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Consolidation In Libyan Oil – A Major Red Flag For Oil Markets?

Tanker Libya

A political breakthrough in Libya could potentially contribute to the return of some of the country’s disrupted oil production.

Libya has been torn apart by civil war, political gridlock, and the arrival of ISIS. Two rival governments have been at odds for several years, battling for control of the country and its oil production. But the standoff has resulted in a stalemate, and the North African OPEC member’s oil production has remained at a small fraction of its pre-war production levels.

But Libyan officials said over the weekend that two rival oil companies have decided to merge in what could be a major political breakthrough. The National Oil Company is based in Tripoli, under the control of the western government. The rival eastern government based in Tobruk tried to set up its own oil company and export oil on its own a few months ago. However, the international community took steps to block the move, and the failed attempt forced it to look to negotiate with the western government.

On July 2, the National Oil Company said in a press release that both sides have agreed to merge their operations. The head of the National Oil Company will lead the merged company with the chief of the eastern company set to become a board member. In addition, the newly merged company would relocate to Benghazi, a city in the eastern part of the country.

“We made a strategic choice to put our divisions behind us and to unify and integrate NOC,” the chairman of the National Oil Company Mustafa Sanalla said in the statement. "This agreement will send a very strong signal to the Libyan people and to the international community that the Presidency Council is able to deliver consensus and reconciliation." Related: Giant Helium Find May Spell Trouble For Tanzania

(Click to enlarge)

A unified National Oil Company is a key building block of reconciliation. A nascent unity government will oversee the new entity. "There is only one NOC, and it serves all Libyans,” Sanalla’s statement read.

For now, revenues will be shared evenly between the central banks of east and west. Related: U.S. Sees Largest Monthly Production Decline Since The Downturn Begun

The matter is not only a concern for Libya’s stability and revenue base – the deal could lead to a return of some oil production and exports, with global effects. Libya’s oil output was down to around 300,000 barrels per day as of May, a little less than a fifth of the 1.6 million barrels per day the country produced in the Qaddafi era. It has hovered around those levels for several years.

But the country has made some small steps of progress more recently. Libya’s Petroleum Facilities Guard recaptured some towns from ISIS militants in June. Also, after the eastern oil company’s failed attempt to unilaterally export oil – which temporarily slowed production to just 200,000 barrels per day – the two governments reached an accord to allow some oil exports to resume from the port of Hariga in the east, allowing oil production to tick up to 350,000 barrels per day.

The latest agreement could have even larger consequences. A return of Libyan production could add several hundred thousand barrels per day of production in relatively short order. According to Reuters, Libyan officials believe that production could quickly double to 700,000 barrels per day if some stability to the country could be achieved. Reuters says that a unified National Oil Company “could also smooth negotiations to reopen the El Sharara and El Feel fields, which are closed due to disagreements with local groups.”

The return of some 300,000 to 400,000 barrels per day is a volume that the oil markets have not been counting on. Libya’s oil production has been disrupted for quite some time, and the instability in the country has led most energy analysts to believe that the chances of Libya ramping up output in any reasonable timeframe were slim. And to be sure, it will be an uphill battle for the competing factions to bring some order to the country and succeed in bringing some oil fields back online. But with a deal for the two oil companies to merge into one National Oil Company, Libya took a small step towards achieving that goal.

By Nick Cunningham of Oilprice.com

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Leave a comment
  • Philip Branton on July 07 2016 said:
    Hmm.......does Egypt want this..?? Does Algeria want this...? Does Boko want this...? The re-location to Benghazi ..?

    Well.......might as well finish the railway between the two cities (Benghazi to Tripoli) the Italians started......

    I don't know if a red flag would be the right one.....maybe a skull and cross-bones.
  • Richard on July 12 2016 said:
    Libya is set to resume oil exports after some period of disrupted oil production due to lack of political stability in the country. Of course, the return of some 400,000 barrels per day is essential for oil markets and oil prices. But I see no red flag actually. Amid the recent decline in shale oil output in the USA there are actually little pending changes, if any, of oil price in nearest future. On the contrary, many experts predict rise of oil prices, for real political stability in Libya and many other major oil producing countries of the region seem hardly achievable in the years to come.

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