Failure to Launch: Long-Term Crude Production Targets Delayed Once More in Libya

Another Delay

Shokri Ghanem, the newly reinstated chairman of Libya’s NOC and the North African country’s de facto oil minister, earlier this week told media that Libya will not be able to reach its 3-million-b/d target, blaming the economic crisis’s impact on investment. "Achieving 3 million b/d by 2012 is not on the table because of a lot of changes in the market and budget constraints," Ghanem was quoted as saying by Reuters, adding that a new target deadline still had to be formulated, but that "it could be 2015 or 2016". In comments to other news agencies, including Agence France-Presse (AFP), Ghanem was quoted as saying; "By 2016-17, we can reach the 3 million b/d target, but we need more budget allocations". According to AFP, he did put Libya’s current oil production capacity at “almost 2 million b/d”, although he did not specify from which projects Libya would have managed to raise its capacity from what widely is regarded to be its top production capacity of between 1.70-1.85 million b/d.

Libya’s medium-term production target has slipped several times over recent years, initially having been set for 2010 in the middle of the decade before slipping to 2012. The new slippage to 2015-17—or what more realistically sounds like 2016-17—is, however, a quite considerable delay, signalling the failure of Libya to get the redevelopment of its mature and declining oilfields underway over the past few years.

A Litany of Problems

Indeed, Libya is finding it extraordinarily hard to move forward with investment in its mature oil and gas assets, not managing to muster its own resources—financial and technical—at its wholly managed assets, or to kick-start its projects managed through joint ventures (JVs) with IOCs.

Libya’s relatively successful reintegration into the international community after it agreed to halt its nuclear weapons research programme and took responsibility for a number of terrorist actions allegedly committed by itself or groups acting on its behalf, was followed by a large inflow of companies returning to old acreage, or taking up new acreage in several exploration-focused licensing rounds. Together with the relatively limited number of mainly European IOCs that continued to work in the country during its isolation, the new openness and scrapping of international sanctions seemed to herald an era of rapid development and technological upgrade of an industry that during decades of resource nationalism (albeit not full nationalisation) and international isolation had experienced quite a steep decline in its production capacity.

While IOCs indeed flocked to the North African state and significant investment was ploughed into exploration programmes, investment into its mature producing assets—where the largest amounts of incremental production capacity can be gained—have failed to properly get underway, as Libya’s government and NOC has spent years concentrating solely on the exploration effort and then on contract renegotiations, raising significant signatory bonuses but delaying any actual investment and work from taking place. This strategy has largely been driven by increasing domestic political pressure on the NOC to quickly bring in more revenues for the state, while capital expenditure (capex) budgets sufficient to launch projects have not been allocated. With the NOC itself at the centre of a protracted power struggle between the regime’s conservative hardliners and the liberalising pro-business group, contract negotiations have become a quick fix, delivering a bonus, but also a greater government take, which has resulted in instant revenue rises, albeit at the expense of IOC appetite for medium- and long-term investment.

As an increasingly large part of Libya’s exploration efforts have failed to be rewarded with significant discoveries, it has become apparent that getting large-scale mature field redevelopments underway is the only way for the country to be able to raise its oil production capacity significantly over 2 million b/d, never mind 3 million b/d. However, although the IOCs have agreed to convert their old exploration and production-sharing agreements (EPSA) into the latest Libyan EPSA-IV contract format— in most cases taking a sharp profitability cut in exchange for up to 20-year long extensions—and have also agreed to significant project investment commitments, the NOC’s limited negotiating and policy-setting capability has been fully tied up by the numerous processes, as well as by the constant tug-of-war between the liberalising and hardline factions of the government regime, preventing it from project-managing its part of the redevelopment process.

Failure to Launch

With increasing politicization, including threats of outright oil and gas nationalizations, as well as a general excess of red tape and bureaucratic hold-ups, progress has been not only slow, but in most cases virtually non-existent. IOCs, especially, over the past year been very reluctant to launch projects and raise their exposure in the face of nationalisation threats and the threat of a loss of operational control. This means that there is no way to assess Libya’s potential success in reaching these targets, since most of the work has failed to get underway at all, leaving virtually no signposts along the way from which to gauge progress.

Despite significant reservoir mismanagement and potential lasting damage at many mature fields in the country from the years of isolation, IOCs have committed to significant capacity increases on many of the largest assets after conducting detailed studies, leaving Libya’s main problems as being organisational and political in nature. The highly personalised nature of the regime and the fear that mid- and upper-mid-level management have in taking decisions, creates great bottlenecks, while generally opaque and often fractured decision-making structures add to the seemingly endless hold-ups. While liberals have been trying to cut red tape and move projects through the vast bureaucracy, little of substance has been achieved to create strong independent institutions and rework the country’s political structures, with there being serious reason for doubt that any faction has the resolve and power needed to undertake such a vast, and in the short term, unrewarding project.

Outlook and Implications

Libya has by now lost the momentum gained when it reintegrated itself into the international community during 2003-04, with much of its exploration work having ended in disappointment and development—not to mention mature fields’ redevelopment —projects being stuck in red tape and bureaucracy. Political pressure to raise government revenues and short-term cash through contract renegotiations and licensing rounds has also led to the NOC having to divert its relatively limited number of senior staff with international industry experience and negotiation capabilities from planning the mature field redevelopments, which are generally long-term projects that will not yield instantaneous results. Nationalisation threats and limiting investors’ operational control have at the same time made IOCs reluctant to move forward decisively with their investment commitments, although these policies appear to have struck a chord with the Libyan population at large.

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