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Indonesia’s Ailing Oil Sector Needs Urgent Overhaul

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Libya’s Biggest Oil Field Shut Down As Tensions Rise

Despite increasing crude oil production,…

Why Oil Markets Don’t Have To Worry About Libya

Oil Field

In the wake of recent developments, Libya’s National Oil Corporation now has full control over all its oilfields and export terminals.

After the recapture of the Eastern region export terminals by the Libyan National Army (LNA) last September, and the recent announcement by the Petroleum Facilities Guard (PFG) to reopen the Al-Ryayna oil pipeline, the oil markets responded with concern. Fears were raised over the impact of Libya’s potential output increase on the global supply glut, and whether Libya’s possible production rise would offset the effect of the recently announced OPEC and non-OPEC output cuts. After all, Libya now has, theoretically, an additional capacity of around 1.1 mbpd, which could, combined with an increase in Nigeria’s production, disarm the global cut deal, and hamper its effect on oil prices and the supply and demand rebalance. However, examining Libya’s current oil industry situation and the political landscape closely may lead to a different conclusion.

Prior to the Arab Spring in 2011, Libya's oil production was at a steady 1.6 mbpd. The country's output has sharply dropped since 2013 when the PFG announced the shutdown of the four oil export terminals under their control on the eastern part of Libya’s coastline over alleged claims of corruption in the oil industry, reducing the country’s output by as much as 900,000 bpd. This shutdown was later combined with the closure of the Al-Ryayna pipeline amid conflict between local militias over the control of oil fields in the south. Libya's production sat at the level of 300,000 bpd for more than 3 years.

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Since last September, NOC was able to double the country’s output to 575,000 bpd, but challenges to bring back Libya’s production to the pre-2013 level remain enormous.

From a technical stand, NOC's ability to ramp up the oil production remains limited in the absence of supporting oil field service companies (OFS) such as Schlumberger, Halliburton and Baker Hughes.

OFS companies provide essential upstream services critical for oil companies to carry the drilling and workover operations necessary to increase production. These services include wireline logging & perforating, cementing, coiled tubing, acidizing, downhole testing, surface testing, fracking, and others

Following the Libyan revolution, major OFS companies returned to the country despite the unstable political situation, and operations resumed in 2012 for two years. However, the 2014 conflicts in West and East Libya have forced those companies out of the country once more, and industry intelligence indicates that their return to the Libyan market is unlikely in the foreseen future.

Additionally, barriers to entry for new players in the market are extremely high; this is a capital-intensive industry, in a politically unstable country, with high security and financial risks, a limited qualified talent pool, and high bureaucratic barriers. Therefore, it would be extremely hard to imagine new companies, local or international, emerging in Libya’s upstream OFS sector under the current circumstances. NOC’s capacity to raise production without the supportive OFS ecosystem remains limited.

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Moreover, from a political stand, Libya’s ability to sustain oil production seems extremely fragile. The majority of the country’s oil fields and terminals are currently under the control of the LNA, which is the military arm of the House of Representatives (HoR) sitting in the Eastern city of Tobruk, while oil revenues pour into the accounts of the Central Bank of Libya (CBL). However, CBL is supporting the UN-backed General National Accord government in Tripoli (GNA) which recently announced forming a paramilitary group called the “Presidential Guard”. As the HoR expressed its concerns regarding the formation of such a group, which could eventually become a rival to the LNA, observers believe it is unlikely that HoR would allow oil to continue flowing if its revenues would be used to support the creation of the Presidential Guard

Furthermore, the Islamic State, though driven from its coastal stronghold in Sirte after the launch of a seven-month U.S-backed military campaign, still has several hundred fighters who have dispersed across Libya. Different western intelligence agencies have expressed concerns over possible clustering of extremist groups in the vast desert south of Libya, a territory difficult to control and monitor by the divided Libyan authorities. That being said, NOC officials have repeatedly demanded improving the security situation in the oil fields in the south as the main prerequisite to resuming operations, especially after several attacks were launched by the Islamic State on oil facilities in that region.

NOC's plans to sustainably raise Libya's crude output remain dependent on the aforementioned issues, and whether the country would be able to resolve its political challenges, and, consequently, create the safe environment necessary for an industry ecosystem to exist in the country.

By Ahmed Ben Mussa for Oilprice.com

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  • Mustafa on December 21 2016 said:
    Well-written and supported by facts. I would have liked to see some action points/recommendations for NOC or Libyan National Army
  • Nabil A. M. Ikhleif on December 21 2016 said:
    But according to Christo Rühl, global head of research at ADIA, the Abu Dhabi Investment Authority, at the sidelines of the Platts Oil Summit in London at the beginning of May 2016 , that the risk to the oil market is the situation in Libya. He explained " the risks to the oil market are really large-scale production coming back from disruptions or existing spare capacity. The biggest spare capacity is in Saudio Arabia and the biggest disruption is in Libya".

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