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Why Libya Could Completely Derail OPEC’s Deal

Tanker offshore loading

As speculators’ heads dizzyingly spin over OPEC’s Wednesday announcement that they will cut output from 33.24 to 32.5 million barrels a day, without noting where the cuts will be made, the increase in oil supply coming out of Libya could be the joker in this deal—and the perspective from on the ground is that exports are not going to be thwarted this time around.

While the world waits to see who’s going to take the oil export hit promised by OPEC at the club’s official meeting on 30 November in Vienna, Libya will be ramping up production and exports, thanks to a move by the head of the Libyan National Army (LNA), General Haftar, to seize control of the country’s oil ports and hand them over to a unified National Oil Company (NOC) earlier this month.

And it won’t be Libya that takes any cuts, nor will it be Nigeria, or even Iran. But more to the point, as Libya gears up to bring close to 1 million barrels per day back on to the market by the end year, the OPEC estimate of oversupply nearly doubles.

Unless someone pays off General Haftar’s enemies to start trouble again at the ports, this is how it’s going to be.

Every detailed move in Libya—even though barely understood—result in major oil price volatility. Thus, when Haftar handed the ports over to the NOC and the NOC announced that exports would resume immediately, oil prices took a dive.

When the first tanker was loading at the Ras Lanuf terminal just days later, the leader of the Petroleum Facilities Guard (PFG), which has been holding Libya’s ports hostage for over two years—orchestrated some minor attacks on the ports in an attempt to thwart exports and reassert himself (he has been badly humiliated since Haftar took the ports without bloodshed and in a full-on PFG retreat). Oil prices immediately went back up on this minor attack—even though no damage was done and General Haftar easily pushed the forces back and gained significant additional territory. Right after this, oil prices dropped again when the first cargoes left the newly liberated Libyan ports with a whopping 1.3 million barrels.

On Tuesday, a giant oil tanker docked at Hariga Port to load 1 million barrels form the Arabian Gulf Oil Co. (AGOCO)—destination, U.S. On Thursday, another tanker docked at Zueitina to load 570,000 barrels to transport to the Zawiya refinery in western Libya.

Officials at AGOCO have also said that the company has increased production by 50,000 bpd (in a week) and is now producing 260,000 bpd. It aims to hit 350,000 bpd by the end of the year. AGOCO, a subsidiary of the National Oil Corporation, operates primarily in eastern Libya. And General Haftar’s move to take over the ports has been production boon for the company.

The fact remains that since General Haftar has taken over the terminals, oil exports have reached over 400,000 barrels per day.

The Man of the Hour in Libya

The last seven days in Libya have been calm on the surface, but this calm is deceptive given what is to come next as the fate of the Presidency Council (PC), the West’s desires, and General Haftar’s gains are decided on an international scene.

The head of the UN-backed Presidency Council, Faiez Serraj, has attended the General Assembly of the United Nations in New York where he met with international leaders, including US Secretary of State John Kerry and Russian Foreign Minister Sergei Lavrov.

From New York, Serraj has launched what appears to be an ambitious project of national reconciliation in Libya, with the support of UN Secretary General Ban Ki-Moon. He then flew, on Monday, to Paris to meet with Hollande on a formal invitation.

But despite this international support, Serraj has extremely tough internal challenges. His deputy in the PC is an ally of General Haftar. This deputy is Ali Gatrani, a hardliner from Cyrenaica. Gatrani is now waiting for Serraj in Cairo, where they will decide the fate of the PC itself.

Gatrani insists he will resign because he is not happy with the political direction. However, Serraj has managed—for now—to convince him that they will be able to reach a compromise. Gatrani’s primary concern is to guarantee that the Supreme Command of the Libyan National Army (LNA) goes to General Hafter, and that the head of the Defense Ministry would also be chosen by Haftar.

Internationally, the US and the EU do not want this outcome and are maneuvering to undermine General Haftar. These external forces are demanding that Haftar be subject to the PC (which is dying), and they insist that Serraj be the Supreme Commander of the Army. (This should be interpreted as the West’s perception that Serraj can be controlled by them, whereas Haftar cannot.)

The Fate of Libya’s Exports

There is a strong argument for the longevity of General Haftar here; and hence, Libya’s continued exports.

General Hafter has strengthened his position exponentially since his seizure of major oil terminals on 11 September.

It is important to understand that Haftar’s move is not only welcomed by the Libyan National Oil Company (NOC), but also by the wider public. Only the West, and fractious militias who are losing their piece of this pie, are opposed to what is clearly a stabilizing move for Libya.

The public is all for this. After all, the Petroleum Facilities Guard (PFG) had cost Libya some US$100 billion dollars over the past two and a half years thanks to their hijacking of the ports.

While certain media would like to paint a picture here of Haftar’s move leading to extreme damage of oil facilities, this is not the case. Despite some minor attacks right after the takeover, there has been virtually no damage and Haftar has only gained strength, while Ibrahim Jadran (who had controlled the PFG) has been pushed further out. If there are any attacks in the near future, they will be ordered and facilitated by external groups hoping to prove that Haftar’s move was not stabilizing.

The Islamists are also trying hard to influence events, and this was evident by contradictory statements coming out of the PC at the time of Haftar’s takeover of the ports. The Islamists directly called for armed factions to oppose General Haftar and ‘liberate’ the terminals. At this point, however, Libya’s oil exports could not be in more legitimate hands—and it will be very difficult to make a case otherwise.

General Haftar has demonstrated very clearly that he is not to be sidelined, so what happens next with appointments to the LNA will be indicative of what ultimately happens with Libya’s oil. This is what everyone should be watching, when they’re not glued to the oil price volatility and OPEC’s smoke and mirrors.

Simple Math

Right now, OPEC estimates that oil supplies outstrip demand by an average of about 760,000 barrels per day (this year). The stated aim, coming out the OPEC meeting in Algiers Wednesday—is to reduce OPEC output by 0.74 million barrels per day, or approximately the same amount as the estimated oversupply.

Considering Libya’s goal of reaching exports of 1 million bpd by year’s end—even if it falls short of this goal—the math doesn’t really add up. Who is going to take the hit to allow Libya to ramp up?

Libya has always had a major impact on oil prices, and its last increase, according to the Wall Street Journal, helped “spark the continuing price rout that saw oil fall by more than 50% and OPEC members’ budgets plummet.”

OPEC’s deal isn’t signed and sealed until 30 November when the real grit begins of deciding where the cuts are actually going to come from. Much of this may depend on the Libyan wildcard—and how much the country can ramp up production in exactly a month, and how much it can get out of its ports.

At the end of the day, 740,000 barrels per day isn’t that much, especially split among OPEC members. But it’s not a real number because it doesn’t consider Libya. The only saving grace for this deal might be a resumption of major pipeline attacks in the Niger Delta when the rainy season ends, which is pretty much the same time that the OPEC deal details will be sorted out.

By Julianne Geiger for Oilprice.com

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