Courtesy of STRATFOR (subscription required), some very interesting analysis of what Libya’s upcoming elections may mean for international investors:

Libya’s citizens will head to the polls July 7 in the first national elections since the October 2011 ousting of former leader Moammar Gadhafi. The upcoming election will select a prime minister, Cabinet and a constituent authority that will be tasked with drafting a new constitution. Because the ruling National Transitional Council is ineligible to participate in the future government due to restrictions included in a Jan. 1, 2012, elections law, the future government will contain neither Gadhafi-era politicians nor transitional council members, who have kept a tenuous hold on Libya’s simmering regional power centers.

International investors may be hoping that elections in Libya will translate into a more secure investment climate, but power in post-Gadhafi Libya will not rest with an elected parliament. The ongoing diffusion of power to locally elected city governments and the increasing clout and integration of regional militias will mean that future investment, especially related to the energy sector, will have to meet the demands of national, regional and local government as well as militant groups. This increases the chances that political instability will continue to hamper Libya’s ability to further develop its natural resources.

Regionalization of Libyan Politics 

Three regions make up modern-day Libya: Tripolitania, the eastern province of Cyrenaica and the southern region of Fezzan. Libya’s geography has divided the populations of these regions and has made it difficult to develop infrastructure linking them. 

Geography makes these divisions inevitable. For instance, in the early years of Libyan independence, the state had two capitals with ministries split between them until Gadhafi consolidated the regional power centers under his rule. But in today’s Libya, the revolutionaries’ distrust of the National Transitional Council — due to the secrecy of its membership, meetings and hydrocarbon revenue distribution system — reinforces their suspicions of the notion of a centralized government. Demonstrations against the transitional council have persisted since January, when the council’s then-vice chairman, Abdel-Hafidh Ghoga, was assaulted and then forced to resign after a Benghazi protest became unmanageable. Fundamentally, every group and region in Libya wants to maintain the de facto semi-autonomy it presently enjoys and will resist attempts by any central authority to rein it in, especially if that means ceding more authority to Tripoli.

The National Transitional Council is currently based out of Tripoli, though many members, especially those from former rebel strongholds such as Benghazi and Misurata, have continued to work from their hometowns. These regional representatives maintain strong ties to both their communities and local militias, building up their own patronage networks through their positions in the transitional council. In several instances they have named certain militias as partners of the national security forces so that the fighters could receive salaries from the National Transitional Council.

Meanwhile, there has been a rise in support for locally elected city councils in former rebel bastions, where Tripoli’s influence and bureaucratic institutions hold little sway. Benghazi’s city council announced in March 2012 that it would take control of the city’s day-to-day administrative issues, a move that angered transitional council officials. Members of the Benghazi city council manage local infrastructure projects and security issues and settle disputes with regional rivals — independent of the National Transitional Council and with the support of local militias.

Libya’s largest regional militias are in Zentan, Misurata and Benghazi. These militias, in addition to their associated city councils, are the biggest obstacles of the current transitional council and the future national government in achieving control over a unified Libyan state. The council’s security forces have been unable to prevent renegade militia attacks or to convince regional militia leaders to lay down their arms or join the council’s security forces. For instance, the al-Awfea Brigade took over the Tripoli Airport on June 4 and held it until the next day, when the National Transitional Council negotiated a resolution. Only a few months before, in April, the council had to secure the international airport, which Zentan’s militia had overtaken, and its inner-city airport, Benita, which had fallen under the control of Souq al-Jomaa, a militia that hails from the central Tripoli suburb of the same name.

There are also jihadist militants and non-Arab tribal groups such as the Tuareg and Toubou that threaten Libya’s security situation. An increase of tribal attacks can be expected, and jihadist militants will continue to operate without a strong central government security presence.

Libya’s Distinct Energy-Producing Regions

The same geographic features that led to the separation of Libya’s population centers also gave rise to two distinct oil-producing regions, each with its own local government oil bureaucracies. Nominally, the National Oil Corp. is a state-level institution with oversight of all aspects of Libya’s energy sector. In practice, however, Waha Oil Co. handles foreign investment in Libya’s western oil fields, and the Arabian Gulf Oil Co. has regional oversight of Libya’s eastern oil fields. (The Sirte Oil Co. works within the Sirte Basin, which is tied into the eastern infrastructure.)

Oil companies in the Middle East often have regional subsidiaries, but in Libya there is no alternative. Just as it prevents socio-political cohesion, Libya’s geography also prevents the integration of internal oil and natural gas infrastructure. Eastern Libya produces roughly 75 percent of the country’s oil, while the rest of the country is responsible for roughly the same percentage of natural gas production and almost all natural gas exports. Power plants and refineries are designed to work with blends from nearby oil fields and lack pipeline infrastructure to receive shipments of feedstock from other parts of the country. Rather than use production from one part of the country in another part, Libya has had to import costly refined products as it struggles to keep pace with domestic fuel demands.

Currently, purchasers of Libyan crude make payments directly to the central authority, which officially is the National Transitional Council. The transitional council’s management of this money, and of Libya’s $65 billion sovereign wealth fund, is a key complaint of groups outside the transitional council and its future replacement. Council members use these funds to buy lavish offices and homes in the Tripoli area, to travel and to maintain their individual patronage networks with various militias. The regional power centers have charged that the transitional council’s members, who will be ineligible to formally re-enter government until a constitution and parliament have been established, are using the funds to influence political parties and shape the soon-to-be elected government.

Regional oil companies have also used their control over local production and exports to extract aid from the National Transitional Council. Arabian Gulf Oil Co. cut its oil production in May in response to ongoing demonstrations against the transitional council outside its offices in Benghazi. While National Oil Corp. denied that any cut in production ever occurred — another demonstration of the disconnect between the regional and national oil companies — at the regional firm’s behest it eventually sent negotiators to deal with the protesters. National Oil Corp. responded to both the city council and Arabian Gulf Oil Co. by opening its first branch outside Tripoli, in Benghazi, on June 7. The move was widely seen as the central government’s attempt to assert its authority in the region.

Local militias have also been a threat to oil production. Local militants controlled important oil export infrastructure during the war and have proved themselves capable of taking over vital infrastructure such as airports to exact demands from the National Transitional Council. With the central government failing to ensure security and falling short on promises to pay salaries to the militias, Western oil companies have begun to deal directly with the militias, local oil companies and regional civilian leaders to conduct day-to-day business. Stratfor sources have confirmed that Western oil companies have hired local militias, specifically the Zentan militia, to protect southwestern oil fields from Tuaregs. 

Implications for Libya’s Energy Sector

The current oil minister, Abdulrahman Ben Yezza, is the former Libya-based adviser to Italian energy giant ENI, long the largest foreign player in Libya’s oil and natural gas sector. Ben Yezza has been instrumental in convincing international oil companies to return to operations in Libya, persuading the transitional council to honor Gadhafi-era contracts and maintaining ENI’s strong presence in Libya’s western, eastern and southern oil fields.

Unlike ENI, other foreign oil companies with operations in Libya are increasingly feeling the effects of decentralized authority over Libya’s natural resources. Royal/Dutch Shell has long hoped to become involved in Libya’s natural gas industry and expand its liquefied natural gas production. However, with its production focused in Libya’s natural gas-poor eastern fields and with no way to connect to the large natural gas fields in western Libya, Shell decided to halt its activities in Libya in May 2012. (Incidentally, ENI is the majority owner and operator of these western natural gas fields and the pipeline — with a capacity of 11 billion cubic meters per year — that delivers natural gas directly to Italy.)

BP, which recently re-entered the Libya market, is focusing on its offshore operations, where the promise of financial return is not as assured but where it has to deal with the central government only — not with any of the regional players. Russia’s Gazprom has also been eyeing Libyan oil fields. It currently has an asset-swap agreement with ENI — Russian oil for Libyan oil — though it is unclear if ENI’s domestic political situation, or the delays brought on by the Libyan revolution, will affect this.

ENI will continue to be the best-situated foreign player to work within Libya’s uncertain political situation. Well-connected with Libya’s national-level bureaucrats, ENI also has experience operating with nearly all of Libya’s regional oil authorities, service providers and marketing organizations. ENI’s years of social projects outside Tripoli have afforded the Italian company a wealth of contacts and connections beyond the National Oil Corp. Would-be energy investors in Libya will likely include ENI on their list of authorities who must be appeased before business deals can go through.

An unstable Libya does not affect only ENI and other international oil companies. The current consensus in Europe is that Libyan energy production and exports will remain stable and will soon begin to surpass pre-war levels as Western investment and development continues. These assumptions have direct bearing on other decisions such as those regarding the EU embargo on imports of Iranian crude and the need to diversify natural gas supply. To continue doing business in Libya, foreign oil firms will likely need not only agreements with the nominal authority in Tripoli and the National Oil Corp. but also with regional oil authorities, regional political bodies, militia commanders and possibly tribesmen.