Wednesday, 27 June 2012

Libya struggles to attract economic investment

Speaking June 26 at an event in Vincenza, Paolo Scaroni, CEO of Italian oil and gas giant ENI, told reporters that everything in Libya is fine and the democratic process would run its course as expected. Italian businesses, according to Scaroni, have an important place in Libya because Europe consumes 85 percent of Libyan oil.

However the economic situation in Libya is not as smooth as the ENI chief purports and some energy firms are developing cold feet when it comes to investment.

It has been more than nine months since a NATO military intervention in Libya’s civil war collapsed Moammar Gadhafi’s regime and ended his hold on the oil-rich North African state.

The difficult and messy international military work is now done, but Libya’s internal tribal problems are just starting to emerge. Especially concerning the control of the large crude oil and natural gas deposits so critical to Libya’s economy. Libya is remarkably dependant on its hydrocarbon industry. Energy accounted for 95 percent of Libyan export earnings in 2010.

Although the interim Libyan government recently proposed to increase oil production by a third to 2 million barrels per day (bpd) by year-end, with a five-year goal of 2.2 million bpd, a figure that is sure to impress their European buyers, the damage to and neglect of the oil fields is limiting hydrocarbon production.

One problem is that the infrastructure of crude oil development is quickly reaching production capacity, even as May registered the highest barrels per day (bpd) output since the fighting.

Those impressive Libyan oil reserves were estimated in 2010 to be close to 80 billion barrels, and this particular black gold is extremely cheap to extract (some fields price their extraction close to US$1 per barrel).

Before the unrest, Italy received nearly all of Libya’s 10 billion cubic meters of natural gas per year according to 2009 figures. On top of that, Italy and France together received 43 percent of Libyan oil exports before the fighting in 2011. This could go some way in explaining why Rome and Paris campaigned so hard for a NATO intervention during the uprisings.

Things were different back then. The Europeans bought Libyan energy at very low prices (lower than world market rates) and the difference was then pocketed by Qaddafi and corporations such as ENI. Such energy firms eagerly anticipate those fields coming back online so their investments can begin to return profits once more, but all this will depend on how the security situation holds.

Of the 6.5 million people in the country, almost all Libyans claim allegiance to one tribe or another. Official UN estimates count over 140 tribes, all staking territorial (and overlapping) rights to different parts of the country. Needless to say, these tribes have a long history of antagonism towards one another.

Qaddafi understood this and skilfully played them off against each other during his reign. This is likely a fair chunk of the reason why he remained in power for so long. Now that Qaddafi is gone however, the division amongst the Libyan tribes is complicating the transitional government’s ability to project control from a centralised position

While the transitional government has a semi-functioning police structure, those police forces are still unable to effectively protect the major cities from armed gangs. In fact, armed groups in Benghazi and Tripoli ignore all government calls to disarm, setting up de facto security forces that simply won’t recognise the government police apparatus.

The elections planned for July 7 should go some way in preparing the ground for a more stable political structure, and by extension a stronger economy, even if it doesn’t immediately alleviate the deep tribal differences. The job of the new government will be to draft a working constitution for reconciliation and disarmament of the militias to establish some semblance of centralised security.

With all the unrest however, the potential for immanent unification could be a pipe-dream. Only after the government stabilises the political and security situation will foreign investment be attracted again.

Ultimately the health of Libya’s economy will depend on just how quickly and convincingly the new government can tie up loose political ends and unite the tribes by emphasising national unity over tribal unity. Just how that government will look considering the disparate players involved is unknown.

If the new Libyan government after July 7 cannot control the militants, international energy firms such as ENI, BP and Shell will no longer just remark rhetorically about suspending oil exploration and extraction. Instead they very likely will pull out completely and abandon drilled oil wells to simply wait out the unrest for a calmer time. This will hurt Libya economically as the expense of developing fresh oil production systems becomes more expensive as time goes on.

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