Libyan Oil Field
A security officer walks past a gas pipeline after an explosion south of the city of Ajdabiyah in Libya, April 3, 2013. Reuters/Esam Al-Fetori

When Western forces intervened in the Libyan revolution two years ago, it was the first time the U.N. had ever approved the establishment of a no-fly zone in an OPEC member country.

But Libya isn’t just any oil-producing country -- it is Africa’s largest in terms of proven reserves, with more than 47 billion barrels as of last year. Keeping the spigots secure in Libya is a necessity for many international powers. It is equally important to Libya, where hydrocarbons account for more than 60 percent of GDP and a whopping 95 percent of revenues.

Libya is often painted as a chaotic place where business is anything but usual and internecine violence is the norm. But oil production there has actually recovered quite well since the fall of the four-decade long regime of Moammar Gadhafi in August 2011. Before the country’s revolution, Libya produced about 1.65 million barrels per day (bpd). Following a short period when oil drilling and shipments ceased, Libya has rebounded to produce about 1.5 million bpd now, according to Oil Minister Abdelbari al-Arusi.

But that’s just a small part of the story. In truth, Libya’s oil future -- and thus the prospects for its economy -- is not as bright as the numbers seem to indicate. The rapid recovery of production involved little more than switching on shuttered facilities and letting the energy companies retake control of maintaining operations. Contracts signed during the Gadhafi era were simply continued.

This is not a viable approach over the long haul. Infrastructure at the oil fields and transportation arteries throughout the country will need to be sustained -- so far upkeep is spotty at best -- for Libya to be counted as a legitimate global producer. Moreover, security at oil sites will have to be upgraded substantially in order for energy companies to drive profitability and productivity. Some Western companies are dug in for now, but only because they are loath to cut their losses.

“The countries already invested in Libya are sustaining their production and protecting their people as best they can, largely with an indigenous workforce,” David Goldwyn, head of Washington energy consulting firm Goldwyn Global Strategies and former coordinator of international energy affairs for the U.S. State Department, told International Business Times. “But the prospects for expanded investments are limited by political uncertainty and the fragile nature of the security system.”

Foreign Firms Dig In

At the moment, the Libyan oil industry is in limbo. Real progress won’t come until the next licensing period, during which the government will offer new onshore and offshore zones for exploration and production.

The last round of divvying up resources began in 2005 under the Exploration and Production Sharing Agreement IV. To win bids for joint ventures under the EPSA IV framework, international oil corporations had to offer huge shares of production -- often approaching 90 percent -- to Libya’s National Oil Corporation, or NOC, and agree to significant risks and huge signing bonuses.

Several companies ultimately paid a high price for that gamble. Anglo-Dutch company Royal Dutch Shell (NYSE:RDS.A), BP (NYSE:BP) of the United Kingdom and the London-based natural gas company BP Group PLC (LON:BG) spent hundreds of millions of dollars between them on exploration agreements. Not one has produced a single unit of hydrocarbons in Libya since winning bids under EPSA IV, and only BP has a staff presence in the country.

Oil Minister Al-Arusi has pledged to unveil bidding rules this year that will offer more lenient terms to encourage oil companies to participate. But he has been vague about the terms he supports, in part because new energy policies would need the approval of Libya’s central government. Right now, that government is barely operational.

Libyan Oil Minister Abdelbari al-Arusi
Libyan Oil Minister Abdelbari al-Arusi at Libya's Oil Ministry office headquarters. Reuters/Ismail Zitouny

Libya is currently headed by the General National Congress (GNC), a popularly elected interim legislature. Elections to establish a permanent parliament will follow a referendum process for Libya’s new constitution, which will follow the election of a body to draft the document. The process is an arduous and complicated one, and the gears seem to get stuck at every turn.

The last major setback came three weeks ago when the GNC passed a controversial Political Isolation Law, which bars former members of the Gadhafi regime from holding political office. If enforced to the letter, this sweeping piece of legislation would affect people who worked for the government decades ago but fully participated in the 2011 rebellion, including current Prime Minister Ali Zidan.

“Nothing major or long-term will happen until there’s a constitution, because officials aren’t willing to stick their necks out,” said Jason Pack, researcher of Middle Eastern history at Cambridge University and president of “Decisions require consensus to be painstakingly built.”

Black Gold Everywhere

For the short term at least, international companies have good reason to hunker down in Libya. The country’s crude is abundant. It is also generally light and sweet -- that is, low on density and sulfur, a favorable formula for importers and downstream operators -- and easy to access.

There are five main hydrocarbon basins in Libya. The largest by far is Sirte in the north, but the other four are comparatively underexplored and brimming with potential.

Although Libya has five refineries, with total capacity upward of 400,000 bpd, most of Libya’s oil is exported as crude through terminals along the Mediterranean. These terminals were often targets of violence during the revolution, and the biggest of them -- As Sidr and Ras Lanuf -- both suffered shutdowns. As Sidr erupted into flames in March, 2011. Opposition spokespeople blamed pro-regime forces, saying government artillery was responsible for a blast that sent black plumes of smoke billowing over the coastline, about 360 miles (580 kilometers) east of Tripoli. That same month, an intense exchange of government airstrikes and rebel rocket fire damaged an oil tank and led to a months-long shutdown at Ras Lanuf, though the refining facilities there were for the most part left intact. Both terminals reopened last year but will need more attention and maintenance if they are to remain viable in the long term.

That’s not in the cards right now. Tripoli is too weak to protect oil assets effectively, and Libya has restrictive policies about letting the energy companies send in their own armed guards. That leaves only local security to protect oil companies’ investments.

Al-Arusi tried to bolster confidence this year by raising the number of Libyan oil facility security workers to 18,000, but many of those recruits were members of the various militias that fought to overthrow Gadhafi. They remain well-armed and resistant to central control. These hired hands are often the perpetrators of disturbances at these sites including protests, destruction of equipment, or violent altercations with other groups over the rights to security assignments.

These activities have resulted in shutdowns and delays at several fields and pipelines across the country -- particularly in the East, where most of Libya’s most valuable concessions are located. And the situation is getting worse, not better. The latest disruption came on May 16, when protesters forced a shutdown in the town of Zueitina at an oil terminal through which one-fifth of Libya’s exports flow.

It’s a tough business environment, to be sure. But those foreign firms that have already put down roots in Libya appear willing to sit tight for the time being, as long as the NOC can offer favorable business terms to offset the clear risks -- and the sooner the better.

“I don’t see immediate drastic changes to the investment climate in Libya,” said Carole Nakhle, an energy economist at the Surrey Energy Economics Center. “Companies will, however, be expecting more lenient treatment from the Libyan government.”

Who Will Reap the Spoils?

If and when oil production in Libya approaches some level of stability, the winners among energy companies may not be those that would have seemed to have an inside track. France was the first country to provide military support for the Libyan rebels and the first to recognize the opposition as the legitimate government of Libya. Moreover, France’s Total S.A. (NYSE:TOT) was the first major international oil company to ramp up production in the aftermath of the uprising. But so far the nascent Libyan leadership has not expanded France’s energy concessions or softened the terms of Total’s exploration agreements.

Indeed, the most favored energy company in Libya is Italy’s Eni (NYSE:E), even though Italy played a minor role in the Libyan intervention. Eni has been Libya’s largest foreign producer of hydrocarbons for decades, in part because Libya was once a colony of Italy.

“Eni has a strong footprint in the country, not only in industrial terms, but also at the historical, social and personal level,” said Nicolò Sartori, a researcher with the Istituto Affari Internazionali in Rome. "Of course, the Libyan authorities will attempt to attract other international investors, and the production share of the Italian company will decrease relatively compared to other foreign energy players. But I don’t think we will see very soon another company replacing ENI as a top foreign producer.”

Mellitah Oil and Gas complex
A view of the Mellitah Oil and Gas complex is seen, 100 km (60 miles) west of Tripoli March 4, 2013. Reuters/Ismail Zitouny

When Libya is finally ready to issue a new round of energy licenses, contenders for prime contracts are likely to come from more non-Western countries than the past. For example, Russia and China are expected to win key assets, even though they did not back the rebels during the revolution. Unlike many British and American outfits, energy companies from these countries will be less concerned about paying off government officials and about a likely lack of government openness and transparency.

“Countries like Russia and China will be able to do decent business, even though they either supported the Gadhafi regime or were lukewarm about the uprising, because they are more able to work in the current Libyan business climate,” said Cambridge University’s Pack.

Moscow-based oil company Tatneft (MCX:TATN) has held blocks on the Sirte and Ghadames Basins since the Gadhafi era, and the company announced in March that it would return to its operations in Libya, which were abandoned during the uprising. Gazprom (MCX:GAZP), too, is eyeing opportunities; executives say they are planning to buy a stake in Eni’s Elephant field later this year.

China was never a major investor in Libya’s oil market in terms of exploration and production, but it has been a significant consumer of Libya’s exports. Now Beijing, which was lukewarm about the uprising, seems eager to improve its relationship with Tripoli. Last year, two of China’s major oil firms, Sinopec and PetroChina, made deals to purchase a combined total of 140,000 bpd from Libya. And given Chinese officials’ attempts to play a more active role in the Middle East of late, it’s quite possible that the country’s state-owned firms will be more likely to place bids for concessions once they become available.

"Should [Russian or Chinese companies] offer good deals and ambitious investments – taking greater risks than Western ones in these precarious security conditions – why wouldn't the Libyan authorities accept that?” Sartori said.

Fueling A Win-Win

Libya’s economic growth has been rapid during the post-Gadhafi recovery; GDP is expected to rise between 16 and 18 percent this year, according to Libya’s Central Bank. The World Bank is less optimistic, forecasting a growth rate of 7.6 percent and predicting that GDP expansion will simmer down to more normal levels of about 5 percent in 2015.

But with oil production comprising the lion’s share of Libya’s GDP, rosy forecasts are dependent on real improvement in energy output and stability in the oil patch -- and here the predictions become very hazy and conditional.

“If we have several years of this instability, it’ll have an impact down the line,” said Bhushan Bahree, senior director of the IHS CERA Global Oil Group.

That's a big if -- with big implications. Business Monitor International expects Libyan oil production to rise to 1.78 million bpd by 2017 and 1.87 million bpd by 2022. But the risk management firm warns that such forecasts are dependent on Libya successfully forming a strong government, outlining a global growth strategy and fending off political challenges that could weaken the economy. So far, none of this is being addressed with any efficacy.

In other words, Libya has its work cut out for it.

Libya Oil Pipeline
A worker operates a bulldozer to build earthen dams to prevent oil spill after an explosion at an oil pipeline south of the city of Ajdabiyah April 3, 2013. Reuters/Esam Al-Fetori