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Sanctioning investment
Sunday, 01 July 2007
May’s agreement between the UK’s BP and the Libyan government on natural gas exploitation, worth US $900 million, is just the beginning. With exploration under the current agreement expected to cover a timeframe of seven to 10 years, BP - whose portfolio in the Maghreb is becoming steadily more important - is making a commitment of several decades to Libya. In the long run, the deal could be worth $25 billion.
BP will also invest $50m in national technical training schools to build local technical capacity and, based on certain performance benchmarks, will add another $50m.
Following the end of sanctions, there’s no doubting the excitement over what Libya has to offer. Amid fierce global competition for hydrocarbons, the country with the second-largest oil reserves in Africa and excellent oil quality is instantly attractive to oil and gas investors from around the world. Libya is just as keen to draw in foreign investment and expertise, not only to resume the long-stalled exploitation of its hydrocarbons sector, but also to transform its economy.
Thanks to high oil prices, the state has more than comfortable fiscal and current account surpluses and foreign reserves, giving it spending power to finance infrastructure and social investment needs.
Foreign interest
Under international sanctions, both new exploration and the upgrading of existing hydrocarbons facilities was limited, generating a huge pent-up demand for capital and expertise.
As recent key deals show, investor interest in Libya comes from all regions. There are more than 30 international firms in Libya for the first time. US companies are retaking control of business interrupted by the sanctions regime. Russian, Indian, Chinese and Brazilian companies have edged into the oil sector - mirroring global competition in this industry. After three vibrant oil exploration bidding rounds, Libya is now moving on to tackle its gas reserves, which especially interest European firms. Drawn by the planned bank privatisation, the traditional presence of Middle Eastern banks has been supplemented by a growing presence of Western banks, including Paribas and HSBC.
In May, Russia was reportedly getting nearer to closing a $2.2bn sale of military equipment. South Korean Daewoo Engineering & Construction Co Ltd signed a $847m agreement with the General Electricity Company of Libya (GECOL) for the construction of two 750MW power plants. Libya’s National Oil Corporation (NOC) and the Dow Chemical Company have agreed on a joint venture to operate and modernise the Ras Lanuf petrochemical complex.
Beyond petroleum
Aside from the obvious attractions in the hydrocarbons sector, foreign investors can look forward to interesting opportunities in areas that government has identified as priorities for oil revenue spending.
Oliver Miles, chairman of MEC International, which publishes an annual survey on business in Libya, underlines that oil and gas exploration and development bring with them a host of other business opportunities for suppliers, ranging, as he says, "from insurance to sandwiches". Prospects for the import of consumer goods, for example, exist on a broader basis as Libya’s own manufacturing capacities still need to be developed.
In May, Libya’s Minister for Electricity, Water and Gas, Omran Abu Kraa announced a five-year, $11.2bn programme to expand the country’s power generation capacity to 7,000MW. There is a broad range of infrastructure plans, including roads, railways, airports, but also housing, water and sanitation and industrial infrastructure, all of which will be key projects for international tenders.
Infrastructure development is also a prerequisite for another promising sector. Libya’s potential especially for high-end tourism is, in principle, enormous. Still under-explored, it has a stunning coastline, spectacular ancient ruins, and one of the world heritage sites - all this practically on Europe’s doorstep, and assets that would allow Libya to focus on high-end tourism. There is no doubt that a lot of investment is required to develop the sector to full capacity, as tourism and transport infrastructure are still weak, but both these aspects present opportunities for foreign firms.
The government is currently investing in the construction of several resorts. It will also need to address administrative issues left-over from a more bygone isolated era. Visa regulations for individual tourists remain cumbersome, for example. Tourists tend mainly arrive with cruise ships where the organisers have arranged the group visa, and go on shore only for daytrips - to be back on the ship for a sundowner. Libya is also unlikely to develop a successful tourism sector unless it allows visitors to drink alcohol. The government is currently thinking about exceptions to the country-wide ban on drinking for tourist areas.
Ongoing statist role?
Structural changes to improve the investment environment in Libya have been extensive since 2004. In the recent past, Libya has regularised relations with external creditors, liberalised trade and investment, and announced a privatisation programme. Business has responded keenly.
But in a country still learning capitalism, the state is unlikely to give up its dominant role anytime soon, despite strong rhetorical emphasis on business and private sector development.
"Libya is one of the most exciting but frustrating oil and gas plays to emerge in the last five years," says Catherine Hunter, Administrator for the Middle East and North Africa Programme at the International Energy Agency. "Most outside players are very interested in getting access to existing oil and gasfields for development work, but the Libyans find it easier or more attractive to get the foreigners to work on exploration.
"The Libyans have been promising development work and enhanced recovery since about 2004, but have either lacked the political will and administrative capacity to focus on exploration and development at once. That means that development work is always just around the corner."
Libya’s ageing refining industry has lots of potential, for example, but Libyan officials do not yet have the capacity to negotiate such deals.
"The state fulfils a key political function: distributing the oil revenue to the population via employment, wages, and social benefits like free education, healthcare, and hence reducing dissent," says Wolfram Lacher, north Africa analyst with Control Risks. "For as long as there is sufficient oil revenue, which is probably for the foreseeable future, there is less need for the Libyan government to provide incentives for private sector development."
Lucy Norton, Senior Associate with the Risk Advisory Group, cautions that large and prestigious projects do well because they typically benefit from direct access to the head of state, as BP’s direct deal with the Libyan government shows.
Doing business in Libya is more challenging for smaller companies that face more difficulties in dealing with Libya’s bureaucracy and proliferation of laws and regulating agencies and often changing rules. Developments are driven by a very small and closed circle of people, and institutions are still weak, a situation exacerbated by the severe scarcity of qualified human resources. To outsiders, it is not always clear who takes the decision and how well co-ordinated different activities are. Key decisions are often still referred upwards to the head of state. Libyan authorities are still in the process of defining the concepts of a properly regulated market economy in their environment.
Joanne Aaron from export credit insurers Atradius has immediate knowledge of the main investment flows - the company’s main exposures in this market are in the oil and gas sector, engineering and iron and steel.
"Libya can be a challenging market, and obtaining accurate company information is difficult, but things are improving," she says.
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http://www.ect.gov.ly
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http://www.libyaninvestment.com/
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