War Damage to Hit Return of Libyan Crude

If Libya speeds up the revitalization of its oil industry, Wikistrat analysts predicts a bright future for the country.

A Libyan rebel sits in front an oil refinery after the capture of Ra's Lanuf, March 5, 2011
A Libyan rebel sits in front an oil refinery after the capture of Ra’s Lanuf, March 5, 2011 (AP/Hussein Malla)

Damage to Libyan production and port infrastructure means at least a fifteen month wait until crude output reaches preconflict levels.

Prior to the conflict, Libya was producing roughly 1.6 million barrels per day. Assessments of severe damage turned out to be less than initially expected but production levels are still being measured in the tens of thousands rather than the hundreds of thousands of barrels per day that was hoped for. Many of the oilfields and terminals were mined, workers’ camps looted and some of the wells have had trouble producing again but the main concern is the ports which were a major site of battles and suffered from NATO bombing.

The average fifteen month estimate of return to preconflict production levels falls between the most optimistic of oil executives, who are estimating a return in weeks and the most pessimistic of oil consultancies, which see a full return in about three years. Currently, none of the foreign oil producers have returned to Libya, but the provisional government has assured them they will honor the Gaddafi era contracts although no new exploration concessions will be granted until after the formation of a constitution and formal government.

Analysis

High dependence on oil revenues has left Libya’s economy vulnerable and exposed. The country has much to gain internally by improving its energy security as part of a wider effort to diversify its economy.

The threat of a prolonged come back to preconflict oil production levels demonstrates the need for Libya to diversify its economy which is overly dependent on oil revenues. Conservative analysts suggest that a series of market liberalizing reforms, so as to open the economy, would be a good first step toward this goal. When considering the inevitable and profound political change that will occur in the country in the coming weeks and months, Libya will need to have secure and stable funding to build a solid foundation for the economy and nation to prosper.

Additionally, the return of Libyan crude to oil markets is important to moderating global oil prices. Although preconflict Libya accounted for 2 percent of global oil production, increased production capacities, tapping into estimated reserves and general development could increase this number. Indeed, the vast, untapped Libyan desert has had international exploration corporations from China to Europe seeking to strike the next big rig. Its oil industry has much potential to expand when Libya’s current political situation rectifies and calms.

Wikistrat Bottom Lines

Opportunities

Those in power can take Libya in a new direction by opening and liberalizing its economy so as to spread risk across different sectors, precluding future slumps due to potentially slowed oil production.

Risks

Such stops to production means some wells may not produce oil at the same levels or at all. With the government already declaring that new exploration concessions won’t be granted for some time, the prospect of drilling replacement wells is even further away. If this is the case, the more pessimistic estimates of years for a return to preconflict production levels will prove acurate and troublesome for global oil prices.

Dependencies

A return of Libyan production will depend on the stable formation of a government, first and foremost. A new government provides the stability to both keep sectarian violence from further disruptions while also bringing back the oil companies into the country. Oil production will then depend on the ability to rebuild the infrastructure, successfully clear the oilfields of those mines and to get dormant wells to begin producing again.

Aaron Holm and Katherine Kokkinos contributed to this analysis.

Comments

  1. The sub-saharan press and many elites in that part of the world attribute Kaddafi’s fall to his desire or ambitions to use Libya’s oil capital to help create major financial institutions on the continent and to influence political debates at the Africa Union. It is unclear what the new Libyan provisional government will do in regards to that policy.
    Obviously, the priority of the new government is to restore pre-conflict oil production levels and to diversify its economy; however, pursuing Kaddafi’s ideology will earn the new government political support from the Africa Union and may represent a challenge to the World Bank and IMF since Libya could not be bombed twice and it has become clear that the collateral damage inflicted on Libya’s oil infrastructure was beyond the objectives of the UN resolution to remove Kaddafi.
    The above scenario is unlikely, because it is hard to exercise goodwill in defeat; however it is also true that strong ideologies are tested in hard times.
    Some attention should be paid both on the Western press and the Sub-saharan press on the validity of Kaddafi’s economic model. The arguments for or against Kaddafi’s economic model will confirm or infirm the perception, in many African circles, that African economies are subject to endless cycles of starts and destructions due to policies of the World financial and military institutions.