Libya, by dismantling its weapons of mass destruction programs, cast off the pariah status the country had endured for nearly two decades.

Nowhere has the return of Libya been more welcomed than the oil sector. With proven reserves of some 30 billion bbl, and suggestions that a further 100 billion bbl could be discovered in the country's vast unexplored areas, Libya presents a major opportunity. With that opportunity, however, comes risk.

Politically, Libya is a stable country. The lifting of sanctions has removed the greatest political crisis facing the country and its charismatic dictator, Col. Muammar

al-Gadhafi. There is currently no viable challenge to Gadhafi's leadership. Opposition groups are exiled and deeply divided.

Within the government, reformists and conservatives continue to fight a "turf war," vying for influence with Gadhafi. Reformists, led by Prime Minister Shukri Ghanem, are currently in Gadhafi's favor. However, the establishment of a sincere pro-market outlook and the replacement of hardline conservatives will take time. If foreign investment fails to have the wide-ranging socio-economic impact expected, the reformists could find Gadhafi's favor swinging back toward the conservatives.

Possibly the most significant risk remains the leader himself, once described by US President Ronald Reagan as the "mad dog of the Middle East." Gadhafi's mercurial and at times eccentric nature remains a volatile factor in the country's foreign policy and relationship with foreign investors.

Over the longer term, the greatest threat to Libya's political stability is the unanswered question of succession. Gadhafi holds no official post, but has adopted the ceremonial title of "Brother Leader of the Revolution." Who would replace Gadhafi upon his death, and what their role in the government would be, remains unclear.

The security risk to business in Libya is very low, though this may increase as the country opens up to foreign political and commercial interests. There is a low risk of Islamic extremist terrorism because most domestic Islamic extremist groups have been wiped out or forced into exile by Libya's security services. The efficacy of the country's internal security apparatus, together with the difficulty of entering Libya and the absence of foreign targets in the country make a large-scale terrorist attack unlikely.

By far the greatest risk to foreign companies operating in Libya is its business environment. The country has only recently permitted private-sector activities, and business practices remain severely underdeveloped. Business transactions are often extremely slow, even by regional standards. Payment of invoices can take up to 6 months, driving away companies with cash flow problems. Corruption is rife, and it is often difficult for companies to determine who to deal with.

Problems exist all levels. For example, obtaining visas for expatriate workers, or even visiting business people, is extremely cumbersome. It is often nearly impossible for businesses (even those already operating in Libya under government contracts) to secure multiple-entry or block visas. The government has promised to improve the visa system, but has done very little so far.

Problems posed by Libya's opaque and intractable business environment are beginning to show in the hydrocarbons sector. Negotiations over the return of US oil majors the Oasis Group (Marathon Oil, ConocoPhillips and Amerada Hess) and Occidental Petroleum have stumbled over Libya's demand for "financial fees" as compensation for maintaining their concessions during the US companies' absence. The much-publicized heads of agreement (HoA) with Royal Dutch/Shell is also understood to have stalled, though the reasons remain unclear.

Oil is central to Libya's economy, accounting for around 95% of GDP. Sanctions have taken a toll on the hydrocarbons sector, which is now inefficient and operating with outdated technology. Despite its huge reserves, Libya currently only produces around 1.5 million b/d of oil, less than half the production level in 1970. It is looking to reverse this by attracting up to $30 billion in foreign investment in order to reach the target of 3 million b/d of oil over the next 20 years.

Now, all eyes are on the upcoming fourth Exploration and Production Sharing Agreement (EPSA-4), a new-style oil and gas licensing round that is expected to be held soon. EPSA-4 marks Libya's first competitive bidding round and could determine the future direction of Libya's oil industry. Failure would be a serious setback to the sector's development, but if successful, further - and larger - licensing rounds will follow.

Reference

Control Risks Group, founded in 1975, is a business risk consultancy whose aim is to enable clients to take risks with greater certainty and precision and to solve problems that fall outside the scope of mainstream management resources. For more information, visit www.crg.com.