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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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Libya’s Oil Crisis Is Far From Over

  • Ousting of NOC chairman Sanalla may not lead to more stability in Libyan oil exports.
  • Libya produced around 650,000 bpd of crude in June.
  • Ongoing disagreement about a fair distribution of the country’s oil and gas revenues continues to be one of the main underlying problems.

 

For a moment last week, it seemed that Libya might be snapping back into some version of itself more approaching normalcy than has been evident for some time. There was news from local sources that the country’s state-owned National Oil Corporation (NOC) had lifted the force majeure on the eastern oil terminals of Zueitina and Brega that had been in place on and off for weeks. This move was made specifically to allow an oil tanker ship to carry condensate for use in power generation in the country, but the expectations were that it would presage a broader opening of Libya’s oil export infrastructure. Such force majeures and other associated shutdowns and blockades have resulted in Libya producing just 650,000 barrels per day (bpd) of crude oil in June, its lowest level since October 2020. This message of optimism was one conveyed also by NOC chairman, Mustafa Sanalla, last week. And yet, within the space of just a few hours, Libya had returned to its usual state of extreme nervous tension, with all the reliability and trustworthiness as a global oil supplier of a puff adder on Benzedrine. Functioning more every day as a twisted parody of the failed state that the casual removal in 2011 by the West of its long-time leader, Muammar Gaddafi, made it, Libya appears now to have lost Sanalla himself as the chairman of the NOC, with all the additional chaos that this may spark. According to several local news reports, the Government of National Unity of Prime Minister, Abdul Hamid Dbeibah, has replaced Sanalla as the chairman of the NOC with his long-time associate, Farhat Bengdara, who was governor of the Central Bank of Libya from 2006 to 2011. Sanalla, highly respected by several international oil companies (IOCs) for keeping much of Libya’s oil production flowing despite extreme political pressures from all sides in the ongoing civil conflict, has rejected Prime Minister Dbeibah’s authority to sack him. Additionally, in a fiery television appearance, Sanalla – who has received backing from both of Libya’s opposing legislative bodies - warned Dbeibah not to touch the NOC or the oil revenues and contracts that it manages. Bengdara then held his own news conference at the NOC headquarters building and received the backing of two major NOC affiliate companies - Al Waha Oil, and Arabian Gulf Oil - before Al Waha then deleted its message of support. 

Related: EU Considers Mandatory Gas Rationing

All of this follows the very recent failed attempt by Fathi Bashagha – appointed prime minister of the ‘alternative government’ in the east of the country three months ago – 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 United Nations (U.N.)-led process in 2021 - to hand over power until such a time as a properly elected government is voted into office by the people of Libya. Bashagha, who has led three such coup attempts in three months, is unlikely to stop his current attempts to seize power, given the distinct possibility that recent talks held in Egypt at the behest of U.N. envoy Stephanie Williams to reach an agreement on a new constitutional framework and a timeline for elections might see him side-lined. 

Since the removal of long-time leader Gaddafi, in 2011, as analysed in depth in my new book on the global oil markets, the multi-factional civil conflict that has ensued found genuine relief only in the September 2020 agreement 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). However, even back then, a key part of this deal was an in-principle agreement to look into establishing a commission not only to determine how oil revenues across Libya are distributed but also to consider the implementation of a number of measures designed to stabilise the country’s perilous financial position. Just prior to the September 2020 agreement, there had been yet another series of long-running oil blockades that had cost the country an estimated US$9.8 billion in lost hydrocarbons revenues. 

Both before this 2020 agreement and after it began to break down, Libya’s oil sector has been subject to various-scale blockades of its key oil facilities, and the NOC had also declared a legal state of ‘force majeure’ because “it is impossible to implement its commitments towards the oil market.” Libyan crude oil production had seen the extended loss of around 550,000 bpd of its oil production because of these blockades on major fields and export terminals, which included the closure of the Zueitina port, whose crude loadings average around 90,000 bpd, with 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 just prior to this the El Feel oil field, which produces 70,000 bpd, was closed, as was the 60,000 bpd Brega operation. 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.

Before Gaddafi’s removal in 2011, Libya had been easily able to produce around 1.65 million bpd of mostly high-quality light, sweet crude oil and production 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. This said, 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. Even up until the most recent major production blockades of its western fields ended and eastern ports, Libya had been producing around 1.2 million bpd. From that level, there still appeared ample scope to increase this to the 2.1 million bpd targeted by Libya’s minister of gas and oil, Mohamed Aoun, and to hit the informal interim targets of 1.45 million bpd by the end of 2022, and 1.6 million bpd by the end of 2023. It is apposite to remember at this point that Libya still has around 48 billion barrels of proved crude oil reserves – the largest in Africa. 

A considerable part of the reason for Sanalla’s dismissal by Dbeibah may have been to do with his ongoing disagreements with oil and gas minister Aoun, but this in turn is tied into the ongoing failure of all parties to agree on any meaningful handling of the country’s oil and gas revenues. At the core of Libya’s short-, medium-, and long-term crude oil production outlook, and again reiterated behind the scenes in the recent Cairo talks initiated by the U.S., is that there must be genuine progress on the issue of fair distribution of oil revenues, the promise of which had successfully underpinned the 2020 agreement for longer than anyone expected. According to a Washington-based legal source spoken to by OilPrice.com at the time of the September 2020 agreement and reiterated recently, 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.” 

Part of this process would be the creation of technical committees with representatives drawn from all sides of the civil conflict. These separate committees would deal with field awards, in tandem with the oil and gas ministry, and the dispersal of oil and gas revenues, in tandem with the ministry and the Central Bank of Libya (in which the revenues are physically held). As it stands, neither the GNA nor the Central Bank of Libya have publicly and unequivocally agreed to its core principles as yet. Indeed, during the last major series of blockades of Libya’s oil infrastructure, the U.S. ambassador to Libya, Richard Norland, urged the country’s central bank to safeguard oil revenue from misappropriation.

Bengdara said last week that any challenge to his leadership of the NOC should be made via the courts, but parliament stated that Sanalla’s position and his board remained valid, while the other legislative body, the Tripoli-based High State Council, called on Dbeibah to revoke the decision to install a new NOC head. Bengdara also said that there would be “good news next week” on returning oil exports to their maximum level, it remains unclear how true or long-lasting this might be, given the ongoing turmoil over the leadership of the NOC. 

By Simon Watkins for Oilprice.com

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