Libya: what next for oil and gas production?

Paul Boughton
Libyan armed forces loyal to the regime came under intensifying bombardment from cruise missiles and French, United Kingdom and United States air forces on Saturday, as it quickly became clear that the ceasefire declared by Libya on Friday (17 March) was not being upheld. The country's forces instead launched heavy attacks on the main rebel stronghold of Benghazi in the east and one of the last remaining rebel-held cities in the west of the country, Misurata. Attacks by the coalition were understood to target mainly the command and control structures and air defence capabilities of the Libyan armed forces, but also dealt some heavy blows to the advancing government-loyal ground forces and their logistics.

Attacks were initially undertaken by aeroplane and naval units from France, the UK and the US, with a larger number of countries mainly from the NATO alliance joining the force yesterday (20 March) and over the coming days, as their planes are moved into position at UK bases in Cyprus and Italian bases on the island of Sicily and on the southern mainland. A further build-up of the coalition's naval capabilities is also expected in the coming days, as the French aircraft carrier Charles de Gaulle is moved into the area and assets from several other countries are expected to, in practice, enforce something akin to a naval blockade of Libya.

The decisive attacks against Libyan ground forces advancing on rebel-held cities are now widely hoped to again turn the balance in the country and not only allow the beleaguered opposition forces to advance, but to further undermine the regime's position and make the cohesion of its armed forces start to crumble. As the rebellion against the Qadhafi-led regime spread last month, a large number of Libyan tribes pledged their allegiance to the opposition coalescing in Benghazi, while significant parts of the armed forces deserted the long-time leader. The regime's ability to stem the tide of desertions by clamping down on opposition in the capital, Tripoli and other key areas, while shoring up and mobilising its key supporters, managed to eventually check the advance of the quickly assembled opposition revolt. The government forces then used their remaining armament and logistics advantage to isolate the opposition in the towns that the rebellion had managed to free and then retook them one after another. Many—at least outside the coalition, but likely also within—are now hoping this might be reversed if the Qadhafi regime's wings literally are clipped and his ability to move, co-ordinate and supply armed forces quickly across Libya's vast distances is damaged. If the regime’s survival again can be put into question, there would be reason to expect that military as well as political desertions will again pick up and that the regime's remaining grip over the west and centre of the country, in particular, will start to crumble.

Colonel Qadhafi himself has, nevertheless, vowed to remain in power and fight until his last drop of blood, promising that this will become a very drawn-out war. Libya is, however, a tribal society—his core tribal and political supporters (these categories are often, but not always, the same) have much to lose should his regime fall—if his ability to project power onto opposition and defectors is seriously weakened, the remaining vestiges of his regime might start to be seen as a liability by many of those groups, which might choose to abandon Qadhafi in order not to be dragged into a civil war against the absolute majority of Libya's population, which in the long run can only be lost.

Should this assumption, however, prove wrong and a sufficient part of the population rallies behind the regime in the face of international attacks, the situation could indeed become lengthy. The popular support demonstrated through almost all of Libya's cities in the unco-ordinated beginning was a strong sign of how widely despised the regime is by what looked like a clear majority of the Libyan people.

IOCs Changing Situation

Navigating the fast-changing Libyan environment has indeed been hugely challenging for IOCs with upstream assets in the country since the start of the unrest. Discreet feelers to the opposition were extended almost immediately by the IOCs, especially when local tribes in parts of the central and eastern Sirte Basin, where most of Libya's oil is produced, pledged their allegiance to the opposition and unilaterally assumed security responsibility over the oilfields in their areas. Most companies were rightly careful not to bind themselves too closely to any entity, however, given the unorganised opposition leadership and the very fluid situation. As the Libyan government over the past two weeks has managed to claw back control over virtually all oil and gas installations—at least nominally when it comes to the remote upstream desert areas—a few of Libya's main players were quick to start ingratiating themselves with the regime, in order to make sure that they would not be punished with expropriation or revoked contracts due to the supportive stances of their home governments toward the opposition. Italy's Eni stands out in this regard, having officially called for international sanctions to be lifted last week and lifted a cargo of crude from its offshore al-Bouri field in a demonstration of its willingness to heed calls from Libya's National Oil Corporation (NOC) to quickly return and restart production in the country.

Outlook and Implications

Now, however, most of the IOCs in Libya are in a situation where their home governments de facto are at war with the country's regime, making it increasingly hard for them to envision returning to some form of normality should the Libyan regime in the end not crumble. While threats by Qadhafi himself of Western IOCs losing their contracts in favour of companies from China, India and Russia to a high extent are incompatible with a quick restart of Libya's oil and gas industry, the sanctions situation still taking shape means that if the ground conflict between the regime and the opposition ultimately results in a victory for the regime, or a stand-off in a divided country, IOCs will struggle significantly to do any business in Libya, or at least the part of it controlled by the regime.

This is underlined by plans by the EU to add Libya's NOC to a blacklist of entities sanctioned for their close attachment to the Qadhafi regime during a summit later this week (24-25 March). According to Reuters, plans are also advanced for a simultaneous blacklisting of dealings with the Libyan central bank. Together, these two measures would make it virtually impossible for EU-based IOCs to run any significant oil and gas projects in the country and even make crude purchases from Libya very complicated. Following last week’s UN sanctions against Libya, the crude trading situation became complicated enough according to some trading sources, who told Reuters that crude purchases were now impossible to finance and that "the only way you could do it is to pay up front. You can take a suitcase and fill it with millions of dollars and go to Tripoli to pay for a cargo if you want". Unilateral US sanctions had already seemingly halted most US players from trading with Libya and the forthcoming EU sanctions are likely to extend that to European companies and beyond. Chinese companies have been assumed by some to potentially benefit from this, however, with international banks refusing to deal with companies dealing with Libya this would still not be straightforward and would require the use of elaborate middleman structures. Nevertheless, as long as airstrikes keep falling over Libya, tankers are highly unlikely to be sent to Libyan ports to lift the last remaining crude it has in storage.
Fig. 1. Source: IHS EDIN. Oilfields in italics, oil port facilities in black bold, oil infrastructure in green.

Fig. 2. Source: IHS EDIN. Oilfields in italics, oil port facilities in black bold, oil infrastructure in green, gas in red.

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