In the wake of the revolution in Libya there are serious issues facing companies and businesses operating in the country, particularly those involved in Libya's oil industry, which before the unrest accounted for 95% of the country's export earnings. The continuing instability has meant that both political and operational risk has greatly increased for multinationals wanting to resume business there, with many nervous to return to the country.
Experts maintain that there are still many opportunities in Libya, in sectors ranging from the oil to the tourism industry. In terms of infrastructure, the country is hugely underdeveloped, meaning that there are good prospects for foreign companies in this sector. Businesses, in particular oil companies, are waiting to take advantage of these opportunities, as entering into contracts in Libya could be extremely lucrative for those willing to take some calculated risk.
New market for risk
In the past few weeks both the US and the EU have lifted sanctions preventing certain payments to Libya, and insurance costs are coming down. According to Peter Hornsby, head of the political and credit risk division at insurance broker Lockton, a market for risk is emerging.
“Is the risk market willing to support Libyan risk going forward? Cautiously, yes. The question is can they protect Western companies? They are going in to the unknown – the rhetoric is pleasing to the ear but in reality will this be the case?”
While this seems to be a cause for optimism for foreign companies wanting to invest in Libya, their ability to attract investment and get operations running on the ground is limited by the current state of security in the country.
“The security situation is key. Sorting this out is taking longer than expected so there is some nervousness about what can be done,” says Ben Knowles, partner at law firm Clyde & Co. “Security companies are waiting to get going on the ground and if they are not ready then we are still weeks off starting all of this business.”
This could continue for some time, making it difficult to resume business and seriously threatening Libya’s path to development, which will rely on foreign investment. Insurers are unlikely to offer cover if it is not worth the risk.
There is likely to be claims issues from companies that have had assets destroyed and contracts voided as a result of the revolution, although there has been less commercial property damage than expected. Many expropriation claims are currently being investigated – some have a built in lag which allows insurers to wait six months before paying out to see if equipment or property is returned. Government requisition of assets is covered under English law but political violence cover is an extension that some companies will not have.
Political risk is also a major factor for multinationals to consider at this point. It remains to be seen who the key players will be in the new Libyan government and how things will be run. Like many other 'Arab Spring'-affected countries, there is a lack of experienced politicians in Libya, and for 40 years there has been no effective opposition making it difficult to determine who will come to the fore.
It is likely there will be a mixture of expatriates, as well as those connected with the former regime. The current de facto government, National Transitional Council (NTC), appears to be liberal and pro-Western – probably due to the support that the West gave against Gaddafi – but fundamentally there needs to be greater support for trade and investment from the authorities.
The NTC has promised to honour all ‘legal’ contracts, but whether they will do this remains uncertain. “The risk is not necessarily the unwillingness of the NTC to honour obligations – the political force majeure is the highest risk. The practical risks of getting payments, and what the final composition of the government might be are all complicated,” says Mr Hornsby. “It might be a case of better the devil you know than the devil you don’t.”
Threat of corruption
There is also the issue of corruption. There will undoubtedly be some ambiguity over contracts, which will be reviewed by any new government. It is important that proper and fair terms are agreed upon by both parties.
Mr Knowles stressed the importance of transparency in the new regime, suggesting that it is important to have multiple investors in each sector in order for Libya to create a strong and stable environment for foreign investment. One way forward would be for the NTC to offer contracts to companies on a temporary basis.
“Companies need to offshore as much of the risk and uncertainty as possible, but some calculated risk needs to be taken. I would advise my clients to absolutely avoid anything under Libyan law as we do not really know what it is,” says Mr Knowles.
Despite the risks involved in operating in Libya, there have been developments to suggest that the situation is improving. The US has issued a licence lifting the sanctions on transactions to the Libyan National Oil Company and the government of Libya. Similarly, both the UN and the EU have lifted asset freezes related to Libya, with the UN adopting a resolution committing their help to improving political instability and institutions in the country.
“The international community want to make sure there is a stable situation there – there is enough instability in the region. Libya needs international money, both commercial and political, to get infrastructure to a good standard,” says Mr Knowles.
Oil industry craves normality
Oil companies in particular have been keen to resume normal business in Libya – production fell to 50,000 barrels per day (bpd), compared to 1.6 million bpd before the revolution. Italian oil giant Eni announced at the end of September that it had restarted production in 15 wells in Abu-Attifel, 300 kilometres south of Benghazi, with production levels starting at 31,900 bpd. French company Total and Arabian Gulf Oil have also started pumping again.
“It is important for Libya to get oil flowing in order to get the financial resources for development. Those who show early interest are likely to get preferential terms and contracts,” says Mr Hornsby.
What is clear is that without the resolution of the security situation and the establishment of government institutions, Libya is unlikely to be able to attract the foreign investment it needs to develop its infrastructure and improve logistics. Promisingly, ports in the country are beginning to reopen and the lifting of sanctions makes it possible for companies to resume business. The fact that oil companies have begun increasing their production shows promise for the country and indicates that it might well open up quite quickly should the security situation be resolved.