In a little over a year since the end of the revolution, Libya has made considerable progress on several fronts, starting with oil production, which returned to near pre-conflict levels faster than many observers had predicted. More recently, an interim government led by Prime Minister ‘Ali Zidan was approved by the elected General National Council, an important milestone for the nascent democracy.

Despite this progress, the outlook for Libya is far from guaranteed. Current oil production levels are based on running existing fields hard and the combined challenges of maintenance issues and decline rates should not be underestimated.

More significantly, foreign companies have been much slower to resume exploration activity than to restart existing production. Prior to the revolution, companies had struggled to make significant discoveries on exploration acreage, which had been secured under expensive deals with the Qadhafi regime. Several companies had ceased exploration and relinquished acreage by 2010 and now, with continued concerns about security and stability, companies are thinking long and hard before restarting exploration. The Libyan government will need to work hard to create a suitable environment for the return of expatriate specialists and the investment in exploration that is needed to prevent Libyan output falling in 2013.

As Libya started its post-revolution journey, the rapid return of oil production to near pre-war levels stood out as a success story and brought much needed revenue into the country. There have been other positive signs, including the swearing-in of the first elected Libyan government in over 40 years and the first tentative signals that some foreign oil companies are preparing to resume exploration. However, the recently appointed Oil Minister, ‘Abd al-Bari al-‘Arusi, and his colleagues face a daunting array of challenges to maintain current Libyan oil production levels and convince foreign firms to resume exploration in Libya. Key amongst the issues is the security situation, which links to the political future of Libya.

THE RETURN OF LIBYAN PRODUCTION

The successful return of Libyan oil production has been striking. In June 2011, at the height of the conflict, the IEA predicted that Libyan oil production would face a “long, protracted stoppage” and that there would be a “long haul” to recovery, with full capacity returning only in 2015. Based on the average of estimates collected by Energy Aspects, Libyan oil production rebounded rapidly following the revolution, from a low of 10,000 b/d in August 2011 to 1.03mn b/d by January 2012 and 1.49mn b/d by May 2012. This is almost back to the 1.55–1.60mn b/d levels in 2009 and 2010, prior to the revolution. The rapid resumption contrasts with the speed of recovery in other countries following comparable interruptions, for example Iraq after the second gulf war.

Three factors explain how Libyan production has been restored rapidly. Firstly, although there was significant damage to certain oil export terminals including Es Sider and other infrastructure, as well as significant looting of equipment, the oilfields themselves were not destroyed. In part this is because the rebels recognized that controlling Libyan oil was not only central to the overthrow of dictator Mu’ammar al-Qadhafi, but was also the key to economic recovery, and they therefore deployed fighters to capture and hold key fields during the revolution. The second factor is that local workers had the skills required to restart much of production without waiting for the return of overseas contractors. Often these initial repairs were based on temporary workarounds to damaged or looted pumps, but these were sufficient to get production up and running again. The final factor is that the National Transitional Council signaled early on that it was committed to restarting production and would recognize the rights of foreign oil companies that had been awarded contracts under the Qadhafi regime. These factors meant that Libyan production surprised the market to the upside, with most of the negative predictions about the complete loss of infrastructure avoided. However, these factors are far from fully resolved and can go a long way in explaining why it will be difficult, in our view, for Libya to raise production much above current levels in the next couple of years.

INFRASTRUCTURE ISSUES

Starting with infrastructure, Libya faces serious constraints following the overthrow of Qadhafi. Capacity bottlenecks, particularly in pipeline and storage capacity, impacted production levels in early 2012, especially for fields that use the Ras Lanuf terminal as an export hub, because of the destruction of several storage tanks at the terminal during fighting. The restart of the 220,000 b/d Ras Lanuf refinery in late August 2012 improved the situation, allowing crude production in the fields to increase again, although the storage capacities are yet to be fully repaired. Germany’s Wintershall, which had shut in a small volume of production, now expects to lift its overall output back to pre-war capacity of 100,000 b/d in early 2013, following reconstruction of a 100,000 b/d pipeline to connect its fields with the Suncor-operated Amal field to the north from where production will be shipped to Ras Lanuf.

However, recent protests have once again threatened to impact upstream operations. The 120,000 b/d Zawiya refinery, which provides gasoline to the capital Tripoli, was blockaded twice during November by veterans protesting about a lack of medical support. The stoppages only lasted a few days and so did not impact on crude production, but a longer outage could force a reduction in field output. Security concerns led workers at the Ras Lanuf refinery to threaten to go on strike in early November, and while the strike was narrowly averted, it shows the vulnerability of refining operations. Protests also forced the closure of the 60,000 b/d Zueitina export terminal in Eastern Libya in last December, with no crude shipments made yet in 2013 (as of 9 January) and oil fields shut down to prevent technical damage.

The other dimension of the infrastructure challenge is that, as the EIA noted in June this year, the return of Libyan production has depended on routine and non-routine maintenance being deferred. Fields have faced a range of issues, often because the initial repairs made to get them operational again were temporary, for instance installing temporary pumps to bypass pumps damaged or looted during the conflict. The longer that fields run without comprehensive maintenance, the higher the risk that their output will be affected. This is without factoring in the decline rates that Energy Aspects estimates at 6-8% annually for Libyan fields. Addressing these decline rates and maintaining and improving production infrastructure will require the return of expatriate specialists. Although most foreign companies have lifted their force majeures, fewer have returned expatriate workers to Libya due to the security situation and in some cases foreign workers are not permitted to travel out to oil fields, which are viewed as less secure than Libyan cities. Without regular maintenance, there is a serious risk of acceleration in the natural decline rate in Libya, with an adverse impact on the country’s production profile.

Table Upcoming Projects In Libya

Company Date Field, Location ‘000 B/D
Eni 2014 NC-118, Ghadames 10
Medco 2015/16 Area 47, Ghadames 50
Total 2016+ Dahra/Garian Structures (block C-17, Mabruk) 20
RWE 2017 NC-193 & NC-195, Sirte 30
Waha 2017+ North Gialo, Sirte 100
Waha 2017+ NC-98, Sirte 80*
*Condensate.
Source: Company reports, IEA, Energy Aspects.

EXPLORATION REMAINS UNCERTAIN

The limited return of foreign expertise and investment is also apparent in the shifting timetable for new production coming on stream (see table). Even those companies that were quickest to lift their force majeures and return to producing fields in late 2011 did little to restart their exploration programs. While this is partly due to the uncertain security situation, which limits company willingness to bring in expatriate contractors or invest in expensive new exploration wells, its origins also lie in the tough contract terms and poor discovery record in the era prior to the overthrow of Qadhafi.

Terms could have been tolerable if exploration finds had lived up to expectations. However, when foreign companies began drilling exploration wells, the successes were few and far between. NOC data on discoveries from October 2006 to February 2011 lists finds on only five of the 53 contract areas, with the most promising being a block in Area 47 in the Ghadames Basin held by MEDCO. This is the only one of the 53 contracts that is currently moving into production. In fact, data on these contracts compiled by Energy Aspects shows that over half of the contracts awarded under the four bidding rounds were relinquished, usually at the end of the five-year exploration period but in some cases earlier. After the violence of 2011 halted all exploration activity, plans to resume exploration are only confirmed for eight of the contract areas. Other companies such as Gazprom, Hess and Wintershall are still undecided about whether to resume exploration as they weigh up the security outlook and the prospects for their holdings compared with other exploration options in Africa and elsewhere.

The picture looks a little brighter for exploration on acreage that was not part of one of these four bidding rounds. BP and Repsol have both confirmed their plans to resume exploration, although this will only begin in the coming months. Eni restarted offshore exploration at the Bouri field in February 2012 and resumed onshore drilling in the Sirte Basin in December. AGOCO, a national oil company, has also restarted its exploration program in the Ghadames Basin. Some of this exploration is also covered by EPSA IV contract terms, as NOC renegotiated many existing contracts under the new terms, generally with less generous production shares for the foreign companies and substantial signature bonuses, between 2007 and 2010.

The slow and uncertain resumption of exploration indicates that post-Qadhafi Libya has not yet rekindled the producer enthusiasm it enjoyed last decade. Contractual terms, limited discoveries to date and the current levels of insecurity all play their part in deferring decisions by foreign companies about whether to commit to new exploration programs. For the incoming government, which depends on oil exports for the bulk of state revenue, this will represent a significant concern. Oil Minister ‘Arusi will need to convince firms holding exploration acreage that it is worthwhile to restart their activities so new discoveries can be made to offset decline rates and maintain or even increase Libyan output in the longer term.

A related challenge will arise when Libya launches a new exploration license bidding round for foreign companies. The government will need to strike a balance between offering terms that are favorable enough to attract bids and appearing to give up national resources too cheaply. In September, the NOC chairman indicated there were plans to evaluate the history of exploration and production sharing agreements to help determine the right model for future licenses. There is also likely to be significant political debate before new exploration contracts are awarded, which will further add to the length of time. A senior NOC official was recently quoted as suggesting the next round of deals was at least a year away and, in our view, this will probably slip in 2014, given the preparatory work required and the range of other challenges facing the Government.

Table Current Status Of Contracts Under Epsa Iv Licensing Rounds

Licensing Round Average Production Share Contracts by Course of Action
Relinquish Begin Production Resume Exploration Undecided
EPSA IV Round 1 18.10% 12 1 1 1
EPSA IV Round 2 13.80% 18 0 1 2
EPSA IV Round 3 14.50% 1 0 2 7
EPSA IV Round 4 12.50% 1 0 4 2
Total 32 1 8 12
Companies BG, Chevron, Eni, ExxonMobil, Indian Oil, Inpex, Japex, Liwa, Mitsubishi, Nippon, Oil India, Oil Search, ONGC Videsh, Oxy, Petrobras, Petramina, Shell, Statoil, Total, Woodside Medco Indian Oil, ONGC Videsh, Oil India, POGC, RWE, Sonatrach, Suncor, TPAO CPC, Eni, ExxonMobil, Gazprom, Hess, Liwa, Oxy, Tatneft, Wintershall
Source: Company reports, Energy Aspects.

SECURITY SITUATION

Security issues continue to overshadow the recovery of Libya’s oil sector and more generally threaten the gains made since the revolution. Nearly 200 militia groups formed during the revolution, and many have retained their weapons and continue to operate with little regard for national army and police authority. These militias represent different cities and political factions, often using violence to pursue their interests.

Bringing the security situation under control will require both an end to serious violence and clear evidence that government forces have the credibility to displace the militias and to maintain law and order. The longer the current violence continues, the more likely the view of Libya as an unstable country is to become entrenched. In our view, there are few signs that the security situation will dramatically worsen, but there are also few indications at present that it is improving either. This will impact decisions by foreign companies whether to increase their presence in Libya, and especially whether to resume exploration activity, with most companies appearing to be waiting for improvements in the security situation.

Successfully handling the militia groups is a significant political headache. They were at the heart of the revolution, which gives them a strong claim to a role in shaping the future of Libya. Many were also co-opted, first by the National Transitional Council, to support the state and provide law and order in the early days of the new state, strengthening their sense of influence. Now the government wants to see them disbanded or, as a minimum, disarmed, rather than having to appease them.

The militias also reflect a deeper challenge for the new generation of elected Libyan politicians. The various militia groups represent different regional and religious factions, often associated with particular cities. The announcement that the NOC is to be split into two companies, one focused on exploration and production based in Tripoli and another focused on refining that will have its headquarters in Benghazi, demonstrates the compromises required. Resentment had built up in Benghazi over control of the oil industry and the associated government jobs all being based in Tripoli. However the solution appears to be a political fudge and is unlikely to help Libya develop a coherent strategy for the oil and gas sector.

Given how politically difficult it has proved just to form a government, the work of the Libyan government looks daunting in our view. As well as addressing the security situation and the day-to-day running of the country, Prime Minister Zidan’s government must oversee the drafting of a new constitution, which will lead to further elections once it is complete. Divisions over how to appoint a congressional committee have led to the National Forces Alliance staging a boycott of the national assembly. Much like recent events in Egypt, the constitutional drafting process is likely to be controversial and add to already high levels of political tension. The short timescales set out for the process in Libya only add to the challenges.

OUTLOOK FOR 2013

In 2012, Libya has made substantial progress but has also suffered some notable setbacks. As 2013 begins, the outlook for Libya remains mixed. Libyan output will probably remain close to current levels, between 1.4-1.5mn b/d based on the average of estimates Energy Aspects collected. The impact of the Wintershall pipeline coming into operation in spring 2013 looks set to be balanced by further minor disruptions to production of the type witnessed in recent months. The limited prospects for new production, issues with maintenance and field decline rates and the fragile security situation all mean that Energy Aspects see little prospect for Libyan production rising above pre-revolution levels of 1.55mn b/d in the short term, and output could decline during 2013. Moreover, with the growth in light, sweet crude in the US likely to push out more Nigerian barrels, which in turn are set to be available in greater abundance in Europe, Libyan exports will face some competition from similar quality crude. While easy access to the Mediterranean will keep Libyan crude in favor, any compression in light-heavy differentials is likely to result in lower revenues for the country.

For significant exploration to resume in Libya, the government will need to improve the security situation in 2013. Foreign oil companies remain cautious about committing to the investment and bringing larger numbers of expatriate workers back into the country to run exploration programs. Even companies such as BP and Repsol, which have announced they plan to resume exploration, could reverse their decisions if the situation does not improve and they judge the risks to be too high. The associated risk, of course, remains that without much progress in sorting out the security situation, the return of expatriate workers remains a challenge, with a direct impact on Libya’s decline rates, risking sending the country’s production into a steady decline from current levels.

Improving security across Libya will be a top priority for the government of Mr Zidan. To do this will require a strategy for persuading militias to disband rather than continue to try and influence national politics and gain advantage.

Energy Aspects expects this to be an uncertain process and anticipates further violence and setbacks through much of 2013, even if Libya’s first elected government can manage the political balancing act required to keep the country on the right track.