Huge Obstacles Impeding Libya's Stability

By Nirode Masson
IDN-InDepth NewsAnalysis

LONDON (IDN) - A new study has pointed to lack of political stability and security as Libya's main hurdles on the road to post-conflict reconstruction and economic recovery. Though officially declared as "liberated", Libya is considered an "extreme risk" country.

Prior to the uprisings, Libya's hydrocarbon industry accounted for over 95% of export earnings and between 85% and 90% of fiscal revenues. But it was run inefficiently under Gaddafi’s rule. A mere 25% of the country is said to have been explored for hydrocarbon reserves, making post-conflict Libya an attractive proposition for international oil companies.

But indications are that NTC would renegotiate, if not annul, contracts signed with the Gaddafi regime. Oil and Finance Minister Ali Tarhouni announced on October 11 that a committee will be established to examine whether all past oil contracts are legitimate.

The ambiguous nature of the term "legitimate contract" deriving from the inescapable nature of corruption in Gaddafi's Libya leaves the door wide-open for Gaddafi-era deals to be investigated, Maplecroft risk analysts caution, adding that the number of probes into deals signed during the rule of Gaddafi is likely to increase over the coming months and possibly years.

Gazprom summoned

Reports on October 21 said that Libya's National Oil Company (NOC) had summoned Russia's Gazprom to defend its actions related to an alleged "breach of investment obligations". The "breach" relates to Gazprom's alleged failure to pay for student education.

"While the NTC has expressed willingness to allow Gazprom to rectify the situation, the case reflects the authorities' will to confront international oil companies with their past actions or failings. NTC officials have also not ruled out excluding from future tenders companies, which they believe have not lived up to their commitments," says the Maplecroft study.

This would be a logical reaction to the weakness of the central government, which can retain legitimacy only by tackling emotive issues, such as corruption, which resonate strongly with the public.

The absence of a clear regulatory framework and stable government has however not prevented some companies from returning to Libya. It has also not deterred new companies from seeking to enter the market.

Indeed, in addition to oil companies such as Wintershall, Total and Eni, Libyan energy firm Zueitina Oil is reported to have resumed operations. Others such as Austrian oil firm OMV announced on October 18 that it is considering sending expatriate staff back to Libya. Non-oil sector companies are also being encouraged by the authorities to seek out opportunities.

The study finds little evidence to suggest that companies from countries which stood behind NATO's intervention to support the NTC against Gaddafi are receiving preferential treatment over those which did not.

This is despite NTC leaders indicating that companies from countries – such as France and the UK – which placed their political and support squarely behind the rebels at an early point of the military campaign would enjoy preferential treatment. "Companies should therefore anticipate usual levels of competition," Maplecroft risk analysts advise.

Overhaul

While Libya is unlikely to witness significant changes to its regulatory framework in the coming months, key institutions such as the NOC will likely undergo a significant overhaul, says the study. During the uprisings, sanctions against the NOC meant that it was only the Benghazi-based Arabian Gulf Oil Company (Agoco) that was able to act as the intermediary with outside markets.

This effectively inverted the relationship with the Tripoli-based National Oil Company (NOC) – the latter being freed from EU sanctions on September 23, 2011. "Given Benghazi's oil wealth and its pivotal role in the revolution, Agoco may not easily cede control back to the NOC. This is because the entity feels that it has proven itself capable of running independently," Maplecroft risk analysts are convinced.

Calls for a change in how the NOC does business have also become increasingly shrill. Some members of the NTC are calling for a reduction in its overall powers, although specific details have not been revealed as yet.

"That companies continue to use personal connections to establish a foothold in the sector accounts for a number of business risks. This risk is exemplified by the confusion surrounding Heritage Oil's acquisition of a 51% controlling stake in the Benghazi-based Sahara Oil Services Holding," says the study.

It adds: "The company’s confirmation in October of its US$19.5m investment was immediately contradicted by the NTC's director of international cooperation, Ahmed Al-Taghdi, who disputed the legality of the deal and said that 'it was too early to consider deals with Libyan oil companies.' This serves as proof of overlapping and contradictory decision-making within the NTC itself. This pertains to the NOC, whose role in deals involving foreign companies acquiring stakes in support services remains ambiguous."

In view of the ongoing 'purge' of senior managers in businesses and some institutions, foreign companies cannot presume that individuals who are currently in positions of authority will continue to hold their posts in the days, weeks and months ahead. Political dealings and negotiations with energy companies currently lack transparency and reflect wider uncertainty in the business environment. Purges of alleged Gaddafi supporters in the oil sector coupled with damaged infrastructure are undermining recovery.

Risky purges

The study is concerned about rising number of purges. These, it says, risks depriving public and private sector institutions of experienced individuals as well as causing disruptions to business and reputational damage to business partners. For businesses looking to operate in Libya, the risk of disruption over calls for management to resign because of ties to the former regime is particularly significant.

The Waha Oil workers have been on strike and refuse to return to work until the management – accused of colluding with the Gaddafi regime – is fired. The premises of the joint venture were allegedly used to house pro-Gaddafi forces during the unrest. Workers claim they have evidence that management provided Gaddafi’s forces with 'food, shelter and equipment', though it is not clear if this was done under duress.

This problem is expected to become more widespread, particularly now that the focus is shifting away from defeating the meanwhile deceased Gaddafi and refocusing on reconstruction efforts. An indication of this is provided by a report in October that the management of Metillah (a subsidiary of the NOC and operating a joint venture with Eni) had been ejected, and divisions were emerging between the 'new' and 'old' guard in the Tripoli Chamber of Commerce and Libyan Businessmen's Council. Similar tensions are reported in the National Oil Company itself. [IDN-InDepthNews – October 30, 2011]

Picture courtesy of euronews.net

2011 IDN-InDepthNews | Analysis That Matters

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