Oil Sector Reform in Libya

Oil Sector Reform in Libya

[caption id="attachment_55227813" align="aligncenter" width="620" caption="A worker's helmet lies on the ground at the Zawiya oil refinery, some 40 km west of Tripoli"][/caption]

The overthrow of Qadhafi’s regime has cost Libya’s economy dearly. Forecasts for 2011 are that GDP has declined by 28 per cent, industry by 45 per cent, and exports by 82 per cent. It is not difficult to understand why. Before the conflict, Libya produced 1.6 million barrels of oil per day (bpd), generating some 80-85 per cent of Libya’s GDP. During the conflict, production was slashed by 90 per cent, hence 2011’s dismal figures. With fighting now over and political stability returning, Libya’s economic recovery is predicted to be as rapid as the 8-month war was calamitous. For the next two years, GDP is expected to improve at 14 per cent year on year; industry at 45 per cent in 2012, and another 16 per cent in 2013; and exports at 164 per cent in 2012, another 70 per cent in 2013, and still another 20 per cent in 2014. Thereafter, all these growth measures drop off to single digits. At the same time, no other measures – public and private sector consumption, imports, domestic demand, services, and so on – are forecast to get above single digits.

It is hardly controversial to suggest that the engine of Libya’s economic recovery will be oil and gas, and that growth in this sector will plateau after two or three years of rapid growth. But if the energy sector will remain as vital to Libya’s economy after the conflict as during the Qadhafi era, it need not be business as usual. Libya’s new government has a historic opportunity to reform how business is done in Libya, to change the culture of commissions and kick-backs, promote fair competition, and ensure business transparency to match political accountability. The size and importance of the oil and gas sector makes it a natural focus for this task.

Challenges and Opportunities

Getting one’s business ahead of the pack in Libya today is not easy. The NTC has limited administrative capacity to either liaise with or receive trade delegations. There are access and practical logistical issues; more commercial carriers are flying to Tripoli, but visa applications are a lengthy and time consuming process, and suitable hotel accommodation is in short supply. There are banking problems, insufficient cash supply, and entrepreneurialism is restrained by lack of credit. Shortages of lorries and tankers destroyed during fighting and drivers who are still with militias is preventing transportation of everything from building materials to fuel to food, contributing to shortages outside urban centres. There are infrastructure issues; utilities need safety checks, roads need repairing, the ports at Khoms, Misrata and Tripoli are all operating significantly under capacity, and so on and so forth.

Yet as successful entrepreneurs know well, where challenge lurks opportunity beckons. That is certainly how the British government is seeing it. Delivering the keynote at a recent London conference, Edward Oakden of the United Kingdom’s Trade and Industry department (UKTI) was being frank when he acknowledged, “we want to maximise the commercial return on reconstruction”. For the UK government, according to Oaken, that means matching their priorities with the priorities of Prime Minister El-Keib’s newly appointed cabinet. UKTI identifies the key sectors as infrastructure, health, oil and gas, communications, construction, transport services, and finance and business systems. Yet, as Open Oil’s Johnny West recently blogged, most things in Libya eventually come back to oil. At least in recent times, Libya’s politics, history, and economics are slick with the stuff. All the more reason, in his view, to grasp the historic opportunity of the current political transition to produce policy and legislation that will promote transparency in business. As he recently told this writer, "You can't guarantee good policy and honest government by transparency alone. But you can certainly guarantee bad policy and corruption without it”.

Certainly oil is a priority for the new government. Actually, oil never really stopped being a priority, and both Qadhafi and rebel forces carefully avoided damaging Libya’s oil infrastructure during the eight-month war. Since fighting stopped, Libyans have been cleaning tanks, turbines, and pipes, sourcing tools and parts, cannibalising equipment, patching tanks, and gradually starting oil flowing again. By mid-November, production had already increased to 600,000 bpd and is expected to reach 800,000 bpd by the end of the year, all so far without foreign assistance. Some think production is increasing at an even faster rate and believe the National Transitional Council is being bullish in its forecasts. Addressing the London conference by video link, Tripoli businessman Sami Zaptia suggested production might even reach 1 million bpd by year-end. To put this in context, 80 per cent of current production is in the Sirte Basin, and Ghadames, Mursuq and Kufra basins are all operating significantly under capacity; current reserves are estimated at 46 billion barrels of oil and around 54 trillion cubic feet of gas; and 60-70 per cent of Libya is unexplored, according to Libyan business consultant Tarek Alwan. And as Zaptia reminded his audience, Libya is Europe’s closest source of oil.

Reforming Business

Cleary the biggest restraint on foreign investment in Libya is political instability. Confidence will grow as Prime Minister Keib’s new cabinet gets to work, but impediments remain. For example, the new government’s unelected, interim status raises questions about the legality of contracts it enters into with private sector companies on behalf of the state. From the reverse perspective, political stability will improve if the economy can be kick-started. That seems to be the view of many foreign governments, especially Britain and France. In truth, however, political stability and economic growth are each other’s condition of possibility; they are mutually enabling, and will proceed – or decline - in tandem. Probably Libya’s historically bureaucratic and corrupt public sector will shrink as the recovery bites, efficiencies improve, and opportunities are leveraged via private sector investment. But this ought to stimulate more rather than less interest from government in how business is done in Libya.

One of the more strategic questions raised at the London meeting came from a lawyer at a leading international law firm headquartered in the United Kingdom who wondered how seriously the new government is interested in promoting business transparency. It is perhaps too early to know, and the topic was not pursued. Speaking with her later, however, she pointed out that transparency encourages economic development and growth, but that failing to promote transparency can have the opposite effect.

For example, companies registered in jurisdictions with strong anti-bribery and anti-corruption laws are reasonably concerned that they not be disadvantaged by obligations that competitors registered in less stringent jurisdictions are not required to follow. Transparency here means something like fair competition. The Kurdish Regional Government is testing a different version of transparency; their decision to publish all their oil contracts is viewed by some as a landmark in transparency. Clearly full disclosure and fair competition will not always be compatible or desirable – think oil and gas auctions. The point, however, is that Libya’s new government should think about transparency both as a political value and as an economic strategy, because not doing so will undermine political stability and distort economic growth.

Globally, Libya’s new government has no end of examples and experience to draw on, and plenty of goodwill, both domestically and abroad. But before boldly setting out, Libya must work out where it wants to end up. As Sami Zaptia told the London meeting, Libya must decide what it wants to be, not next year or in five years, but in 25 or 30 years. It is still early days and there is a long road ahead, but decisions today will be difficult to reverse. This is all the more reason to think carefully today about fostering an economic environment that will promote stability and development and will benefit Libyans for decades to come.

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