The Fuse

Libya: Internal Disruptions and Political Obstacles Preventing Resolution on Oil Production

by Andrea Alie | August 04, 2016

The new push of US-led airstrikes in Sirte, the last ISIS stronghold in Libya, is not the only front on which Tripoli looks to be making progress in attempts to bring about domestic stability. Libya is a country ruled by two opposing governments, their loosely loyal armed forces, and rogue militants. Its oil industry, the cornerstone of governmental revenue and GDP, has been in shambles since 2013 due to the complex web of political battles. However, reports over the weekend indicated that an agreement struck with the militia that has been blockading Libya’s critical export terminals of Es Sider and Ras Lanuf could, if it holds, allow the nation to begin recouping its badly needed oil revenue. Some analysts are positive about the supply outlook in the OPEC country—a report by Morgan Stanley estimates the nation could quickly double its output to around 0.6 mbd.

An agreement struck with the militia that has been blockading Libya’s critical export terminals of Es Sider and Ras Lanuf could, if it holds, allow the nation to begin recouping its badly needed oil revenue.

The latest in a series of blockades of the oil ports, offline since 2014, has been undertaken by the Petroleum Facilities Guard (PFG). Their return to operation would be a significant gain for Libya, given that they provide two-thirds of Libyan oil export capacity. The fragile ecosystem of Libyan politics and the resolve of the newly unified National Oil Company (NOC) was tested by the PFG’s demands and through a compromised agreement to end the blockade. These institutions have shown that they are determined to restore the Libyan oil industry to pre-2011 production levels.

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Initial expectations for increased Libyan oil production came after last month’s unification announcement of the rival NOCs, each affiliated with different governments, in Tripoli and Tobruk. Since 2013, production disruptions have not only been caused by physical damage to infrastructure like pipelines, oil fields, and storage tanks, but also by blockades by rival militant groups fighting for control of the oil flow. Due to these disruptions, Libya’s oil production has been decimated and is currently less than one-fourth of its pre-2011 levels of 1.6 mbd.

Since 2013, production disruptions have not only been caused by physical damage to infrastructure like pipelines, oil fields, and storage tanks, but also by blockades by rival militant groups fighting for control of the oil flow.

Prior to the unification agreement, domestic stability took a step forward with the creation of an internationally backed government, the Government of National Accord (GNA), in December 2015. The GNA, based in Tripoli, gained domestic traction in March 2016 when it received support from several key institutions including the Central Bank, the Tripoli NOC, and the PFG. It was founded to replace the two rival governments which had been in power since 2014, one in Tripoli and the other in the Eastern city of Tobruk. While the GNA has successfully replaced the previous Tripoli government, the National Salvation Government (NSG), it has yet to be endorsed by the rival government, the House of Representatives, the former elected parliament that moved to Tobruk after the NSG took power. The remnants of Libya’s army, under the command of General Khalifa Haftar, support the Tobruk government, leaving the GNA with a series of fractured militia groups and—in theory—the PFG as its armed forces.

When the PFG turned and blockaded the ports, the GNA was left without a unified military force and without a way to physically force the PFG to abandon its blockade. The blockade was not the first time the PFG has made a move to threaten Libya’s oil export prospects, but it was the first time it has threatened facilities controlled by a unified NOC. The inherent risk for the PFG in such a move was high: Instead of exploiting a divided industry, it faced one with the same priorities, and therefore, the same incentives to force the PFG from its blockade instead of encouraging disruption.

While such political discord between governments and a rogue army would be a problem for any country’s stability, its dependence on oil revenue and loss of production has left Libya short of much needed funds.

While such political discord between governments and a rogue army would be a problem for any country’s stability, its dependence on oil revenue and loss of production has left Libya short of much needed funds. The country currently is dealing with a growing negative current account balance and an ongoing—and costly—war with ISIS in Sirte since 2014, which is causing Libya to hemorrhage money. With the largest oil reserves in Africa at 48 billion barrels, Libya’s economy has long been deeply dependent on petroleum. According to OPEC data, the average percentage of government revenue coming from oil over the past decade is 88 percent. While there is a Sovereign Wealth Fund dating from the Qadhafi era valued at over $60 billion, it has been frozen under UN sanctions until the GNA is in control and accepted as the legitimate government.

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The history of conflict between the governments, the NOCs, and the PFG goes back to 2013 when the General National Congress, the official government in Tripoli, created the PFG to protect Libya’s oil and gas infrastructure. Shortly after, PFG leader Ibrahim Jadhran and his forces broke away to fight for an independent state along the coast, justifying past blockades by claiming, “Oil exports are supposed to benefit the Libyan people but the opposite is true.” He also implied the government was too corrupt to be trusted with oil revenue. Jadhran then reported that he was paying the PFG soldiers their salaries but did not comment on his source of the money. On Thursday, July 21, 2016, Jadhran met with the UN’s Libya envoy, Martin Kobler, to discuss terms for the re-opening of the ports, which included a one-time lump sum payment for “re-opening,” a payment for back salaries of PFG members, and regular salary payments to the PFG, an estimated total cost of $200 million. Future costs were not elaborated on in the terms that were publicized. These terms were given to the internationally backed GNA and remained unsigned as public criticism against encouragement for rogue militias to take infrastructure hostage grew.

Mustafa Sanalla, the chairman of the unified NOC, denounced the terms in a letter addressed to UN representative Kobler, accusing Jadhran of extorting money from previous Tripoli governments and then failing to release storage tanks or open ports that he had blockaded. There are two prominent examples of such incidences, the latest of which occurred in January 2016 when the PFG abandoned storage tanks to ISIS when there was no imminent risk. The other headline came in 2014, when Jadhran tried to sell Libyan oil to North Korea on his own, via a tanker that was stopped while still in Libyan waters when the impending sale was discovered by Tripoli.

In his letter to Kobler, Chairman Sanalla focused on the fact that the money used to pay the PFG would be taken from infrastructure repairs that would have affected both Tripoli and Tobruk. What started out as a one-way standoff between the GNA and the PFG broadened to include the Tobruk government in an escalating political saga. On July 25, General Abdel-Razek al-Nadhouri, a military commander in Benghazi, released a statement saying that any unauthorized tankers that cross into waters claimed by the Tobruk government, including the area around Es Sider and Ras Lanuf, would be fired upon with heavy equipment. While both NOCs opposed the terms of the PFG, the Tobruk government’s independent military stance on the matter drew into question its NOC’s commitment to operating in unison with its Tripoli counterpart.

The dual reaction and differing approaches by the Tripoli and Tobruk NOCs to addressing the demands from the PFG demonstrate show why it will be a complicated struggle to reach the 0.9 mbd target set by Sanalla for the end of 2016.

There has been no follow-up statement from Tobruk in response to the Tripoli NOC confirming on July 31 that an agreement between the GNA and the PFG had been reached. Sanalla stated that the only payment being made to the PFG would be for back salaries and not include the much criticized “re-open” fee. With infrastructure repairs needed in the ports and the potential for other factions to mount challenges in search of a piece of the revenue, it’s evident why many observers are skeptical that the agreement with the PFG will lead to an imminent resumption of exports. The dual reaction and differing approaches by the Tripoli and Tobruk NOCs to addressing the demands from the PFG demonstrate why it will be a complicated struggle to reach the 0.9 mbd target set by Sanalla for the end of 2016. Militant groups are likely to continue disrupting Libya’s energy infrastructure because of its high value in comparison with all other Libyan resources, and rival factions fighting to gain the upper hand in whatever government emerges will be highly reluctant to relinquish or share control of the infrastructure that can fund their political and security apparatus.

 

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