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Libya’s Choice | ASHARQ AL-AWSAT English Archive 2005 -2017
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London, Asharq Al-Awsat- Libya’s Transitional government has established a committee to review its existing oil contracts and concessions. Prior to the overthrow of the Gaddafi regime Libya produced 1.6 million barrels of oil per day. 1.1 million barrels were produced by Libya’s National Oil Company (NOC), while the rest were produced by foreign oil companies. The largest producer was Italy’s ENI; other foreign producers included Total, Conoco Phillips, Marathon, Hess and Occidental. In addition, BP and Shell had committed to large exploration projects, and the list of foreign companies with exploration licenses in Libya is extensive and includes British Gas, Chevron, Chinese National Petroleum Company (CNPC), Exxon/Mobil, Gazprom, PetroCanada, Nippon Oil, OMV, Oil India, ONGC, Pertamina, Petrobras, Repsol, RWE, Sonatrach, Tatneft, Woodside and others.

What will Libya’s objectives be in reviewing oil contracts and concessions? Will the new government seek to reward companies whose governments where supportive of the revolution (or punish those who were not supportive)? Will the new government seek to undo corrupt agreements? Will the new government seek more favourable terms?

The most rational objective for the new government would be to seek to increase production at least to pre-war levels if not higher. At its pre-revolution production level or 1.6 million barrels per day, Libya’s years of reserves (ratio of reserves to production) was 79 years, in line with the average for OPEC. At current production levels of 1.2 million barrels per day, Libya has 107 years of reserves, well above the OPEC average and indicative of the potential to increase production significantly. If Libya were to increase its production to 3 million barrels per day, it would still have 43 years of reserves, below the OPEC average but above OEPEC members Algeria, Angola and Ecuador.

Two essential pre-conditions for a stable and properly functioning oil industry are security and a stable, transparent and predictable legal regime. Iraq offers a good example of the impact of the absence of these preconditions on oil production. It has taken Iraq almost a decade to recover its production to pre-war levels of 3 million barrels per day. The lack of security resulting from the insurgency no doubt contributed significantly to the slow recovery in production. Problems in the legal regime have not helped either. In 2009 Iraq’s first round of concessions received a muted reception from oil companies when it changed the terms of the concessions that it offered from the usual production sharing to a fee for services arrangement. Eventually, in the second and third rounds the oil companies accepted these terms and today most of the large international companies are present in Iraq. The Iraqi legal regime also suffers from uncertainty arising from the power sharing between the central government and the semi-autonomous region of Kurdistan. The Kurdistan Regional Government has been offering more attractive production sharing concessions to oil companies, yet oil majors are uncertain whether to accept these concessions whose validity is contested by the central government and which may result in their being excluded from concessions offered by the central government. Participants in the Kurdish oil concessions have been the independents with a higher risk tolerance such as London listed Heritage Oil. Iraq also has an ongoing problem with corruption.

Post-war Libya has been fortunate to enjoy much better security than post-war Iraq. Aside from minor and local conflicts, Libya has avoided the widespread insurgency that has prevailed in post-war Iraq. This benign security environment no doubt has helped Libya resume production rapidly after the end of the war. Consequently, a stable, transparent and predictable legal regime—of which the pending review of oil contracts and concessions will form an essential part—is the other precondition for a successful oil industry.

For all its many faults, the Gaddafi regime cannot be accused of negotiating oil contracts that were not favourable to it. Libya enjoys a 93% share of production from its oil contracts with foreign companies, one of the highest if not the highest in the world. This compares with 20%-60% for Nigeria (offshore), 57%-62% for Brazil, 70% for Russia and Kazakhstan. The new government, therefore, does not need to improve terms on its existing oil contracts. If anything, the new government could provide more favourable terms for the oil companies in order to encourage greater exploration and development and increase production. While the new government has indicated it will give greater autonomy to the Benghazi region, it must take care to avoid the legal uncertainties between central and regional government prevailing in Iraq.

The best working hypothesis is that the new Libyan government will be a rational actor and take the necessary steps to provide the preconditions for a sustained increase in oil production and development of its oil industry. The new government will know from ample precedent that the industry responds better to incentives than threats. It has only to look at the unfolding debacle of Argentina’s renationalization of YPF for a recent example.