The Fuse

Libya: OPEC’s Involuntary Swing Producer

August 07, 2017

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.

The chairman of Libya’s National Oil Corporation, Mustafa Sanalla, might just be the hardest working man in oil these days. Luckily for Libya, and unfortunately for OPEC, his hard work is paying off. Sanalla has facilitated a five-fold increase in oil production over the last year from a low of 200 thousand barrels/day last summer to 1.1 million b/d in recent weeks, despite prevailing chaos and rival governments.

A series of breakthroughs going back to 2016 made this possible. Last September, forces loyal to eastern strongman Khalifa Haftar captured major oil terminals along the Gulf of Sirte. Haftar’s bold offensive was decisive—it ended a multi-year blockade by another faction—but there was still much uncertainty at the time because Libya had two NOCs. It still does.

Sanalla has facilitated a five-fold increase in oil production over the last year from a low of 200 thousand barrels/day last summer to 1.1 million b/d in recent weeks, despite prevailing chaos and rival governments.

The first is the original, decades-old NOC in Tripoli, which is run by Sanalla and enjoys international recognition. The other was established in the east in 2014 as a way for authorities there to sidestep Tripoli and export oil independently. Because Haftar was and remains so cozy with eastern authorities, it seemed plausible that he would allow the upstart NOC to restart production, cutting out the original NOC. He wisely declined. Instead, he allowed Sanalla to get to work. Production more than tripled in a matter of months.

Sanalla has managed to unlock another 300-400 thousand b/d this year by patching together “deals” with various factions that hindered output or shut essential bottlenecks, especially in the west. But because the Central Bank is notoriously reluctant to distribute oil revenues—even to sustain its most important industry—Sanalla has done all this with no money to speak of. His NOC is broke. “Until now we haven’t received one penny,” he told Reuters last month.

Except for a few nasty but fleeting episodes, Sanalla has managed to stay in the good graces of the major political players at the national level, in part because the international community has insisted on it. Sanalla’s savvy deal-making and Haftar’s willingness to work with him have pushed Libyan production above one million b/d for the first time since 2013. Sustaining that level will be tricky. In those years after the 2011 uprising ousted Qaddafi but before the civil war erupted in 2014, oil infrastructure was regularly targeted by demonstrators and workers.

While Libya and Nigeria were both exempt from the OPEC/non-OPEC deal agreed to in Vienna last November, their concurrent resurgence is making it that much harder to tighten market fundamentals and raise oil prices. Yet Sanalla isn’t planning to contribute cuts any time soon. He briefed the Joint OPEC/Non-OPEC Technical Committee on July 22 in St. Petersburg, where he laid out Libya’s production outlook and constraints. 1.1-1.2 million b/d would appear to be Libya’s max capacity for the short- to medium-term, especially if funds are withheld.

Three days after Sanalla briefed OPEC and others, a new roadmap for Libya’s tortured political transition was announced. Meeting outside Paris and hosted by French President Emmanuel Macron, the head of the UN-backed government in Tripoli, Fayez Sarraj, reached a ceasefire deal with Haftar. New elections are to be held in 2018. Whether it’s another interim government or a fully-empowered one depends on how quickly a new constitution can be put to referendum, although that’s already proving controversial. At the very least the 2018 elections will be held to legitimize one authority over all others.

If Sanalla can’t afford to pay his workers, they might see fit to interrupt production. It would not be the first time.

Sanalla has had the blessing of both sides for about a year but the latest breakthrough is still welcome news. Yet there are many more spoilers to account for. The NOC’s cash crunch poses maybe the greatest threat to Libya’s prospects. Without proper funding, Sanalla could fall short of his year-end production target of 1.25 million b/d. He’ll also find it hard to sustain today’s high volumes without investment and timely maintenance. Trade press reports suggest production is wobbly already, slipping some days because of power shortages and other, preventable technical issues. Of course, if Sanalla can’t afford to pay his workers, they might see fit to interrupt production. It would not be the first time.

All rumors aside, it’s unclear exactly what Sanalla promised local factions in exchange for restarting production. There’s simply no telling whether Sanalla can deliver on those promises when the time comes—or how long locals are willing to wait. Fast forward to mid-2018, after the next elections are held, and the results could prove explosive. Haftar has given every indication that he plans to run for president. His victory might be completely legitimate but it could also serve as the starting gun for a new conflict, with NOC caught in the middle again.

Haftar’s victory might be completely legitimate but it could also serve as the starting gun for a new conflict, with NOC caught in the middle again.

Reports this week that western output was briefly throttled after an “armed group” captured a vital bottleneck (this time a terminal control room in Zawiya) underscore how vulnerable the industry remains. Other sources claim it was a protest by workers that was resolved in a matter of hours. The most recent closure is only the latest in a string of shutdowns impacting Libya’s largest oil field this year. Sharara, which pumps 270 thousand b/d on a good day, was re-opened in December, but Sanalla didn’t secure a “permanent” solution with pipeline blockaders until April. Since then, the field was shut briefly by workers in June and by whoever is really behind the closure this month.

This appears to be the new normal in Libya: higher production, on average over time, punctuated by significant closures that shut in hundreds of thousands of barrels/day, however briefly. For OPEC, Libya has become an atypical and involuntary swing producer of sorts. It can slash production overnight, when the oil industry is threatened, or rapidly raise output if circumstances permit.

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