Political Volatility: A Risky Business For Contracts

Contributor:  Timothy Haïdar, EIC
Posted:  05/11/2011  12:00:00 AM EDT
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In January 2011, the Tunisian president was forced to flee the country following weeks of anti-government protests, setting into action a chain of events which is still unfolding.

The revolutionary unrest then extended to Egypt, where the president Hosni Mubarak was forced to resign, before spreading to Libya with the aim of ousting leader Colonel Gaddafi.

Two months down the line, Libya's huge 1.6 billion barrel a day of oil exports has decreased by two-thirds and western companies are now uncertain as to their future in the region.

Combine these factors with the fallout from the BP oil leak in the Gulf of Mexico, the questions being raised about the future of nuclear power following recent events in Japan, and the possibility of unrest spreading further in the Middle East, and the industry is facing a very different landscape than it was just 12 months ago.

Libya

Nordine Ait-Laoussine, Algeria's former energy minister, was perhaps confirming what many in the oil and gas industry already knew when she recently said  it was clear "important changes are in progress that are likely to impact energy markets in the long term."

Oil prices continue to soar, hitting highs not seen in over two years, with just one of the effects of this being a new uncertainty for investors about future price volatility.

The good news for the industry is rebels in Libya have confirmed they will honour current contracts in place in the country.

"We have already assured people we respect all contracts signed by Libya, this is especially true regarding the oil industry," Hafiz Ghoga, a spokesperson for the National Libyan Council, said.

"It is only normal to divert these revenues through the provisional national council, which is the legitimate representative of the Libyan people," he added.

Similar sentiments have been expressed by the National Oil Corp.

This is certainly reassuring news for majors like Eni, BP and Respol, which although they have scaled back production while the unrest continues, stress that they do see a future for Libya and its abundant reserves.

Eni chief executive officer Paolo Scaroni, speaking to investors on March 16th, said: "I don't consider relations with Libya compromised. We maintain relations with the national oil company, which is our natural counterpart," Bloomberg reported.

BP also has strong relations with Egypt, being one of the largest investors in the country, so will be watching the situation in North Africa as it unfolds.

Looking to the Future

The future of operations in Libya is fraught with uncertainty for members of the oil and gas industry.

Government officials have made it clear in the future they are likely to prioritise giving contracts to nations which they believe have been their allies during the period of unrest, namely those to the east which have not been involved in United Nations military action.

National Oil Corporation chairman Shukri Ghanem said rather than using the traditional open bidding process, contracts could be directly awarded, with India and China identified as likely recipients.

"We will be looking at giving direct block contracts to countries ready to come and work in the country, because we want to increase production," he was quoted by Reuters news agency as saying.

Gaddafi himself had previously expressed the only European country he was interested in doing business with was Germany.

In contrast, former Libyan energy minister Omar Fati ben Shatvan has hinted that the rebels are unlikely to take a positive view of rewarding contracts to countries which did not support their efforts if they eventually win.

"The new democracy will be good for those who helped it. Russia and China have lost," he said, adding French and Italian firms are to be welcomed.

Such uncertainty presents a host of challenges for contract risk management, from force majeure clauses, to which companies to partner with in the first place, and it is too early to tell whether similar unrest could spread to more regions of the oil rich Middle East.

Timothy Haïdar, EIC Contributor:   Timothy Haïdar, EIC


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