Oil & Gas: Libyan promse falters

By John Hamilton* in Tripoli
Posted on Monday, 7 February 2011 14:12

Backers of Western interests are up against those who think foreign oil companies get too good a deal, pitting the liberalisation camp against champions of ‘Libyanisation’

Five years after Libya reopened its oil sector to global participation, it has not matched its billing as a black gold El Dorado. The need to import foreign expertise is as great as ever; large sections of production infrastructure need upgrading and vast areas of the desert are unexplored. This policy of opening has come up against domestic fears that international companies and specialists might extract too many benefits at the expense of the Libyan government and people. The result is a political and economic standoff between the champions of liberalisation and ‘Libyanisation’.

Having rushed into Colonel Muammar el Gaddafi’s jamahiriya (state of the masses) in their dozens since 2005, oil companies are now finding it harder than ever to make money. Many operators, who had outbid each ?other to get footholds in this new market, are contemplating temporary withdrawal until conditions improve. The end of 2010 will see the largest number of licences surrendered, with many of the 23 companies which signed five-year exploration deals in November 2005 handing back their areas after failing to find oil. Most notably, Occidental Petroleum (Oxy), which alone signed up for nine licences in early 2005, has already given them all back.

Conditions are also extremely hard for those still exploring or those who have long-term production agreements. The latter include joint ventures such as those held by ConocoPhillips, Marathon and Hess, which reacquired its old stakes in the Waha project with the National Oil Corporation (NOC) in 2005; Oxy, which bought back into the Zueitina project; and a number of European and Canadian companies, such as Italy’s Eni, Spain’s Repsol, France’s Total, Germany’s Wintershall and Petro-Canada. Over the past few years the NOC has renegotiated its contracts with most of these partners, holding out the prospect of increased output as an incentive. The Waha partners and Wintershall, which have yet to renegotiate, are under intense pressure to do so.

Tight budget?

For most of these companies, the benefits of agreeing on a new contract and a lower percentage of production now appear less obvious. Since the beginning of 2010, a tight budget has brought most NOC-related projects to a standstill. “It is October and companies haven’t yet been given their budgets,” said one local business source.

The problem extends far beyond the energy sector. Worries about overspending have blocked the progress of key projects across the whole economy.Contractors on large infrastructure projects, from a new airport terminal to several multibillion dollar real-estate developments, have been obliged to down tools while awaiting payment; some have even left the country.

The pressure was ratcheted up a notch in September, after an official from the NOC’s human resources department wrote to each of the international companies asking them to dismiss all the consultants who work for them on daily rates. “You are asked to terminate all ongoing contracts and any other contracts that can be classified under this category,” the letter stated, adding that some work could be assigned to local specialists. It suggested that companies were both inflating the cost of some projects and delaying the policy of Libyanisation intended to increase the number of locals employed in the oil sector.

The request came as a shock to exploration companies because they cannot afford delays or mistakes if they are going to be able to drill the necessary number of wells stipulated in their contracts, let alone find oil. One Tripoli-based industry executive said the rates that companies pay for the best-qualified staff to carry out highly technical and dangerous operations are set globally, and that it was impossible for Libya to buck this trend. “They [the rates] are the same in Algeria, Angola or Poland,” he said. Another company’s country manager said that for some specialist posts, such as drilling managers, Libyan alternatives “do not exist” and that, “without these specialists, the industry in Libya will simply cease to function.”?


The stakes are high. Oil is not only the most important engine of Libya’s wealth, it has also been at the forefront of attempts to reintegrate the economy into the global economic community. The extent of Libya’s diplomatic rapprochement with the US and the UK is largely measured by the success which companies have had in acquiring exploration assets. The huge exploration deals signed by Shell in 2005 and BP in 2007 indicate the progress that British diplomats have made in rebuilding diplomatic relations with the jamahiriya.

At the centre of these changes over much of the past decade has been the complex figure of the NOC chairman, Shukri Ghanem, who previously served as prime minister and minister of the economy. In August 2009, he resigned only to be brought back two months later after the intervention of Saif al Islam, the influential and reform-minded son of Colonel Gaddafi. Ghanem is the most senior official to be associated with the reform movement of which Saif is the figurehead. He has consistently advocated the abolition of subsidies and the opening of the economy since returning to the country after many years as an energy economist for the Organisation of Petroleum Exporting Countries in Vienna. He was the architect of the measures that allowed international companies to enter the country. Under his leadership, the NOC has asserted itself by shaping a role in policy formation in the oil ministry, in setting prices and in acting as an industry regulator. Ghanem has also overseen the drafting of a new oil law that will replace the one drawn up in 1955.

?Muddled divisions?

However, the lines between reformists and conservatives are muddled, and Ghanem’s centralised style of management within the NOC has also become an obstacle to reforms.

His authority will be tested in the coming year, as criticism of his handling of international companies increases. After his resignation from the government in 2009, the General People’s Committee (GPC), Libya’s cabinet, created a new institution with the role of setting policy and strategy for the oil sector. The Supreme Council for Energy Affairs (SCEA) has yet to assert itself, but it plans to become the leading body in a reshaped sector, in which the NOC is restricted to operational and marketing responsibilities. The GPC has also taken control of Ghanem’s draft energy law, which is now being revised by a governmental legal committee.

The individual most commonly placed in opposition to Ghanem is Prime Minister al-Baghdadi Ali al-Mahmudi, who was deputy prime minister under Ghanem before he replaced him. Although the GPC, under Mahmudi, set up the SCEA, this does not mean that he represents the concerns of all Ghanem’s opponents in the sector, most of whom believe that the policies of resource nationalism and Libyanisation are undermining development. Ultimately, both the prime minister and the NOC chairman are obliged to implement policy directives from the leadership.

??*John Hamilton is the principal author of Libya’s Energy Future, a special report on the sector published by Cross-Border Information in July 2010

This article was first published in the December 2010-January 2011 edition of The Africa Report.

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