TRIPOLI (Reuters) - Libya will join its neighbors in tackling sensitive fuel market reforms and plans to do away with all subsidies within three years, Oil Minister Abdelbari al-Arusi said.
The International Monetary Fund (IMF) estimates over 14 percent of Libya's budget or about $7 billion will be swallowed up by subsidies for food and fuel, which the government says are ineffective because they encourage smuggling and fail to target those most in need of state help.
"The authorities intend to remove subsidies on all fuel, including both gasoline and diesel," the oil minister said in an interview.
"We expect the implementation of this process to take place within the next three years and there will be awareness campaigns for citizens in order to prepare them."
Arusi has said gasoline prices needed to rise in line with those of its neighbors to stop fuel being smuggled over its borders.
Libya is not exposed to the same pressure as neighboring Egypt or Tunisia, which are both fighting political unrest to undertake painful economic reforms to secure loans from the IMF.
Tension, however, between the government and armed militias has been rising since authorities began a campaign to dislodge gunmen from strongholds in Tripoli to curb lawlessness since the ousting of dictator Muammar Gaddafi in a 2011 uprising.
Gunmen in pick-up trucks surrounded Libya's justice ministry on Tuesday to press demands that former Gaddafi aides to be barred from senior government posts.
With a population of around 6 million, Libya's fuel subsidies are dwarfed by those of larger nations on an absolute basis. Egypt, for example, spends around $15 billion or over a fifth of its GDP on fuel subsidies.
Fuel subsidies in Libya cost around 8.5 percent of its GDP in 2011 -- averaging out to about $487 a head or roughly $3 billion, International Energy Agency data shows.
However, proportionally they are very high with the subsidization rate of 75 percent, meaning the government covers three quarters of the cost of fuel. And spending is rising rapidly to drive the post-war reconstruction effort - an extra $1.57 billion or so will be spent on subsidies this year over last year.
OIL PRICE TUMBLE
The recent fall in benchmark world oil prices to a nine-month low of less than $100 a barrel could present a barrier to increasing Libya's OPEC quota, an issue it intends to raise at the next meeting in May.
"We have the potential to produce about 1.7 million barrels per day (bpd), but there are many obstacles, including the drop in prices on the world market," Arusi said.
Current output remains slightly short of pre-war levels at around 1.55 million bpd, he added, due to security and maintenance issues that have hampered the full return of Libya's oil.
This level is in line with Libya's last OPEC target set in 2008 at 1.47 million bpd.
Arusi said a shortage of parts needed in oil fields had been felt most acutely at Libya's Mesla and Sarir oil fields, but he expected these to arrive soon. Security problems in other fields - such as Ghani, where fighting broke out last month - were under control, he said.
NEW LICENSING ROUND
Arusi also said his ministry still planned to launch Libya's first post-revolution licensing round this year and negotiations about terms on which fields will to offered were underway.
"We are now in the process of reviewing previous agreements," the oil minister said. "We expect to start (the new round) at the beginning of the fourth quarter of this year."
The terms of Libya's last licensing round were seen to be among the tightest in the industry and some foreign oil companies are asking it to sweeten them.
Germany's Wintershall BASF.F has ruled out exploration in Libya, despite the country's vast resources, as long as the conditions offered to foreign oil companies remained unchanged.
Royal Dutch Shell (RDSa.L) suspended drilling and abandoned exploration on two Libyan blocks due to disappointing results, it said last year, while other firms are wary about resuming exploration because of concerns about safety.
(Writing by Jessica Donati; editing by Keiron Henderson)