How Libya’s Energy Economy Can Avoid Iraq’s Mistakes

Since Muammar Qaddafi was toppled in Tripoli, Saddam Hussein’s fall in Baghdad eight years ago and 1,800 miles away has framed much of the way many think about it. Global leaders, reporters, experts, and even Libyan officials have explicitly argued that Libya will not become another Iraq. This is particularly emphasized when addressing oil and natural gas, which not only dominate Libya’s economy but also are important to the global economy. Indeed, the potential challenges Libya faces are evident from the fact that only this year did Iraq consistently surpass its immediate prewar oil production and export levels. But while the two countries share some similarities, they also are vastly different in many ways, including the circumstances of their regime change. These differences make the chances of a quick revival of Libya’s oil and natural gas industry more likely—especially if it avoids some of the costly mistakes made in Iraq.

Oil and natural gas account for 95 percent of Libya’s export revenue, and that will likely endure for the foreseeable future. The first big oil find in Libya was in 1959, and by 1969, according to Daniel Yergin’s oil industry history, The Prize, the country was producing more oil than Saudi Arabia. But 1969 also marked the year that Qaddafi and some other young military officers seized power in a coup against King Idris. The following year, which would come to mark the highpoint in Libyan oil production of 3.3 million barrels per day, Qaddafi nationalized some of his country’s oil industry, created a National Oil Corporation, and pressured other Arab oil-exporters to do the same even before the 1973 Yom Kippur War. Libyan oil output reached a nadir of 1 million barrels per day in the mid-1980s, rose and then stagnated in the 1990s and early 2000s at slightly below 1.5 million, before climbing to about 1.7 million barrels per day in 2010. Last year’s oil output was still only about half of its 1970 peak, and far below Saudi Arabia’s 8.4 million barrels per day.

Libya’s energy sector is also very important for the global oil market and economy. Although Libyan oil production represented only about 1.9 percent of global petroleum output in 2010, it is of such high quality that it is irreplaceable and has a disproportionate influence, particularly on gasoline prices. Moreover, Libya supplied 10 percent of Italy’s natural gas consumption and 10 percent of the European Union’s daily crude oil imports. The severe decline in Libyan oil supply over the past six months contributed to the rise in oil and gasoline prices (especially in Europe). It also contributed to Saudi Arabia pumping more oil and to the United States and other Western countries releasing strategic oil reserves this past summer, albeit with dubious results. Owing to its importance both nationally and internationally, what, then, are the prospects for Libya’s energy sector, and what lessons can Libyans learn from Iraq?

History argues for some caution about Libya’s near- and even long-term future. Energy-producing countries experiencing conflict have generally taken years to restore production to pre-crisis levels. There are many examples: Iran’s current oil production is only about 60 percent of its peak output under the Shah in 1974; Iraq’s output is only 75 percent of its 1979 peak, the year before the Iran-Iraq war began Iraq’s economic spiral; Venezuela’s production is only about 70 percent of the pre-Hugo Chavez peak in 1998; and Russia’s output is less than 90 percent of the 1987 Soviet-era peak. Each of these countries has distinct reasons for its output problems—wars, breakdown in security and government control, and political interference—but there are enough instances to suggest a pattern of political turmoil driving long-term declines in a country’s energy sector.

There are several ways that the Libyan energy sector seems about the same or worse than Iraq’s after Saddam Hussein fell, which should make us worry that it will repeat a similar, post-conflict pattern. First, the six-month Libyan rebellion seems to have inflicted greater damage to the country’s infrastructure than did the three-week battle to topple Saddam in 2003. In fact, the Iraqi oil industry actually did not suffer much damage during this initial period. Instead, it was badly impacted by widespread postwar looting of its infrastructure and the electricity sector that feeds it. That damage was then compounded by frequent attacks on energy facilities by insurgents and terrorists, mostly beginning in 2004.

Libya’s energy infrastructure has so far fared worse. Libyans initially conveyed publicly and privately to oil companies that the oil facilities survived in good shape. But Nuri Berruien, the new chairman of Libya’s National Oil Company (NOC), said on September 5 that there had been heavy damage to some facilities, especially those for export, as well as instances of serious looting. A Financial Times reporter confirmed that view after touring three key energy-producing cities, adding that thousands of mines were laid in the area. Oil companies are making their own assessments on the ground. Many of the key facilities are in the middle of the country, where a lot of the fighting has occurred, while Qaddafi’s hometown of Sirte, a key oil area, remains a loyalist holdout.

Second, in Iraq there were almost 150,000 U.S. and allied troops on the ground after Saddam fell, which, while insufficient to ensure long-term security, could still execute military operations at a high level. Libya, on the other hand, has a population about one-quarter the size of Iraq’s, but NATO has no troops on the ground, and the rebel army will be tested in its ability to ensure security. It must first defeat troops loyal to Qaddafi and it is unclear, at this point, how long that could take or if an insurgency will arise.

Third, modern Libya and Iraq are basically artificial constructs, with many fundamental cleavages. Although Baghdad was the seat of a great nation for many centuries, modern Iraq is a product of the post-WWI peace settlement and British ignorance. Libya’s divisions should be less challenging but might still pose significant problems. Its founding in 1952, after it had been controlled by Italy for several decades with its capital in Tripoli, cobbled together three autonomous Ottoman provinces (Tripolitana, Cyrenaica, and Fazzan). Its founding leader, King Idris, who had sided with the Allies in WWII, was an anti-Italian rebel leader from the eastern part of the country, the former Ottoman province of Cyrenaica, whose capital was Benghazi. Cyrenaica also holds most of the country’s oil reserves. When Qaddafi came to power, he again made Tripoli the dominant city, and moved the state oil company’s offices there. Not surprisingly, Benghazi was the capital of the anti-Qaddafi rebellion, and the new Libyan leaders have been slow to relocate to Tripoli. These regional tensions, along with other tribal conflicts, could undermine Libyan stability and energy growth.

Fourth, Libya’s stability could be challenged by a rise of Islamic radicalism, as Iraq’s has been. Both Qaddafi and Saddam suppressed Islamic extremists, and the fall of their regimes facilitated their resurgence. Radical religious Shia and Sunni in Iraq have been violent and difficult to integrate into a new polity. There already is evidence of some presence and prominence of Islamic extremists among rebel leaders and in society, but it is too soon to determine what role, if any, they will play in a new Libya.

On the other hand, there are also many ways in which Libya’s energy sector appears to be better positioned than was Iraq in mid-2003. First, Iraq had to contend with a post-Saddam oil sector that had been ailing for years; in fact, by 2003 Iraq had endured wars and international sanctions for more than 20 out of the proceeding 23 years. Iraq’s ability to resume and maintain production as it did was due to the extraordinary efforts of many very capable Iraqi oil officials, such as Jabbar Luaby, who headed the Southern Oil Company, and some retired American oil executives and other officials who served the U.S. government. Indeed, Libyan leaders might gain from the expertise of some of these Iraqi oil experts, according to Fadhel Othman, the former head of Iraq’s State Oil Marketing Organization.

Libya’s oil sector, by contrast, had been improving since international sanctions were lifted in 2003 and 2004. Indeed, ahead of expectations, Libya has already begun to produce oil again, and Berruien predicts that Libya could return to prewar oil production in 15 months. That timeframe is more optimistic than some international oil executives and experts predict. But if it ends up being correct, Libya will be ahead of Iraq, which did not resume its oil operations and exports until two months after Saddam was toppled, partly because the Bush Administration first wanted a United Nations Security Council resolution for political and legal concerns.

The second, and perhaps most promising, difference between Libya and Iraq is that international oil companies (IOCs)—with their deep pockets and advanced training, techniques, and technology—are resuming their work in Libya after an only 6-month absence. IOCs have been in Libya for decades. Qaddafi curtailed their authority and their profit split, but he did not evict them. ENI, the Italian giant, has been in Libya since 1959; it is by far the biggest player, producing about 15 percent of Libya’s oil and natural gas output in 2010. Other large energy players in Italy are Austria’s OMV and France’s Total. Iraq, in contrast, forced out its IOCs in 1975 following nationalization. IOCs only returned last year to the majority of the country, and they are now contributing to a surge in Iraq’s energy sector, so that Iraq, given sufficient stability, could become one of the top energy producers in the world in the next decade.

The third reason for optimism is that the terms Libya has brokered with the IOCs encourage more production in Libya than Iraq. The now-welcomed IOCs in Iraq no longer enjoy production sharing agreements—where they share in the profits from the oil produced, which often incentivizes them to produce quickly—in contracts approved by Baghdad. The Kurdish government in the north has offered production sharing agreements, and the Kurdish areas have generally enjoyed greater oil output growth. IOCs in Libya do have production sharing agreements, and the de factogovernment, the Transitional National Council (TNC), recently pledged to respect existing contracts. It would behoove the new authorities in Tripoli to avoid the mistake of their Baghdad counterparts in becoming more nationalistic at the expense of the IOCs, not to mention greater efficiency and revenue.

Fourth, Libya will be managing its own reconstruction of energy and other sectors, building on its prior work with IOCs. While the new leaders are bound to make mistakes, this is better than foreigners doing so. In Iraq, the U.S. government and its coalition partners decided to manage the massive postwar reconstruction effort despite being institutionally ill-equipped to do so. They made several mistakes. One of the biggest was to under-invest in the country’s energy sector. The Bush Administration seemed so spooked by the charge that the war was about oil that it did not focus on improving the sector enough, even though oil exports contribute more than 90 percent of Iraqi revenue. The new Libyan authorities will fortunately not share the Bush Administration’s burden and will hopefully invest wisely and heavily in its oil and gas sector. Indeed, it is important for Libya to not only resume its prewar production levels but also to far exceed them. It certainly has ample financial resources to do so, in contrast to post-Saddam Iraq. This will help provide jobs to Libyans in this uncertain period, which is vital not only for the Libyan people’s prosperity but for the country’s peace and stability as well. With oil prices now more than three times what they were in the spring of 2003, the world—or at least those countries which are net energy-importers—will also welcome such greater energy investment and output.

Fifth, Libya’s geography also offers advantages over Iraq. Iraq sells its oil to Europe or the United States through its pipeline to Turkey, or to far away Asia via vulnerable southern offshore terminals. Its oil exports have been constrained by limited export capacity. Iraq also has abundant natural gas reserves but does not yet have the infrastructure to ship by pipeline to Europe or to liquefy it to sell to Asia. In Libya, by contrast, the main buyer of its oil and natural gas is Europe, only hundreds of miles away across the Mediterranean. The proximity ensures easier and more secure transport. The 370-mile undersea natural gas Greenstream pipeline, from Melitah (west of Tripoli) to Sicily (from where the gas then flows to the Italian mainland), supplies 10 percent of Italy’s natural gas consumption. This pipeline, with a capacity of 9 billion cubic meters per year, came online in 2004 and is operated by ENI in partnership with Libya’s National Oil Corporation. Libya was advanced in developing natural gas, becoming the second country in the world in 1971 to export liquid natural gas.

Sixth, and finally, Baghdad was hamstrung by its insistence on maintaining central control over its energy operations throughout its many regions. The result was alienating regional politicians and undermining its energy sector. Baghdad’s fights with the Kurds and its threats to IOCs not to do deals in Kurdistan undermined its focus and undercut energy output everywhere. It wasn’t until 2009 that Baghdad finally cut deals with IOCs, years after the Kurdish Regional Government did. And fights over revenue sharing with the regions continue, undercutting oil production. Libyan leaders can learn from these mistakes and offer greater latitude to regional leaders and oil officials, which could redound to the greater good.

To be sure, much remains fluid in Libya and there are many challenges ahead. But if the new leadership can avoid some of Iraq’s mistakes while learning from its successes, Libya’s energy sector holds great promise. Successfully rehabilitating its oil and natural gas exports will provide an immeasurably important boost to the prospects of a new Libyan society and government, not to mention the prospects of the global economy as well.

Originally appeared in The New Republic on September 26, 2011.