Author: Steven Zweig Date: September 29, 2009

CATEGORIES: ARTICLES, OIL PRODUCERS, WORLD

Profile of an Oil Producer: Libya

Libya, near the intersection of Africa, the Middle East, and Europe. (image: cia.gov)

Libya is located in northern Africa, on the southern shore of the Mediterranean Sea. Bordered by Egypt to the east, Algeria to the west, and Niger, Chad, and Sudan to the south, Libya occupies a strategic position, near the intersection of Southern Europe, Islamic Africa, and the Middle East, and touching on nonIslamic Africa as well. The nation has long used its position to extort tribute from the rest of the worldeven before Libya was Libya, Tripoli (its capital city) was one of the famed Barbary Pirate states that preyed on Mediterranean shipping, leaving a nations commerce alone if it paid Tripoli protection money. After the discovery of large petroleum deposits, Libya again leveraged its strategic resources (now oil rather than its location astride trade routes) to secure tributethough the tribute often took the form of investment. Libya

Page2

under Muammar Qaddafi, Libyas leader since his successful and bloodless coup in 1969, has pursued its interests despite becoming a pariah in the global community; Qaddafis sponsorship of terrorism, support for the Palestine Liberation Organization, and warm relationship with the Soviet Union led to economic sanctions and Libyas isolation. Yet Qaddafis recent willingness to abandon terrorism and Libyas weapons of mass destruction have allowed Libya to reestablish diplomatic relations with the Western world and bring Libyas oil-dominated economy back into the world market. Libyas Oil Reserves Libya has Africas largest proven oil reserves, with roughly 44 billion barrels. Its reserves are almost 25 percent larger than those of Nigeria (36 billion barrels) and dwarf those of the third-largest petroleum-producing African nation, Algeria (12 billion barrels). For comparison, estimates of U.S. conventional oil reserves range from 2130 billion barrels, Iraqi reserves are around 115 billion barrels, Iranian reserves near 138 billion barrels, and Saudi reserves near 260 billion barrels. While Libya is not one of the few true heavyweights in terms of oil reserves, its crude reserves are substantially greater than the United States and are more than sufficient to give it much greater international leverage than its tiny population (just over 6 million people) or modest per capita GDP ($16,000) would normally suggest. Libyas Oil Industry: Overview Libyas oil industry is dominated by its state-owned National Oil Company, which controls at least a majority interest in all oil exploration, production, and refining. Any foreign firm looking to operate in Libya must do in partnership with the NOC. Libyas modest oil consumption (251.5 thousand barrels per day) compared to its production (1.7 million barrels per day) makes it a substantial net exporter of petroleum. (It also has significant natural gas reserves, estimated at 1,540 billion cubic feet.) Petroleum is the nations major export: 95 percent of its export dollars come from oil, and oil provides one-quarter the countrys total GDP and 60 percent of its public sector wages. In 2008, Libya was the worlds twelfth-largest oil exporter, though it ranked behind nationssuch as Nigeria and Algeriawith smaller reserves. Thats because the Libyan oil industry is well down from its peak production and has

Page3

been for decades: Libyan production peak in the late 1960s at a bit over 3 million barrels per day, and current exports of around 1.4 million barrels per day are less than half the peak volume. Part of that decline is the natural decline of any oil field over time. However, the larger part has been owing to Libyas long-standing, and only comparatively recently reversed, estrangement from the international community. This estrangement derived from the foreign policy of Libyas leader, Muammar Qaddafi, who supported terrorists, separatists, and anti-Western causes through the late 1990s. In the early 2000s, Libya succeeded in ending its isolation from the rest of the world, particularly the West. This led to a rapid influx of investmentnot just dollars, but also expertiseinto Libya and particularly its oil sector. Libya hopes to increase production by 50 100 percent with the aid of this investment. Libya and OPEC Libya is a long-standing member of OPEC, the Organization of PetroleumExporting Countries that includes the Gulf states, Venezuela, and the other North African oil-exporting nations. Libya has been a member nearly since OPECs inception, joining the organization two years after its founding, in 1962. As a member of OPEC, Libya has allowed the cartel to set production and pricing quotas for it. Since Libya has consistently underproduced relative to its oil reserves, living within its quotas has not been a problem for it. Indeed, Libya has often been a voice for restraining production and honoring quotas, often in the face of opposition from Saudi Arabia, which tends to more aggressively manage its output to influence crude prices. Muammar Qaddafi Libyas leader, Colonel Muammar Qaddafi, came to power in a coup in 1969. (Note: there are many ways to transliterate his name from the Arabic, so you may have seen various other spellings. This is similar to the way Beijing used to be Peking based on a different system or way of transliterating.) Despite being called a mad dog by President Ronald Reagan, Qaddafi is a shrewd political operator, as his longevity (four decades in power) in a volatile part of the world amply testifies. A former low-ranked military leaderhe was a mere captain when he seized power, though he accepted a ceremonial

Page4

promotion to colonel shortly after his ascendanceQaddafi is the unquestioned and absolute ruler of Libya despite having no formal political post. Eschewing the usual titles or positions of President or Prime Minister, Qaddafi took the title of Brother Leader, though as head of a one-party state with no independent judiciary he would more aptly be called a dictator.

Muammar Qaddafi addressing the UN in September 2009. (image: nationalpost.com)

While Qaddafi has firm control of domestic politics, his ambitious but hardly coherent foreign policypan-Arab, anti-Western, and often violenthas generally put Libya at odds with petroleum-importing Western nations, to the detriment of its oil industry and therefore of the entire Libyan economy. The developments in Qaddafis foreign policy provide insight into Libyas economic fortunes. Qaddafis Foreign Policy 1: Support for Radicals and Terrorists Initially, Qaddafis Libya supported radicals, terrorists, and anti-Western movements. Qaddafi has recently moderated but not entirely abandoned his anti-Western stance. Over a period of more than two decades, Qaddafis Libya supported a number of separatist and terrorist groups, and was also implicated in a number of terrorist acts, including:

The Palestinian Liberation Organization

Page5

Rebel movements in several African countries, such as Sierra Leone and Liberia The Black September movement, which was behind the 1972 Olympic massacre in Munich The 1986 Berlin discotheque bombing that killed American servicemen The Irish Republic Army

Libya also pursued nuclear weapons, or at least wanted to create the appearance that it could credibly arm itself with the atom. Especially before the specter of biological warfare raised its diseased head, nuclear weapons were the high card in high-stakes international poker, and the appearance or threat of them was almost as goodin terms of deterrence, and also for raising a nations statureas their actual possession. However, Libya overreached with the 1988 bombing of Pam Am Flight 103 over Lockerbie, Scotland. This bombing, which has been variously ascribed to retaliation for an American attack that killed Qadaffis daughter or for the accidental shooting down of an Iranian airliner by US aegis cruiser U.S.S. Vincennes, led to Libyas near-complete international isolation as well as severe US and UN economic sanctions against Libya. These sanctions had the effect, among others, of substantially curtailing Libyan trade and its ability to attract foreign expertise and investment to expandor even maintainits vital oil sector.

Wreckage of Pan Am Flight 103 in Lockerbie, Scotland. (image: dailymail.co.uk)

Page6

Qaddafis Foreign Policy 2: Rapprochement with the West and an End to Isolation Libya endured international isolation for years, but sanctions took their toll on the nations economy, especially on its all-important petroleum industry. Oil production fell after American oil companies withdrew from the country and the sanctions kept them and other Western businesses out for years.

Qaddafi meets with Silvio Berlusconi, prime minister of Italy, Libya's former colonial ruler. (image: zimbio.com)

Libyas isolation also reduced its relevance in international affairs. Faced with a weakening economy and the loss of international stature, Qaddafi reversed himself in the late 1990s. Beginning in 1999, when Libya handed over for trial two Libyan state employees who were suspects in the Lockerbie bombing, the nation took a series of steps designed to ingratiate itself with the world:

Setting up a fund to compensate the families of the victims Accepting responsibility for the Lockerbie bombing Publicly abandoning its nuclear weapons program Renouncing terrorism Sharing intelligence on terrorists with Western security agencies Settling a long-standing dispute with Italy over Italys colonization of Libyan land during the period 1911 to 1943

Page7

These efforts have borne fruit: sanctions were fully lifted by 2004 and Libya has been seen as an ally of the West in the war on terror. The way was paved for Western companies to do business with Libya again. Libyas leader even had the opportunity to address the United Nations General Assembly in Septembera long, rambling address which excoriated the UN and the West. (Video of the speech is available on YouTube.) Impact of Libyas Foreign Policy on its Oil Industry During Libyas isolation, its oil industry suffered, as the foreign investment and expertise it needed was kept out. Libyas oil and natural gas industry is not self-reliant in terms of its oil and natural gas industry. These are capital-intensive, highly technical industries that any nation with a small population and a limited non-petroleum economic base would have difficulty servicing on its own. For example, almost two-thirds of Kuwaits population are foreign workers, many of them employed in the oil industry. Once sanctions were ended in 2004, many foreign (especially European) nations rushed to invest in Libya, especially in its oil and gas sector. At present, over three-dozen foreign oil companies are working in Libya, including such Western global giants as BP, Exxon Mobil, Occidental Petroleum, and Italys Eni SpA. And not just oil companies are present: giant engineering and technology firms such as Siemens AG and Alcatel SA are also hard at work in Libya since the lifting of sanctions. Just as Qaddafis previous radical foreign policy drove out foreign investment and companies, reducing its oil production by half, his recent positioning of Libya as an ally against terror and a responsible member of the world community seems to be bringing investment and expertise back in. Other Factors Affecting Foreign Partnerships and Investment However, even though sanctions no longer prevent foreign investment in or partnerships with Libya to exploit its oil and natural gas resources, significant structural and political impediments to foreign involvement remain, such as:

Lack of a manufacturing base that can domestically produce necessary drilling equipment and supplies Heavy customs duties imposed on imported equipment

Page8

Lack of a skilled, educated workforce Labor laws requiring the hiring of Libyan nationalseven when they lack necessary training, education, or skills Frequent difficulty of ascertaining who has title to real property

In addition, Libyas own behavior discourages investment by penalizing foreign companies for economic success and creating an insecure business environment. For example, Libya frequently pressures foreign companies to renegotiate existing contracts to give Libya a much larger share of any profits as well as to guarantee Libya a large, up-front signing or licensing fee. Other examples of Libyan behavior that encourages foreign countries to not invest in or partner with the nationdespite its abundant untapped oil and gas wealthinclude:

Jailing company representatives on espionage charges to exert leverage in trade negotiations Refusing to allow one foreign company to sell another its Libyan assets, as recently happened when Libya prevented Canadian oil company Verenex from selling its Libyan holdings to China National Petroleum Company. Indeed, not only did Libya block the Verenex-CNPC deal, but Libya is now picking up Verenexs assets at a discount, sending the value of the Canadian companys shares tumbling. Nationalizing foreign oil company assetsLibya threatened to do so recently, as part of its renegotiation of contracts, a threat given credence by the fact that Libya has previously nationalized foreign oil company assets

Owing to all these issuesas well as some expensive dry holes and failed exploration, which naturally dampens enthusiasm for Libyan projectssome [f]oreign investors no longer see Libya as the new El Dorado it appeared to be after international sanctions were lifted-especially in the current economic climate, as Mehdi Haroun, a partner in international law firm Herbert Smith LLP, which advises oil companies working in Africa, stated. The Outlook For Libyas Oil Industry Currently, Libyan oil production is approximately 1.7 million barrels per day and current net exports are around 1.4 million barrels. The countrys National Oil Company has a goal of raising production to 2.3 million barrels per day by 2013. While this is a significant increase over current levels, it falls well short of an earlier NOC goal of 3 million barrels per day by 2013. This downward

Page9

revision of NOCs goals may reflect a realistic appraisal of the nations ability to attract stable foreign partnerships, expertise, and investment, as well of Libyas overall business and labor climate. Libya hopes to modernize and strengthen its economy. As part of that, it recently committed to a $9.86 billion investment in developing and upgrading production at 24 of its oilfields. Libyas problem is that the nation cannot do it aloneit needs foreign investment, expertise, skilled workers, and equipment. However, multinational oil companies may be reluctant to make the necessary level of commitment to Libya, if Libya is unwilling to demonstrate a reciprocal commitment to them. If Libya can threaten to nationalize holdings; if it can reopen already negotiated contracts to boost its income or extract tribute from companies that want to work or invest there; if it can interfere in third-party business dealings and contracts; then businesses may be denied the certainty they need to make major, long-term investments. For all Qaddafis rhetoric over the years about pan-Arabism and Pan-Islamism, his Libya has far more in common with Russias kleptocracy or Venezuelas populist strongman rule than it has with the stable and prosperous Gulf nations of Saudi Arabia, Kuwait, or the UAE. The Gulf nations are not democratic and certainly had their problems with the West and with modernity; however, much more so than Libya, their political systems provide a stable platform for oil exploitation and economic growth. Libya has not yet provided a stable platform. Therefore, while any nation with 45 billion barrels of oil has to be taken seriously and is a significant player in the global oil market, there is every reason to believe that Libya will continue to fail to realize its full potential as an oil producer.

This article was posted on Tuesday, September 29, 2009 at 12:41 pm and is filed under Articles, Oil Producers, World To read more articles like this one visit HeatingOil.com. Canal Street Station Box 1547 New York, NY 10013 2009 HeatingOil.com LLC