Abu Dhabi, UAEFriday 6 December 2019

Future of Libya’s oil industry hinges on swift outcome of conflict

The country’s oil output has recovered remarkably to 1.1 million barrels per day, a major improvement on the lows of 2014 and 2016

Under the leadership of Mustafa Sanallah, head of NOC, Libya’s oil output has recovered remarkably, reaching around 1.1 million barrels per day at times. AP 
Under the leadership of Mustafa Sanallah, head of NOC, Libya’s oil output has recovered remarkably, reaching around 1.1 million barrels per day at times. AP 

Libyan oil has sustained a remarkable recovery amid widespread anarchy. Now, with general Khalifa Haftar ordering an advance on Tripoli, it calls into question the future of the country’s oil industry.

Gen Haftar’s intended seizure of Tripoli from militias backing the weak but internationally-recognised Government of National Accord (GNA), comes just ahead of a planned national conference on April 14-16th in the western city of Ghadames, which now appears defunct.

The general, head of the Libyan National Army (LNA), has gradually taken over control of eastern Libya from his base in Benghazi. In February, he moved on the vast, sparsely populated and lawless southern province of Fezzan, and extended his grip to two of Libya’s largest oil-fields in the Murzuq basin, Sharara, owned by Repsol of Spain, and El Feel, operated by Italy’s Eni. As part of this operation, he expelled a Chadian rebel group, a favour to France which supports Chad’s president Idriss Déby.

The LNA – more a coalition of armed groups than a coherent army - is stretched. Its advance into the south was accomplished by negotiation more than fighting, and even there the marginalised Tebou people remain a threat. Gen Haftar may face stiffer opposition in the north-west from the constellation of militias that control Tripoli and the port city of Misrata. Misratan militias may both defend Tripoli and advance east on the oil ports tenuously held by the LNA.

The Zawiyah terminal to Tripoli’s west is key for oil exports from the Murzuq basin, and further west Mellitah exports gas to Italy. With control of those – itself far from straightforward - the general would be able to cut off virtually all the country’s revenues at a stroke. But to move beyond veto power to positive control of Libya’s finances, he needs Tripoli, the headquarters of Libya National Oil Company (NOC), the central bank which receives all oil revenues and funnels them into the economy, and the Libyan Investment Authority, steward of the nation’s remaining wealth.

Under the leadership of Mustafa Sanallah, head of NOC, Libya’s oil output has recovered remarkably, reaching around 1.1 million barrels per day at times. This is down from the pre-revolution level of 1.6 million bpd, but a major improvement on the lows of 0.3-0.4 million bpd at times in 2014 and 2016, when armed groups supposed to be protecting fields instead blockaded them for higher salaries or other grievances.

Mr Sanallah has targeted output of 1.4 million bpd this year, but even with good security at all fields, this would probably remain out of reach because of eight years of minimal investment, sabotage at several fields in the key Sirte basin, and destruction of export facilities during various rounds of fighting. NOC’s capital budget for this year is only about $900 million, and, except in a few safe spots offshore, international partners are hardly spending. France’s Total has been waiting for a year for approval of its plan to purchase a stake in the Waha consortium, one of the two leading producers in the Sirte basin.

Nevertheless, NOC has stayed apart from the factional fighting. Last June, after capturing the Sirte export terminals of Ras Lanuf and Es Sider, the eastern administration tried to sell crude oil on its own account, perhaps emulating the success of the autonomous Kurdistan region of Iraq. Had it succeeded, it would have secured an independent revenue stream and undermined the finances of the Tripoli government. But the attempts were blocked by the UN.

The eastern administration issues its own currency, printed in Russia, and has sold $23 billion in bonds. Now the LNA has more financial commitments, funding fuel in the south and paying off various local groups, while the central bank in Tripoli claims to have $70bn of foreign exchange reserves. Money may be one reason for Gen Haftar to move now.

This round could end with Gen Haftar in control, with a negotiated settlement, a destructive stalemate, or even an unravelling of the LNA’s gains.

Further deadlock or extended fighting, bringing more damage and blockades of oil fields and terminals, would undo the progress painstakingly made by Mr Sanallah. That has wider implications, requiring other Opec countries to make up the shortfall, and possibly easing American sanctions pressure on Iran. Italy for one, already having lost access to Iranian oil, is keen to keep supplies of Libyan crude and gas flowing. But already, foreign oil companies, including Eni, have had to evacuate their staff from western Libya in response to the latest fighting.

Conversely, a reunified government, however achieved, would still face a plethora of local groups and protestors obstructing petroleum operations. Subsidies and state employment are a heavy drain on the government budget, which balances this year only with some dubious assumptions. Yet armed groups prefer subsidies to continue, as they sustain themselves from smuggling fuel. Reconstruction would bring further large bills. On the other hand, international oil firms would be glad to invest with reasonable security and clarity of government policies.

The general has gone deeper into his Libyan labyrinth. When and where he emerges will set the course of the nation’s oil industry, and so its economy and its political possibilities.

Robin M. Mills is CEO of Qamar Energy, and author of The Myth of the Oil Crisis

Updated: April 10, 2019 01:27 PM