By Emma Farge
BENGHAZI, Libya (Reuters) - Libya's eastern city of Benghazi would risk fading back into obscurity after a six-month interlude as the seat of the rebel government were it not for one powerful asset: oil.
Benghazi residents are struggling to convert their wartime sacrifices into economic clout to restore the status of a city once deemed on a par with the capital, Tripoli, and rescue it from its relative obscurity in the Muammar Gaddafi era.
Under Gaddafi, Benghazi was at the mercy of Tripoli for its share of state funding, even though most of this is generated from nearby eastern oil fields. Libya's economy is almost entirely reliant on oil and gas revenue.
Cradle of the anti-Gaddafi revolt, Benghazi had languished low on the deposed ruler's list of spending priorities, which many see as punishment for a tradition of eastern resistance to his 42 years of one-man rule -- and to Tripoli's dominance.
"There's a feeling of entitlement in Benghazi and they want rewards. They held the fort for six months and this came on the back of a period of repression," said a Libyan oil industry source in the city where the interim National Transitional Council (NTC) set up its headquarters early in the revolt.
Youssef Mahmoud, an engineer at Jowef Oil, a subsidiary of the state National Oil Corporation (NOC), typifies the sort of grassroots resource regionalism that has the potential to shake up the North African country's bedrock industry.
He heads a group of about 4,000 state oil workers called the February 17 Oil Committee, and is lobbying Libya's interim rulers for a "greater say in oil policy" that would be symbolized by moving NOC headquarters from Tripoli to Benghazi.
"Gaddafi took it (the NOC) to Tripoli because he wanted control. But where are the fields?" complained Mahmoud, jabbing his finger at a map of Libya, showing a large clump of black circles representing oil fields in the eastern Sirte Basin.
The east supplies more than 60 percent of oil exports and much of Libya's untapped oil is thought to be in this region, including the virgin Kufra Basin near the Sudanese border.
Libya has Africa's largest oil reserves.
Benghazi residents hope oil revenue, worth around $130 million a day at current Brent prices, can fuel an economic revival in the east, from cleaning up the streets to promoting new industries such as tourism.
"It's not just oil, we have beautiful places," said Ali, who works in a youth hostel in Benghazi.
Old postcards in hotel cabinets remind visitors of the city's former charms. One shows the long, crescent-shaped Italian 'Lungomare', or seaside promenade, with its Doric columns and distinctive double-domed Catholic cathedral. Another pictures Juliana Beach full of happy, paddling children.
Today, seafront visitors encounter the near-ubiquitous smell of sewage and rusting carcasses of broken-down cars.
POINT OF NO RETURN
It may be hard for Libya's new rulers to ignore Benghazi's demands, given the role the city played in initiating the revolt against Gaddafi in February and spearheading a NATO-backed military campaign that has pushed his troops back to Sirte.
Eastern Libya's many former rebel brigades will not want to see their region lose out in the post-Gaddafi era -- although fighters from the Western Mountains and Misrata may be just as keen to turn their military exploits into political power.
Benghazi's trump card, however, is oil.
"When armed local stakeholders, and perhaps militias, start saying this oil is on our territory, it becomes an emerging political risk," said Henry Smith, Libya analyst at London-based consultancy Control Risks.
Besides the city's well-documented political and military roles, the Benghazi-based Arabian Gulf Oil Company (Agoco) played a vital role for Libya in selling oil and buying fuel when international sanctions had incapacitated the NOC.
This inverted the relationship between the parent company and its subsidiary, perhaps irreversibly.
A senior NOC source said plans were in place to wrest control back from Agoco by mid-October, but added that the relationship between the two firms would likely have to alter.
"There will be a struggle for power. The NOC wants to go back to its old role and Agoco is saying that it supported the revolution so it wants a bigger say," he said.
"It wants a commercial basis. Agoco wants to get some profits from the operations."
In an indication of the simmering tensions, a source within Agoco referred to the NOC as "Bab al-Aziziya for the oil sector" -- the name of Gaddafi's fortified compound in Tripoli.
OLD AND NEW RIVALRIES
Healing the historical east-west rifts, and new ones that have emerged during the revolution, will be a key test for interim rulers in the factionalized and heavily-armed country.
Cultural divisions between Tripoli and Benghazi pre-date Roman times when Tripolitania and Cyrenaica were separate provinces. Libya's Senussi kings were from the east and Benghazi was seen as Tripoli's equal before army officers led by Gaddafi toppled King Idris in 1969.
Months of conflict have reinforced a sense of distance between Tripoli and Benghazi, 1,000 km (625 miles) apart.
Poor telephone links mean Libyans must dial internationally between the two cities. Gaddafi forces are still holding out in the coastal city of Sirte, impeding traffic on the main east-west highway and forcing travelers to fly via a NATO air corridor in the Mediterranean or to go by ship.
Benghazi's ambitions for economic power in the new Libya may sound aspirational, but some politicians may be listening.
All three foreign leaders who visited Libya in September -- French, British and Turkish -- chose to visit the city.
"(French President Nicolas) Sarkozy has given a message by coming to speak in Benghazi. He is saying that Benghazi should not be ignored," said Nasser Ahdash, head of the National Forum, a political group which has helped organize marches to back demands that Benghazi should be Libya's economic capital.
In another nod to the eastern city, NTC leader Mustafa Abdel Jalil, from eastern Libya himself, has not yet moved to Tripoli from Benghazi. Initially, his foot-dragging was seen as linked to security concerns. Now it looks more political.
The NTC's vice-chairman and spokesman, Abdel Hafiz Ghoga, said the move would not happen until Libya is fully "liberated" from Gaddafi and that the NTC would not abandon Benghazi.
"We will keep a base for the NTC. Benghazi is necessary."
(Additional reporting by Rania El Gamal; Editing by Alistair Lyon)
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