Restoring Libyan oil output could take years

The imminent end of a seven-month civil war in Libya holds the promise of restoring oil production in the OPEC-member nation, adding to supply, pushing prices lower and providing the global economy with a much-needed shot in the arm.

But there are a number of obstacles to overcome before Libyan oil output ramps up again, and it's anybody's guess how long it will take.

While some production could begin in a few months, restoring pre-war levels will take more than a year, according to a top Libyan oil official who defected from the government in May.

"It will not be easy to start again at the same level," Shokri Ghanem told Reuters Monday. "I think it will take a few months to come back to production, but to come back to the level of production that we used to produce it will take some time, maybe a year and a half."

Ghanem said some oil facilities were damaged as workers who had left them in a "panic" weren't able to shut them down properly.

Oil prices, which have fallen in recent weeks on concerns about a weakening global economy, held steady Monday as trades assessed the unfolding situation in Libya. Traders expect oil prices to fall as Libyan production resumes.

Private estimates vary widely on the question of how long it will take to get Libyan oil production back to pre-war levels, largely because it's not known how badly its production, pipeline and shipping facilities were damaged by fighting and sabotage. Lack of routine maintenance since the war began also could make it harder to restart production.

Analysts polled by Reuters estimated it would take up to a year to restore production to 1 million barrels per day and up to two years to get back to pre-war levels of about 1.8 million bpd, or about 2 percent of global output. Industry research firm Wood Mackenzie estimated last week that it could take three years for Libya to resume pumping at pre-war levels.

"It will be some time before Libyan oil production resumes," said Caroline Bain at the Economist Intelligence Unit. "However, the prospect of resumed output from Libya will remove some of the political risk premium in the oil price."

Libya has an estimated 46.4 billion barrels of reserves — enough to sustain production for 70 years at pre-war levels. During the fighting production has fallen to just a few hundred thousand barrels a day, barely enough to meet Libya's domestic needs.

Now as rebel forces consolidate control of the country, they face series of hurdles before they can restore oil output and bring much-needed cash to rebuild the war-torn country.

The first is establishment of a new, unified government that can overcome political infighting among various tribes and rebel factions.

"They will probably enter a democratic process, but it will take a long time because they are not really prepared. They had no experience over the last 40 years with any type of parliamentarianism or democracy," said Martin Hvidt, a Middle East analyst at the University Of Southern Denmark. "The danger would be that you would have an extended period when it is not clear who will be in charge."

Rebel forces have made a good start, establishing a National Transitional Council that has won recognition from the U.S. and other countries as the legitimate governing authority in Libya. That will help reassure oil buyers signing contracts with Libya.

"The NTC is an impressive body. They've done an impressively good job governing Benghazi ... They've been preparing for several months," said Shadi Hamid, research director at the Brookings Doha Center. "It's probably going to be messy. There's always a risk after the fall of a leader. ... But the international community is united in supporting the NTC."

As Libyan oil comes back on line, it likely will have the most  impact on the London benchmark price of Brent crude, because most of Libya's oil is sold to European consumers.

On Monday, Brent was still trading above $107 a barrel. But Julian Jessop, chief international economist at Capital Economics, expects Brent to drop back below $100 within weeks, if not days, and to fall to $85 by 2012.

Lower oil and gasoline prices would give a much-needed boost to the sagging U.S. economy. Though pump prices have fallen this summer, they are still well above average levels seen after the recession ended in June 2009. Those elevated prices have taken a big bite out of consumer spending. Economists who believe the U.S. will skirt another recession are betting heavily that lower energy prices will help revive growth by the end of the year.

Battle for oil spoils
Even as the battle for the streets of Tripoli rages, private oil companies are waiting in the wings.

Under the Gadhafi regime, Libya’s oil industry was run by the state-owned National Oil Corp.,  which was responsible for managing exploration and production sharing agreements with international oil companies. Most private and national oil companies suspended operations and evacuated their staffs after fighting broke out in February. Along with smaller subsidiary companies, the NOC accounted for around 50 percent of the country's oil output.

Early in the conflict, rebel forces seized one of those subsidiaries, the Arabian Gulf Oil Co., of AGOCO, based in the eastern city of Benghazi. AGOCO said Monday that it was ready to start oil output in its two eastern fields, with capacity of 250,000 barrels per day.

"We have taken care of the maintenance. We have Libyan oil companies and can start any time if security is approved. We can start without the foreign companies," said Abdeljalil Mayouf, information manager at AGOCO.

But AGOCO also is signaling that there may be changes coming in existing contracts with private and national oil companies doing business in Libya.

Italy's Eni was the top producer before the conflict broke out and was quick to establish a presence as Moammar Gadhafi's last loyalist forces dug in Monday around the capital of Tripoli. Italy's Foreign Minister Franco Frattini said Eni staff had arrived to assess what would be needed to restart oil facilities in the country's eastern region.

He also made clear the Italians intend to play a major role in getting Libya's oil industry on its feet.

"The facilities had been made by Italians, by (oilfield services group) Saipem, and therefore it is clear that Eni will play a No. 1 role in the future," Frattini told state TV RAI.

China also wants a piece of the post-war Libyan oil industry. Foreign Ministry spokesman Ma Zhaoxu said in a statement Monday on the ministry's website that "China is willing to work together with the international community and to play an active role in the future reconstruction of Libya."

Before fighting erupted in February, some 35,000 China citizens were working in Libya. Estimates of China investments there run as high as $18 billion

Russian companies, including oil firms Gazprom Neft and Tatneft, also had projects worth billions of dollars in Libya. Brazilian firms such as Petrobras and construction giant Odebrecht also had business there.

But those contracts could be in jeopardy under the new management of Libya's oil industry.

"We don't have a problem with Western countries like Italians, French and UK companies. But we may have some political issues with Russia, China and Brazil," AGOCO's Mayouf told Reuters.

Other major oil companies operating in Libya before the civil war began were Great Britain's BP; U.S. companies ConocoPhillips, ExxonMobil, Hess Corp., Marathon, Occidental Petroleum and Shell; France's Total; Spain's Repsol; Germany's Wintershall; Norway's Statoil and Austria's OMV.

Those countries and companies will now have to wait for Libya's new political power to take shape before they begin negotiations with the countries new oil industry managers.