1 April 2011 Last updated at 03:24 ET

Libyan rebels look to compete with Gaddafi through oil

By Aidan Lewis BBC News

Since Libya's uprising began in February, the north of the country has become a battlefield and the production of oil - which generated most of the country's income - has slowed dramatically.

In the west, Col Muammar Gaddafi is thought to be using huge reserves of cash, and possibly gold, to pay those fighting to keep him in power.

In the east, rebels trying to topple his regime have appeared weak in comparison, relying on the UN-backed international military mission to make gains.

They want to shore up their position by exporting oil, which would potentially give them billions of dollars to buy supplies and arms, and bolster their credibility as a future government.

The rebels say they are already producing up to 130,000 barrels a day and hope to raise this to 300,000 barrels in coming weeks. They say damage to oil infrastructure has been limited.

But they still face big challenges.

International companies have pulled out staff while retaining rights over the exploitation of oil, the security situation remains unstable, and Libya's oil industry is subject to international sanctions.

Help for rebels

Col Gaddafi has framed Western intervention as an oil grab and made overtures to potential buyers in China and India. He has threatened to sue any oil company that does business with the rebels.

The rebels "are ready with the infrastructure, they've got people in the fields, at the terminals, there are a lot of people there who know what they're doing", says John Hamilton, a Libya expert at British risk analysis firm Cross-Border Information.

"But they need the financial structure in place. That's something they're working to put in place but they need international co-operation to achieve."

There are signs that this co-operation may be arriving.

US and UN officials have said sanctions do not apply to rebel oil sales - even though the US listed the rebel-controlled Arabian Gulf Oil Company (Agoco) as one of those targeted.

Qatar has also offered to assist the rebels in selling oil, and may be able to help them avoid difficulties over ownership rights, according to Greg Priddy, an oil analyst with Eurasia Group consultancy.

But Mr Priddy said eastern Libya needed 100,000 barrels of oil a day just for its own use, and it would take some time before rebels could start earning large sums from exports. "It's not something that's going to happen in the next couple of months," he said.

Before the conflict began, Libya was producing 1.6 million barrels a day, accounting for about 2% of world output. Some 70% of the oil comes from the east.

Libya holds Africa's largest crude oil reserves, and its oil, most of which was being sold to Europe, is especially valued because of its light, low-sulphur quality.

Cash and gold

The International Energy Agency said that by mid-March, Libyan oil production had "slowed to a trickle", and that exports could be off the market for many months.

With an economy that is heavily dependent on oil, the resumption of oil sales could become more important as the conflict drags on.

"My personal view is that allowing Agoco to trade independently is absolutely essential not only from a strategic but also from a humanitarian point of view, and Libya is in serious need of resources to support the people there and allow life to go on," says Mr Hamilton.

"The east needs to be ready in a sense to come to the aid of the west when Gaddafi goes."

So far, Col Gaddafi has shown no sign of going, but part of the international plan for wearing him down involves cutting him off from assets and cash held abroad and future oil revenues.

This could take time, partly because the Libyan leader is said to have built up a huge reserve of funds that he is now drawing on.

The International Monetary Fund has estimated the value of Libya's gold reserves at $6bn (£4bn). And Ibrahim Dabbashi, the Libyan deputy representative to the UN who has defected to the rebels, says the cash reserves, which would be easier to use for direct payments, are worth "tens of billions".

He says it was widely believed among senior Libyan officials that a stash of this money and gold was moved to the Libyan south in shipping containers during the 1990s.

"Now we know clearly that these amounts are being used for financing the recruitment of mercenaries, for buying armaments, and for financing the war," Mr Dabbashi said.

Gaddafi handouts

It is not known how fast Col Gaddafi might be getting through his funds, but he has certainly been displaying new levels of largesse.

Early on in the rebellion his government gave away 500 dinars ($400; £250) to every family, and said it would raise state salaries by up to 150%.

Some loyalists in Tripoli were given as much as 17,000 dinars, a new car and a weapon.

And foreign mercenaries, of whom there are thousands, were reportedly being paid as much as $10,000 to sign on, with a daily wage of up to $1,000.

In one sign that it was under pressure the Libyan central bank has begun recirculating old, large banknotes.

Fuel shortages have also been reported, though Mr Priddy said that as long as Col Gaddafi retained control of the Azzawiya refinery, he was likely to have enough petrol for military operations.

He said that in the east, the rebels should have enough fuel if they could retain control of the country's other big refinery, at Ras Lanuf.

A rebel source in the eastern port of Tobruk confirmed that the rebels had enough fuel, but said they could do with more cash. He said they were negotiating with British officials to take possession of hundreds of millions of Libyan dinars printed in the UK.

With international backing and the prospect of selling oil, the rebels are confident they have the momentum on their side, even if Col Gaddafi is able to hang on in the longer term.

In the shorter term, the main hope remains that the Gaddafi regime will crumble from within.

"It would have to be a combination of the military pressure that's now being exerted and sanctions, and the impact that has on the people around Gaddafi - providing them with incentives and pressuring them to move over to the rebels or desert, or leave the country," says Wolfram Lacher, a Libya expert at the German Institute for International and Security Affairs.

"That's the only real scenario in which I can see Gaddafi's demise in the short term."