The Fuse

Libyan Civil War Threatens Oil Supply

by Nick Cunningham | April 10, 2019

Crude oil prices rose to five-month highs on supply concerns in Libya. The North African OPEC member has been ravaged by war and instability since the 2011 ouster of dictator Muammar Qaddafi, but had until recently managed to restore a significant portion of its oil production.

The attack on Libya’s capital by a militia called the Libyan National Army (LNA) threatens to cut off, or at least disrupt, the nation’s oil supply.

The attack on Libya’s capital by a militia called the Libyan National Army (LNA) threatens to cut off, or at least disrupt, the nation’s oil supply. The turmoil is a reminder that even amidst rising U.S. oil production, the global market can be rattled by far-away events. Brent crude surged above $71 per barrel in response, the highest price since November 2018.

Civil war reignites
Since Qaddafi’s downfall, Libya has been torn apart by an internecine conflict that continues to the present day. General Khalifa Haftar, who leads the LNA, has tried to position himself as a guarantor of stability, ready to fight off extremist elements. In the past, he has enjoyed support from the CIA, although the U.S. government currently supports diplomatic negotiations between the LNA and the internationally-recognized government in Tripoli. Haftar has also at times had the backing of the UAE, Egypt, and France, but press reports suggest that most of the general’s international supporters were surprised and dismayed by his decision to advance on Tripoli and essentially squander all the progress made to date on the UN-backed political negotiations.

By most accounts, even as Haftar is recognized as having superior military might when compared to the official government, his attack on Tripoli has united disparate factions against him. Critics view him as another dictator, and his decision to defy the international community has done little to dispel this notion.

The events are fluid, but the initial attack on the capital was not decisive. The longer the fighting stretches on, the more likely Libya could see oil supply disruptions. “Concerns that the situation in Libya will escalate further are driving oil prices ever higher,” Commerzbank wrote in an April 9 report. “An important oil terminal from which oil from the country’s largest oilfield is exported is situated close to Tripoli. If this port were to be shut down due to the fighting, this could see a delivery outage of up to 300,000 barrels per day.”

Earlier this year, the LNA moved swiftly to take territory in the southern part of the country, helping to bring the Sharara oil field back online. Libya’s largest oil field had been offline since December, and the LNA cleared the way for its return. Libya’s oil production jumped by 196,000 barrels per day (b/d) in March, bringing output back above 1 million barrels per day (Mbd), according to OPEC’s latest monthly report.

But actions by Haftar and the LNA have not always been uniformly positive for the flow of Libyan oil. While he restored shipments to two large oil export terminals in Libya’s east a few years ago, in 2018 he also blocked exports for a period of time from the same ports in an effort to put oil revenues under the purview of his own National Oil Company based in the east, intended to supplant the internationally-recognized NOC in Tripoli.

However, the latest attack on the capital presents the gravest threat yet to the country’s fragile peace effort, as well as to its oil production.

Libya’s oil rebound at risk
However, the latest attack on the capital presents the gravest threat yet to the country’s fragile peace effort, as well as to its oil production. “There is no reason to expect any immediate impacts from the fighting on Libya’s oil and gas infrastructure, which is focused in the east and south-west of the country,” Hamish Kinnear, Senior MENA Analyst at global risk consultancy, Verisk Maplecroft, wrote in an analysis on April 5. “A drawn-out conflict, however, will force the LNA to commit increasing amounts of military and financial resources to its war effort. This means the group will have to dial down its already limited presence in oil producing areas of the Oil Crescent and the south west, raising the risk of disruption to production.”

Verisk Maplecroft argues that the LNA’s control over Libya’s oil fields, such as the Sharara, depend on a web of alliances with local militias and factions. The LNA has also received some funds from the government in Tripoli to protect major oil fields. But those payments will likely cease after the LNA’s attack on the capital. That, in turn, could make it more difficult for the LNA to ensure the uninterrupted operation of some of Libya’s oil fields. “No funding increases and an expensive war effort will leave Haftar much less able to financially support the local militias responsible for security at oil and gas sites across the country,” Hamish Kinnear wrote for Verisk Maplecroft.

The sudden risk to Libya’s oil supply comes at a time when the broader global oil market is tightening. Ongoing OPEC+ production cuts of 1.2 Mbd, combined with declines in Venezuela and Iran, have pushed Brent crude up more than 30 percent so far this year. Oil jumped in response to Haftar’s attack on Tripoli, but so far there is no sign of an actual outage. If the fighting does manage to disrupt Libya’s oil production and exports, oil prices could climb much higher.

 

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