Bidders for Libyan oil need high appetite for risk

• Clashes harm investor confidence
• Licensing round for 22 blocks
• Contracts to be awarded in November

Deadly clashes last week have rattled investor confidence and potentially put at risk plans for the first Libyan oil and gas exploration and production licensing in almost two decades, analysts say.

Fighting has erupted in the capital, Tripoli, between government forces and militias. This in turn has led to deadly protests calling for the removal of prime minister Abdul Hamid Dbeibah in the UN-backed Government of National Unity. That government is itself vying for national power with the rival Government of National Stability in the oil-rich east.

“While this does not necessarily spell the end of the licensing round, it certainly harms investor confidence and pushes the process in a troubling direction,” says Jalel Harchaoui, associate fellow at UK-based Royal United Services Institute. “This is especially true of companies that are not already active in Libya.”

In March, state-owned National Oil Corp (NOC) launched a licensing round for 22 onshore and offshore blocks as part of a strategy to help raise production to between 2 and 3 million barrels per day (bpd).

Libya is Africa’s biggest holder of oil reserves and this was the level of production before the 2011 uprising that led to the overthrow of Colonel Muammar Gaddafi and plunged the country into civil war. 

NOC had roadshows in Texas, London and Istanbul to market blocks containing at least 2 billion barrels of oil equivalent, with contracts set to be awarded in November. 

“Licences will be a huge boost in terms of morale and prestige,” says Harchaoui. “They [Libya] need to go markedly beyond 1.35 million bpd, including gas and condensate, because oil prices have come down and Libya has no other source of income.”

Gas and oil production, which is averaging 1.38 million bpd, has not been affected by the latest clashes in Libya, NOC said last week. Most of the country’s oil infrastructure lies in the east.

“Certainly, the outbreak of violence in Tripoli, after so many years of relative calm, is a negative sign that could bring renewed skepticism amongst investors and foreign oil companies when thinking whether to take part in the next oil and gas licensing round,” says Claudia Gazzini, a Libya analyst at the International Crisis Group.

Since 2011, clashes between rival militias in the east and west have undermined energy security with blockades on infrastructure, forcing NOC to halt some production and exports. Production plunged 50 percent in mid-2022.

“Any renewal of fighting or a blockade would be a major blow to the government’s efforts to attract further international oil company interest in Libya’s oil sector,” says Hamish Kinnear, senior Middle East and North Africa analyst at Verisk Maplecroft. 

“Ultimately, a high appetite for risk is necessary for any IOC looking to operate in Libya. A recent dip in oil prices is likely to dampen that appetite.”

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Several European companies already operate in Libya, among them BP, TotalEnergies, Italy’s Eni, Austria’s OMV and Spain’s Repsol. However, Libya has failed to woo US companies such as ExxonMobil and Chevron.

“There is a general interest from US oil companies in this licensing round [but] whether or not any of them will be actually bidding is still an open question,” says Gazzini. “Libyan crude is cheaper to produce, and cheap to get to the oil terminals, so it is seen as a high yield and return for investment.”

Libyan crude is light and easy to process in European refineries, making the blend a favourite for them.

“The most prestigious and the biggest companies that NOC would hope for are the Western giants,” says Harchaoui. “Although they appreciate the quality of whatever is on offer, they are [also] the most risk adverse.”

That is why NOC is likely to attract existing operators that are familiar with Libya’s security risks, as well as newcomers from Turkey, the UAE and Algeria – countries that have close political and economic ties with Tripoli.

“What will be interesting is to see if some of the new Libyan oil companies that have mushroomed over the recent years will also be taking part in these bids,” says Gazzini.