Libya faces major obstacles in its quest to boost crude production to pre-war levels, including the potential for populist politicians to target the contracts of international oil companies.
But the country needs cash. And the death of Libyan leader Moammar Gadhafi removes a major impediment to restore output to its pre-war level of 1.6 million barrels a day, the loss of which drove international crude prices sharply higher last spring.
Libya's return to international markets will put renewed pressure on other OPEC producers, who are already worried about sluggish demand growth and prospects for increased Iraqi production.
Oil industry experts say it will take months – perhaps longer – for Libya to boost output to the level it was producing before the rebellion. It is now producing about 350,000 barrels per day, from virtually no output at the height of the civil war.
"But that was the easy bit," Bhushan Bahree, Middle East expert with energy consultant IHS CERA, said Friday. "We don't know how quickly they will be able to go from here."
Coupled with wider unrest across the Middle East and North Africa, the loss of high-quality Libyan oil last February sent international prices soaring, with North Sea Brent topping $130 (U.S.) a barrel in April. The price shock prompted Saudi Arabia to boost production and the United States to release emergency supplies from storage.
With a slowing global economy, prices have settled back, with Brent closing on Friday at $109.56. But traders were more focused on Europe's sovereign debt crisis and global economic weakness than on Libya.
The news of Mr. Gadhafi's death had little impact on prices because markets had already factored in the downfall of his regime and the resumption of production.
Analysts expect Libya to reach production of 600,000 barrels per day by the end of the year. (In comparison, Canada produces close to 3 million barrels per day.) Many oil companies – including Canada's Suncor Energy Inc. – have yet to return to the country to assess damage to their wells and supporting infrastructure. Suncor officials did travel to Tripoli earlier this month with Foreign Affairs Minister John Baird, but a spokesman said the company is still assessing the security situation.
As well, there are questions about whether the interim government, the National Transitional Council, will respect the contracts signed by the Gadhafi government, despite assurances that it will.
Finance and Oil Minister Ali Tarhouni has promised an inquiry into corruption in the oil sector and into contracts that, in his view, are too generous to the international oil companies (IOCs), Crispin Hawes, analyst with Eurasia Group political risk consultancy, said in a research note.
"Longer-term production recovery will be affected by the slow return to Libya of expatriate personnel and the continued absence of IOCs, some of which are concerned over security of contracts and remain hesitant to re-engage in the country until the current situation stabilizes," Mr. Hawes said.
Meanwhile, the Organization of Petroleum Exporting Countries has reduced its forecast for demand in 2011 and 2012, and will have to find ways to accommodate growing Libyan production even as it considers the need to restrain overall production from the cartel.
In a recent forecast, OPEC said it expects the demand growth for its crude to remain flat in 2011 and 2012, and that the risks to that forecast are all on the downside.
Saudi Arabia and the Gulf states increased their production last spring to compensate for the loss of Libyan output. But they did not match the entire 1.6-million-barrel production loss, and may have to do more than roll back that temporary increase in order to keep prices from tumbling next year.