit, Libya has a long pedigree of producing senior Opec technocrats and secretaries general, including the current head of the cartel, Abdallah Salem el-Badri. As such Libya is likely to remain a part of the organisation for a long time to come.

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