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Saturday, May 25, 2024

Prospects for Libyan oil: Learning from Iraq



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As Iraq is learning, obtaining political agreement and channelling domestic investment will be vital to ensuring openness and transparency in Libya’s oil rents.

While Libya has turned the oil taps back on, the institutional reforms that are needed to properly leverage this great asset seem unlikely to be implemented. Increasing the transparency of dealings regarding the ‘black gold’ that lies beneath Libya will be essential to ensuring balanced growth and employment for the Libyan people, but this will prove no mean feat. Given that pressure is unlikely to come from external governments, the incentives and pushes for reform will have to be generated domestically through civil society and a free media.

Since the demise of Muammar Gaddafi in October 2011, oil output has been recovering. According to the Libyan National Oil Company, Libya is now pumping 840,000 barrels a day, just over half its pre-war level and it is expected that Libya will be back to its pre-conflict output levels by the end of 2012. For a country emerging from conflict, oil offers a way to fund future development. Libya has the world’s eighth largest proven reserves of oil, much of which is also highly prized for being low-sulphur, which is much cheaper to refine. The importance of oil revenues to finance the re-construction of Libya will be crucial, as it was after the demise of Saddam Hussein in Iraq in 2003. What does Iraq show that Libya might learn from?

Lessons from Iraq

Iraq is also a country heavily dependent on oil reserves and which has undergone a transition from dictatorship, albeit under very different circumstances to Libya. In 2003, the top US administrator in Iraq at the time L. Paul Bremer said, “Iraq is open for business”. However, most of the business has tended to focus on the most highly valued commodity Iraq has at its disposal: oil. In 2002, the year before the United States invasion, Iraq produced on average only 1.9 million barrels of oil a day. The plan is to now raise Iraqi output from its current 2.5 million barrels of oil a day to 12 million barrels daily by 2017. Most outside experts are sceptical of the production targets – the International Energy Association in Paris, for example, predicts that Iraq will not surpass six million barrels a day until 2030.

While it is promising that oil production is seeing optimistic investment, however, the onus will be on the government to ensure revenues are used effectively.

Oil exports account for around 65% of Baghdad’s federal budget and 95% of Iraq’s foreign exchange earnings. But, importantly, unlike its neighbours, Iraq is the only Middle Eastern oil producer part of the Extractive Industries Transparency Initiative, a scheme which aims to increase transparency over oil payments by companies to governments and governments’ use of revenues. In contrast to the Middle East, half of EITI-compliant countries are sub-Saharan African. Of course, providing information is only a start and the oil sector is still widely perceived to be deeply corrupt. Last year, Iraq was ranked 175 out of 182 countries in Transparency International’s Corruption Perceptions Index. After all, transparency does not necessarily equal accountability. For that, a country needs intermediaries, such as the media and civil society.

One lesson that Libya might be able to learn from Iraq is that, although little progress has been made on accountability, many of the key obstacles have been identified and recognised in the country. In an effort to encourage non-oil investment in Iraq, for example, Prime Minister Nouri al-Maliki gave a presentation in December 2011 to more than 400 executives representing a wide range of industries including engineering and construction, architecture, maritime cargo and financial services. Hussain al-Shahristani, the country’s deputy prime minister for energy affairs, has also recently explained, “People in this part of the world have been told that they have to choose between freedom and prosperity”. He went on to say that diversifying their economy will allow “Iraq…to prove them wrong”. Proving history wrong is certainly the challenge, and recognising the reasons for that history is the first step towards effecting potential solutions. Libya too will need to recognise such history moving forward.

What Libya must do

Recent work by political scientists Michael Ross, Kai Kaiser, Nimah Mazaheri suggests that it will be difficult to make these political transitions. They humbly conclude that it will be “challenging for many of the regimes in the region to transition” to better governance, and warn of the possibility of continuing conflict. Indeed, it seems that some of the reasons that have led to the recent political instability of the region, such as higher inflation and unemployment, will likely make more democratic arrangements harder to maintain going forward.

Particularly in the light of this, supporting a free media and civil society will be a key step to ensuring transparent oil revenues will be used for the benefit of Libyans. These elements provide the link between transparency and accountability. However, while generating domestic pressures aimed at keeping Libya EITI-compliant will help, domestic pressures will require a broad based support from elsewhere.

The Centre for Global Development’s idea of oil-for-cash, for example, plans on providing a windfall payment on a per capita basis derived from oil revenue. This income is then taxed to generate a relationship based on no taxation without representation. Such a scheme is ambitious, and while the likes of Ghana, one of the newest oil producers, has a solid tax system in place, Libya has never had such a basic mechanism. The use of Libyan civil society groups such as the Libyan Civil Society Organisation may however provide the clout for such ideas to climb up the priorities of the current transitional council and the consequent newly-elected government.

While the pressure is on Libya’s transitional government to have elections, many important long-term decisions and key players are likely to be formed in the coming months before the elections take place. Attention will no doubt focus on areas such as the electoral system and constitution, but it will be important to also support other long-term factors that will ensure a brighter future for Libya such as a freer media and civil society. These elements are the best hope that oil revenues in the future are used for the development of Libyan people rather than a small coterie of elites. This will also allow Libya to start taking a view of what future it wants for itself. This, in the long run, will involve ensuring that Libya has a plan beyond petroleum.

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