Will Libya’s oil production make a comeback in attracting investors?

Will Libya's oil production make a comeback in attracting investors Will Libya's oil production make a comeback in attracting investors
Workers at an oil port in Libya on 24 September 2020 [AFP/Getty Images]

Libya, once a prominent player in the global oil markets, is now seemingly poised for an oil production comeback that could potentially attract investors.

With a rich history in oil production, Libya’s peak production in 1970 reached nearly 3.4 million barrels per day (mb/d), positioning it as the second-largest Arab oil producer after Saudi Arabia. However, over the past half-century, Libya’s oil production has experienced a significant decline, currently standing at only 32 percent of its peak and ranking 18th in the world. Nevertheless, the country aims to regain its former status by aspiring to achieve an output of 2 million barrels per day by 2030.

While Libya has announced ambitious targets in the past, such as reaching 2.2 million barrels per day by 2023, it has fallen short due to factors other than a scarcity of oil. In fact, Libya’s proven oil reserves have more than doubled over the last four decades, positioning it as Africa’s largest holder of such reserves, constituting nearly 40 percent of the continent’s total. Despite this abundant resource, above-ground factors, primarily politics and poor governance, have hindered Libya from fully capitalizing on its oil wealth, resulting in a struggling economy heavily reliant on oil.

The downfall of Libya’s oil production can be traced back to the 1969 coup d’état led by Muammar Qaddafi, an army officer who subsequently isolated the country and faced international sanctions. Just as these measures were lifted, Libya became engulfed in a major popular uprising in 2011, inspired by the Arab Spring revolutions in Tunisia and Egypt. This uprising ultimately led to the death of Qaddafi, the fall of his decades-long regime, and a subsequent drastic overhaul of the political system.

Will Libya's oil production make a comeback in attracting investors
Workers at an oil port in Libya on 24 September 2020 [AFP/Getty Images]
The political turmoil following Qaddafi’s demise resulted in a fragmented country, divided along tribal, regional, and ideological lines, making it challenging for any government to effectively manage and stabilize the oil sector. This instability and lack of governance have directly impacted Libya’s ability to attract foreign investment and capitalize on its vast oil reserves. Despite multiple attempts by the United Nations and other international actors to foster political unity and stability, the country remains politically divided, hindering progress in the oil sector.

However, recent developments offer some hope for Libya’s oil production and its potential to attract investors. The ongoing peace talks between the two main rival factions, the Government of National Accord (GNA) and the Libyan National Army (LNA), have resulted in a ceasefire agreement and the establishment of a unified interim government. While challenges and uncertainties remain, the formation of a unified government provides a glimmer of hope for the stabilization of the country and its oil sector.

A stable political environment is crucial for attracting investors to Libya’s oil industry. International oil companies have shown interest in returning to the country and resuming operations, given Libya’s significant oil reserves and comparatively low production costs. However, they have been hesitant due to the volatile nature of the country’s political landscape and the potential risks associated with investing in a post-conflict environment.

Investors will closely monitor the progress of the unified interim government in ensuring security, enforcing the rule of law, and implementing necessary reforms to revitalize the oil sector. Key factors that would attract investors include the establishment of transparent and efficient governance structures, the resolution of disputes over contracts and ownership rights, and the provision of adequate infrastructure for oil operations.

Moreover, international collaboration and support will play a vital role in Libya’s oil revival. The United Nations, regional organizations, and major international powers must continue to provide assistance in rebuilding and stabilizing Libya’s institutions, promoting reconciliation, and encouraging economic diversification to reduce the country’s dependence on oil revenue. Additionally, addressing the challenges of corruption, smuggling, and illegal oil exports will be crucial to ensure a transparent and accountable oil industry that can attract reputable investors.

Despite the official conclusion of the civil war in 2020, Libya continues to face challenges as a “fragile and conflict-affected state” according to the IMF. This volatile history has had a negative impact on the confidence of oil-sector investors. Although there have been some recent signs of hope, major oil companies have not yet committed the necessary capital to significantly increase production. It is worth noting that Libya possesses the longest-lasting oil reserves in the world, with the potential to last nearly 340 years. However, without a significant improvement in the investment climate, Libya is at risk of losing out on the energy transition, as its valuable oil resources may become worthless.

A volatile history

Libya’s history has been marked by volatility, particularly in relation to its oil industry. After gaining independence in 1958, the country quickly discovered its vast oil reserves and began exporting in 1961. Joining OPEC in 1962, Libya experienced significant growth in oil production until it reached its peak in 1970.

However, this success also brought trouble. In 1969, King Idris was ousted by Qaddafi, who established the National Oil Corporation in 1970 and later nationalized the industry. This move, which took control away from foreign companies, set the stage for a tumultuous relationship with Western governments.

Qaddafi’s association with terrorist groups and his hostility towards Western nations led to the imposition of sanctions by the United States in 1978. The bombing of a Pan Am airliner over Lockerbie, Scotland, in 1988 further isolated Libya. Despite indictments of Libyan intelligence operatives for their involvement in the attack, Qaddafi’s government refused to extradite them, resulting in United Nations sanctions.

These international censures had a significant impact on Libya’s oil sector, hindering investment and further complicating its volatile history.

After the 9/11 terror attacks on the U.S., Qaddafi made offers of counterterrorism cooperation and took the decision to dismantle Libya’s weapons of mass destruction and long-range missile development programs. As a result, the sanctions were eased in 2004, leading to a struggle in oil production to surpass 1.5 million barrels per day. However, the relaxation of sanctions allowed international oil companies to return, which ultimately boosted production.

Unfortunately, Libya faced another period of instability when the Arab Spring spread to neighboring countries. The overthrow of Qaddafi in 2011 created a political vacuum, and warring factions targeted domestic oil production facilities, causing a significant drop in production to 500,000 barrels per day.

Currently, the country remains politically divided with two rival governments – one in Tripoli and the other in eastern Libya – each supported by different influential powers in the region.

Divided nation

The Government of National Stability (GNS), which is primarily supported by Egypt, Russia, and the United Arab Emirates (UAE), holds influence over the eastern and southwestern regions of Libya, including the majority of the country’s oil fields. It is aligned with the Libyan National Army led by Field Marshal Khalifa Haftar.

On the other hand, the Government of National Unity (GNU), mainly backed by Turkey and Western nations, and endorsed by the UN, maintains control over the capital city of Tripoli and its surrounding areas. Despite efforts for reconciliation led by France, a political resolution between the two factions has proven to be elusive. Consequently, the division between the east and west is expected to persist, as neither side can establish complete military or political dominance over the nation.

In conclusion, Libya’s oil production has the potential to make a comeback in attracting investors, given its abundant reserves and comparatively low production costs. The formation of a unified interim government in the country offers hope for stability and progress in the oil sector. However, significant challenges remain, primarily related to governance, security, and the ongoing political divisions within the country. To fully capitalize on its oil wealth and attract investors, Libya must prioritize political unity, implement necessary reforms, and engage in international collaboration and support to create a stable and transparent oil industry.

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