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Thu 25 Aug 2011 12:57 PM

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Big oil faces big unknowns in Libya

Oil firms hoping to soon get back to business soon in Libya may be disappointed

Big oil faces big unknowns in Libya
Rebel Libyan envoys have told Rome that Libya will honour existing oil contracts in the post-Muammar Gaddafi era (Getty Images)

With Brent crude above $100 per barrel, foreign entities invested in Libya have a strong incentive to get production back up and running quickly.

Italy, one of the biggest investors in the North African country, is confident it will be back to business as usual.

But even once the fighting stops, oil companies can expect a bumpy ride.

Oil majors don't need much prodding to a return to a country where pumping oil was highly profitable, thanks to low production costs.

A more stable and secure environment is key. There must also be some sort of effective, recognisable government.

The key question is how the oil majors will be received in Libya.

Rebel Libyan envoys have told Rome that Libya will honour existing contracts in the post-Muammar Gaddafi era.

There is a long history between the two countries, and Italy's ENI thinks oil and gas flows could resume before winter.

Yet even the countries that supported or took part in the military intervention are likely to be vulnerable.

Rebel leaders have said contracts would be reviewed for signs of corruption. The transitional government may come under pressure to renegotiate contracts from a population feeling it has not fully shared in the country's oil wealth.

Libya has tightened terms on production contracts in recent years. But there is scope for more severity. Foreign investors were willing to accept tough terms in Iraq on the basis that it might lead to big-ticket projects later.

And there is a queue of oil players hoping to get their foot in the door in Libya.

Libya has a clear incentive to resume pumping oil and it needs foreign expertise. But it can afford not to rush into making decisions.

The country's net foreign assets, which should be released from the current freeze once Libya is officially deemed "liberated", are estimated at around $150bn -enough to cover 37 months' worth of imports.

And even if oil companies manage to hold onto their terms, there is no guarantee on the long-term solidity of the Libyan government's promises.

Oil companies hoping to soon get back to business as usual may be too optimistic.

(Una Galani and Fiona Maharg Bravo are Reuters Breakingviews columnists. The opinions expressed are their own.)

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