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Simon Watkins

Simon Watkins

Simon Watkins is a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for…

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Is Libya The Next Wildcard For Oil Markets?

  • The head of Libya’s LNA, General Haftar has ordered his troops to be on standby until a fair distribution of oil wealth is reached.
  • The last time such a warning was issued, Libya’s oil blockade led to a plunge in production and exports.
  • Oil majors Eni and TotalEnergies have recently confirmed ongoing investment in the development of Libya’s oil industry.

Given the economic mayhem that energy price-fuelled inflation has caused for Western governments since Russia’s invasion of Crimea, the last thing they want is another oil production shutdown in Libya that would push oil prices higher again. However, last week saw Khalifa Haftar, the head of the Libyan National Army (LNA) that is based in the country’s oil-rich eastern region, order his forces to be standby until a fair distribution of oil wealth is agreed between the leaders of its main warring factions. The last time he issued such a warning, Libyan oil production of over 1.2 million barrels per day (bpd) collapsed, contributing to rising oil prices.

Haftar’s warning should be taken very seriously by Libya’s other main political factions and by the global oil markets as it harks back to an identical point he made back on 18 September 2020 when he agreed to an end to the nationwide blockade of key oil installations. At that time when the deal was agreed between Haftar’s LNA and elements of Tripoli’s U.N.-recognised Government of National Accord (GNA), he said that the lifting of the blockade was only in place for one month unless a further agreement that laid out precisely how oil revenues were to be divided was made. At the end of every blockade, he says the same thing, but no progress is made towards such a goal, although promises to do so are made. 

Back in 2020, it was GNA Deputy Prime Minister Ahmed Maiteeq who said that an in-principle agreement had been made to establish a commission to determine how oil revenues across Libya were distributed in the future and to consider the implementation of several measures designed to stabilise the country’s perilous financial position. At that point three years ago, the blockade from 18 January when it started to 18 September when it was lifted had cost the country at least US$9.8 billion in lost hydrocarbons revenues. According to the official statement in 2020 on the formation of this committee, it would: “Oversee oil revenues and ensure the fair distribution of resources… and control the implementation of the terms of the agreement during the next three months, provided that its work is evaluated at the end of the 2020 and a plan is defined for the next year.” 

To address the fact that the GNA effectively holds sway over Libya’s National Oil Corporation (NOC) and, by extension, the Central Bank of Libya (in which the revenues are physically held), the committee was also tasked to “prepare a unified budget that meets the needs of each party… and the reconciliation of any dispute over budget allocations… and will require the Central Bank [in Tripoli] to cover the monthly or quarterly payments approved in the budget without any delay, and as soon as the joint technical committee requests the transfer.” According to a Washington-based legal source who works closely with the Presidential Administration on energy matters spoken to by OilPrice.com at the time, the NOC had been working on “alternative banking arrangements for the oil revenues that may or may not involve the input on final dispersal of more players.” However, the details of this were never worked through and no replacement ideas have been forthcoming since then. 

Instead, Libya descended into further chaos, and more blockades. The most significant recent example of this was last year’s series of widespread blockades of various ports and installations, including the 60,000 bpd Brega operation, and the Zueitina port, with crude loadings average around 90,000 bpd. Oil production also stopped at Abuatufol, Al-Intisar, Anakhla, and Nafura. Just prior to this, the Sharara field in the west of the country, which can pump around 300,000 bpd, was also shut down and before this the El Feel oil field, which produces 70,000 bpd, was closed. These sites are key suppliers of mostly high-quality light, sweet crude oil, notably including the Es Sider and Sharara export crudes, that are particularly in demand in the Mediterranean and Northwest Europe for their gasoline and middle distillate yields. Overall, during that wave of blockades and shutdowns, Libya was losing around 550,000 bpd of its oil production. 

Framing these blockades was political tumult of an extraordinary degree, even by Libyan standards. Theoretically, the aim of this was to create a more stable framework for a longstanding agreement of the type that Haftar originally had in mind back in September 2020. Practically, it resulted in a situation that exuded all the stability and welcome to would-be Western investors of a puff adder on Benzedrine. July 2022 saw the GNU Prime Minister, Abdul Hamid Dbeibah, replace the widely-respected Mustafa Sanalla as chairman of the NOC with Dbeibah’s long-time associate, Farhat Bengdara, who was governor of the Central Bank of Libya from 2006 to 2011. Sanalla rejected Prime Minister Dbeibah’s authority to sack him, and in a fiery television appearance, warned Dbeibah not to touch the NOC or the oil revenues and contracts that it manages. 

All of this followed the failed attempt by Fathi Bashagha – appointed prime minister of the ‘alternative government’ in the east of the country three months before – to seize power in Tripoli. Bashagha, and the Nawasi Brigade militia who accompanied him, were eventually driven out of the city by various of the many factions fighting there. This occurred amid the ongoing refusal of the Dbeibah - who was appointed through a UN-led process in 2021 - to hand over power until such a time as a properly elected government was voted into office by the people of Libya. May this year saw Libya’s eastern-based parliament vote to suspend Bashagha as its appointed prime minister and assign his duties to his finance minister, Osama Hamada. Given that Bashagha led three such coup attempts in three months, it is fair to assume that he does not see his political future as over just yet. 

It is difficult now to believe, but before the removal of its long-time leader, Muammar Gaddafi, in 2011, Libya was not the twisted parody of the failed state that it is today. The country had easily been able to produce around 1.65 million bpd of mostly high-quality light, sweet crude oil and production had been on a rising production trend, up from about 1.4 million bpd in 2000. Although this output was well below the peak levels of more than 3 million bpd achieved in the late 1960s, the NOC had plans in place before 2011 to roll out enhanced oil recovery (EOR) techniques to increase crude oil production at maturing oil fields. Given this plan, there appeared scope to increase crude oil production up to the 2.1 million bpd targeted by Libya’s then-minister of gas and oil, Mohamed Aoun, and to hit the informal interim target of 1.6 million bpd by the end of 2023. It is apposite to remember as well at this point that Libya still has around 48 billion barrels of proved crude oil reserves – the largest in Africa. 

This is why several major Western companies still persevere in the country. Relatively recently there was an announcement from Libya that Italy’s Eni had signed an agreement with the NOC that would see it invest around US$8 billion to produce about 850 million cubic feet per day (mmcf/d) from two offshore gas fields in the Mediterranean Sea. Eni still produces gas in Libya from its Wafa and Bahr Essalam fields operated by Mellitah Oil & Gas, a joint venture between the Italian company and the NOC. Prior to this, Bengdara had also stated that he expected a separate program of offshore and onshore drilling to start within the coming months, under the leadership not just of Eni but BP and TotalEnergies too. Back in April 2021, at a meeting between then-NOC chairman, Mustafa Sanalla, and the chief executive officer of TotalEnergies, Patrick Pouyanne, the French firm agreed to continue with its efforts to increase oil production from the giant Waha, Sharara, Mabruk and Al Jurf oil fields by at least 175,000 bpd. It also agreed to make the development of the Waha-concession North Gialo and NC-98 oil fields a priority, according to the NOC.  The Waha concessions – in which the then-Total took a minority stake in 2019 – have the capacity to produce at least 350,000 bpd together, according to the NOC. The NOC added that the French firm would also “contribute to the maintenance of decaying equipment and crude oil transport lines that need replacing.” 

Attempting to predict all the likely shenanigans that may happen in the next few days is as futile an exercise as trying to ascertain how many angels can dance on the head of a pin. It can, though, be said with some certainty that whatever scenes unfold, the final act is unlikely to have a happy ending. Specifically, the likelihood of further major blockades looks very high, as Haftar does not put his forces on standby unless he intends to use them. 

By Simon Watkins for Oilprice.com

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