Although Libya’s promise as a vastly underexplored oil producer remains undimmed, experts say it is unlikely to meet its target of 3m barrels a day by 2012-2015.

The results of exploration undertaken by foreign companies since international sanctions on Libya were lifted in 2004 have so far yielded few sizeable finds.

While this may change over the longer term, experts argue that, for the moment, Libya’s best hope of increased volumes lies in field redevelopment and enhanced oil recovery projects.

“The biggest impact on oil production will come from the application of secondary and tertiary recovery techniques,” said Wood Mackenzie, the research and consultancy firm, in a report in November.

Libyan oil production peaked at 3.3m b/d in 1970, but after the introduction of UN and US sanctions in 1982, production fluctuated between 1.1m and 1.5m b/d.

One of the main reasons for the drop was that US companies left and most of the oil majors stayed away, depriving the country of crucial technology, particularly that needed to improve yields in maturing fields.

But since the removal of sanctions, foreign companies have piled into Libya, lured by the promise of the biggest proven reserves in Africa.

The country has held four licensing rounds, giving out dozens of contracts and renegotiating older ones to bring them in line with new fiscal terms.

“In 2005, Libya was one of the industry’s hottest prospects,” says Craig McMahon, lead Middle East and North Africa analyst at Wood Mackenzie.

“Companies that offered the most aggressive fiscal terms won the exploration licences. There was a feeding frenzy, which resulted in some exceedingly tough terms being agreed. Only when oil prices rose did some of the most aggressive bids start to look potentially economical.”

Output rose to 1.9m b/d in 2008, but the target of 3m b/d is “unrealistic in the short term” according to Wood Mackenzie.

In the past 18 months, National Oil Corporation, the Libyan state-owned company has finalised contract extension agreements with Eni, Petro-Canada, Occidental, Repsol-YPF and Total resulting in the pledging of significant development budgets.

Wood Mackenzie says the contract extensions have the potential for “a large increase in production”.

But NOC approvals of companies’ redevelopment plans have been slow to come, holding up the potential increases in output.

“Very little is happening,” says Mr McMahon. “The reason is that National Oil Corporation has not yet sanctioned the development plans.”

He says that the main reasons for delays are funding pressures within NOC and a reluctance on Libya’s part to increase production at a time of lower oil prices and demand.

“Production in 2009 has actually been cut as a result of the reintroduction of Opec constraints.”

Mr McMahon and others say that the current situation leaves companies frustrated, especially given the large signature bonuses companies paid to extend the duration of their licences.

John Hamilton, a Libya specialist on Africa Energy, an industry newsletter , says that leading companies with established exploration or production agreements, such as ENI, Shell, Total and BP, can afford to continue with their plans in Libya.

However, there is pressure on a number of US and Asian operators whose exploration licences will expire next year, several of whom have not made significant finds.

One of the largest companies that may have to decide whether to negotiate extensions with NOC or scale down its exploration is Occidental Petroleum, which has had limited success at five licences acquired in 2005, although it also has other exploration and redevelopment agreements with NOC that will expire in 2037.

“Some companies are worried that NOC wants to tighten the terms of future exploration agreements,” says Mr Hamilton. “This is causing concern, as, in most cases, they haven’t made the discoveries they hoped for, and in the current climate it will be hard to justify reductions in their stakes.”

So far only Verenex of Canada and RWE Dea of Germany have made significant discoveries.

But Mr McMahon believes it is unlikely that companies will abandon Libya.

“There are a lot of press reports about companies scaling down operations,” he says. “But those who have sizeable possessions there have all paid large signature bonuses. They may well review the size of their Libyan operations but their commitment to the country will remain.”