Libya Speeds Oil Output but Sees Hurdles Ahead

TRIPOLI—Libya’s oil production is coming back online faster than expected but hurdles remain for the country’s economic recovery from the shocks of the war and an ongoing state of political limbo, interim Oil Minister Ali Tarhouni said.

Mr. Tarhouni said he is optimistic about the rebounding Libyan energy sector as the country begins to move ahead after the eight-month revolution that ousted Moammar Gadhafi from office. Mr. Tarhouni said oil production should reach 700,000 barrels a day by the end of the year—nearly half of prewar production—confirming estimates made earlier Thursday by the International Energy Agency.

But Mr. Tarhouni offered a more mixed picture about the rest of the economy, as Libya’s interim prime minister conducts stiff negotiations with the rest of the rebel-run National Transitional Council about the makeup of a new government to run the country until elections, which are now expected to be held around June 2012.

View Interactive

While the oil sector dominates Libya’s economy, local and foreign businesses are hoping that a more open and transparent government will make it easier to work in the Libyan market, especially the infrastructure sector, health care and education—areas that the interim authorities have said will be of priority interest for spending next year.

Mr. Tarhouni, a former economics professor at the University of Washington in Seattle, cautioned that the pace of Libya’s reconstruction will be slower than the private sector is hoping, saying it was unlikely that the unelected authorities leading the country now will award major reconstruction contracts until a more representative government comes to office.

“I don’t anticipate that the transitional government will make any big infrastructure decisions until elections,” he said at a Tripoli news conference on Thursday.

Mr. Tarhouni also said Libya won’t offer new oil concessions during the eight-month tenure of the incoming government. The NTC has said it is committed to honoring all previous contracts.

Libyan businessmen say they are hesitant to make fresh investment plans and import orders largely because of uncertainty about the new post-Gadhafi legal landscape and instability of Libya’s currency, the dinar.

The dinar has lost 9% of its value against the dollar in the past two weeks, due to worry over the political limbo and a shortage of foreign-currency supply in the market, according to currency traders.

It is unclear whether Mr. Tarhouni will retain his position in the new government, which is expected to be formed in the next two weeks. The economic challenges facing that government will be huge, with some of the most pressing issues being the formation and budget for a new national army, plus how to trim government payrolls and support the private sector.

Libya’s business community is lobbying the new interim government to relax many of the heavy-handed state policies that crimped corporate work during the Gadhafi regime, including foreign-currency exchange limits and a law that forced private enterprises to make Libyan employees shareholders of the business.

“My advice to them is to help support a free market. The free market will give us enough help to make the economy and our businesses healthy,” said Mohammed Raied, the chairman of Libya’s largest dairy producer, Al-Naseem Ice-Cream and Dairy Products. It is unclear whether the transitional government will tackle these legal issues over its eight-month tenure.

Businessmen also say they are having a hard time reopening their lines of credit to kick-start imports of goods and services, because many countries haven’t unfrozen Libya’s sovereign assets and central bank reserves that were placed under sanction soon after the revolt against Gadhafi began in February.

Libya’s economic chiefs are in dispute about the wisdom of unfreezing those funds. Central bank chief Saddek Elkaber urged the international community this week to move quickly to free up the country’s foreign reserves in order to ease a liquidity crunch in the country.

However, Mr. Tarhouni and many officials in the Ministry of Finance are recommending a more cautious approach, in part to prevent corruption or mismanagement of the nation’s wealth. “We don’t yet have the capacity to monitor these funds,” he said.

Mr. Tarhouni said oil and gas will remain the driver of economic development and growth for the foreseeable future in Libya, which before the war was the world’s 18th-largest oil exporter.

He said the bright spot of the economy was the quicker-than-expected return to pre-revolution oil production levels. Currently, Libya is pumping 570,000 barrels a day, and he expects a return to prewar levels of 1.5 million barrels a day by June. He also said Libyan natural-gas exports from the port of Melita would restart “any day now.” Gas supplies from that terminal go to the Italian market.

As recently as September, the International Energy Agency was predicting Libya would produce no more than 400,000 barrels a day by the end of this year. That milestone was passed in October, the IEA said on Thursday, as it estimated end-year output at 700,000 barrels.

Many constraints remain before Libya can restore full prewar oil production, the IEA said. Damage caused by fighting around export terminals during the war is likely to constrain output even if oil fields haven’t been damaged, it said.

Wall Street Journal