The Fuse

Don’t Count Out Libya Just Yet

September 02, 2015

Guest Post by Matthew M. Reed | @matthewmreed

Matthew M. Reed is Vice President of Foreign Reports, Inc., a Washington, DC-based consulting firm focused on oil and politics in the Middle East.

libya oil production reed

Given the recent mayhem in Libya, it’s easy to forget just how resilient the country’s oil industry has been since Muammar Qaddafi was toppled in 2011. The odds may be stacked against it, but huge upside potential remains. The industry is handicapped more by politics than technical issues, meaning that a flood of oil is only a political breakthrough away. Libya desperately needs oil revenue, increasing the urgency of a resolution—which would make the current market glut even worse.

During the uprising, rebels and regime loyalists rarely attacked oil facilities because both sides believed they would win and cash in.

Libya has bounced back before. In late 2011, after Qaddafi was ousted and the transitional government took over Tripoli, the oil industry rebounded almost immediately. Production in 2012 averaged a stunning 1.45 million barrels per day (mbd)—only about 100,000 b/d shy of what Libya averaged the year before the revolution. During the uprising, rebels and regime loyalists rarely attacked oil facilities because both sides believed they would win and cash in. Libya’s NOC thus had an easy time turning on the taps and finding customers.

Oil output remained steady into the following year. Then, in the summer of 2013, guards took half of Libya’s oil production hostage by closing four major terminals on the coast. With no outlet for the oil, eastern fields had to be shut and production plummeted. Libya’s powerless government, elected in 2012, never mustered the force required to retake the terminals. With no fear of reprisal, the guards demanded more autonomy for their territory and a new constitution enshrining federalism.

The federalists couldn’t resist the urge to sell oil themselves. They failed to do so multiple times, most spectacularly in March 2014, when they hijacked a tanker and loaded it with stolen oil. U.S. commandos raided the ship and returned it to Tripoli. A follow-up UN resolution warned against any theft of Libyan oil thereafter. As a result, the guards sobered up and reached a deal with a new Libyan government in July 2014. Once again, production climbed steadily—from just 243,000 b/d in June to 1 mbd at the very end of October.

The rebound was real but short-lived. Not long after the July deal was reached last year, Libya slipped into civil war. In June, popular outrage against a dysfunctional parliament prompted new elections, the results of which were unkind to Islamists who dominated the General National Congress (GNC). Ousted at the polls, those Islamists joined forces with revolutionaries who wanted to purge all remnants of the old regime. Militias belonging to these camps forced the government of Prime Minister Abdullah al-Thinni to flee the capital. He and the elected parliament relocated to eastern Libya, closer to Cairo than to Tripoli.

The revolutionary-Islamist alliance known as Dawn has dominated the capital ever since. But its control over vital state institutions—specifically the Oil Ministry, National Oil Company and Central Bank—is questionable. Dawn reimposed the defunct parliament in Tripoli. It has since appointed its own oil minister, even though the post is meaningless these days.

All things considered, Libya’s old NOC is functioning as well as it can; it handles day-to-day operations and exports.

Oil ministries typically handle budgets, long-term planning, and contracts. Yet planning and foreign investment is impossible because of the civil war. (The internationally recognized government headed by Thinni did away with the oil minister post last year.) All things considered, Libya’s old NOC is functioning as well as it can; it handles day-to-day operations and exports. The Central Bank claims neutrality while processing oil sales arranged by NOC. It carefully guards oil revenues and is now only paying for wages, imports and subsidies. Export volumes are limited and prices have collapsed over the last year, meaning the bank is burning through reserves to prop up what’s left of the welfare state.

The civil war did not immediately impact oil production. It took until November for the fight to reach major fields. On November 5, pro-Dawn militias captured the Sharara field in western Libya without firing a shot. Pro-government forces to the north retaliated by shutting the pipeline that connects Sharara and others to the coast. Some 400,000 b/d was lost overnight.

In December, Dawn launched a frontal assault east along the coastal highway, which strings together export terminals in the Gulf of Sirte. The attack stalled but not before destroying storage tanks at Es-Sider. Libya’s NOC had no choice but to declare force majeure there and at the nearby Ras Lanuf terminal, slashing exports and production by another 450,000 b/d. From the high point of October to the lows of late December, oil production fell by about 80 percent—and that was before ISIS exploded onto the scene.

The rise of ISIS

ISIS in Libya map sept 2015

Whereas the civil war’s main factions wanted to control production, ISIS aimed to destroy it from the start. From its stronghold in Sirte, ISIS raided smaller oil fields in central Libya this past February and March, destroying critical equipment and killing foreign workers. ISIS in Libya has not attempted to capture and monetize oil fields like it did in Iraq and Syria. This is likely due to logistical and market constraints: ISIS in Libya doesn’t appear to have the manpower and knowledge base to keep up oil operations; moving oil economically is also tricky because remote fields all pump oil north by pipeline to territory that’s out of ISIS control.

Small-scale smuggling is possible but replicating ISIS’s success in Iraq and Syria may be impossible because there are few customers nearby and there are no readily available options for refining. ISIS has not attacked an oil facility since March, but it remains perfectly positioned to do so. Both Dawn and the recognized government are preoccupied with the civil war and neither seems eager—or able—to oust ISIS from Sirte.

A vacuum of leadership

Libya’s new NOC is almost six months old but has had no luck attracting customers. Libya’s long-time buyers are still going through Tripoli and dealing with the old NOC, as they’ve done for decades.

Complicating this grim situation is the desperation of the recognized government. For some time now, officials have complained that the Central Bank is not forthcoming with funds. The bank has only become more tight-fisted since the civil war broke out and rival governments claimed the right to tap Libya’s riches. Thinni’s impatience led him to establish his own NOC in the east and a new Central Bank of sorts. The new NOC is almost six months old but has had no luck attracting customers. Libya’s long-time buyers are still going through Tripoli, dealing with the old NOC, as they’ve done for decades.

In May, the eastern NOC’s troubles prompted one of Thinni’s deputies to concede exports to the original NOC for the remainder of 2015, citing the fact that customers were locked into annual term contracts. Beginning in 2016, however, all buyers would be expected to go through the new NOC and pay into a new government bank account based in the UAE.

The conflict over exports came to a head on July 2 when the old NOC in Tripoli announced that the Ras Lanuf terminal was ready to reopen. Unlike Es-Sider, the nearby Ras Lanuf terminal was undamaged by Dawn’s December offensive, but remained closed as a precaution. Throughout the conflict, the old NOC has arranged liftings at eastern ports—even though the government controls those terminals and it is actively trying to cut the old NOC out of the picture.

The lifting of force majeure could have raised exports by about 200,000 b/d. But the announcement hit a nerve in the east. Broke and beat up, with nothing to show for its international recognition, Thinni’s government demanded that buyers go through the eastern NOC if they wanted to lift oil at Ras Lanuf. Otherwise, oil tankers risked being attacked or impounded by pro-government forces.

The new NOC now has a new chief. It’s unlikely that he’ll have better luck selling oil but if he does it could spark a legal battle for exports that Libya has thus far avoided. In the meantime, Libya’s two NOCs are planning rival conferences for customers and investors in the coming months.

This year countrywide oil production is averaging just 400,000 b/d. It’s on pace for the worst year in recent memory, including 2011, when sanctions and war completely shut down the industry for months. Current output is probably closer to 350,000 b/d and there’s little reason to believe it will rise soon.

The good news—and maybe the bad news—for the oil industry is that politics are the heart of the problem. Technically speaking the sector could be in much worse shape. The United Nations is currently seeking a national unity government, one that could export oil without controversy, tackle ISIS and start rebuilding the country. This is still a longshot but the upside is huge. Reconciliation at the national level would pave the way for exports to rise rapidly, like they did in 2012 and 2014. Libya’s track record of surprises should not be overlooked.