A swift rebound in Libya will be difficult, not least of all because of competing groups vying for control of the country and oil facilities remaining vulnerable to attack from ISIS.
Libya has been a major wild card for global oil markets since 2011, when virtually all production went offline as the country descended into civil war. Currently, output is slightly above 300,000 b/d, about a fifth of total capacity before the Gaddafi regime fell, with the potential to rise now that there’s been a merger of the two national oil companies and a likely re-opening of two major ports. Given how stagnant the country’s production has been over the past several years, increases in export volumes will likely be a bearish development for oil prices and force a rethink of global fundamentals for the rest of this year and next. But a swift rebound will be difficult, not least of all because of competing groups vying for control of the country and oil facilities remaining vulnerable to attack from ISIS.
Disruptions in the North African OPEC country, which currently make up almost a third of the global market’s total outages, have been factored into the oil price for some time, given that the country hasn’t seen production near full capacity since early 2013.
At the beginning of this month, the state National Oil Company (NOC) merged with its competition set up in the eastern part of the country. In the deal, Mustafa Sanalla, the head of NOC, will remain in his position while his counterpart in the east will sit on the merged NOC board.
While this step is a positive development, there are a number of threats, making the entire oil situation fragile. “Even if the NOC deal sticks, it doesn’t mean guards or workers on the ground have to adhere to it,” Matt Reed, Vice President of Foreign Reports in Washington, DC, told The Fuse. “Those groups can always use oil to twist arms in Tripoli.”
Political instability is also a major factor that clouds the production outlook as the UN-backed government is trying to unify the different factions throughout the country.
“Even if ISIS is crippled…the group could still sabotage infrastructure wherever, whenever, with very little manpower.”
Even more problematic is that ISIS is active in Libya despite the entire group seeing major setbacks on the battlefield throughout the Middle East and North Africa. “The problem in Libya is that so much infrastructure is above ground in remote locations, it’s virtually impossible to protect,” said Reed. “Even if ISIS is crippled—even if it loses its home base in Sirte—the group could still sabotage infrastructure wherever, whenever, with very little manpower.”
Earlier this year, Reed, writing in The Fuse, outlined how ISIS’ tactics are different in Libya than in Iraq and Syria, where the militant group has been selling oil for revenues. In Libya, its ambitions have been to attack infrastructure to undermine the rival governments. This strategy will continue to loom over the country’s oil sector.
The production outlook, from grim to hopeful
The newly merged company, which will set up its headquarters in eastern Libya, is eager to up export volumes as soon as possible. “After the unification of NOC, the opening of the ports and the increase of production are absolutely our top priorities,” Sanalla said this week.
Last month, production rose slightly with the reopening of Marsa al Hariga terminal. News reports say that the Petroleum Facilities Guard (PFG) is poised to reopen oil fields that have been offline. The Guard controls the Ras Lanuf and Es Sider terminals in the east, both of which have been closed since late 2014. The International Energy Agency (IEA) says these two are able to export some 600,000 b/d. In the western part of the country, the outlook is not as bright. Two rival factions, which shut down oil fields in late 2014, are still at odds, and output there won’t rebound until a reconciliation occurs.
Though production capacity was as high as 1.6 mbd before the fall of the Gaddafi regime in 2011, it is likely only half that level now.
Moreover, as a result of damage from ISIS attacks and export constraints, increasing volumes will be a long slog. Though production capacity was as high as 1.6 mbd before the fall of the Gaddafi regime in 2011, it is likely only half that level now. Sanalla said earlier this year it would take years to return to full capacity. “Under normal circumstances in a peaceful country, it would take years to order, fabricate, and install the kinds of infrastructure Libya has lost,” said Reed. “Libya is not normal or peaceful, and it won’t be for some time.”
Full market impact unclear
With the security situation in the country still dire and a political resolution possibly a ways off, a swift restart of production that has been offline will not occur. It will likely take time, perhaps the rest of the decade. Analysts are not optimistic on a quick recovery, but if the recent developments are a turning and volumes increase, even gradually, Libya could very well be a bearish factor for oil prices going forward.