Libyan oil: With Brent crude above $100 a barrel, foreign entities invested in Libya have a strong incentive to get production back up and running quickly. Italy, one of the biggest investors in the North African country, is confident it will be back to business as usual. However, oil companies can expect a bumpy ride even when the fighting stops.
Oil majors don’t need much prodding to return to a country where pumping oil was highly profitable, thanks to low production costs. A more stable and secure environment is the key. There must also be some sort of effective, recognisable government.
The key question is how the oil majors will be received in Libya. Rebel Libyan envoys have told Rome that Libya will honour existing contracts in the post-Muammar Gaddafi era. There is a long history between the two countries, and Italy’s Eni thinks oil and gas flows could resume before winter.
Yet, even the countries that supported or took part in the military intervention are likely to be vulnerable. Rebel leaders have said contracts would be reviewed for signs of corruption. The transitional government may come under pressure to renegotiate contracts from a population feeling it has not fully shared the country’s oil wealth. Libya has tightened terms on production contracts in recent years. But, there is scope for more severity. Foreign investors were willing to accept tough terms in Iraq on the basis that it might lead to big-ticket projects later. And, there is a queue of oil players hoping to get their foot in the door in Libya.
Libya has a clear incentive to resume pumping oil and it needs foreign expertise. But, it can not afford to rush into making decisions. The country’s net foreign assets, which should be released from the current freeze once it is officially deemed “liberated”, are estimated at around $150 billion — enough to cover 37 months’ worth of imports. And, even if oil companies manage to hold onto their terms, there is no guarantee on the long-term solidity of the Libyan government’s promises. Oil companies, hoping to soon get back to business as usual, may be too optimistic.