The Demise of OIl and Gas Exploration in Libya Before It Even Begun

I recently spoke with a senior procurement executive at a large oil and gas company conducting exploration projects in Libya. This gentleman shared with me some of the challenges of operating in a region of the world that has essentially been shuttered in for the last 40 years. Even neighboring countries such as Algeria have had a more favorable operating environment, and recent efforts have focused on building a community of suppliers in this region.

Libya is a large country with most of the population on the coast. Besides oil, there is some agriculture, but the majority of the economy resides on the ability to tap into oil and gas. The airports and roads have been largely in disarray due to lack of maintenance and upgrading. However, there has recently been massive construction activity in Tripoli.

Developing good market knowledge is a challenge in Libya. This is a market that is entirely different from the rest of the world. Algeria has been joined up with the rest of the world, so there is a strong presence of international companies and many of them are involved in joint ventures through Algerian entities. Libya is a different story, as it has been shut off due to Western boycotts, and only recently has the Quadaffi regime begun to have peace talks and begin to establish a limited support infrastructure. As Libya opened up, there were more companies entering and willing to take the risk of investing in oil and gas infrastructure that could tap into Libya’s untapped oil resources. This would in turn bring sorely needed resources into this region of the world. Even before the uprising this week, getting materials and equipment into the country was not easy. In the past 5 or 6 years, executives couldn’t even get a contract signed in Libya. There was a limited supply base, with ENI (an Italian company) having the most dominant presence, with other suppliers such as Schlumberger beginning to establish a few limited projects.

Managing and planning costs of exploration in Libya has also been difficult. Prices that are valid in the Gulf of Mexico certainly do not apply. Further, taxation is a relatively fluid concept, and is based on a hypothetical deemed profit mechanism.
The most important element however is the cultural understanding of the Libya people. Libya is a tribal culture, and is composed of many different dialects and regional differences. As such, there is a strong need for a local presence consisting of locals who understand the subtleties of managing relationships in this culture. With the current set of uprising and violence this week, investment in Libya is only going to get more difficult. Indeed, most Western companies have fled the region recently.

Despite the hope that was beginning to emerge, the future looks extremely risky for investment in the Libyan oil and gas supply chain.