Libyan Oil Production Surprise Puts Pressure On Prices

Given the ongoing imbalance between global oil supply and demand in the wake of the major waves of Covid-19 that hit the world last year, news that Libya is now targeting 1.45 million barrels per day of oil output by the end of this year, 1.6 million bpd within two years and 2.1 million bpd within three to four years will compound a negative price sentiment on oil pricing for many traders. Although the most bullish of forecasts - principally from oil companies and state producers talking their own book - look for demand to catch up with supply by the very end of this year, more independent authorities take a less optimistic view. The International Energy Agency, for example, just last month stated in its 'Oil 2021 Analysis and Forecast to 2026' that: "Global oil demand, still reeling from the effects of the pandemic, is unlikely to catch up with its pre-Covid trajectory…[and although] world oil markets are rebalancing after the Covid-19 crisis spurred an unprecedented collapse in demand in 2020, they may never return to 'normal'." With even more supply set to come into the markets in the short-term from countries not bound by current OPEC-mandated caps, notably Iran, and longer-term from deep-water offshore projects, notably in the Gulf of Mexico, further Libyan output will only worsen the oil price outlook.

Back on 18 September last year when an agreement was signed between Khalifa Haftar, the commander of the rebel Libyan National Army (LNA) and elements of Tripoli's U.N.-recognised Government of National Accord (GNA) to lift the broad-based blockade of Libya's energy infrastructure, the pact remained a tenuous proposition. At that point, with Libyan oil production only averaging around 70,000 bpd, the agreement between the two sides that had been engaged in a three-year civil war was to be reviewed after just a month, as highlighted by Haftar. He also made it clear at that stage that unless a further agreement laid out precisely how oil revenues were to be divided in the future, in a manner that was agreeable to his side, then no extension of the deal to keep the blockade lifted would be granted. This was addressed to a degree with a corollary in-principle agreement by the GNA - particularly supported by its Deputy Prime Minister, Ahmed Maiteeq - to look into establishing a commission to determine how oil revenues across Libya are distributed and also to consider the implementation of a number of measures designed to stabilise the country's perilous financial position. There was a genuine impetus to do both, not just to re-activate Libya's U.S. dollar oil export revenue stream but also because the blockade that had run from 18 January to 18 September had cost the country at least US$9.8 billion in lost hydrocarbons revenues.

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The key to the spirit of that agreement enduring at least in part was the personal political posturing as 'men of the people' of the agreement's two key protagonists: Haftar and Maiteeq, and this remains a key reason why it is highly possible that Libya may indeed reach its new production targets. Specifically, the effect of the opportunity cost of nearly US$10 billion in lost oil export revenues in less than nine months for a country that is more than 90 per cent dependent on such revenues triggered and sustained widespread protests in the run-up to the signing of the 18 September agreement. These permeated across to Benghazi, one of Haftar's strongholds, culminating in arson on the headquarters of the eastern government in the city, an attack on a police station in Al-Marj, and the consequent death of at least one protester and the wounding of many others, according to local news reports. The same pattern of popular discontent also manifested itself in other cities in the areas controlled by Haftar's forces in the east of Libya, especially over such issues as power cuts and shortages in petrol and cash.

Haftar indirectly cited these protests in the run-up to the signing of the 18 September agreement when he stated that he had "put aside all military and political considerations…[to deal with the]…deterioration of living conditions [in Libya]." Statements such as this, and the signing of the 18 September agreement, not only benefited Haftar's popularity by being seen to put 'the people' above his perceived personal interests but also the reputation of the GNA's Maiteeq too. Maiteeq was seen as the principal architect of the 18 September agreement and the spearhead of the commission that was dealing with how to extend the agreement and he achieved both of these things when the GNA Prime Minister, Fayez al-Sarraj, had noticeably not been able to do either. It is no secret that Maiteeq, who was briefly the elected Prime Minister of Libya himself in 2014 until the Justice Ministry ruled that his election was invalid, still seeks the top office. Related: Many European Refiners May Not Survive COVID

Libya certainly has the natural resources to meet these new targets as well. It remains the holder of Africa's largest proved crude oil reserves, of 48 billion barrels, and before civil unrest began in earnest in 2011 after the ousting of long-time leader, Muammar Gaddafi, it had been producing around 1.65 million bpd of mostly high-quality light, sweet crude oil (notably 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). This had been on a rising production trajectory, up from about 1.4 million bpd in 2000, albeit well below the peak levels of more than 3 million bpd achieved in the late 1960s. That said, National Oil Corporation (NOC) plans were in place before 2011 to roll out enhanced oil recovery (EOR) techniques to increase crude oil production at maturing oil fields and the NOC's predictions of being able to increase capacity by around 775,000 bpd through EOR at existing oil fields looked well-founded. Around 80 per cent of all of Libya's currently discovered recoverable reserves are located in the Sirte basin, which also accounts for most of the country's oil production capacity oil reserves, according to the Energy Information Administration.

Adding to the optimism is that at a meeting last week between NOC chairman, Mustafa Sanalla, and the chief executive officer of oil and gas giant, Total, 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 and 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 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 Total will also "contribute to the maintenance of decaying equipment and crude oil transport lines that need replacing." 

By Simon Watkins for Oilprice.com

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