While the remaining forces loyal to Muammar Gaddafi still hold out against the rebel militia and its NATO allies in the coastal town of Sirte, the fight for Libya’s oil has already begun. Europe’s oil companies are hovering like a flock of carrion birds over the carcass of Gaddafi’s regime.
The pickings to be had are significant. Libya accounts for 2% of global oil production, but the development of new fields could see that figure double in the next decade. Proven reserves of 46.4 billion barrels are confirmed, but vast tracts of the Libyan deserts remain unexplored.
Europe’s oil giants Eni, Total, BP and Repsol YPF are perfectly positioned to take advantage of these commercial opportunities. Gas production, too, has huge potential, and Libya’s geographical proximity on the southern shores of the Mediterranean Sea could release Western Europe from the stranglehold of high-pricing Russia producers who currently dominate their gas supply. In both oil and gas the economic stakes are high in the endgame of Libya’s revolution.
The National Transitional Council that has replaced the Gaddafi regime has already indicated that companies from the NATO nations are likely to be rewarded. Abdeljalil Mayouf, the NTC’s oil industry spokesperson, told the Reuters News Agency: ‘We don’t have a problem with Western countries like Italians, French and UK companies. But we may have some political issues with Russia, China and Brazil.’
The implications of this statement, linking economic contracts to the political support given to the NTC by NATO is clear. The shares of all the leading European oil companies climbed dramatically earlier this month as a result of Mayouf’s comments, led by Eni with a massive jump of 7%.
But are these expectations of rich pickings justified? How well placed are the NATO countries to take advantage of the opportunities being offered by the NTC? And how will this affect the interests of China, Russia and other non-NATO oil consumers? As oil accounts for 95% of Libya’s export earnings, and the industry contributes to over 70% of national GDP, these questions will surely dominate the debate over Libya’s future over the months to come.
OIL STRATEGIES OF NATO MEMBERS
While Chinese and Russian companies are now worried about the security of their existing contracts, European oil firms expect to benefit with new business and a larger share of the Libyan oil market.
Leading the rush to Tripoli is the Italian oil company Eni, whose representatives are reported to have been in contact with the NTC since last April. Though the Eni chairman, Giuseppe Recchi, has warned that it will take time to get the oil flowing freely again, he is confident that the new Libyan government will honour the contracts of the Gaddafi regime. His enthusiasm is echoed by Italy’s Foreign Minister, Franco Frattini, who has made the optimistic claim that Eni would ‘have a No.1 role in the future’ in Libya’s oil industry.
The Italian government does indeed seem keen to do all it can to support the new rulers in Tripoli, moving quickly in early September to unblock $500 million of Libyan assets held in Rome.
But Eni’s European rivals also hope to get in on the action. Total of France is already a major player in Libya, and given the prominent role that French President Sarkozy has played in supporting the NTC they will hope to gain further lucrative contracts. Repsol YPF of Spain and OMV of Austria also hold large contracts from the Gaddafi era, while Britain’s BP have taken a leading role in developing Libya’s emerging gas fields, and will now hope also to ramp up their activities in oil exploration and production.
US oil interests are present, too, but they hold a much smaller share of the Libyan market than do the Europeans. ConocoPhillips, Marathon and Hess all did business under Gaddafi, but in total the US currently takes less than 1% of its oil from Libya. However, if the new government in Tripoli creates the conditions where new exploration and development can be encouraged, then these American companies will surely hope to become bigger players in the Libyan industry.
The reasons for the intensity of European interest in Libyan oil are clear enough. Italy is Libya’s nearest European neighbour and the most important oil trade partner, receiving 30% of the 1.3 million barrels a day exported under the Gaddafi regime in 2010. The sweet, light crude oil produced in Libya is popular elsewhere in the European market, too. Production costs in Libya are generally low, and the short distance to European markets brings great advantages.
For many years Libya’s pariah status as sponsor of international terrorism hampered its trade with Europe. Ironically, it was Al-Queda’s attack on New York’s Twin Towers that brought Gaddafi in from the cold. The West’s need to neutralise their enemies in the Arab world brought an end to sanctions against Libya in 2003 and 2004, and in 2006 the US removed Libya’s designation as a ‘state sponsor of terrorism’. These steps were followed by Gaddafi’s personal political ‘rehabilitation’ as Western leaders drew him into their post-9/11 global alliance against fundamentalist Islam. For the supporters of Al-Queda, Gaddafi became as hated a figure as was American President George Bush.
As relations with the West improved, Europe rapidly increased its imports of Libyan oil. By 2010, France was receiving 15% of Libya’s oil exports, Germany and Spain 10% each, Greece 5%, and the United Kingdom 4%. In the same year, the USA received 3% of Libya’s exported oil, while 11% went to China. While China does not dominate the Libyan oil market, it nonetheless remains a very important partner.
HOW WILL CHINA SECURE ITS INTERESTS?
Despite the provocative statements of the NTC’s representatives and the aggressive opportunism of Europe’s oil companies, China is likely to be a key player in Libya in the months ahead. But it might take time to regain influence.
Chinese commitments to Libya were already well established under the Gaddafi regime, Libya being the third most important partner in Africa after Angola and Zambia. China was by 2010 one of Libya’s most important trade partner’s, too, with projects worth more than $18 billion underway including several ventures in the oil sector. The state-owned CNPC had begun exploring new offshore fields in Libyan waters before the war erupted, and both Sinopec group and CNOOC had engineering projects. Overall, some 75 Chinese companies were involved in Libyan projects in 2010, employing more than 35,000 staff.
Beijing was unwilling to give its backing to the NATO involvement in the rebellion, standing alongside Russia and the Africa Union in its opposition. But this did not imply that China fully supported Gaddafi. It has been reported that Chinese representatives were in touch with the Libyan rebels since March, when contact was made via the NTC’s Qatari allies. Though Beijing was slower to recognise the new government in Tripoli than have been the NATO nations, on 3 September the Foreign Ministry announced that China would ‘respect the choice of the Libyan people’ and was ready to assist in the reconstruction of the country.
When the NATO countries meet in Paris last week with the ‘Libyan Contact Group’ to discuss the next steps to be taken in consolidating Libya’s revolution, the reconstruction of the oil industry was high on the agenda. Prime Minister Cameron and President Sarkozy were keen that British and French companies play a significant role. What needs to be done, and will there be a role for China despite NATO’s dominance?
Reports suggest there has been relatively little damage to industrial infrastructure, but the loss of labour and expertise with the flight of so many foreign workers, including Chinese nationals, will slow down the recovery. During the civil war production plummeted to only 60,000 barrels a day, amounting to less than 20% of Libya’s domestic needs. It is likely to take a year of more to get oil production back to full speed.
The NTC need revenues from oil, and they need them fast. They will restore some exports immediately, as the offshore fields of Al Jurf (operated by Total) and Bouri (operated by Eni), lying 150 kilometers north of Tripoli, can resume production as soon as staff can be returned to the rigs. The offshore natural gas field of Bahr Essalam could also be back in production rapidly, pumping supplies to Italy via the undersea 500 km Greenstream pipeline.
But the lion’s share of Libya’s revenues come from the main desert oil fields in the Sirte and Murzuq basins, and for these to come back to full production the labour force needs to be restored, the pipelines checked and the oil export terminals at Ras Lanuf, Melitah and Es Sider repaired and made fully operational. Although the NTC are being bullish about how quickly production can be restored, sources at Eni think that only 50% of the pre-war production can be restored by early next year, while other energy analysts think that it might take three years to get back to pre-war levels.
Similar recovery work took 8 years to complete in Iraq under the American occupation. There insurgency hugely hampered reconstruction, and although lessons have been learned from the Iraqi experience the NTC needs to ensure that those forces loyal to Gaddafi are dealt with speedily and do not become a continuing security risk. Several well-armed and efficient military formations are still fighting for Gaddafi’s cause, and should they decide to carry the struggle into a guerrilla campaign of attrition then oil installations would become principal targets. This is the NTC’s nightmare scenario, and it began to become a reality on 12 September with the first reports of attacks by forces loyal to Gaddafi, blowing up the pipelines and setting fire to storage installations at a large desert depot.
Even if the targeting of oil facilities can be avoided, the reconstruction problem may turn out to be technically tricky. Much of Libya’s refining technology is out-dated and in poor condition. UN sanctions between 1993 and 2004 made it difficult to improve and repair the main refineries, and the maintenance carried out under the Libyan National Oil Corporation has been neither regular enough nor efficient enough. If new fields are to be explored and exploited, then Libya will need to significantly upgrade its oil industry facilities. In all of these areas, Chinese investment can have a major role to play and is sure to be competitive.
Gaddafi was often a difficult partner for the international oil industry. The European companies now flocking to Tripoli hope to find the NTC easier to do business with. This is the honeymoon period for the NATO alliance in Tripoli. But as the many political contradictions and tensions within the loose coalition that is the NTC come to light, the position of the NATO countries will be challenged and put under increasing pressure.
There is in fact a confused cacophony of political opinion within the NTC. Some NTC stalwarts may insist upon a stronger national interest in and control of the oil industry, for example. Others may be suspicious and wary of committing their economic future solely to the European market. Some will surely want to strengthen links with their friends in Qatar and other parts of the Arab world, relationships that were badly undermined by Gaddafi’s antics.
NATO and the NTC are not natural allies. As the politics of the NTC unravels in to its various factions, as it surely will, Chinese players will be brought back to the table. Once contracts are being discussed and the hard bargaining begins, money will talk. Chinese companies have been successful in securing contracts all over Africa in the last decade, often beating their western rivals to secure the deal. They have been especially effective in the oil sector, and in Libya they will again compete effectively with any of the oil giants of the West, no matter what the NATO involvement in Libya’s revolution may have been.
When it comes to the longer-term reconstruction and development of Libya, the rhetoric of the rebels’ military struggle will fade. The NATO nations seem unlikely to get it all their own way. Once the cheque books are out, doors will again be opened to major Chinese investment. Just give it a little time.
David M Anderson is Professor of African Politics at the University of Oxford, and a Fellow of St Cross College, Oxford.
An edited version of this piece was published in The Global Times (Hong Kong) on 10 September 2011.