The toppling of Gaddafi and prospects of foreign energy companies in Libya

Although it’s quite possible that Libyan authorities will appreciate Russia’s mediation during recent 2011 events, Russian companies are likely to have limited access to the exploration of Libyan oilfields.

Widely spread today opinion about the depletion of global hydrocarbon reserves triggers off competition for taking them under control. Yielding a profit from North African natural resources, primarily oil and gas, is an important factor making this region attractive for foreign business.

The main driving force for developing deposits of mineral resources has always been commercial profitability. Subprime cost of oil and gas production as well as the proximity to the European Union, the largest market of supply, rouse interest of the world energy companies to Libya. According to Gazprom, Libya takes the first place in Africa and the fifth among OPEC member-states  in terms of proven reserves of light low-sulphur oil (5,1 bln. t). (http://gazprom.ru/production/projects/deposits/libya).

Under Muammar Gaddafi there were created in Libya very much peculiar conditions for foreign oil-producing companies. Despite its dependence on foreign partners, Libyan leadership over the period of several years imposed on them tight fiscal requirements, resorted to various negotiations tactics aimed at gaining maximum benefit from their business. It was the state support of a natural monopoly National Oil Corporation of Libya (NOC) that irritated western oil-producing companies most.

Another Libyan peculiarity leaps into the eye – since the state dominates in oil sector the leadership of the country enjoys the right to reduce the quotas of foreign companies from 49% to 20%, which can become a containing factor for foreign investors (1). ENI, Occidental Petroleum Corporation and Repsol agreed to review the terms and conditions of their contracts. What is more, they agreed to the new requirements of the Libyan government and decreased the share of their revenues from the export of Libyan oil and gas in 2008-2009 in favor of the government.

More than 35 foreign companies were operating in the Libyan energy sector before the war. Eleven largest foreign state-owned companies – Chinese CNPC, Indian ONGC, Russian Gazprom, Brazilian Petrobras, Algerian Sonatrach, Polish Oil&Gas, Turkish Petroleum and others – are closely tied to their governments.

Among the most prominent foreign companies operating in Libya were Italian ENI, German Wintershall, French Total and GDF Suez, American ConocoPhillips, Hess, Occidental, Marathon, Austrian OMV, Spanish Repsol-YPF, Canadian Suncor, Dutch-British Royal Dutch Shell, Norwegian Statoil, Australian Woodside Petroleum, Russian Gazprom and others. Companies from Arab states also operated in Libya. For example, Abu-Dhabi based Al-Maskari Holding in December 2010 signed with the Libyan government a $3 bn. contract on construction of an integrated energy hub. The project provides for electricity generation with the use of solar energy and natural gas as well as underwater laying of high-voltage power transmission lines in the Mediterranean, which will connect Libyan and Italian grids.

Foreign oil companies accounted for the major part of oil production in Libya. Owing to that Libya was steadily stepping up its export of oil, main importers of which in 2010 were according to IEA Italy (376 thousand barrels per day), France (205 thousand b/d), China (150 thousand b/d), Germany (144 thousand b/d), Spain (136 thousand b/d), Great Britain (95 thousand b/d), Greece (63 thousand b/d), USA (51 thousand b/d) and others. Only Italian ENI in 2009 was producing about 110 thousand barrels per day, or 10% of the overall oil production of the company.

The share of Russian energy companies in production of Libyan oil is much smaller than of foreign ones. While Italian ENI was producing about 110 thousand barrels per day in 2009, Russian TATNEFT only in 2010 discovered first deposits for industrial production of oil with the capacity of 415 barrels per day. This wide gap can only be accounted for by the peculiarities of exploration work of Russian companies.

Despite the important role foreign companies played in Libyan energy sector, the former Libyan government, as it was said above, used to interfere in their activity. For example, the criticism of Canadian Prime Minister S.Harper after terrorist al-Meghrahi had been discharged affected the business of Canadian company Petro-Canada which was forced to slash oil production from 90 to 45 thousand barrels per day. In its turn, the government of Libya argued that this reduction was the result of new OPEC quotas. However, no other company decreased its production, what makes us draw the conclusion that the main prerequisite of successful business in this country is friendly inter-state political relations.

Thus, there is no doubt that NATO interference in the armed conflict in Libya which grew into a civil war has both geopolitical and economic grounds. Libya has become another place of severe fight for natural resources. France, Great Britain, USA, Italy, Canada, Turkey, the Netherlands, Qatar, Denmark and other participants of NATO operation pursue in Libya their own energy interests.

Besides, there is every reason to consider NATO operation as an attempt to counteract China’s expansion and Russia’s plans to strengthen its positions in Libya. Before the operation was launched Chinese companies had already concluded $18 bn. worth contracts. With major oil deposits located in Eastern Libya and China’s interest to them the odds are high that the position of Chinese companies in Libyan energy sector will become stronger.

           OJSC GAZPROM is known to have made an offer to the Libyan government to buy excessive reserves of hydrocarbons. Mass media reported about the agreement of the two sides to launch negotiations on this issue, but later there was no information about any accords signed (http://www.rg.ru/2008/07/09/gazprom-livia-anons.html).

It is most probably that a new Libyan government supported by the West will try to weaken the position of Libyan NOC on the internal market and start energy assets privatization campaign transferring Libyan oil deposits to the exploitation of foreign investors which will meet the interests of largest Western and some Arab energy companies.

In particular, Qatar was the first to recognize National Transitional Council as the legitimate Libyan authority. In response, Libyan rebels granted to Qatari oil company Qatar Petroleum access to Libyan oil with the view to supplying it to the world market.

 There is every reason to assume that the positions of BRICS countries, which abstained from voting on resolution 1973 of the UN Security Council, will be weakened. The interests of oil companies of those countries that facilitated the toppling of Muammar Gaddafi will be taken into account in the first place by the distribution of new oil concessions.

Before the war Libya produced about 1.6 ml barrels of oil per day, while in July 2011 the production fell to 100 thousand b/d. This slump can be explained by the damage inflicted on infrastructure. According to the forecasts of Shukri Ganemah, former Libyan Minister of oil industry, it will take two years to come back to the pre-war level of oil production in Libya. With the prospects of stepping up energy resources production before at least 2030, the projects in this country remain to be very attractive for investments (see Table 1).

Since the main bulk of loans and other financial resources from USA, EU and Persian Gulf monarchies will be used for the reconstruction of infrastructure, it should come as no surprise that the US and EU companies will be awarded most lucrative contracts.

Analyzing new Libyan realities we can’t but be concerned about the prospects of the realization of Russian contracts concluded under Gaddafi as a compensation for writing off Libyan multibillion dollar sovereign debt before the USSR. However, it can’t be ruled out that   the new Libyan leadership, upon approval of its Western sponsors, will acknowledge Russia’s mediation in settling the conflict. Hence, Russian GAZPROM can count on the resumption of its business activity in this country interrupted by the war. At the same time it should be stipulated that provided Russian companies develop interest to doing business in Libya, their access to mineral resources deposits will be limited.  

Table 1

 Libya natural gas supply and demand scenarios for 2010-2030.

Source: Supplying the EU Natural Gas Market – Final Report, November 2010, Mott MacDonald, Table 3.4: Libya Supply Scenarios, 2010–2030, p. 13.

1. Deutsche Bank Research. North Africa – Mediterranean neighbours on the rise. 2010. P. 12 (http://www.dbresearch.de/PROD/DBR_INTERNET_DE-PROD/PROD0000000000258295.pdf).
2. Московские новости. 2011. 29.03. № 2(2).
3. РБК daily. 2011. 24.08. № 152(1196). С. 5.