Kadafi said to be hurting from loss of oil revenue

A battle in which Libyan rebels repelled government-backed militias from the strategic Mediterranean city of Port Brega marked the first attempt by forces loyal to Moammar Kadafi to recover lucrative oil-rich territory that has been stripped from his grasp.

Kadafi’s long hold on power has rested largely on billions of dollars in oil revenue that pour into the Libyan treasury. But three-quarters of that oil is pumped from wells in the eastern part of the country now in rebel hands, according to industry executives here, and is refined and exported through key terminals in the east such as Port Brega.

Kadafi’s fate rests on whether cutting off that revenue is enough to topple him, or whether he has amassed enough oil wealth in his 41-year rule and has enough liquidity to keep the loyalty of a patronage network that will fight to keep him in power.

Rebel leaders who now control eastern Libya say that drastically reduced production since the uprising began along with international sanctions will deprive Kadafi of revenue he needs to fight for survival.

Eastern-based senior executives at the Arabian Gulf Oil Company, a subsidiary of the state-owned National Oil Corp., say they have turned against Kadafi. They contend the country is now losing up to $100 million in oil revenue a day.

Those losses have not affected the revolutionaries who control eastern Libya because oil profits have always flowed directly to the regime in Tripoli, to the west, they say.

“We never saw that oil money anyway, so it’s Kadafi who’s hurting, not us,” said Mustafa Gheriani, foreign relations director for the provisional government based in Benghazi.

Yet diplomats and analysts abroad say the short-term effect of the revenue disruption is uncertain.

“That is nothing compared to the wealth accumulated over the last few years,” said Mohammed El-Katiri, a London-based analyst with the Eurasia Group, a political risk analysis firm. “The population is small. To run the place and keep the people happy won’t cost him a lot,” El-Katiri said.

Following the money when it comes to oil, Libya and Kadafi is no easy task. “It’s not transparent in the slightest as to how cash flows work” in the Libyan oil industry, says Holly Pattenden, an oil analyst with Business Monitor International, who estimates Libya’s annual oil revenue at $50 billion.

Oil and gas account for 95% of Libya’s export revenue, according to the International Monetary Fund. Those gushing profits helped Libya rack up a trade surplus of $44 billion in 2008 and foreign reserves of $136 billion, according to a 2009 cable from the U.S. Embassy in Tripoli to Washington recently released by WikiLeaks. A healthy portion of that revenue comes from taxes Kadafi’s government imposed on the National Oil Corp.’s foreign partners.

“There is a large tax burden on oil companies in Libya, and that obviously makes for a major flow of income to the regime,” Pattenden said.

But the money did not reach all Libyans equally, leading to resentments that have helped fuel the revolt. Like many Libyans in the east, Arabian Gulf Oil Company executives and workers have long resented the Kadafi regime in Tripoli, 600 miles away. They say Kadafi lavished resources on cronies and supporters, but starved the east of money for infrastructure, education and healthcare.

The lobby inside Arabian Gulf Oil Company headquarters features photos of two employees, referred to as “martyrs,” who were killed in clashes Feb. 21 that ended government control in Benghazi. The bulletin board has appeals for blood donations on behalf of the provisional government.

“The aim of the revolution is to distribute that money all across Libya, not just the east,” said Abdeljalil Mohamed Mayuf, a senior manager for the state-owned firm.

Production at the Arabian Gulf Oil Company’s fields in the desert south of Benghazi is about one-third the normal capacity, Mayuf said. The lag costs the company about $30 million a day, he said. It continues to pump — and store — some oil and natural gas because it is expensive and time-consuming to completely shut down production and then start up again. About a third of the company’s 5,800 workers are no longer reporting for work, and almost all its 200 or so foreign workers have left the country.

The firm’s refineries in the east are producing gasoline, diesel and heating oil at nearly normal levels for domestic consumption, he said, satisfying current energy needs for both consumers and the provisional government in what company executives call Free Libya.

“What we produce belongs to the people now, not to Kadafi anymore,” said Anwar Jeroushi, an auditor at the company.

A major question is how long Kadafi can continue to funnel money to the tribes that form his political base, or pay the mercenaries he is reported to be using to break up demonstrations in the capital and other cities.

“No regime can just survive on the use of brute force; co-option is critical,” said Fawaz Gerges, an expert on the Middle East and North Africa at the London School of Economics. “He has used billions of dollars to construct a base and also to divide the various tribes that are opposed to him.

“What the sanctions do is fuel tensions within his base,” Gerges said. “This is where the attrition begins within the regime.”

Gerges said the importance of oil money explains Wednesday’s attack on oil towns such as Port Brega. But with international sanctions impeding Kadafi’s ability to sell oil and gas abroad, even winning back control of pipelines and export terminals would not re-start the revenue flow.

Arabian Gulf Oil Company’s executives say that Kadafi may be trying to sell oil for cash under the sanctions radar because money owed for previous deliveries has been frozen, something industry analysts say is possible.

“The banks in Libya have shut down. The shippers can’t obtain letters of credit from the banks. So if Kadafi is going to seek to avoid sanctions by selling cargoes of oil in cash, he’s going to have to find fairly unscrupulous buyers who don’t mind having all the paperwork, and there is no lack of those in the global oil industry,” Pattenden said.

Meanwhile the Arabian Gulf Oil Company’s executives in Benghazi say they expect to collect the money owed them once Kadafi cedes power.

“We trust the international community to deliver the money,” said Yousef S. Gherryo, manager of the engineering department. “It could be weeks, or months.

“It depends of how fast we get rid of Kadafi and how fast a new government is established.”

david.zucchino@latimes.com

henry.chu@latimes.com

Zucchino reported from Benghazi and Chu from London.