Peninsula - 17/5/2006

The United States’ move on Monday toward normalised relations with Opec member Libya should help the African nation in its quest to expand its crude oil production capacity, experts said.

Culminating a years-long rapprochement, Washington will reopen an embassy and remove Libya from a list of state sponsors of terrorism, rewarding the longtime pariah nation for scrapping its weapons of mass destruction programs.

Libya produces about 1.6m barrels per day of crude oil, which puts it toward the rear of the pack of Opec’s 10 members. Led by the one-time US antagonist Muammar Gaddafi, Libya badly needs foreign investment in its energy industry, estimated at about $30bn. Libya has not pumped above 2m bpd of oil since the 1979 oil price shocks.

The lifting of sanctions will make it easier for US companies to ship in high-tech gear that could breathe new life into Libya’s fields, many of which have languished from two decades of underinvestment and neglect.

So-called enhanced oil recovery projects on existing fields are one of international majors’ best chances to play a role in boosting Libya’s capacity in the near term, experts said.

“The quickest return we are likely to see is the acceleration of negotiations on enhanced oil recovery from Libyan oil fields which can bring new supplies to the market in the next two or three years,” said David Goldwyn, an energy consultant and former government official.

“The normalization of diplomatic relations will mean that the export of these enhanced recovery technologies should happen,” echoed Charles Esser, an analyst at the US Energy Information Administration.

Technologies used to boost crude oil flows by injecting steam or other liquids deep into underground oil reservoirs, as well as techniques for drilling horizontally, could see an uptick in Libya, Esser said.

For example, sagging production at the El Bouri oilfield off Libya’s western coast—its largest producing oilfield—could be revived with such equipment, the EIA said.

El Bouri produces about 60,000 bpd of oil, less than half of its 1995 output, mainly because of an inability to import enhanced oil recovery equipment, the EIA said.

Ali Aujali, chief of the Libyan Liaison Office in Washington, said lifting sanctions will put US oil companies on an equal footing with other international oil firms competing for the rights to drill in Libya.

“All the oil companies need the full relations between the two countries because there are still some restrictions on certain technology the American countries need very badly to use in Libya,” Aujali told Reuters. “Now I think they can compete with the other companies and they can go ahead with their job in Libya.”

US oil companies like Marathon Oil Corporation, ConocoPhillips and Amerada Hess Corp. which returned to Libya last year after a 19-year absence, will face less red tape to ship oil field gear to Libya, Goldwyn said.

“That will be a big help to them, just getting basic equipment over there,” Goldwyn said. It will also be easier for US executives to obtain visas to travel to Tripoli to negotiate oil deals. he said. Though some so-called duel-use items like explosives and pipes used in oil drilling will likely still be licensed by US officials, “the basic nuts and bolts of the oilfield operations equipment” will be easily shipped, he said.

Libya has targeted output of 2m bpd by 2008 and around three million bpd in 2015, up from output now of around 1.6m bpd. The biggest step in boosting US-Libyan trade came in 2004, when the United States ended a broad trade embargo that started in 1986, said Kathleen Little, a partner at Vinson and Elkins LLP, a law firm that advises clients in Libya.

But Monday’s move will reshape the way that US oil firms both big and small view Libya, said Stephen Davis, also with Vinson and Elkins.