Despite being home to Africa’s largest oil and fifth-largest gas reserves, Libya has a long way to go before regaining investor confidence. Nigel Wilson reports on the political and security issues that are blocking the industry’s recovery.


Since the overthrow of Muammar Gaddafi in 2011, Libya’s energy sector has descended into crisis. Fuelled by a gradual fragmentation of political and economic power, the country’s hydrocarbon production and exports slumped, while foreigners working with international companies have been steadily exiting the country. The current predicament, with two parliaments, two governments and various rival militant groups competing for control of the country’s oil wealth and rapidly failing state, has endured for the past 18 months.

Despite ongoing talks led by the United Nations (UN) to unite the rival governments into a single entity, the prospects for recovery in the energy sector this year remain weak. The Tripoli-based National Oil Corporation (NOC) stated in January that Libya had foregone US$68bn in potential oil revenues since 2013, as a result of 75 port disruptions or oilfield shutdowns across the country. Highly dependent on the hydrocarbon sector for revenue, Libya is expected to have the fastest-shrinking economy in the world in 2016, according to January predictions by the Economist Intelligence Unit (EIU).


Oil and gas production and export slump

Libya had long been an attractive prospect to investors for its ample resources and strategically desirable location. The country boasts Africa’s largest proven oil reserves: 48 billion barrels at the end of 2014, or 38% of the continent’s overall resources. And at an estimated 53 trillion cubic feet, Libya also has the continent’s fifth-largest gas reserves.

“Libya still has significant reserves that have yet to be developed,” says Catherine Hunter, senior energy analyst at IHS. “There are known reserves of gas in the west, and offshore there are potentially quite scalable resources.”

“What’s more, it hasn’t been extensively explored with modern exploration techniques. We had the sanctions era and before that there were limitations on how much people could get involved. It’s never had the kind of scrutiny that more advanced or developed places have had.”

In 2010, before the Arab Spring spread throughout North Africa and the Middle East, Libya produced 594 billion cubic feet of natural gas and an average of 1.65 million barrels of oil per day. While production dropped significantly in the wake of Gaddafi’s ousting in 2011, Libya had almost recovered output to pre-revolution levels by the middle of 2012.

Production levels were intermittently reduced by ongoing political and economic disputes, but they held up relatively well until the second half of 2013, when they slid to 220,000 barrels per day in November. A brief surge in the autumn of 2014 aside, oil production has rarely exceeded 500,000 barrels per day since then.

In late February, total production was around 360,000 to 370,000 barrels per day, less than a quarter of the average level in 2010. The possibility of a revival in production and exports this year is wholly dependent on a range of localised security issues that currently fall outside the control of the rival governments.

Issandr El Amrani, North Africa project director at International Crisis Group, explains: “It’s pretty bleak. The security situation makes it very difficult for oil companies to function. In parts of the country there are lots of micro-conflicts that are blocking production.

“To be able to produce and export more, you need to repair these facilities and that can’t happen until the security situation improves. Right now, without a breakthrough on the political side, there’s no reason to think the situation will get better soon.”

Despite the crippling of much of Libya’s oil industry, some of the gas facilities in the country’s west, as well as offshore projects, have continued to function relatively normally throughout the political strife. While its capacity has been reduced, the existing gas pipeline to Italy has been one of the rare components in Libya’s energy infrastructure that has not been drastically impeded by the ongoing political and economic chaos in the country.

“There are pockets of something approaching normality. Looking at onshore, western gas has just carried on going to Italy at quite high rates. Offshore has been a reliable supply source for Eni and Total so there are different zones and different elements of vulnerability which are determined by geography,” adds Hunter.

“The question is ‘how long can those facilities carry on as is?’ If there’s any change in government, then the legal or contractual framework might be in doubt. Security-wise they seem to have escaped the worst, but a change in government could alter things.”


Slim prospects for a unity government

In mid-2014, the Libyan government effectively split into two separate entities based in cities at opposite ends of the country. Both have since competed for international credibility without success. The Tripoli-based government has retained de facto authority over of the state’s main economic institutions, namely the NOC, the Central Bank of Libya (CBL) and the Libyan Investment Authority (LIA).

The rival government, based in the eastern city of Tobruk, is recognised by the international community but lacks control over the country’s key institutions.
It has established rival institutions, including an eastern branch of the CBL and NOC, in an attempt to market and export oil but with limited success or international support to date. Moreover, both governments are backed by loose alliances of armed factions throughout the country.

On January 19, 2016, Libya’s Presidential Council announced that a deal had been brokered by the UN to form a national unity government in Libya. However, the membership of the new body was the subject of fierce division between the two rival governments at the time. On February 14, a revised unity government was announced by the Council, although the body has yet to be approved by the eastern parliament. With the eastern government harbouring doubts about the new deal, experts are pessimistic about the prospect of a solution in the near future.

“It doesn’t look likely that we’ll see a breakthrough anytime soon. Even if we do see the parliament in Tobruk accepting the deal on the government line-up, the implementation will still take a very long time,” says El Amrani. “The key issue preventing a deal right now is who will control the Libyan army and security services. The latest line-up includes two men who are associated with the Gaddafi regime so that’s being opposed, especially in the west. So there are a lot of unresolved issues,” he adds.

Moreover, the UN-led process has been perceived in some quarters as a top-down attempt to install a unity government with very little Libyan input, thus reducing the likelihood that it would function effectively.

Mohamed Abdelmeguid, lead Libya analyst at the EIU, tells GTR: “The Libyan political agreement itself, as the UN named it, has gone through at least six revisions. That on its own tells you that this plan is far from consensual.

“The parliament in the east has still not approved it, despite going way beyond the UN deadline to accept it. People are starting a Libyan-Libyan dialogue, bypassing the UN completely. Delegates from both sides of the negotiation table have started their own negotiating process with pure Libyan input. I really don’t think that the plan is consensual, and the amount of opposition to it is enough to render it useless.”


Security a priority for international companies

Despite the uncertainties of the ongoing political crisis, the key challenge for international energy companies with investments in Libya remains security. Since the ousting of Gaddafi, Libya’s hydrocarbon infrastructure has increasingly been subjected to labour unrest and attacks by armed groups.

Often, attackers have not sought to damage infrastructure, but rather have taken over and halted work at facilities in an attempt to extract political or economic concessions from Tripoli. However, with deteriorating security conditions in the post-Gaddafi years, takeovers at energy facilities have become increasingly violent, while some groups have resorted to damaging individual parts of Libya’s upstream energy infrastructure in an attempt to extract local concessions.

The general decline in security has prompted international companies to steadily withdraw international staff, as sporadic disruptions at central and eastern oilfields became more permanent chaos. Meanwhile, the rise of extremist, ideological Islamist groups in parts of the country since mid-2014 has made certain areas dangerous to operate in for internationals.

“When it comes to international staff, whether North African expatriates, Western or Eastern expatriates, we can’t take them to every part of the country. There are parts of the country where we strongly advise that they don’t go,” says Nigel Lea, regional director Libya at GardaWorld, a security services company. “There are absolute no-go areas for foreigners such as Sirte and Derna, due to radical Islamic groups who would not welcome foreigners.”

The exodus of international staff reflects the decline in production and exports of Libyan oil. While the majority of the companies with a presence in Libya have not completely exited the country, many are producing negligible amounts, and others are looking to divest from the country.

Abdelmeguid points out: “When the bulk of companies that are operating in Libya published their annual results for 2015, most of them either reported zero output or they excluded the country altogether. If you can bring back security, these companies will go back. Oil infrastructure by its nature is very costly, so you don’t want to invest so much and then exit the country. That’s the last thing you want to do. So if security is resolved, they will remain in Libya and they will try to ramp up production to recover the costs they made over the previous years.

“There are other lingering issues. Libyan investment policies are very restrictive and this is a legacy from the Gaddafi era so I think these companies could negotiate for softer terms from the NOC but that’s secondary to security matters,” he adds.


Competition from Iran

Regional and global market developments are also troubling for the North African country. Even if a unity government were installed that could manage security effectively, the regional and global gas markets have shifted significantly in recent months. Oil prices have plunged by around 70% since July 2014 amid a global supply glut.

“Libya crashed out of a different market to the one that’s around now, with oil around US$30 to US$40 per barrel,” says IHS’ Hunter. “And the prospect of Libya recovering market share is so far from where it is at the moment, it’s very remote from the current situation.”

Meanwhile, having agreed a deal over supervision of its nuclear programme in exchange for the lifting of international economic sanctions, Iran has emerged as a relatively stable and secure oil and gas producer, providing an alternative for international energy companies looking to invest in the region.

“New entrants would want to see very significant improvements in security, legal matters and contractual terms and they would probably have their eyes on neighbouring countries that offer better prospects, like Iran for example,” says Abdelmegiud. “In the energy sector, Iran has the potential to crowd out investment from other countries.”