Qadhafi's Death Leaves Libyan Oil Industry Uncertain

Qadhafi's death marks uncertainty in Libyan oil industry.

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The death of Libyan dictator Muammar Qadhafi marks the end of an era, both for the nation and its once-booming oil industry, choked off by the turmoil of the revolution. And as with prospects for the liberated Libyans to form a united, democratic government, the post-Qadhafi era begins with a sense of cautious optimism in the petroleum fields so essential to the nation's recovery.

Oil exports accounted for more than 95 percent of Libya's export earnings in 2010, according to the U.S. Energy Information Administration (EIA). Since the fall of Tripoli in August, Libya's national oil company has moved quickly to restore output, according to the International Energy Agency (IEA), but thus far most production—down to around 300,000 to 400,000 barrels per day from a peak of about 1.6 million barrels daily—has been diverted to satisfy domestic demand.

Projections for the country's oil output have been revised slightly upwards, but questions remain about the extent of infrastructure damage caused by fighting, and power struggles within the nascent National Transitional Council could undermine efforts to get Libya's oil industry back online.

[Read: Qadhafi's Death Won't Mean End for U.S. Role in Libya.]

"If this leads to greater political clarity within Libya, and to a more stable operating and investment environment, then it may result in a more rapid restoration of the Libyan oil sector," David Fyfe, head of the IEA's oil industry and markets division, said in a statement. "However, many logistical, operational, and security-related challenges remain in that country, so we are not changing our underlying assumptions on Libyan production recovery for now. We still believe it could take many months for production to regain pre-crisis levels."

[Read: Politicians, World Leaders React to Qadhafi's Death.]

Most of the current oil production is derived from fields in the western and southern parts of the country, largely unaffected by fighting. While restoring production to pre-war levels may prove more difficult as the dust settles and damage is assessed, Libya has many advantages in its efforts to revitalize its oil industry.

For one, damage to the oilfields as a result of clashes between pro-Qadhafi forces and rebels appear to be relatively localized with the most damage affecting terminals and pipelines in the eastern side of the country. Production facilities in the western and southern regions have already started ramping up, according to Sarah Emerson, president of Energy Security Analysis Inc., who expects output to exceed 450,000 barrels by December.

"Now the question is as [production] continues to ramp up in excess of the refining requirements, then [Libya] can begin to export and that's where the money comes in," Emerson says. "[Qadhafi's death] is really incidental to the process. It starts a clock ticking, which says, 'Can you get the political stability together?'"

Emerson predicts conservatively that the country could see production of 800,000 to 1 million barrels by the end of next year, but full capacity very likely won't return until the end of 2013, she says.

[See photos of Muammar Qadhafi.]

The gradual re-entry of Libya—which holds Africa's largest proven oil reserves, according to the EIA—into global oil markets will likely ease pressure on supply and lower prices for refiners around the world.

"It's good news for the Europeans. It's good news for the East Coast United States," Emerson says.

mhandley@usnews.com