Hurdles to reviving Libya's oil sector

August 25, 2011 12:11 am | Updated August 11, 2016 03:42 pm IST

POST-QADHAFI: At stake are not only the financial health of Libya and its people but also world oil supplies.

POST-QADHAFI: At stake are not only the financial health of Libya and its people but also world oil supplies.

When a new government finally takes hold in Libya, it will have every incentive to get oil production back up and running. But if history is any guide, that task will not be as simple as restarting oil wells and reopening pipelines.

Revolutionary changes in Iran and Iraq set back their oil industries for decades, and President Hugo Chávez has struggled to stabilise oil production over the last decade of radical change in Venezuela. Even relatively peaceful, democratic revolutions can cause great disruptions: the collapse of the Soviet Union sent Russian oil production crashing for years.

World supplies

Libya's oil production has been at a virtual standstill since the rebellion against the Qadhafi regime began in February, paralysing an industry that produced 95 per cent of the country's export earnings last year. The country is pumping an estimated 60,000 barrels a day, instead of its usual 1.6 million barrels. The rebels promise to restore full production within months, but most international experts say it will take at least a year and probably several more to return the country to production levels from before the civil war.

“History shows it's a big, complex job running an oil industry in a time of complete uncertainty about who is in charge,” said Daniel Yergin, the oil historian and chairman of IHS Cera, an energy consultancy. “The very first thing they have to figure out is what damage has been done and who will run the industry. Then the new government will inevitably review all the existing contracts and relationships.”

At stake is not only the financial health of the new government and its people, but also world oil supplies. Before the civil war, Libya each day exported 1.3 million barrels of the high-quality crude that many European refineries depend on. The collapse of its exports helped drive world oil prices to their highest levels since 2008. Libya's oil industry was in sad shape even before the revolt. When Col. Muammar el-Qadhafi seized power in a coup in 1969, Libya produced more than double the amount of oil that it did last year. Swings in oil policy, political cronyism at the State oil company, international sanctions and uneasy relations with foreign oil companies have kept Libyan oil fields and refineries from producing at their peak potential, and the damage could take years to fix.

Among the most urgent tasks of the new government will be how to remake the national oil company into a professional bureaucracy and negotiate new relations with companies like Eni, of Italy, and Repsol YPF, of Spain, while balancing the benefits that will be distributed to competing tribes and regions.

A recent research report by Wood Mackenzie, a consultancy, predicted it would take 36 months for Libya to recover its full pre-conflict production capacity once the fighting ends. “This depends on the scale of damage to oil infrastructure being limited, swift removal of international sanctions and the timely return of international oil companies and foreign workers,” the report said.

Iraq, Iran, Venezuela, Egypt

Even that estimate could be optimistic. When the United States invaded Iraq in 2003, American officials hoped that oil production could pay for reconstruction of the country. But it took eight years to return the country to production levels from before the invasion. Meanwhile, the 2.7 million barrels a day Iraq now produces is still nearly 20 per cent below the level before Saddam Hussein seized power in 1979, as years of war, inept oil field management and sanctions took their toll.

Iran's record through its 30 years of revolution and war with Iraq is even more discouraging. Within three years of the 1979 toppling of the Shah, the country's oil production collapsed from six million barrels a day to one million barrels. Iran has struggled to recover ever since and now produces roughly four million barrels a day.

In Venezuela, President Chávez dismissed 17,000 employees after a strike at the national oil company and nationalised petroleum fields managed by international oil companies. The result has been a decline in production to 2.2 million barrels a day, from 3.5 million barrels a day in 1998.

Each country offers different lessons, of course, and it is unlikely that the emerging Libyan government will become embroiled in a war with its neighbours or have to deal with an invading army. The new government, which will take power with North Atlantic Treaty Organisation (NATO) support, will undoubtedly have a warmer relationship with the United States than the Venezuelan government has had in recent years.

“This could be different,” said Michael A. Levi, an energy fellow at the Council on Foreign Relations. “Most of the prior cases were regimes that moved from being open to the world to being more closed, and the rest of the world often shut them off. No one expects the new Libyan regime to be shunned by the rest of the world.”

Nevertheless, there is little reason to think Libya is going to have an easy time rebuilding its oil production.

The repeated bombing of an Egyptian pipeline that provides natural gas to Israel has shown that energy infrastructure is an appealing and easy target for dissidents unhappy with the outcome of a revolution, and it is unlikely that the new Libyan government will please everybody.

And reductions in oil production following the downfalls of autocratic governments in Indonesia and Mexico in recent years show that political reform does not automatically go hand in hand with increased oil production. In fact, oil production collapsed in Russia after the democracy movement ended the Soviet regime, and it has only recovered in recent years under more authoritarian rule.

“Democracy does not necessarily bring higher oil production,” said Amy Myers Jaffe, an energy expert at Rice University. “The politics of competing political coalitions can slow the investment process, siphon off funds from industry and hinder decision-making on complex technical projects.” — © New York Times News Service

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