Security clouds speedy Libya oil recovery

TRIPOLI (Reuters) - Increasing insecurity and disruptions are overshadowing Libya's speedy return to pre-war oil production, delaying much needed foreign expertise and investment as well as threatening output.

Libya, with Africa's largest oil reserves, is nearing pre-conflict production of 1.6 million barrels per day, exceeding initial forecasts after last year's uprising against Muammar Gaddafi brought it to a virtual standstill.

However cracks are starting to appear as the new leadership struggles to impose order in a country awash with weapons. Expatriate workers remain nervous about precarious security.

The oil ministry has condemned what it called attempts by armed groups to hinder work of some companies after several violent incidents in the last few weeks.

"Security is essential and we hope we can have a better situation than what we have now," Deputy Oil Minister Omar Shakmak told Reuters. "Of course any risk to the environment has an effect not only for international oil companies but also for national oil companies."

With popular discontent simmering, disgruntled Libyans targeted the OPEC member's oil infrastructure last month when they closed off the headquarters of Libya's biggest oil producer, Arabian Gulf Oil Company (Agoco), for two weeks.

Calling for more transparency over how Libya's assets are being spent and jobs for youth, protesters prevented Agoco employees from entering their office in the eastern city of Benghazi and the company, which produces a quarter of Libyan output, said it cut production by 30,000 bpd as a consequence.

In another headache for the sector, former rebel fighters guarding oil installations in the absence of an effective national army have been calling for payment, at times violently.

Former fighters recently entered the Tripoli office of Akakus, a joint venture with Spain's Repsol uninvited. In a separate incident, a group abducted its manager for several hours, Shakmak said, calling the incident "unacceptable".

At the Zawiyah oil refinery west of Tripoli, former fighters guarding the facility barged into the administrative office calling for more money, employees said.

"It appears that Libya has raised production as high as it can without a bigger foreign presence in the country, either directly from international oil companies or from oil services companies," Geoff Porter of North Africa Risk Consulting said.

"It does not seem that Libya will be able to break through the 1.5 million bpd threshold and get back to pre-conflict levels of production without a material improvement in the country's security environment."

SETBACKS

With the bulk of Libya's revenues generated by oil sales, Tripoli cannot afford any setbacks on the one front which has seen a return to normality since last year's war.

Libyan oil company employees have held small protests calling for better security conditions and Shakmak said there were plans to increase security outside offices.

Officials have long spoken of plans to train thousands of former rebel fighters guarding Libya's oil infrastructure under an umbrella oil protection force. However progress has been slow as the central authorities remain weak and fighters hold sway.

For now, the former fighters are paid by the local firms, earning 900-1,000 Libyan dinars a month, officials say.

"I am proud of what they have done, they protected the oil fields ... I support that we should take care of them and make the payments but in a proper way," Shakmak said.

Negotiations continue between Libya's oil chiefs and the defence ministry over the force but officials there say the process is not running smoothly.

"The (Libyan) oil companies give them a salary so they don't (see the) need to join the army. This is a problem for us," Hamed El-Shalwe, director of international cooperation at the ministry of defence said. "It takes time to do this."

Though Libyan officials are sceptical insecurity could halt production, continued bouts of violence are deterring foreign firms from bringing back all their expatriates on the ground.

Libya needs foreign investment and expertise to increase oil and gas production. Those with major concessions were the first back, looking to secure existing contracts. Others send minimal staff to re-open offices and build relationships.

Until a clearer landscape emerges after June national elections, most companies are likely to defer larger deployments. "I don't expect a full expat return till the end of the year," one Western security contractor said.

Even for those visiting desert camps, negotiations with militia commanders are a must to secure safe passage.

Austrian energy group OMV warned last week it faced production and security issues in Libya that could make it hard to match pre-war output levels.

"Without foreign companies, Libyan oil production may well stagnate just below pre-crisis levels, worse, it risks slipping backward," Barclays said in a note.

Unlike Iraq, the scale of the damage was limited, but fields were hastily shut down. "Temporary fixes have allowed Libyan output to resume swiftly but we believe current production levels are simply not sustainable," Barclays said.

As they hope the June polls will give a trajectory for security, foreign oil firms also hope that questions about contracts will ultimately be resolved in their favour. Tripoli has set up a committee to look into deals and its determinations could lead to the reworking of lucrative contracts.

"With elections soon, IOCs can afford to wait and see what the political and security situation will be," one foreign oil executive said. "For now, it's still not clear."

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